Company Report

October 12, 2012

Facebook, Inc.
Consumer Survey Indicates Healthy Engagement/User Experience; Consumer Views on new Facebook Products
Our Call While the near-term outlook on FB remains cloudy given the ongoing transition to mobile, we continue to believe the long-term opportunity is large. Our survey of more than 750 Facebook users indicate engagement remains healthy, particularly among the 18-29 year olds, and user experience remains relatively unchanged versus six months ago, despite the increase in the number of ads being seen over that period. Key Survey Findings: 1. Engagement. 63% of Facebook users access it at least once a day, including 43% who access it multiples times a day. Engagement remains particularly very strong among the 18-29 year olds. An average user is spending about the same time today on Facebook as he/she did six months ago. 2. Mobile. 61% of users have the Facebook mobile app and of these 64% access it at least once a day. 77% of these users are moderately to extremely satisfied including 33% at the upper end of the spectrum. Given how critical mobile is to Facebooks future, we believe the % of extremely satisfied needs to improve. 3. Advertising. Facebook users have noticed more ads over the last six months but the relevance of these ads may need to improve. Most (77%) of mobile users havent noticed ads, which we think indicates the subtle and effective nature of Sponsored Stories and should provide Facebook with significant opportunity to advertise. 4. Gifts. While only 45% of users indicated willingness to use this service, we think this is still a large percentage given it is still a test. This service appears to be slightly more appealing to those in the 30-44 years age group where 52% indicated at least some willingness to use this feature while, interestingly, only 38% of the heaviest users (18-29 year olds) seem willing to use this service. 5. Promoted Posts. If our survey results are any indication, it does not appear users are too keen to pay to promote posts, as only 16% of users indicated a desire to do so. That said, we realize this product may be more suitable for small businesses, a group that was not part of our survey. 6. Search. Our survey shows that nearly half (47%) of Facebook users may be willing to try using a Facebook search engine. Surprisingly, the older age groups were more likely to try than the younger groups.

Buy
FB Price: Close $19.75 Price Target $37.00
Interactive Entertainment / Internet
Arvind Bhatia, CFA (214) 702-4001
abhatia@sterneagee.com

Brett Strauser (214) 702-4009

bstrauser@sterneagee.com

Company Data
Rating Price: Close Price Target 52-Week Range Market Capitalization (M) Shares Outstanding (M) Avg. Daily Vol. (000) Dividend Dividend Yield Assets (M) Buy $19.75 $37.00 $17.55 - $45.00 $13,249.2 674.6 48,808.0 $0.00 0.0% $13,786.0

Revenue ($M) 2011A 2012E 2013E

FY 3,711.0 4,808.4 6,070.7

EBITDA (M) 2011A 2012E 2013E

FY 2,303.0 2,740.9 3,614.6

Price Performance FYE Dec

EPS ($) Q1 (Mar) Q2 (Jun) Q3 (Sept) Q4 (Dec) FY EPS

2011A (Curr)
0.11 0.11 0.00 0.00 0.00

2012E (Curr)
0.13A 0.12A 0.11 0.13 0.48

2013E (Curr)
0.13 0.15 0.15 0.20 0.62

45 40 35 30 25 20 15 May-12 Jun-12 Jul-12 Facebook, Inc. Sep-12 Oct-12

Source: FactSet

Important Disclosures regarding Price Target Risks, Valuation Methodology, Regulation Analyst Certification, Investment Banking, Ratings Definitions, and potential conflicts of interest begin on Page I of the Appendix Section. 800 Shades Creek ParkwaySuite 700Birmingham, AL 35209205-949-3500
Sterne, Agee & Leach Inc. is Member NYSE, FINRA, SIPC

October 12, 2012 Table of Contents Survey Background...............................................................................................................Page 2 User Engagement (desktop/laptop)......................................................................................Page 2 Mobile Engagement...............................................................................................................Page 3 Advertising.............................................................................................................................Page 4 Gifts.........................................................................................................................................Page 6 Promoted Posts......................................................................................................................Page 6 Search.....................................................................................................................................Page 7 Non-Facebook Platform Usage............................................................................................Page 8 Appendix (Survey Results)..................................................................................................Page 10 SURVEY BACKGROUND This week we conducted a survey of more than 750 Facebook users in the United States across various age groups/income levels and a near-equal ratio of men (54%) and women (46%). The data for this survey was collected using SurveyMonkey Audience. Information on how respondents are recruited to SurveyMonkey is available here: http://svy.mk/t3l60A. The SurveyMonkey Audience main website is available here: http://svy.mk/slR9Sy. Detailed survey results are available in the appendix section of this report. For a deeper look at the data, please contact your Sterne Agee representative. USER ENGAGEMENT (DESKTOP/LAPTOP) According to our survey, nearly 63% of desktop/laptop users access Facebook once or more every day, including 43% of users who indicated accessing Facebook multiple times a day. Usage is most pronounced in the 18-29 age group where 78% of users indicated they access Facebook once or more every day (including 61% indicating they access Facebook multiple times a day). Interestingly, our survey also shows that even in the >60 age group, engagement is fairly strong as 55% of this group indicated they access Facebook once or more every day. We note that Facebook reports overall engagement (DAU % of MAU) in the U.S./Canada of 70%. In terms of time spent, nearly half of Facebook users in our survey indicated their Facebook usage is about the same today as it was six months ago. Another 26% of users indicated their usage on Facebook had increased in the last six months, including 7% of users that indicated a significant increase in usage. 25% of users indicated their usage of Facebook had decreased in the last six months, including 4% indicating a significant decrease. Given the above, we are left to conclude that, on average, users are spending about the same amount of time on Facebook today compared to 6 months ago.

Page 2

October 12, 2012

Compared to 6 months ago, are you using Facebook more, less, or about the same amount right now?
49.5%

6.8%

7.8%

11.3%

12.9%

7.3%

4.3% Significantly Less

Significantly more

Moderately more

Slightly more About the same Slightly Less amount

Moderately Less

Source: Sterne Agee & Survey Monkey Sterne Agee View: Based on our survey, we believe engagement levels remain healthy across various age groups. Engagement is particularly strong within the 18-29 year olds, which makes sense given the median age of a FB user worldwide is only 22 (and we believe the average age is slightly higher in the U.S.). MOBILE ENGAGEMENT 61% of users in our survey indicated that they have the Facebook app on their mobile device (smart phone or tablet computer). Of these users, 64% indicated they access their FB account once or more per day, including 46% indicating usage more than once daily. We note these percentages are slightly above desktop users (63%/43%), which makes sense given the ongoing shift to mobile. Women are more likely to use the Facebook Mobile app on a daily basis, with 71% using it once or more daily compared to 57% for men. Our survey indicates that 77% of users accessing Facebook on their mobile devices are moderately to extremely satisfied with their experience, including 33% at the upper end of the spectrum. 7% of users indicated they were not at all satisfied while 15% indicated they were only slightly satisfied.

Page 3

October 12, 2012

Overall, how satisfied are you with your experience using the Facebook mobile app?
44.4%

25.3% 15.4% 7.9% 7.0%

Extremely satisfied

Very satisfied

Moderately satisfied

Slightly satisfied

Not at all satisfied

Source: Sterne Agee & Survey Monkey

How often do you access the Facebook mobile app?

Female 53% 42% Male

18%

15%

17%

20% 5%
10%

5%

8% 2%

4%

Multiple times a day

Once a day

A few times a week

A few times a Less than once a month month

Never

Source: Sterne Agee & Survey Monkey Sterne Agee View: Mobile is the most critical area for Facebook going forward. Since currently only 1 of 3 mobile users of Facebook in our survey indicates a high degree of satisfaction, it suggests there is considerable room for improvement for Facebook. We think the Facebook mobile app is, in fact, improving, and future users are likely to have a more favorable view. As an example, Facebooks recently released new app with the iPhone 5 has been received well. ADVERTISING One of the most important tasks for Facebook is to drive higher monetization (more ads) through advertising while maintaining/enhancing the user experience.

Page 4

October 12, 2012 In our survey, 54% of the respondents indicated they have noticed more ads on Facebook versus six months ago while another 42% indicated seeing about the same number of ads. Only a small percentage (4%) of respondents indicated seeing fewer ads on Facebook versus six months ago. A full 61% of respondents indicated that the relevance of the ads they saw on Facebook was about the same as 6 months ago, 17% of respondents indicated the relevance of ads had improved while the remaining 22% of respondents believed the relevance of the ads had decreased compared to 6 months ago. Results among mobile users are quite different. 77% of mobile Facebook users in our survey indicated they have not noticed ads. Recall, on mobile, Sponsored Stories is the primary advertising vehicle for FB today and this began only a few months ago. We suspect users dont necessarily consider these as ads or as intrusive.

Compared to 6 months ago, have you noticed more or fewer ads on Facebook now?
41.7%

19.1% 15.1%

19.9%

3.3% Much more Moderately more Slightly more About the Slightly fewer same amount

0.5% Moderately fewer

0.4% Much fewer

Source: Sterne Agee & Survey Monkey

Compared to 6 months ago, would you say these ads are more or less relevant to you?
60.7%

12.3% 1.1% 4.1%

8.1%

4.2% Moderately less relevant

9.5%

Much more Moderately Slightly more Neither more relevant more relevant relevant or less relevant

Slightly less relevant

Much less relevant

Source: Sterne Agee & Survey Monkey

Page 5

October 12, 2012 Sterne Agee View: It appears that users are noticing more ads on desktop but the relevance of ads may need to improve. On mobile, users are perhaps not finding Sponsored Stories as intrusive, indicating significant opportunity for FB to expand. On desktop, we believe the relevance of ads needs to improve, as only 1 of 6 FB users believes the relevance of ads shown has increased over the last six months. Since FB differentiates itself by enabling marketers to reach a more relevant audience, we believe this ratio needs to improve continually. We think this may suggest improvement is needed not only from FB but also from marketers providing the content/message. Still, the good news is that a very significant portion (61%) of users believes the relevance of ads shown is at least the same as six months ago. GIFTS 45% of the respondents would consider using Facebooks new Gift feature that allows a user to purchase and send a gift of a physical item (i.e. chocolate, gift cards, flowers, etc.) to someone on their friends list. The remaining 55% of respondents indicated they would be not at all likely to purchase a gift through Facebook.

How likely would you be to use Facebook s new Gift feature that allows you to purchase and send a gift of a physical item (e.g., cookies, chocolate, flowers, gift cards, etc to someone on your friends list?
55.1%

26.1% 13.5%
1.7% Highly likely

3.6%
Very likely Moderately likely slightly likely Not at all likely

Source: Sterne Agee & Survey Monkey Sterne Agee View: We believe this is an area of tremendous opportunity for Facebook. This will allow Facebook to diversify its revenues away from advertising and should lessen the impact of the shift towards mobile. The mobile transition has had less of an impact on revenue for companies with transaction-based models versus those with advertising-based models. Additionally, launching Facebook Gifts could signal Facebooks entry into the large e-commerce market. PROMOTED POSTS Only 16% of the respondents in our survey would consider using Facebook's promoted post feature (currently in testing), which allows a user to guarantee that an important post (i.e. an announcement) is seen by their friends.

Page 6

October 12, 2012

What is the most you would be willing to pay to guarantee that an important post from you (ie. an announcement) was seen by your friends?
83.6%

3.8%

2.8%

4.9%

2.4%

1.3%

1.2%

$0

$.10

$.11-$.99

$1

$2-$4

$5

More than $5

Source: Sterne Agee & Survey Monkey Sterne Agee View: While Facebook began offering promoted posts to pages in Q2, they have recently begun testing the expansion of this features to Facebook users. While we see a significant opportunity for Facebook Pages to promote posts, we view the move into promoted posts for personal profiles as small. While the margins will be high, we think its unlikely for the promoted personal posts to move the needle in the near term. SEARCH 47% of the respondents would consider using a search engine developed by Facebook instead of their current preferred search engine. We note variability across age groups, with the younger demographic (18 to 29 years) being less likely to use a FB search engine with 34% of the respondents indicating they would consider using it over their preferred search engine.

If Facebook developed its own search engine, how likely would you be to use it instead of your current preferred search engine?
52.6%

27.3%

14.4%
1.3%

4.4% Very likely Moderately likely Slightly likely Not at all likely

Highly likely

Source: Sterne Agee & Survey Monkey

Page 7

October 12, 2012 Sterne Agee View: While we think that attempting to compete with Google (GOOG, $751.48, NR)head-on in Search would prove challenging for Facebook, we think Facebook has a good opportunity to differentiate by combining Search with Social. Recall, Facebook currently receives 1 billion search queries per day (albeit these are mostly searches for people). NON-FACEBOOK PLATFORM USAGE Survey respondents indicated that some of the other social websites for which their usage has increased in the last six months include Twitter, Pinterest, Instagram (Part of Facebook), Google+, LinkedIn, and Tumblr.

Page 8

October 12, 2012

INCOME STATEMENT ($ In Millions) - FY End: December

Facebook Annual Earnings Model: Sterne Agee

Arvind Bhatia, CFA (214) 702 - 4001 Advertising Revenue Payments and other fees revenues Revenue ($MM) Y/Y % Chg-- Advertising Revenue Y/Y % Chg-- Payments Revenue Y/Y % Chg-- Revenue Sequential Change -- Advertising Revenue Sequential Change -- Payments Revenue Sequential Change -- Revenue Costs and Expenses Cost of revenue Gross Profits Gross Margin YOY Chg (bps) Marketing and sales % of Revenue Research and development % of Revenue General and administrative % of Revenue Total Operating Expenses Income from operations (EBIT) Dep & Amort costs included in costs above Adjusted EBITDA (ex Stock based comp) % Y/Y Growth % Sequential Growth Adjusted EBITDA Margin Incremental Adjusted EBITDA Margin Other expense, net Interest expense Other income (expense), net ProForma Pre Tax Income (ex SBC) Assumed Normalized Taxes (Tax Rate of 35%) Pro Forma Net Income (Ex SBC) ProForma Fully Diluted Shares Outstanding Pro Forma Fully Diluted EPS (ex SBC)
Source: Company Reports and Sterne Agee Estimates

2010A 1Q:11A 2Q:11A 3Q:11A 4Q:11A 2011A 1Q:12A 2Q:12A $ 1,869 $ 637 $ 776 $ 798 $ 943 $ 3,154 $ 872 $ 992 $ 106 $ 94 $ 119 $ 156 $ 188 $ 557 $ 186 $ 192 $ 1,975 $ 731 $ 895 $ 954 $ 1,131 $ 3,711 $ 1,058 87% 83% 77% 44% 69% 37% 1780% 1388% 818% 147% 425% 98% 112% 107% 104% 55% 88% 45% -3% 22% 3% 18% -8% 24% 27% 31% 21% -1% 0% 22% 7% 19% -6% 493 1,482 75% 374 184 9% 134 7% 113 6% 431 1,051 139 $ 1,190 167 207 564 688 77% 76.9% 614 257 68 9% 53 7% 48 7% 169 395 51 $ 446 84 9% 63 7% 64 7% 211 477 72 $ 549 233 721 76% 363 108 11% 75 8% 54 6% 237 484 244 851 887 2,860 78% 77.1% (105) 203 116 10% 82 7% 65 6% 263 624 376 10% 273 7% 231 6% 880 1,980 323 $ 2,303 $ 94% 62% 64% 42 (19) 1,919 672 1,247 $ 1,184 28% 61% 32% 14% 3% 12%

3Q:12E $ 1,000 $ 192 $ 1,192 25% 23% 25% 1% 0% 1%

4Q:12E 2012E $ 1,148 $ 4,012 $ 227 $ 796 $ 1,375 $ 4,808 22% 27% 21% 43% 22% 30% 15% 18% 15%

1Q:13E $ 1,059 $ 231 $ 1,290 21% 24% 22% -8% 2% -6% 346 944 73% (100) 155 12% 113 9% 138 11% 407 537 209 $ 746 26% -10% 58%

2Q:13E $ 1,206 $ 253 $ 1,459 22% 32% 23% 14% 10% 13% 378 1,081 74% (100) 155 11% 138 9% 157 11% 450 631 229 $ 860 32% 15% 59%

3Q:13E 4Q:13E $ 1,245 $ 1,468 $ 273 $ 337 $ 1,518 25% 42% 27% 3% 8% 4% 401 1,117 74% (100) 165 11% 144 9% 163 11% 471 645 249 $ 894 34% 4% 59% $ 1,804 28% 48% 31% 18% 23% 19% 425 1,379 76% (100) 170 9% 171 9% 194 11%

2013E $ 4,977 $ 1,093 $ 6,071 24% 37% 26%

273 295 303 310 1,181 785 889 889 1,065 3,627 74% 75.1% 74.6% 77.4% 75.4% (296) (179) (100) (100) (164) 136 13% 93 9% 72 7% 301 484 110 594 135 11% 112 9% 127 11% 374 515 139 $ 654 145 12% 113 9% 128 11% 386 503 164 $ 667 155 11% 130 9% 147 11% 433 632 194 $ 826 571 12% 448 9% 474 10% 1,493 2,134 607 $ 2,741 19% 57% 40% (44.0) (21.0) 2,069 862 1,207 2,532 $0.48

1,550 4,521 74% (97) 645 11% 566 9% 651 11%

60% 69% 22 (2) 1,027 359

61%

61%

56% 45% (14.0) 15 513 226 287 2,271 $0.13

55% 36% (10.0) (12) 493 198 295 2,451 $0.12

56%

60%

534 1,862 845 2,659 269 956 $ 1,114 $ 3,615 35% 32% 25% 62% 60% 69% (10.0) 835 292 543 2,734 $0.20 -40 0 2,619 916 1,702 2,724 $0.62

(8) (9) 18 1 405 469 159 184 246 285 1,488 1,510 $0.11 $0.11

(10.0) (12) 481 193 288 2,700 $0.11

(10.0) (12) 610 245 365 2,707 $0.13

(10.0) 0 527 185 343 2,714 $0.13

(10.0) 0 621 218 404 2,720 $0.15

(10.0) 0 635 222 413 2,727 $0.15

Page 9

October 12, 2012

Facebook

1. What is your approximate average household income?

Response Percent $0-$24,999 $25,000-$49,999 $50,000-$74,999 $75,000-$99,999 $100,000-$124,999 $125,000-$149,999 $150,000-$174,999 $175,000-$199,999 $200,000 and up 13.3% 19.2% 19.8% 13.8% 12.0% 5.0% 4.6% 2.3% 10.2% answered question skipped question Response Count 111 160 165 115 100 42 38 19 85 835 9

2. Do you have a Facebook account?

Response Percent Yes No 91.8% 8.2% answered question skipped question Response Count 775 69 844 0

1 of 11

Page 10

October 12, 2012

3. How often do you access Facebook on your desktop and/or laptop computer (NOT including your mobile device)?
Response Percent Multiple times a day Once a day A few times a week A few times a month Less than once a month Never 42.7% 19.9% 18.3% 11.1% 6.1% 2.0% answered question skipped question Response Count 328 153 141 85 47 15 769 75

4. Compared to 6 months ago, are you using Facebook more, less, or about the same amount right now?
Response Percent Significantly more Moderately more Slightly more About the same amount Slightly Less Moderately Less Significantly Less 6.8% 7.8% 11.3% 49.7% 12.9% 7.3% 4.3% answered question skipped question Response Count 52 60 87 382 99 56 33 769 75

2 of 11

Page 11

October 12, 2012

5. Why has your use of Facebook changed?

Response Count 384 answered question skipped question 384 460

6. Are there any other social websites you are using more now than you were 6 months ago (e.g., twitter, pinterest, instagram, google+ etc..), if so which ones?
Response Count 384 answered question skipped question 384 460

7. Compared to 6 months ago, have you noticed more or fewer ads on Facebook now?
Response Percent Much more Moderately more Slightly more About the same amount Slightly fewer Moderately fewer Much fewer 15.2% 19.0% 19.8% 41.7% 3.3% 0.5% 0.4% answered question skipped question Response Count 115 144 150 316 25 4 3 757 87

3 of 11

Page 12

October 12, 2012

8. Compared to 6 months ago, would you say these ads are more or less relevant to you?
Response Percent Much more relevant Moderately more relevant Slightly more relevant Neither more or less relevant Slightly less relevant Moderately less relevant Much less relevant 1.1% 4.1% 12.3% 60.8% 8.1% 4.2% 9.5% answered question skipped question Response Count 8 31 93 460 61 32 72 757 87

9. How often do you ACCIDENTLY click on the ads on Facebook when you see them?
Response Percent All the time Most of the time About half the time Some of the time None of the time 1.3% 1.8% 4.9% 38.7% 53.2% answered question skipped question Response Count 10 14 37 293 403 757 87

4 of 11

Page 13

October 12, 2012

10. Do you generally find the ads on Facebook helpful or annoying?

Response Percent Extremely helpful Moderately helpful Slightly helpful Neither helpful or annoying Slightly annoying Moderately annoying Extremely annoying 0.0% 1.7% 5.7% 25.9% 24.2% 19.4% 23.1% answered question skipped question Response Count 0 13 43 196 183 147 175 757 87

11. What is the most you would be willing to pay to guarantee that an important post from you (ie. an announcement) was seen by your friends?
Response Percent $0 $.10 $.11-$.99 $1 $2-$4 $5 More than $5 83.6% 3.8% 2.8% 4.9% 2.4% 1.3% 1.2% answered question skipped question Response Count 633 29 21 37 18 10 9 757 87

5 of 11

Page 14

October 12, 2012

12. How likely would you be to use Facebooks new Gift feature that allows you to purchase and send a gift of a physical item (e.g., cookies, chocolate, flowers, gift cards, etc) to someone on your friends list?
Response Percent Highly likely Very likely Moderately likely slightly likely Not at all likely 1.7% 3.6% 13.5% 26.0% 55.2% answered question skipped question Response Count 13 27 102 197 418 757 87

13. If Facebook developed its own search engine, how likely would you be to use it instead of your current preferred search engine?
Response Percent Highly likely Very likely Moderately likely Slightly likely Not at all likely 1.3% 4.4% 14.4% 27.3% 52.6% answered question skipped question Response Count 10 33 109 207 398 757 87

6 of 11

Page 15

October 12, 2012

14. Do you have the Facebook mobile app on your smartphone or tablet computer?
Response Percent Yes No, even though I HAVE a smartphone or tablet computer No, even though I DON'T have a smartphone or tablet computer 60.7% Response Count 458

13.6%

103

25.7%

194

answered question skipped question

755 89

15. How often do you access the Facebook mobile app?

Response Percent Multiple times a day Once a day A few times a week A few times a month Less than once a month Never 46.0% 18.4% 17.9% 7.9% 6.8% 3.1% answered question skipped question Response Count 210 84 82 36 31 14 457 387

7 of 11

Page 16

October 12, 2012

16. Overall, how satisfied are you with your experience using the Facebook mobile app?
Response Percent Extremely satisfied Very satisfied Moderately satisfied Slightly satisfied Not at all satisfied 7.9% 25.2% 44.6% 15.3% 7.0% answered question skipped question Response Count 36 115 204 70 32 457 387

17. Have you noticed ads on the Facebook MOBILE APP in the past 6 months?
Response Percent Yes No 22.8% 77.2% answered question skipped question Response Count 104 353 457 387

8 of 11

Page 17

October 12, 2012

18. How often do you ACCIDENTLY click on the ads on the Facebook MOBILE APP when you see them?
Response Percent All the time Most of the time About half the time Some of the time None of the time 2.9% 1.0% 8.7% 47.1% 40.4% answered question skipped question Response Count 3 1 9 49 42 104 740

19. Do you generally find the ads on the Facebook MOBILE APP helpful or annoying?
Response Percent Extremely helpful Moderately helpful Slightly helpful Neither helpful or annoying Slightly annoying Moderately annoying Extremely annoying 0.0% 0.0% 2.9% 12.5% 26.9% 18.3% 39.4% answered question skipped question Response Count 0 0 3 13 28 19 41 104 740

9 of 11

Page 18

October 12, 2012

20. Gender
Response Percent Male Female 54.3% 45.7% answered question skipped question Response Count 407 343 750 94

21. Age
Response Percent < 18 18-29 30-44 45-60 > 60 0.0% 23.6% 25.3% 31.1% 20.0% answered question skipped question Response Count 0 177 190 233 150 750 94

10 of 11

Page 19

October 12, 2012

22. Education
Response Percent Less than high school degree High school degree Some college Associate or bachelor degree Graduate degree 1.6% 8.9% 28.5% 34.8% 26.1% answered question skipped question Response Count 12 67 214 261 196 750 94

11 of 11

Page 20

October 12, 2012

APPENDIX SECTION
Company Description:
Based in Menlo Park, California, Facebook is the worlds largest social networking service with over 900 million monthly active users.

IMPORTANT DISCLOSURES: Regulation Analyst Certification:

I, Arvind Bhatia and Brett Strauser, hereby certify the views expressed in this research report accurately reflect my personal views about the subject security(ies) or issuer(s). I further certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by me in this report.

Research Disclosures:
Sterne, Agee & Leach, Inc. makes a market in the following subject company Facebook, Inc.. Sterne, Agee & Leach, Inc.'s research analysts receive compensation that is based upon various factors, including Sterne, Agee & Leach, Inc.'s total revenues, a portion of which is generated by investment banking activities. Sterne Agee & Leach, Inc. expects to receive or intends to seek compensation for investment banking services from the subject company and/or companies in the next three months.

Price Target Risks & Related Risk Factors:

Investment risks associated with the achievement of the price target include, but are not limited to, a company's failure to achieve Sterne, Agee & Leach, Inc., earnings and revenue estimates; unforeseen macroeconomic and/or industry events that adversely affect demand for a company's products or services; product obsolescence; changes in investor sentiment regarding the specific company or industry; intense and rapidly changing competitive pressures; the continuing development of industry standards; the company's ability to recruit and retain competent personnel; and adverse market conditions. For a complete discussion of the risk factors that could affect the market price of a company's shares, refer to the most recent Form 10-Q or 10-K that a company has filed with the Securities Exchange Commission.

Company Specific Risks:

Risks. Key risks to FB include 1) slower-than-expected growth; 2) competitive threats from companies like Google; 3) regulatory risks; 4) risks associated with entering new international markets, etc.

Valuation Methodology:
Methodology for assigning ratings and target prices includes qualitative and quantitative factors including an assessment of industry size, structure, business trends and overall attractiveness; management effectiveness; competition; visibility; financial condition; and expected total return, among other factors. These factors are subject to change depending on overall economic conditions or industry or company-specific occurrences. Sterne, Agee & Leach, Inc., analysts base valuations on a combination of forward looking earnings multiples, price-to-revenue multiples, and enterprise-value-to-revenue ratios. Sterne, Agee & Leach, Inc., believes this accurately reflects the strong absolute value of earnings, the strong earnings growth rate, the inherent profitability, and adjusted balance sheet factors. Additional company-specific valuation methodology is available through Sterne, Agee & Leach, Inc.

Company Specific Valuation:

Our price target of $37 is based on 25x our 2013 adjusted EBITDA estimate of $3.6B.

Definition of Investment Ratings:

BUY: We expect this stock to outperform the industry over the next 12 months. NEUTRAL: We expect this stock to perform in line with the industry over the next 12 months. UNDERPERFORM: We expect this stock to underperform the industry over the next 12 months. RESTRICTED: Restricted list requirements preclude comment.

Ratings Distribution:
Rating Category Buy Neutral Underperform Count 224 225 22 Percent 47.56% 47.77% 4.67% Count 16 11 0 IB Serv./ Past 12Mos. Percent 7.14% 4.89% 0.00%

Appendix Section, Page I

October 12, 2012 ADDITIONAL INFORMATION AVAILABLE UPON REQUEST: Contact Robert Hoehn at 1-212-338-4731. Other Disclosures: Opinions expressed are our present opinions only. This material is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon as such. Sterne, Agee & Leach, Inc., its affiliates, or one or more of its officers, employees, or consultants may, at times, have long or short or options positions in the securities mentioned herein and may act as principal or agent to buy or sell such securities. Copyright 2012 Sterne, Agee & Leach, Inc. All Rights Reserved.

To receive price charts or other disclosures on the companies mentioned in this report, please visit our website at https:// sterneagee.bluematrix.com/sellside/Disclosures.action or contact Sterne, Agee & Leach, Inc. toll-free at (800) 240-1438 or (205) 949-3689.

Appendix Section, Page II

Founded in 1901, Sterne Agee has been providing investors like you with high-quality investment opportunities for over a century. During the early years, our founders prominently established themselves in the financial securities industry in the southeastern United States. Today, we have expanded to serve all regions of the country. Sterne, Agee is headquartered in Birmingham, Alabama with offices in 22 states. Sterne Agee is one of the largest independent firms in the country. Sterne, Agee & Leach, Inc. is a division of Sterne Agee Group, Inc., which also includes The Trust Company of Sterne, Agee & Leach, Inc.; Sterne Agee Asset Management, Inc.; Sterne Agee Clearing, Inc.; and Sterne Agee Financial Services, Inc.www.sterneagee.com

EQUITY CAPITAL MARKETS

Ryan Medo Managing Dir., Eq. Cap. Mkts. (205) 949-3623

William Jump Jon Schenk

INSTITUTIONAL SALES Director of Institutional Sales Assoc. Director of Inst. Sales

Robert Hoehn

(404) 814-3960 (212) 763-8221

JT Cacciabaudo

INSTITUTIONAL TRADING Head of Trading

(212) 763-8288

EQUITY RESEARCH
Director of Research (212) 338-4731

CONSUMER Apparel Retailing & Toys

Margaret Whitfield Tom Nikic, CFA Arvind Bhatia, CFA Brett Strauser SVP, Sr. Analyst Analyst Mng. Dir. VP, Analyst Mng. Dir. Analyst Mng. Dir. (973) 519-1019 (212) 338-4784 (214) 702-4001 (214) 702-4009 (212) 763-8226 (212) 338-4721 (949) 721-6651

FINANCIAL SERVICES (CONT.) Property/Casualty Insurance

Dan Farrell Nitin Chhabra, FCAS Mng. Dir. Analyst (212) 338-4782 (212) 338-4779

Interactive Entertainment / Internet

INDUSTRIALS Aerospace & Defense

Peter Arment Josh W. Sullivan Mng. Dir. Sr. Analyst (646) 376-5336 (646) 376-5337

Footwear & Apparel

Sam Poser Ben Shamsian

Auto, Auto Parts and Auto Retailers

Michael P. Ward, CFA Mng. Dir. (646) 376-5375

Leisure & Entertainment

David Bain

Coal, Metals & Mining, Engineering & Construction

Michael S. Dudas, CFA Satyadeep Jain, CFA Patrick Uotila, CPA Mng. Dir. Analyst Analyst (646) 376-5329 (646) 376-5357 (646) 376-5358

Restaurants
Lynne Collier Mng. Dir. (214) 702-4045

ENERGY Exploration & Production

Tim Rezvan, CFA Sr. Analyst (212) 338-4736

Construction Materials & Diversified Industrials

Todd Vencil, CFA Kevin Bennett, CFA SVP, Sr. Analyst VP, Analyst (804) 282-7385 (804) 282-4506

Oilfield Services & Equipment

Stephen D. Gengaro Grant Fox Mng. Dir. Analyst (646) 376-5331 (212) 338-4723

HEALTHCARE

Pharmaceutical Services
Greg T. Bolan Himanshu Rastogi, PhD, CFA Mng. Dir. VP, Analyst (615) 760-1469 (615) 760-1478

FINANCIAL SERVICES Asset Management

Jason Weyeneth, CFA Charles Warren, CFA SVP, Sr. Analyst VP, Analyst (212) 763-8293 (646) 376-5309

TECHNOLOGY Data Networking and Storage

Alex Kurtz Amelia Harris Mng. Dir Analyst (415) 402-6015 (415) 402-6018

Banks & Thrifts

Matthew Kelley Matthew Breese Brett Rabatin, CFA Kenneth James Peyton Green Zachary Wollam Todd L. Hagerman Robert Greene Mng. Dir. Analyst Mng. Dir. VP, Sr. Analyst Mng. Dir. VP, Analyst Mng. Dir. VP, Analyst (207) 699-5800 (207) 699-5800 (615) 760-1466 (615) 760-1474 (877) 492-2663 (615) 760-1468 (212) 338-4744 (212) 763-8296

Financial Technology
Greg Smith Jennifer Dugan Mng. Dir Analyst (818) 615-2029 (415) 402-6051

Hardware, Mobile Devices, IT Supply Chain

Shaw Wu SVP, Sr. Analyst (415) 362-7431

LED Supply Chain

Andrew Huang John Shen Mng. Dir. Analyst (415) 362-6143 (415) 402-6052

Life Insurance
John M. Nadel Alex Levine Mng. Dir. Analyst (212) 338-4717 (212) 338-4748

Semiconductors
Vijay Rakesh Mng. Dir. (312) 525-8431

Mortgage Finance & Specialty Finance

Henry J. Coffey, Jr., CFA Jason Weaver, CFA Calvin Hotrum Mng. Dir. VP, Sr. Analyst Analyst (615) 760-1472 (615) 760-1475 (615) 760-1476

TRANSPORTATION, SERVICES & EQUIPMENT

Jeffrey A. Kauffman Sal Vitale Ryan Mueller Mng. Dir. VP, Sr. Analyst Analyst (212) 338-4765 (212) 338-4766 (212) 338-4732

Email Address for Sterne Agee Employees: first initial + last name@sterneagee.com (e.g., jsmith@sterneagee.com)