Facebook posts slower revenue growth, leaves investors in dark
FACEBOOK reported a drastic slowdown in revenue growth and offered no financial forecasts to ease concern over the prospects for boosting advertising in its first earnings report as a public company, sending its shares to a record low.
Facebook executives pointed to early signs of success in new advertising services, but the lack of a detailed financial outlook went over poorly with investors hoping for evidence that the company could soon reverse the continuing slowdown in its business.
"The question is, do you get a re-acceleration in the business at some point?" Oppenheimer & Co analyst Jason Helfstein asked. "Because they didn't give you guidance, you're going to have to wait to find out what happens."
Shares of Facebook, which have shed a third of their value since the company's haphazard stock market debut in May at $38, broke below $24 in frenzied after-hours trading on Thursday. The social networking pioneer was the first US company to debut with a market value of more than $100bn.
Facebook said revenue increased 32% in the second quarter to $1,18bn, a hair above the average analyst forecast of $1,15bn according to Thomson Reuters. That growth rate was the slowest since the first three months of 2011, the earliest period for which the company has disclosed revenue growth.
Mark Zuckerberg, the 28-year-old CE who created Facebook in his Harvard dorm room, said the company was seeing encouraging results from newly introduced advertising services and it now had a "clear path" to building a strong mobile business.
"Mobile is a huge opportunity for Facebook," said Mr Zuckerberg, noting that the company was investing "very heavily" in improving its mobile apps.
Facebook, which competes with established web companies such as Google and Yahoo, said its capital expenditure more than tripled to $413m in the second quarter.
The company's finance chief, David Ebersman, also said operating expenses in the second half would increase significantly from a year earlier. "At this early stage of our growth, investment is a top priority, as opposed to managing for a target margin," Mr Ebersman said.
Facebook posted a net loss of $157m, or 8c per share, in the second quarter after taking hefty stock compensation charges related to its initial public offering (IPO). That compared with net income of $240m, or 11c per share, in the year-earlier quarter.
Excluding the charges, Facebook said it earned 12c per share, in line with Wall Street's forecast.
RISING AD PRICES
Facebook has raced through eight years of breakneck growth that was to have culminated in its May IPO.
Instead, its share price has headed south as investors questioned its valuation of more than 50 times earnings and its longer-term ability to sustain growth as users migrate to mobile devices.
Monthly active users grew to 955-million at the end of the second quarter, up from 901-million at the end of March. But mobile monthly active users surged 67% year on year to 543-million users, adding further pressure on Facebook's business, which only recently began to offer limited forms of mobile advertising.
Facebook's Mr Ebersman noted that advertising "impressions" lagged user growth during the second quarter but new social ads, which appear directly in Facebook users' "newsfeeds", were driving up ad rates.
The average price of a Facebook ad increased 9% during the quarter, Mr Ebersman said, driven primarily by the US, where rates jumped 20% with the company's newly released social ads.
"It's a positive, but it's still early," Ken Sena, an analyst with Evercore Partners, said of the performance of Facebook's new ads. "We won't likely be seeing much material impact any time soon," he said.
The stock price was also likely to come under further pressure, Mr Sena warned, from the imminent expiry of a stock lockup imposed on many Facebook employees after the IPO. That could bring a flood of new shares to the market.
A CHALLENGE ANEW
Facebook said revenue increased 32% in the second quarter to $1,18bn, a hair above the average analyst forecast of $1,15bn according to Thomson Reuters.
Facebook's growth rate in the second quarter was the slowest since the first three months of 2011, the earliest period for which the company has disclosed information about its revenue growth.
"They beat, but the Street was looking for more and that's why I think shares turned lower after an initial bounce," said Michael Matousek, a senior trader at US Global Investors, which manages about $3bn.
"The big question with the stock is how it will monetise its billion or so users. A lot of people think they can't convert those users to money."
On Wednesday, social games leader Zynga - which accounts for more than 10% of Facebook's revenue and faces the same challenge of earning off mobile users - stunned investors by slashing its 2012 earnings forecasts. That helped wipe 9% off Facebook's value during regular trading on Thursday.
Zynga and Facebook were among a bevy of hot tech prospects that went public in 2011 as renewed dot-com mania gripped Wall Street. They, along with fellow 2011 debutante Groupon, have since gone into a tailspin.
Mr Zuckerberg, who owns just over half a billion shares, saw $2,7bn of his paper wealth evaporate on Thursday, taking into account the after-hours dive.
Goldman Sachs, lead adviser on the IPO and the largest institutional shareholder with 41,6-million shares or a 6,6% stake, shed $222m. Fidelity, the largest US fund, which owns 19,8-million shares, saw $106m go up in smoke.
Executives told analysts on a conference call that Facebook aimed for closer integration with popular gadgets such as Apple's iPad and iPhone but Mr Zuckerberg dismissed widespread reports that it would design its own smartphone.
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