I have written two articles about modeling out Facebook. The first one walked your through the basics of how to build the model. The basics were mostly concerned with using the metrics to come to a revenue estimate. The second focused on how a few bulge bracket brokerages models look to give you a benchmark or a guideline. These ideas were again just speaking to the topline.

With the company reporting after the close tonight (7/26/12) I thought we should get the rest of the model up to speed to come up with an EPS estimate.

Where we left off

Right now, our model should have an income statement tab, a revenue tab and tabs for each of the four geographies that Facebook will report on. The next step is to add in the rest of the operating expenses and do some math and we should get an EPS estimate.

Go ahead and create tabs for Cost of Revenue, Marketing and Sales, R&D, G&A and Stock Based Compensation. Each expense line item needs its own tab to help give a clear view of how they relate to revenue. It also gives us the flexibility to add in data points that may be revealed on the call.

Cost of Revenue (COR) is a pretty simple one to address. What I do it take the Income statement that we have already built and copy and paste it into the COR tab. I have my historical numbers from the most recently field S-1 or maybe you could 'borrow' them from another model. COR is basically the transaction costs that are charged to the company in the process of collecting the revenue. Most of the time they are related to credit card and processing fees.

I take the historical numbers and take a look at them as a percent of revenue. I do a simple equation for all three revenue line items (Advertising, Payments and Total). This gives me a trend of the percentage of revenue that COR has been. Next I will simply map out the sequential growth of COR. I will put the sequential growth of revenue directly under that to see how each move in tandem. Finally I will look at annual growth of COR and compare that to revenue.

At this point my COR tab will look like this:

I went ahead and modeled in a 350 number for COR for 2Q12. That gives me a 63% gross margin, a slight decrease from the previous quarter. It also works out to be the same sequential growth rate that the company experience in 2Q11. I see it slightly ticking up on an annual basis, and this sets the company up to make slight improvements in this number for the next several quarters.

The idea of being set up for the next several quarters is a very important one. The company is very young and this is the first public earnings release. It is important that the company beat expectations, but it is even more important that they can show steady progress throughout the remainder of the year. This is gets into some grey areas of accounting and managing revenue, expenses and earnings, but suffice it to say it's important.

We should so the same thing for the other tabs. Data points are important things and you can add in head counts to look at efficiencies. Other data points can easily be added into any of the tabs down the road, but for now, let's just keep the model simple.

The Rest of the Expenses

The Marketing and Sales (M&S) tab can easily be structured in the same fashion. I do a simply copy and paste of the percentage equations as well as the growth equations. Be careful here as the rows have skipped down one line. That can change some of the equations so make sure to review each line. I have marketing at 210 million as we saw a boost from 1Q11 to 2Q11 of 51% sequential growth and I am looking for a more modest 32% growth. As a percentage of sales, M&S also increased over the same time period. M&S is a function of salaries, commissions and marketing costs.

Research & Development (R&D) is a pretty static number that is reflective of investment in the future operations of the company. As a growth company, we expect R&D to grow significantly over the next several years. The profitability of the company can really be managed in this line item more than others over the short term. Over the long term, this is where the profitability comes from. I have 195 million as a modest level of sales and a slight uptick from the previous quarter.

General & Administrative (G&A) is reflective of fixed costs of the business. Things like rent or utilities are the basis of this. Managerial salaries are also falling into this bucket, so this is where Mark Zuckerberg's 2013 salary of \$1 gets dumped into. Other administrators salary's' make up the bulk of this line item.

I did a Stock based compensation tab, but that is getting a little too advanced for the purpose of this and that line item get backed out of the EPS equation anyway. So let's skip that for now and if you need to get some clarity on that topic feel free to email me.

Tying it Together

I link all the estimates in each tab to the appropriate line item in the income statement and now I do some basic math. I subtract COR from Total revenue to get gross margin. I add all the expenses together and subtract that from gross margin to get my operating income.

Now I address to other line items that we have little control over. Interest Expense and Other. Interest expense is just what it sounds like but when the company has several billion dollars in cash it will likely turn into interest income. Therefore expense (as reported) is a negative number. Other refers to items where the company made money but not from its core segments of advertising or payments.

Taxes are next and this is very subjective right now. The company might guide to year end rates, but for now let's stick to a rate that is close to what they paid in the most recent quarter.

The rest is just adding and then dividing to come to an estimate.

One trick that I have found helpful is to make a tab for each quarter that compares the year ago number, the most recent quarter and your estimate to the actual. This way you have a reference point to see how your analysis skills have progressed. I also like to include the key metrics on that page as well to keep track of those estimates too. Before I enter in anything else I like to copy and paste special (values) to cut the cord if you will from the estimates to the quarterly page. This ensures that my estimates remain intact when I update my metric pages with the actual numbers.

Conclusion

You now have your frame work for building your own Facebook model and coming up with an educated guess on what the EPS will be. My estimate is calling for EPS of \$0.10 which is one penny higher than the Zacks Consensus Estimate.

Feel free to comment below on what you think Facebook earnings will be for 2Q12!

Brian Bolan is a Stock Strategist for Zacks.com. He is also the Editor in charge of the Zacks Home Run Investor service

More From Zacks.com

Recommended for You

• Dow inches up to record close on quiet trading day

By Ryan Vlastelica NEW YORK (Reuters) - U.S. stocks finished mostly flat on Thursday as investors paused after a rally in the previous session, though the Dow closed at its second record high in a row. The Nasdaq declined slightly on weakness in tech shares, though its loss was limited by a rallyâ€¦

Reuters

• VMI Makes Bullish Cross Above Critical Moving Average

In trading on Thursday, shares of Valmont Industries, Inc. (NYSE: VMI) crossed above their 200 day moving average of \$144.81, changing hands as high as \$145.05 per share. Valmont Industries, Inc. shares are currently trading up about 0.5% on the day. The chart below shows the one year performanceâ€¦

Forbes

What is my business worth? Itâ€™s a question Iâ€™ve asked myself hundreds of times over my 40-year long ownership career. And valuing your business, as an exercise, is a great thing to do from time to time â€” it gets you thinking and dreaming, which is not a bad thing. But it wasnâ€™t until I...

• Wachtell Lipton Sues Rival Carl Icahn And Calls Him A Bully

The long battle between Carl Icahn and Martin Lipton reached a new and bitter stage when Lipton?s law firm, Wachtell, Lipton, Rosen & Katz, sued Icahn and his publicly traded investment vehicle, Icahn Enterprises over a \$36 million-fee dispute and CVR Energy.

Forbes
• Global Markets Rise After Fedâ€™s Decision to Unwind Stimulus

Stocks rose on Thursday, a day after the American central bank said it would gradually wind down its bond-buying stimulus program during 2014.

The New York Times
• Accenture expects consulting business to pick up

REUTERS - Accenture Plc (NYS:ACN - News) said it expected its consulting business to turn the corner this financial year as orders rise, building on strength in its outsourcing unit that helped the company report better-than-expected quarterly results. Accenture shares rose as much as 5 percent onâ€¦

Reuters
• DRI Makes Notable Cross Below Critical Moving Average

In trading on Thursday, shares of Darden Restaurants, Inc. (NYSE: DRI) crossed below their 200 day moving average of \$50.45, changing hands as low as \$49.35 per share. Darden Restaurants, Inc. shares are currently trading off about 6.4% on the day. The chart below shows the one year performance ofâ€¦

Forbes
• Play

Target confirms security breach; up to 40M customers affected

Target confirms that about 40 million credit and debit card accounts may have been affected by a data security breach.

• Samsung, LG to Show 105-Inch Curved TVs

Inc., the world's top two television makers, said in separate statements Thursday that they will unveil their own 105-inch curved TVs at the U.S. Consumer Electronics Show in January. Samsung and LG were eventually forced to sell the TVs at discounts after limited consumer interest. Samsung saidâ€¦

The Wall Street Journal
• U.S. existing home sales fall to lowest level in nearly a year

U.S. home resales fell sharply in November to their lowest level in nearly a year, hurt by a rise in interest rates since the spring and ongoing price increases that have shut some home buyers out of the market. The National Association of Realtors (NAR) said on Thursday that sales of previouslyâ€¦

Reuters
• Jet Revival Heating Up: What Stocks Will Cash In?

These companies should be able to cash in on the increase in jet sales.

Forbes
• Play

Gold Plunges, Oil Rises and Target Gets Hit With Data Breech

U.S. markets ended mixed on Thursday but gold prices closed at their lowest level in more than three years and oil prices climbed to their highest level since October. Meanwhile, Target shares took a hit on word the big box retailer suffered a data breech.

TheStreet.com Videos
• Tesla the latest to ask Palo Alto for signs that don't meet code

The Palo Alto Architectural Review Board is set today to consider a request from Tesla Motors to add a pair of signs to its El Camino Real showroom that wouldn't typically be allowed under city rules.

San Jose Mercury News
• Public Records Posted Online for Anyone to See

Did you know that public records are posted online and can be viewed by anyone in seconds? Marriages, divorces, bankruptcies, etc. Search anyone.

• Target card-date breach affects 40 mln accounts

CHICAGO (MarketWatch) -- Data from 40 million credit- and debit-card accounts may have been stolen from those making card purchases at Target stores in the U.S. between Nov. 27 and Dec. 15 -- a period ...

MarketWatch
• Should The Marketing Division Set Strategy For Pharmaceutical R&D?

When a pharmaceutical company is successful, it can then afford to do things like donate medicines to cure blindness in sub-Saharan Africa, as Pfizer and Merck are doing. They can set up research centers in India to find new treatments for TB (AstraZeneca) or in Singapore to study tropical diseasesâ€¦

Forbes
• 7 things you should have learned in 2013 â€” but didnâ€™t

Here are strategies that will serve you well in 2014 â€” and perhaps longer â€” that you should have learned if you were paying attention over the past 12 months.

MarketWatch
• 12 Big Things They're Thinking About At Goldman Sachs

We're still in the part of the year when the...

• Target Hit by Credit-Card Breach

Target was hit by an extensive theft of its customers' credit-card and debit-card data over the busy Black Friday weekend, in what appears to be a brazen breach of a major retailer's information security....

The Wall Street Journal
• Oracle results beat the cloud naysayers, at least for one quarter

Oracle shares jumped 6% after the company released seemingly tepid results for its fiscal second quarter. Beneath the surface, some investors saw positive signs that Oracle is increasingly meeting the challenge of its cloud-service based competitors.

The Exchange
• U.S. Secret Service Probing Card Security Breach at Target

The U.S. Secret Service is investigating a suspected theft of customersâ€™ credit-card and debit-card data at Target Corp., the countryâ€™s second-largest discount chain.

Bloomberg