Modeling Revenue Drivers for Facebook

February 20, 2012
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We already the historical statements in place with us. We had started discussing the the historical growth drivers and had released the template for historical driver. This was obviously a very simple template and as the model becomes more exhaustive you can improve this to include more realistic scenarios.

Drivers are the most important part of the model and I would like to give you another chance of getting the drivers right yourself! Today I give you a simple hint on historical revenue drivers, and you should try to build the drivers on your own.

Growth as a driver of Revenue

Usually companies have an agenda of growing their revenues. It is important to measure the growth. So revenue driver’s can be developed by calculating the historical growth rate in revenue. These can be

  • Year on Year Growth Rate (YOY) – It is the rate of change expressed over the corresponding period of the previous year.

YOY = (Ending Value/ Starting Value) - 1

  • Compounded Annual Growth Rate (CAGR) – It is an average growth rate calculated over a period of several years. It is the geometric mean of the annual growth rate.

CAGR = {(Ending Value/ Starting Value) ^ (1/Number of Years)}-1

Importance of Revenue

Revenue also called the "top line" or "gross income" is probably the most important item in income statement. Revenue is “recognized” based on accrual accounting.

Revenue is the first line item in the P&L and we deduct costs from it to get our profits. These profits (in one way or the other) drive the price of the stock. So in effect we can say that revenues are (one of the most important) factors driving the stock price and the shareholder wealth.

There are several financial ratios attached to it, the most important is the profit margin. If any number in the P&L (Gross Profit, EBITDA, PBT, etc.) is divided by Revenue, we get the Margin, which indicates that for each USD of sale, what is the profit we are making.

Revenue Drivers Facebook

Next Steps

2moro we speak about modeling the cost drivers of Facebook.

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About the Author

Pankaj Baheti is a CFA Level III Candidate currently working with Pristine. Prior to Pristine, he was working with Achi Group. He has done his Post Graduate Diploma in Management and loves trekking in the hills of Arunachal.

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