Facebook documents reveal strong profits: source

Facebook CEO Mark Zuckerberg speaks during a news conference at Facebook headquarters in Palo Alto, California May 26, 2010.

Credit: Reuters/Robert Galbraith

By Matthew Goldstein and Alexei Oreskovic

NEW YORK/SAN FRANCISCO | Thu Jan 6, 2011 8:59pm EST

NEW YORK/SAN FRANCISCO (Reuters) - Facebook is generating profits at a faster-than-expected rate, and will likely attract so many investors this year that it will have to disclose financial data similar to a publicly traded company by April 2012, according to a document distributed by Goldman Sachs.

The move could set the stage for a much-anticipated Facebook initial public offering in 2012, though there is no guarantee that the social networking company would choose to sell shares to the public simply because it is required to open its books to the public.

Facebook, the world's No. 1 Internet social network, earned $355 million in net income in the first nine months of 2010 on revenue of $1.2 billion, according to a source who received the documents that Goldman Sachs provided to its clients on Thursday.

Goldman began hand-delivering copies of the 101-page private placement memorandum for a $1.5 billion Facebook offering to its wealthy customers a little after lunchtime in New York, according to the source.

The Goldman customer said he received a separate six-page financial statement containing information on the social networking company.

The document provides some of the most detailed financial information yet about Facebook, which Goldman recently valued at $50 billion in a separate, $450 million funding.

That valuation is high, but not outrageous based on the glimpse into the company's financial performance and the growth that it implies, said Ryan Jacob, of the Jacob Internet Fund.

"It just shows you that these businesses can generate 30 percent to 40 percent, potentially, operating margins," he said. "They probably did at least $500 million in net income in 2010."

Wedbush Securities analyst Lou Kerner, who owns Facebook shares, said, "The revenue kind of are in line with our expectations."

"The surprise was on the profitability. I think it highlights that Facebook is likely to have margins that are going to exceed Google's margins," he said.

The memo said Facebook is likely to have more than 500 shareholders this year, according to another person who reviewed the documents, and that the company may begin filing public reports of its financial performance by April 2012.

(Not everyone thinks Facebook's valuation is justified. For a Reuters Insider video, "Facebook Financials Don't Back Valuation," click here [ID:nRTV176273]))

THE BIG 500

United States securities regulations require companies with more than 499 shareholders to disclose financial information.

Facebook, which was founded in a Harvard dorm room in 2004, has more than 500 million users and is challenging big Web businesses like Google Inc and Yahoo Inc for users' time online and for advertising dollars.