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Facebook, Inc. (NASDAQ:FB)

Discussion on Acquisition of WhatsApp Conference Call

February 19, 2014 6:00 PM ET

Executives

Deborah Crawford – Director, IR

Mark Zuckerberg – Founder, Chairman and CEO

Jan Koum – CEO, WhatsApp

David Ebersman – CFO

Analysts

Eric Sheridan – UBS

Doug Anmuth – JP Morgan

Mark May – Citigroup

Justin Post – Bank of America/Merrill Lynch

Ross Sandler – Deutsche Bank

Kevin Potterton – RBC Capital Markets

Anthony DiClemente – Nomura Securities

Youssef Squali – Cantor Fitzgerald

Brian Wieser – Pivotal Research

Robert Peck – SunTrust

Operator

Thank you for joining us today to discuss Facebook’s acquisition of WhatsApp. Now I’d like to turn the call over to Deborah Crawford, Director of Investor Relations at Facebook.

Deborah Crawford

Thank you. Good afternoon, and welcome to the call. And thank you everybody for joining us on such short notice.

Joining me on the call today are Mark Zuckerberg, CEO of Facebook; Jan Koum, CEO of WhatsApp; and David Ebersman, CFO of Facebook.

Before we get started, I would like to take this opportunity to remind you that our remarks today will include forward-looking statements, and actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are set forth in today’s press release and our Annual Report on form 10-K filed with the SEC.

Any forward-looking statements that we make on this call are based on assumptions as of today and we undertake no obligation to update these statements as a result of new information or future events.

And now, I’d like to turn the call over to Mark.

Mark Zuckerberg

Thanks, Deborah, and thanks everyone for joining us today on such short notice.

I am excited to announce that this afternoon we entered into an agreement to acquire WhatsApp. The combination of WhatsApp and Facebook will allow us to deliver new and engaging mobile experiences, connect many more people around the world and achieve our mission of giving people the power to share, and making the world more open and connected.

Over the last couple of years, Facebook has been on a journey towards becoming a mobile company. Our goal is to connect everyone in the world. And to do this, we’ve invested in delivering great mobile experiences like Instagram, Messenger and of course our core Facebook apps on iOS and Android. We’ve made great progress here.

945 million people now use our mobile products every month, and 556 million of those people use them each day. As I said in our last earnings call, our goal for Facebook over the next few years is to deliver a set of new mobile products that allow people to share any type of content with any set of people they want.

We want to provide the best tools to share with different size, groups and in different context, and to develop more mobile experiences beyond just the main Facebook app, like Instagram and Messenger. This is where we see a lot of growth, as well as a great opportunity to better serve our whole community.

WhatsApp fits this vision perfectly, and the combination with Facebook, will help strengthen both services. WhatsApp is an extremely high quality product, with incredibly strong engagement and rapid growth. It doesn’t get as much attention in the U.S. as it deserves, because its community started off growing in Europe, India and Latin America. But WhatsApp is a very important and valuable worldwide communication network.

In fact, WhatsApp is the only widely used app we’ve ever seen that have more engagement in a higher percent of people using it daily than Facebook itself. After doubling in size from the last year, more than 450 million people now use WhatsApp monthly and more than one million new people are signing up every day.

Based on our experience of building global services with strong growth and engagement, we believe WhatsApp is on a path to reach over one billion people worldwide in the next few years. Internet services that reach a billion people are all incredibly valuable, and we believe WhatsApp will be as well.

Our focus will remain on connecting more people and increasing engagements, but over the long-term, we look forward to seeing what the team can do to build a really great business.

We expect them to bring the same quality and innovation they bring to the rest of the products, and the successful subscription model they already have in place is the product in start. As Facebook works to connect the entire world and to build the infrastructure for global community, WhatsApp will clearly help accelerate our progress.

Jan and the team have built the product with a simple, fast, reliable and a really great experience for people. It’s a great model for our own mobile development process.

WhatsApp also complements our services and will add a lot of new value to our community. People use WhatsApp as a replacement for SMS to communicate with their contacts as well as small groups of people. Our communication product like Facebook Messenger and Chat are used mostly for chatting with your Facebook friends and often sending messages that aren’t necessarily real-time.

These are both different and important use cases, and we’re going to invest in both, to serve both use cases better. We’re committed to building and operating WhatsApp independently. Their product roadmap is very exciting and it’s not going to change.

We will work hard together over the coming years to help WhatsApp grow even faster and reach many more people. As part of this, we expect that overtime WhatsApp will help us make progress in our mission to connect the entire world through things like internet.org by supporting our goal of delivering basic internet services to everyone in the world at affordable prices.

Overall, I am very excited about this deal. And I think it will be great for Facebook and WhatsApp community, as well as for both companies. WhatsApp had every option in the world, certainly thrilled that they chose to work with us.

I am looking forward to what we can achieve together and for the opportunity that develop great new mobile products that serve even more people around the world.

On a personal note, I’ve known Jan for a long time. And I know that we both share the vision of making the world more open and connected through the services we build. Jan’s team has done amazing work over the last five years, and they should be really proud of everything they have accomplished. I can’t wait for him to join Facebook’s team and I look forward to partnering with them to continue achieving amazing things.

I’m particularly happy that as part of this deal, Jan has agreed to join the Facebook board and partner with me to shape the future of Facebook as well as WhatsApp.

Thanks again for taking the time to join us today. And now I’d like to hand it over to Jan.

Jan Koum

Thanks, Mark. I am delighted that WhatsApp is joining Facebook, and I am really looking forward to working together. This is an incredible moment for me and the entire team, and I want to start by just thanking them.

Over the last five years, our team has grown WhatsApp into a product chosen by hundreds of millions of people, achieved many new innovations in mobile and created a world-class product development of innovation.

This moment would not have been possible without the hard work and dedication of a lot of amazing people that I hope and I look forward to sharing the next chapter of WhatsApp history with you.

When Brian and I started WhatsApp, our mission was to build a product that could solve answer [ph] fundamental, to make real-time mobile communication experiences simple, powerful, instantaneous and commonplace.

Our goal was to build a service that could be used by everyone, across every platform and every phone, and that would be a better alternative to SMS as well. We wanted a product that people could use easily and quickly to communicate with all the concepts in their phone and also with groups of people.

As a result, we’ve achieved speak for themselves. Every day over 19 billion messages are sent on WhatsApp. Over 600 million photos are shared. Our community is growing rapidly with over one million new users joining every day. And in key growth regions, WhatsApp has become an important communication tool and part of daily lives with incredible growth and penetration.

WhatsApp has achieved much of what we set out to do, but we still have a lot more work to do. That’s why I’m very excited for us to be combined with Facebook. Facebook gives us a chance to turn WhatsApp into service that reaches even more people and creates even greater value for our users.

Facebook is a social network and offers many different and important functionalities than WhatsApp offers with the communication service, and we’re excited to benefit from the unique expertise, knowledge and infrastructure that Mark and the team has built out over the last decade. We think this will open up many new possibilities for our products in communities [ph].

I believe that WhatsApp will continue to operate independently and autonomously. It’s important for all of us that the team keep working with the pace and energy of a start-up. We will also assume that confidence that Facebook calls for in a process innovation will be great good [ph] for us.

I’ve known Mark for a number of years and I’ve admired the way he has kept Facebook moving fast and innovating even as the company at scale. I think this will be modeled for the way we think about our future as a company too.

I am excited for our future and I am confident that the combination of WhatsApp and Facebook will allow us to do amazing new things together. I am very gratified because we have to keep our team together to continue building and scale a new product.

And now I would like to hand it over to David.

David Ebersman

Thank you, Jan, and good afternoon everyone. Let me start by briefly reviewing the details of the transaction.

Facebook will acquire WhatsApp for approximately $16 billion, consisting of $4 billion in cash, plus 184 million shares or approximately $12 billion worth of our stock. In addition, we will give 46 million RSUs worth approximately $3 billion to the WhatsApp employees including their founders. They will vest over four years subsequent to closing.

The stock and RSUs we will issue to WhatsApp will represent 7.9% of Facebook shares based on current shares and RSUs outstanding.

The deal was unanimously approved by the Boards of Directors of both companies and is already been approved by the WhatsApp shareholders. The transaction is subject to regulatory approvals and we currently expect it to close later in 2014.

As Mark said, we’re really excited to be announcing this acquisition. WhatsApp is an extraordinary asset, a clear technology and market leader in a very important space. They have a network of over 450 million people using the service each month and 70% of them are active on a given day. And just is important is how rapidly the network continues to grow.

We believe WhatsApp is on a path to grow to over one billion people using the service and the network of this scale and engagement are incredibly valuable. Given the size of their network and they value they provide to people who use their service, we’re confident that over the long run, WhatsApp will deliver significant returns for our shareholders.

Now let’s open for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Eric Sheridan with UBS.

Eric Sheridan – UBS

Thanks for taking the question guys. Two quick ones. One, is there any way you can give us some color around the transaction itself. Was this is a competitive process or was this a purely discussion between Facebook and WhatsApp over the last couple of weeks and months? And second, longer term, Mark, maybe you can help us understand how the companies will work together under the Facebook umbrella, and how might their goals be – and WhatsApp be achieved, both independently and working with close with Facebook? Thanks.

Mark Zuckerberg

Sure. So I can take the first one. Jan and I have known each other for a couple of years, right. And we’ve been talking about all the different things that we could do together, and how the world will evolve in terms of communication and then social networks, and he has been a valuable thought partner the whole time.

Last Sunday evening, so about 11 days ago, we started – I proposed that, if we joined together that would help us really connect the rest of the world and could help out with things like internet.org by bringing these two communication tools that are very different together.

And he thought about it. And then over the course of the week, came back and said that, we were interested and [indiscernible] missing from you. And then we discussed the price later in the week and we came to terms that were agreeable to us. And I think we just decided to go forward from there.

From our perspective – both David and I have said this, but we think that WhatsApp is on a clear path to have a billion people using their product. And services in the world that have a billion people using them are all incredibly valuable. And from that perspective, we just think that and the growth rates that they have today and the monetization model that’s early, but it’s promising and in place that they have, we see a pretty clear trajectory ahead and we were just very excited to work together on this.

With the second question, on how to integrate. WhatsApp is going to operate independently. And so that’s a really important thing here. We want to do this the same way that we did Instagram. We felt like we’ve learned some from the Instagram experience. This is obviously a much bigger scale, but a lot of the lessons there – we weren’t sure at the time how well it would work.

It’s in practice, a company really could join and be as independent as when Kevin and I were discussing. And what we found is that it really can work, right. And that I think Kevin would say that he has gotten a huge amount of value out of be able to use Facebook infrastructure and recruit and have Facebook employees join. And that’s just been very valuable to him in scaling. And that’s going to be the model that we use here too.

So whatever services and employees that Jan would like to join WhatsApp, we will be able to do, and we’re not going to push very much. And we’re going to – Jan and I are going to continue to be in dialog about the strategies of the overall company and what we want to do.

Operator

Your next question comes from the line of Doug Anmuth with JP Morgan.

Doug Anmuth – JP Morgan

Sounds great. Thanks for taking the question. Jan and Mark, hope you can talk a little bit more about monetization, you mentioned in the early stages here at WhatsApp, but also, Jan, just curious on your thoughts going forward without ads on WhatsApp. I think you’ve been a little bit more averse to advertising in the early days of this service. Hopefully you can talk about that going forward? Thanks.

Mark Zuckerberg

So let me start off, and then I guess Jan is going to jump in. Our explicit strategy is for the next several years to focus on growing and connecting everyone in the world. And then we believe that once we get to being a service that has billion, two billion, maybe even three billion people one day, that there are many clear ways that we can monetize, but the right strategy we believe, is to continue focusing on growth and the product and succeeding in building the best communication tools in the world.

So that’s actually one of the big reasons why it makes sense for WhatsApp to join us is that, as an independent company, they wouldn’t have been able to purely focus on growth, whereas now we can really help them out a lot with that.

But I’ll hand it over to, Jan, to talk about monetization. I don’t personally think that ads are the right way of monetized messaging services. And I know, Jan, shares this philosophy. So why don’t you go into that?

Jan Koum

Yes, absolutely. I think I’ve talked to Mark about it number of times. And I have talked about it in our blog. We think that for our product for messaging, advertisement is not going to serve as the right thing to go.

We feel that we actually have a very solid monetization system in place that helps us create a direct relationship with our user and our customer. And WhatsApp really focuses on growth. Monetization is not going to be a priority for us. And this is why I actually respect Mark and his vision that he thinks a very long-term on everything they do at Facebook.

They focus on something that has – not just tomorrow, but something that is five or 10 years from now. And that’s the same with our company. When we’re talking about where mobile is going to be, not today, not next year, but in 2020 or in 2025, and as we look forward to the next five, 10 years, five billion people will have a smartphone. And we hold potential to have five billion users potentially given us money through the subscription model.

So we really are excited about the growth today as a potential of where it’s going to be, five, 10 years from now. And we’re not really concerned about monetization today. We’re focused on the growth.

Deborah Crawford

Next question?

Operator

Your next question comes from the line of Mark May with Citigroup.

Mark May – Citigroup

On the monetization side and the subscription model. Can you give us a sense of – I know that you’re less than a year into introducing the subscription plan, but what has been your experience in terms of conversion rate from free to pay, given that sounds like for the foreseeable future that’s how you’ll fund the investments in the business at least partly, and what your expectations are for conversion going forward? And then a question for Mark. Can you give us a sense of what portion of WhatsApp’s active users overlap with Facebook users and what portion of them are using Facebook to connect their profiles and their social graph on WhatsApp? Thanks.

David Ebersman

Hi Mark, this is David. I can take both of these actually. In terms of monetization, as Jan said, their priority of WhatsApp has been and will continue to be, building out and growing the network and getting people engaged with the service and bringing as much utility as they can.

So as you know, they’ve brought up subscription to some users in some countries and it hasn’t been and won’t be the top priority to optimize revenue in the short-term.

In terms of overlap, we really don’t know. I mean we would imagine based on the penetration rates for the few products that obviously in places there must be a level of overlap, but we don’t have the analytics or the knowledge to quantify that at this point.

Deborah Crawford

Next question?

Operator

Your next question comes from Justin Post with Merrill Lynch.

Justin Post – Bank of America/Merrill Lynch

Thank you. Mark, maybe you could talk about why you’re going to keep the businesses separate? And is there any way to leverage the WhatsApp usage to increase usage of Facebook, or do you even see that as a need? Thanks.

Mark Zuckerberg

So this is our operational strategy in the company, not just the acquisitions that we do, but we want to keep all of the different active [ph] experiences. We want the people who are running them to have autonomy.

We have many different products at this point and we have a lot of really talented people running them. And that’s just the kind of standard operating structure that we have at our company. So from that perspective, I feel quite comfortable that this is the right way to go.

And the big question when we – with the Instagram acquisition was we worked to bring an outside company into the model. And what we’ve proven at least to ourselves and we think the results there initially are quite good as well is that, yes that works.

So Jan and Brian as co-founder are clearly amazingly talented, right. I mean with 50 people at their company, they’ve built a product and a network that has almost 0.5 billion people actively using it in five years. No one in the history of the world has done anything like that before.

So I frankly think that even if this weren’t the standard way that we were doing it, that it would be pretty stupid for us to interfere in a big way.

Now that said, I mean Jan and I also know each other really well and have a great degree of trust and our strategic thinking overlaps a lot. So I think that we will find that there will be different ways that the organizations can work together to accelerate because there is growth story to link in different ways overtime, maybe if we think of something although that’s not the plan upfront.

And I think that there is going to be quite a good deal of benefits of the two desks [ph] from being connected.

Deborah Crawford

Next question?

Operator

Your next question comes from Ross Sandler with Deutsche Bank.

Ross Sandler – Deutsche Bank

Thanks guys. Jan, can you talk about how the product may evolve from its current state one-to-one or one-to-many messaging. Are there other product areas that look interesting to you that you see out there? And then I guess a question for Mark or Jan. WhatsApp has actually moved ahead of Facebook Messenger in many countries. Can you just give us a sense of what are the strongest countries for WhatsApp versus Messenger and kind of how you see those co-existing? Thanks.

Jan Koum

Sure, absolutely. I think we will try to not talk about the product roadmap today, because we have certainly not done it. And we don’t usually talk about our upcoming features or our upcoming releases. But what’s important to understand and what Mark has mentioned previously that WhatsApp would be independent and WhatsApp will continue to operate autonomously.

We have certain goals we’ve set out ourselves and generally [ph] WhatsApp on what we want to build into our product this year and we will continue to execute on those goals. Those goals include making our product better, faster, more efficient. And we care about details and we will continue to focus on those details. So not necessarily very attractive, but things like message feed delivery and application reliability and better to life and bandwidth usage, all that matters on a smartphone. And that’s always been our focus and that will continue to be our focus.

So you will see our product evolve. It will become – it will have new features added to it in the next 12 months. We will continue to operate independently and autonomous, and we will continue to – our features will actually plan to do earlier this year over the next 12 months. So that’s not changing, but over the next 12 months or 24 months, our product will evolve and it will become better.

Mark Zuckerberg

And in terms of how Messenger and WhatsApp are going to co-exist. Our thinking on this is that they actually serve fairly different use cases, right. So Messenger what we’ve seen evolve from Facebook Chat which was more of instant messaging, not SMS, and is widely used today for chatting with your Facebook friends. And a lot of the messages are not real-time, right.

If someone sends someone a message and then almost like a more informal, even on the next [indiscernible] during the day. WhatsApp evolves from this model of really reflecting SMS. So it’s a service for very quickly and reliably real-time communication with all of your contacts and small groups of people. And there is – we think that those are two pretty big and different use cases, and that the world needs both and that we’re going to help our community the most by continuing to invest in both.

So Jan was saying that, WhatsApp obviously has their roadmap and he’s going to keep on pushing on that independently. Similarly, the Messenger team is going to continue with their roadmap exactly and they are going to continue to operate independently as well with the team that’s running that today inside Facebook.

Operator

Your next question comes from the line of Mark Mahaney with RBC Capital Markets.

Kevin Potterton – RBC Capital Markets

Hi, it’s Kevin on for Mark. Do the demographics of WhatsApp users skew youngsters and for stand-alone Facebook?

David Ebersman

Hi Kevin. If you look at kind of penetration that WhatsApp has achieved, it certainly goes without saying that they have good penetration across all demographics we would imagine, but it’s not a service that asks you to tell them your age when you sign-up.

Operator

Your next question comes from Anthony DiClemente with Nomura Securities.

Anthony DiClemente – Nomura Securities

Thanks. Sorry, if this asked already, but can you provide what percentage of the existing 450 million MA users are paid versus non-paid? And then just as a follow-up to the last question. Can you give us any sort of breakdown as to how the geographic user-ship of WhatsApp compares to the geographic user-ship of Facebook? Thanks.

David Ebersman

We don’t have the details to share today. As we’ve talked about in terms of monetization, it hasn’t been the top priority for the company and it won’t be. So as they roll this out in, sort of country-by-country as they choose, we’ll learn more overtime, but I’m sure they will do that slowly and thoughtfully. And we don’t have data to share on the geographic breakdowns.

Anthony DiClemente – Nomura Securities

Okay.

Operator

Your next question comes from the line of Youssef Squali with Cantor Fitzgerald.

Youssef Squali – Cantor Fitzgerald

Thank you very much. Just a couple of clarifications. David, can you just help us maybe understand just the basis for valuation you’ve got to, and I am assuming it was a competitive stage, but maybe just any more color on that would be very helpful? And then in terms of growth, while you’re not releasing any, maybe split between international and domestic. Just where is most of that growth is coming from? Is it mostly international, or is it really split evenly domestic and international? Thanks you.

David Ebersman

Sure. So let me take the second one first. I mean you can’t be growing at a pace like that without growing pretty broadly around the world and that’s what’s happening with this service. So it’s extremely impressive how they are executing.

In terms of valuation, as we discussed in the remarks, the primary thing that we focused on was just how healthy this network is and how well it’s growing. And our confidence that if you have a network of this size with people who are as highly engaged as customers are with WhatsApp, that they are really on a path to get to a network of a billion people or more in a relatively short period of time.

So we looked at other networks that have achieved that kind of size and scale and what kind of value that they’ve created and what they are worth and that helps give us a framework for thinking through what might make sense here.

The only other thing that I would add is that, the service they provide is tremendously useful to people and we’ve always believed that if you bring a lot of utility into the marketplace, that sets you up to build a great business overtime.

If you think about messaging, it’s the number one activity on smartphones, as the onset there is a 1.5 million to two billion smartphones out there today. That’s going to grow to three, four, five billion smartphones overtime.

And they are already at a place now where the messaging volume running through WhatsApp is nearly the same as the scale of the entire telecom SMS messaging volume. And that’s a $100 billion business for carriers in terms of direct messaging piece. So it’s a really valuable service that people are willing to pay for.

Operator

Your next question comes from the line of Brian Wieser with Pivotal Research.

Brian Wieser – Pivotal Research

Thanks for taking the question. I was wondering, are there any regulatory issues that you expect? And so I am wondering if there is any more clarity if you can find around when you expect the transaction may close?

David Ebersman

Yes. So we’re confident that we will obtain regulatory approval and are planning to close the transaction later in 2014. There is not really a lot more to say on that front.

Deborah Crawford

Operator, we have time for one last question.

Operator

Your last question comes from the line of Robert Peck with SunTrust.

Robert Peck – SunTrust

Yes. Mark, could you maybe talk a little bit about the competitive dynamics? You could obviously have other large messaging platforms out there, LINE, WeChat, Kakao, Kik, etcetera. Could you talk about the technological mode around the company, and is there – have you been quantifying sort of data sharing and lift you’d get from sharing data back and forth? Thank you.

Mark Zuckerberg

Yes, messaging is a very competitive space as you’re saying. I mean WhatsApp I think is the clear global leader at this. If you go country-by-country, there are countries like in Korea or Japan where another messaging service is bigger, but if you look across the world, I think WhatsApp is in most countries. It’s right across Europe, in Latin America, India, like lot of places in Asia. It’s kind of the clear leader.

And I think a lot of this gets down to the details that Jan was talking about in early answer, where these guys just obsessively focused on simplicity and speed and reliability. But when they go into a country, I mean they don’t rest until their service is faster than SMS, and as reliable with obviously all the disadvantages that come with going over the data network instead of the voice network.

So that’s I think the technical advantage that these guys have. It’s a company of really hardcore engineers, who are obsessing over perfecting messaging, not adding a lot of bloated features into a messaging app. And I think that’s like the way that – that’s the right strategy. I think that’s what people want.

And overtime, I think people are going to pay for that, and then want to pay for it, and will be happy to pay for the best one.

Deborah Crawford

Great. Thank you. Thank you everybody for joining us today. We appreciate your time and we look forward to speaking with you again.

Operator

Thank you. This concludes today’s conference call. You may now disconnect.

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