Facebook's $200M Cash Cushion May Be a Lifeline

n20531316728_2397 Facebook today confirmed that it has received a $200 million investment from Digital Sky Technologies, valuing the Palo Alto, Calif.-based company at $10 billion, significantly less than it was in 2007 after an investment made by Microsoft valued it at $15 billion. In a conference call discussing today’s news, Facebook CEO Mark Zuckerberg blamed the differences in valuation on the current economic conditions, and the fact that Microsoft was seeking a strategic relationship with the social network.

In a nutshell, DST operates or has a stake in several top social networks in Russia and Eastern Europe that actually make money. Zuckerberg said he hopes to capitalize on his new investor’s experience monetizing those social networks, but stressed that this deal isn’t about the cash. I beg to differ.

On the call Zuckerberg noted that an IPO wasn’t imminent and said this money was more of a cash cushion given that Facebook has been EBITDA positive for the past five quarters (going on six). The company expects to be cash-flow positive in 2010, he added. I’m not privy to Facebook’s financials, but using EBITDA for a business that requires a constant and continued purchase of servers is meaningless. The metric measures earnings before interest, taxes, depreciation and amortization and is often used as a substitute for cash flow. But in businesses in which equipment costs are high and replaced in a short amount of time (servers typically only last 3-5 years), EBITDA is essentially a meaningless metric.

For example in January 2008 Zuckerberg said Facebook expected EBITDA of $50 million for the year, which sounds lovely until you do the math (as Kara Swisher did) and realize that given Facebook’s plans to spend $200 million on servers in 2008, cash flow would have been negative by some $150 million. Today Zuckerberg said that Facebook expects to be cash-flow positive in 2010, which means that Facebook will continue to lose money throughout this year. And it may be losing a lot of money, given its expenses. In March, Facebook was looking for $100 million in debt for equipment, and Om Rich Miller over at Data Center Knowledge has estimated Facebook spends $20 million to $25 million a year just to house its servers.

The social network has raised more than $350 million in previous deals, as well as some debt for equipment, but an entrepreneur doesn’t dole out additional equity lightly. Zuckerberg hinted on the call that this capital might go toward a future product or acquisitions, but the deal may also reflect concerns over the ability to get debt financing in this market and the length of any recession.

Another interesting item in this funding includes a separate $100 million that DST is committing to buy out the common stock held by current and former Facebook employees — a trend we noted last year. As Zuckerberg said on the call, the company isn’t anticipating an initial public offering, and apparently insiders are getting antsy. Facebook already attempted to create a common stock repurchase program once before, but finding an acceptable valuation was too difficult, and the program was shelved. Zuckerberg offered up few details about the proposed program, saying they’d be disclosed at a later date. Because Facebook’s common stock is stripped of many of the preferences that the stock of investors like DST or Microsoft has, the valuation for the common stock will be the best indicator of the company’s true worth at that point in time.

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