Facebook reveals revenue, profit slide ahead of IPO

SAN FRANCISCO Mon Apr 23, 2012 7:40pm EDT

Facebook Vice President of Product Chris Cox delivers a keynote address at Facebook's ''fMC'' global event for marketers in New York City in this February 29, 2012, file photo. Facebook Inc said its revenue declined sequentially in the first quarter, the weakest top-line performance by the world's largest social media network since at least 2010. REUTERS/Mike Segar (UNITED STATES - Tags: BUSINESS)

Facebook Vice President of Product Chris Cox delivers a keynote address at Facebook's ''fMC'' global event for marketers in New York City in this February 29, 2012, file photo. Facebook Inc said its revenue declined sequentially in the first quarter, the weakest top-line performance by the world's largest social media network since at least 2010.

Credit: Reuters/Mike Segar (UNITED STATES - Tags: BUSINESS)

SAN FRANCISCO (Reuters) - Facebook Inc reported its first quarter-to-quarter revenue slide in at least two years, a sign that the social network's sizzling growth may be cooling as it prepares to go public in the biggest ever Internet IPO.

The company blamed the first-quarter decline, which surprised some on Wall Street, on seasonal advertising trends.

"It was a faster slowdown than we would have guessed," said Brian Wieser, an analyst with Pivotal Research Group.

"No matter how you slice it, for a company that is perceived as growing so rapidly, to slow so much on whatever basis - sequentially or annually - it will be somewhat concerning to investors if faced with a lofty valuation," Wieser said.

Facebook is preparing to raise at least $5 billion in an initial public offering that could value the world's largest social network at up to $100 billion.

"The biggest issue is the realization that Facebook is not going to have an easy time meeting high expectations of the public market," said Jeff Sica, chief investment officer of SICA Wealth Management, which manages more than $1 billion in client assets, real estate and private equity holdings. "It will affect how people look at the IPO."

Investors are still likely to sign up in droves for the IPO; However, growth concerns may make some investors less likely to keep the stock over the long term, he added.

"I'm still encouraging people to participate in the IPO, under the acknowledgement that it could be a bumpy ride," Sica said. "There are high expectations and I hate high expectations."

The company, founded by Mark Zuckerberg in a Harvard University dorm room in 2004, surpassed 900 million monthly active users in the first quarter and said its full-time staff grew by about 1,100 employees to 3,539 in the past 12 months, according to an updated filing with the U.S. Securities and Exchange Commission on Monday.

Facebook also disclosed that it has agreed to pay Instagram $200 million if the company's recent deal to buy the photo-sharing start-up for about $1 billion does not go through.

Facebook said it paid $300 million in cash for Instagram, along with 23 million shares of Class B common stock. It said the fair value of its Class B common stock was $30.89 per share as of January 31.

Spending roughly doubled over the past 12 months, outpacing the 45 percent revenue increase during the period, it said.

Net income slid 12 percent to $205 million in the quarter, from $233 million a year earlier at the rapidly expanding company.

Facebook said its advertising business, which accounts for the bulk of its revenue, typically slows down in the first three months of the year. The rapid advertising growth may have "partially masked" such trends to date, and seasonal impacts may be more pronounced in the future, it noted.

Revenue, which totaled $1.06 billion in the three months ended March 31, declined 6 percent from the fourth quarter. It was the first quarter-on-quarter drop since at least 2010.

"It was bound to happen. You are going to see a slowdown," said Anupam Palit, an analyst at GreenCrest Capital LLC, noting that it is harder to double revenue when the base is larger.

But he also said Facebook has not worked out how to make more money in some international markets where it is growing the fastest, such as Brazil, India and the Philippines.

"They have not cracked international markets yet, while others like Google do very well internationally," Palit added.

Apart from slowing growth, Facebook is also grappling with other issues. Yahoo Inc is suing it for patent infringement even as the social networking company tries to beef up its intellectual property arsenal. On Monday, it said it would pay $550 million for hundreds of patents from Microsoft Corp.

PAYMENTS HINT

Facebook gets most of its revenue from advertising, but has a Payments business centered around Facebook Credits, a virtual currency used mainly to buy virtual goods within social games.

However, the company hinted at a possible an expansion of Facebook Credits into other areas.

Facebook gets a cut of up to 30 percent from virtual goods sales on its platform.

"In the future, if we extend Payments outside of games, the percentage fee we receive from developers may vary," the company said in its IPO filing on Monday.

Some investors expect e-commerce to be a major area of expansion for Facebook. Some industry experts said that if Facebook Credits were used for purchases of physical goods, the company's cut would have to be a lot lower than 30 percent.

(Reporting By Alistair Barr and Alexei Oreskovic; Editing by Gary Hill and Richard Chang)

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
Comments (8)
Facebook bought Instagram for $1 billion and AOL patents from Microsoft for over $500 million. That $1.5 billion spent negates the earnings.

Apr 23, 2012 4:03pm EDT  --  Report as abuse
WiseOldElf wrote:
Revenues up 45%, but net income down 12% (approx.)suggests costs are rising. Revenues just managed to cross the $1 billion mark. I don’t know about anyone else, but I strongly doubt if Facebeook is worth the huge valuation figures being bandied about in the media.

Apr 23, 2012 4:30pm EDT  --  Report as abuse
mick68 wrote:
We’re talking about a gimmicky social meeting site right? Yeah, thot so. The lie has become true, and will return to a lie once again soon enough. 77 billion my aunt’s petunia.

Apr 23, 2012 7:16pm EDT  --  Report as abuse
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.