Facebook's earnings disappoint investors, match predictions

In its first earnings report as a publicly traded company, Facebook indicated its growth is slowing and profit margins are smaller than last year at this time. One analyst says, 'Facebook is no Google.'

By , San Jose Mercury News

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    Monitors show the value of the Facebook, Inc. stock during morning trading at the NASDAQ Marketsite in New York in this file photo.
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Facebook issued its first earnings report as a publicly traded company on Thursday, with numbers that managed both to match analysts’ predictions and dismay investors who were hoping for a great deal more.

The world’s leading social network announced results for its last quarter that confirmed its revenue growth is slowing and its profit margin is smaller than a year ago. And even though top executives voiced high hopes for selling new kinds of “social” advertising, investors drove Facebook’s stock price down in after-hours trading — to its lowest point since a controversial Wall Street debut that also disappointed investors.

“The bottom line of this call is that Facebook is no Google,” said Karsten Weide, a social media analyst with the IDC research firm. Internet search giant Google reported its profit and sales both doubled in the first earnings period after its 2004 stock market debut.

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Facebook said its revenue grew 32 percent from a year ago, as the company took in $1.18 billion for the quarter ending in June. The company had a net loss of $157 million, after taking $1.3 billion in charges for employee stock grants. After factoring out those one-time charges, Facebook reported earnings of 12 cents a share.

The results were just slightly better than analysts had forecast. Analysts surveyed by Thomson Reuters predicted, on average, that Facebook would report earnings of 12 cents a share, excluding one-time charges, on revenue of $1.15 billion.

But in terms of growth, Facebook was unable to match the 107 percent revenue increase that it reported a year ago. And while Facebook reported 955 million monthly active users, up more than 25 percent from a year ago, that fell short of the 50 percent increase in users the company reported in July 2011.

Facebook also said it delivered 2 percent fewer ads to users in the United States, as more people shifted to using the social network on smartphones and mobile devices, where Facebook only recently started selling ads on an experimental basis.

CEO Mark Zuckerberg, in some of his first public remarks since the company went public in May, sought to assure investors that Facebook is focused on delivering ads and other products to mobile users, whose numbers grew by 67 percent, to 543 million, over a year ago.

“Mobile is a huge opportunity for Facebook,” he said during a conference call with Wall Street analysts.

But after being viewed as one of Silicon Valley’s hottest companies in recent years, Facebook now finds itself working to convince investors and advertisers that its concept of “social advertising” — ads that incorporate recommendations from users’ friends — can be the next big thing in online commerce.

Early tests of new social ads, including those appearing on Facebook’s mobile platform, indicate they are more effective than Facebook’s traditional display advertising, Chief Operating Officer Sheryl Sandberg said Thursday.

But she said Facebook is “still in the early days of building that monetization engine,” and she acknowledged that advertisers face a “learning curve” in terms of understanding how to use those ads.

Social ads are so new that it’s difficult to forecast what kind of revenue they will produce, added Chief Financial Officer David Ebersman, explaining why Facebook would not offer “guidance” or detailed projections for earnings in the next quarter or year.

Analysts said that’s another reason why investors showed little confidence in Facebook’s stock. Most companies do offer those projections, although some, including Google, do not.

“No guidance is a concern,” said Arvind Bhatia, an analyst with Sterne Agee. But he added, “this is a new medium. That’s why they’re reluctant: They don’t want to paint themselves into a corner.”

Bhatia, who is still upbeat about Facebook’s potential, said investors who reacted negatively “are focused too much on the short term.” But IDC’s Weide said Facebook still hasn’t proven the potential of its advertising efforts.

“There has always been this talk about social advertising and how effective it will be, but it has not materialized,” Weide said. “It’s a story of hype versus reality.”

Pressure on Facebook was already building after the online gaming company Zynga, whose business is closely tied to Facebook, announced Wednesday that its earnings were far worse than expected.

Facebook’s stock closed Thursday at $26.84 and fell below $24 in late trading — the lowest it’s been sinceFacebook’s May 18 initial public offering, when the stock debuted at $38. The highly anticipated IPO turned into a major disappointment for investors who expected the stock price to quickly shoot up.

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©2012 San Jose Mercury News (San Jose, Calif.)

Visit the San Jose Mercury News (San Jose, Calif.) at www.mercurynews.com

Distributed by MCT Information Services

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