Facebook's leaked financials reveal leaky business

Kara Swisher reported last Thursday that Facebook spilled the beans on its finances during an all-hands company meeting.

While it is very possible that this was some sort of intentional leak, it's still interesting because it gives an insight into a company that has been given a $15bn valuation by investors such as Microsoft and Li Ka-shing.

• 2007 revenue: $150m
• 2007 headcount: 450
• 2008 projected revenue: $300-$350m
• 2008 projected headcount: 1,000
• 2008 projected EBITDA: $50m
• 2008 capital expenditures: $200m

• Clearly, Facebook has a fair amount of revenue, but the current valuation values the company at 100 times current annual revenues.
  
  Assuming the company hits its EBITDA projection for 2008, its current valuation represents 300 times projected EBITDA.
  
  This is extremely rich for any company, let alone a company that has yet to prove that it has a long-term business model that enables it to effectively monetise.
  
  
• As Kara Swisher notes, the company's $200m in projected capital expenditures next year will create a negative cashflow of $150m, again assuming the company hits the $50m EBITDA mark.
  
  Given the amount of cash the company has raised, it would be foolish to expect that it's simply going to sit on it.
  
  Therefore, to a certain extent, the planned capital expenditures are not altogether surprising.
  
  I would be interested, however, to learn how the $200m will be put to use because this makes all the difference.
  
  With Facebook still yet to prove that it has a scaleable business model, I think it's going to be hard for the company to put the money to good use.
  
  I suspect much of it will go towards infrastructure, development and possibly acquisitions.
  
  None of these is necessarily going to help the company achieve what should be its primary objective: becoming a self-sustaining entity.
  
  
• Facebook may have big goals for the future, but the planned increase in headcount to 1,000 employees from 450 just doesn't seem justified.
  
  Again, Facebook has not yet established that it has the foundation to become a viable long-term player.
  
  Therefore it doesn't make sense to scale like one and I fail to see why, at this stage of the game, the addition of significantly more employees is going to really help Facebook create true value.

Perhaps the most important thing to consider when looking at Facebook's financials is the fact that a significant portion of its revenue reportedly comes from its ad deal with Microsoft - under which Microsoft has (reportedly) guaranteed certain payments. This is not unlike the $900m deal Google signed with MySpace.

As part of Google's disappointing year-end earnings report, it was revealed that Google is not having success in turning social networking into a profitable advertising platform.

Based on Sergey Brin's comments, it's clear that Google is losing money on its deal with MySpace.

Given that social networks seem to be failing to deliver for advertisers across the board, Facebook's revenue numbers need to be looked at within this context.

There is a strong likelihood that Microsoft's deal with Facebook is, at worst, losing money for Microsoft, and, at best, breaking-even.

As such, Facebook's $150m in revenue does not necessarily represent what I like to call "solid revenue".

That is, because the entity that is the source of much of it might be losing money on the relationship, it is not revenue that a company like Facebook can realistically expect to receive perpetually unless the dynamics of the deal change from win-lose to win-win.

I'm not sure that's going to happen anytime soon. As I've pointed out before, it's quite possible that social networks just aren't going to be the boon to advertisers that many thought they would be, regardless of the "potential".

The truth is that social networking has been mainstream for years and despite numerous attempts to develop advertising models that work for it, nobody has yet figured it out even though a lot of smart and talented people have been trying.

When you throw in the fact that a sustained economic downturn will force advertiers to tighten spending and focus on spending in areas that deliver results, things aren't looking so rosy for Facebook.

At the end of the day, it's obvious that Facebook does not yet have the makings of a $15bn company and if it were to go public anytime soon, would probably have a very difficult time getting the public markets to give it such a valuation.

The challenges it faces, and the risks it's taking, could mean that it never reaches a point where such a valuation is justifiable.

If that's the case, Facebook might just be remembered as Web 2.0's Webvan.

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