When social networking company Facebook announced Tuesday that it was cash flow positive for the first time, the company was cryptic about the reasons. But here’s Facebook’s secret weapon: “Self-serve ads,” or those ads that advertisers can create on the site in a matter of minutes to target specific demographics of users.

chamath-1“Self-serve ads are the gift that keeps on giving,” said Facebook’s vice president of growth, mobile and international expansion Chamath Palihapitiya (pictured), in an interview today. “All channels are doing very well, but that channel is just crushing it.”

Self-serve ads let marketers target precisely who they want to appeal to. For example, advertisers can target users that are female, aged 13-17 and live in San Francisco.

Palihapitiya confirmed that the company’s self-serve ad revenue is not only growing, it is accelerating on a quarterly basis. In fact, it has been accelerating ever quarter since it was first offered in August 2007. Notably, the offering was built and launched around the same time as the ill-fated Beacon, a separate ad product that met with disaster after irate users complained it was violating their privacy.

And Palihapitiya had a hand in both projects. He had a personal role in blessing the self-serve ad product, which was led by Tim Kendall (pictured below, left) and Kent Schoen on the business side and Kang-Xing Jin within engineering.

facebookFacebook said on Tuesday that it is “free cash-flow positive”, which means it is making money after setting aside capital to grow and maintain its technology. Not only that, it reached that goal a year ahead of schedule, fueled by growth that pushed the company past the 300-million-user mark this month.

The startup has been EBITDA profitable since last year (or profitable before accounting for interest, taxes, depreciation and amortization). While related, profit and cash flow are slightly different — a business can technically earn a profit but have negative cash flow if its customers are slow to pay or if it has a large bill coming due. Facebook hasn’t changed its forecast for 70 percent year-over-year revenue growth.

Palihapitiya said the self-serve ads are also helpful in letting the company make early money when expanding into foreign markets. After it gets more established in those markets, it hires a direct sales team, which can then reach out in a more aggressive effort to pitch to the largest advertisers in those countries.

While the company declined to break out its revenue growth because it’s private, it relies on a handful of channels for income. First are the self-serve ads, which let businesses pick a demographic and create campaigns that hit only that group.

tim-kendallIt became an obvious part of Facebook’s business model three years after Facebook was born five years ago. With users electing to share a good deal of personal information about themselves from their favorite music to hometown, Facebook has accumulated a gold mine of data for marketers. Beyond that, the company is pushing users to continuously share information about themselves through links and status updates, which in turn will feed richer data back into the system. But Facebook hasn’t said whether that data is incorporated into the ad system yet.

Second are the larger ad campaigns that Facebook tailors for brands, which can run upwards of $100,000 depending on a company’s needs. Then there are virtual goods, like the “Gifts” users can buy for $1 or so to place on friends’ profiles. Despite the buzz this category is getting, we’re told by Facebook sources that the revenue from virtual goods isn’t meaningful for the company. (However, it’s the bread and butter for game developers, such as Zynga, which will pull in well over $100 million in revenue this year, according to CEO Mark Pincus.)

The startup is also experimenting with payments by allowing application developers to accept Facebook Credits in exchange for physical and virtual goods.

Facebook’s annual revenue could come in at $550 million, according to the company. Silicon Alley Insider ran a few estimates pegging the revenue breakdown this way:

  • $125 million from brand ads
  • $150 million from Facebook’s ad deal with Microsoft
  • $75 million from virtual goods
  • $200 million from self-service ads.

But around the time Silicon Alley Insider made those estimates in the middle of the year, Facebook had pegged its year-end target at 300 million users — the goal it just blew through on Tuesday, according to Palihapitiya.

Palihapitiya described his conversations with Zuckerberg as follows:

Zuckerberg has a really good understanding about how the dynamics of this business works. Earlier this year, he asked me, ‘What do you think the year-end goal should be?’

I said, ‘Maybe 240.’ Then he asked me some questions and said: ‘275.’

That was 25 percent higher than my upper bound, so I had to scramble and figure out a way to get there.

When I came back in mid-year, I said: ‘we can do 300’. He then made it higher again. We’ll probably make it.

So it’s possible that annual revenues (and costs) may track higher. Assuming Facebook maintains the same rate of growth, at roughly 50 million new active monthly users every two months, it might get to 385 million by year-end, according to our math.

“I live and die by that one metric,” Palihapitiya said.

facebook-ads

[You can follow VentureBeat on Twitter, along with VentureBeat writers Matt Marshall, Dean Takahashi, Anthony Ha, Camille Ricketts, Paul Boutin, Kim-Mai Cutler, and Matthaus Krzykowski.]