Facebook 2012 Annual Report Page 53

Value of Our Advertising Products. We believe that increasing the value of our advertising products and the

consequent return on investment to marketers from working with Facebook will increase marketer demand and
thereby increase the amount marketers spend with us. We aim to increase the value of our advertising products
through such means as increasing the size and engagement of our user base, improving our ability to select
relevant advertising content for each user, developing new ads formats and products, and improving the
measurement tools available to marketers to optimize their campaigns. For example, in 2012, we launched
advertising in News Feed and Custom Audiences in order to enable marketers to more effectively reach their
target customers.

Management of Ad Inventory. Our revenue trends are also affected by ad inventory management changes

affecting the number, size, or prominence of ads we display. For example, in 2012 we began showing ads in
News Feed. These News Feed ads are displayed more prominently and we receive a higher price per ad
compared to ads displayed on the right hand column of our web page.

Product Innovation. We make ongoing product changes intended to enhance the user experience and

increase user engagement. For example, in 2012, we launched new versions of our iPhone app that are faster and
more reliable than the prior versions of our app. The new versions of the apps significantly increased News Feed
loads and user feedback shared. Our new products often also increase costs if they require additional compute
power and infrastructure.

Investment in Infrastructure. Our investments in the scope, reliability, redundancy, and efficiency of our

infrastructure affects our expenses and capital expenditures. In 2012, we continued to make significant
investments in our technical infrastructure to ensure that our growing user base can access Facebook rapidly and
reliably, by expanding the capacity of our data centers in Prineville, Oregon and Forest City, North Carolina and
by initiating construction of a new data center project in Lulea, Sweden. We also invested in hardware and
software efficiency projects to improve the performance of our infrastructure.

Investment in Talent. As of December 31, 2012, we had 4,619 employees, an increase of 44% from the end

of 2011. Our employee headcount has increased significantly and we expect headcount growth to continue in
2013 as we ramp up our investment in technical staff, sales and marketing, and general and administrative
personnel. We have also made and intend to make acquisitions with the primary objective of adding software
engineers, product designers, and other personnel with certain technology expertise.

Business Development and Acquisitions. As part of our business strategy, we periodically make acquisitions

to add specialized employees, complementary companies, products, technologies, or other assets. For example, in
2012, we acquired Instagram, Inc. and certain AOL patent assets from Microsoft Corporation. Our acquisitions
will affect our future financial results due to factors such as the amortization of acquired intangible assets and
may also result in potential charges such as restructuring costs or impairment expense.

Geographic Earnings Mix. In 2012, our tax rate was 89%, up from 41% in 2011, primarily due to significant

amounts of share-based compensation expense being allocated to our international subsidiaries in low tax
jurisdictions, leading to non-deductible losses in those subsidiaries. Our future tax rate and financial results will
be affected by the relative profitability of our corporate entities in higher versus lower tax jurisdictions.

Seasonality. Advertising spending is traditionally seasonally strong in the fourth quarter of each year. We

believe that this seasonality in advertising spending affects our quarterly results, which generally reflect
significant growth in advertising revenue between the third and fourth quarters and a decline in advertising
spending between the fourth and subsequent first quarters. For instance, our advertising revenue increased 46%,
18%, and 22% between the third and fourth quarters of 2010, 2011, and 2012, respectively, while advertising
revenue for the first quarter of 2011 and 2012 declined 3% and 8% compared to the fourth quarters of 2010 and
2011, respectively.

Share-based Compensation Expense. During the year ended December 31, 2012, we recognized $1.57

billion of share-based compensation expense. Of these amounts, $1.04 billion was due to the recognition of