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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.'

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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.

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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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