Facebook Falls After Report Fails to Quell Growth Concern - Businessweek

Facebook Inc. (FB) (FB) plunged to a record low after its first earnings report as a public company showed a slower sales gain and narrower profit margins, failing to allay concerns over growth that have dragged down the shares.

The stock fell 12 percent after Facebook reported its second-quarter operating margin dropped from a year earlier and sales grew at the slowest pace on record. Payments-related sales were $192 million, below the $199.3 million average analyst prediction in a Bloomberg survey.

Facebook executives led by Chief Executive Officer Mark Zuckerberg, addressing analysts for the first time since the company’s May 17 initial public offering, issued no growth forecasts and said little else to reassure investors who fret that the company is overvalued. The largest social network is adding users faster than it can generate ad sales, the company said, reiterating remarks it made in the run-up to the IPO.

“It has become a show-me story,” said Nabil Elsheshai, a senior equity research analyst at Thrivent Financial for Lutherans. “The problem is deceleration, and there wasn’t anything from an outlook perspective that would indicate that is going to stop.”

The shares dropped to $23.71 at the close in New York. The Menlo Park, California-based company is down (FB) 38 percent from its $38 IPO price.

Marred Debut

Facebook raised $16 billion in its IPO, the largest ever for a technology company. Yet its debut was marred by technical glitches, and the stock only managed to close above $38 on the first day of trading. The company had first proposed a price range of $28 to $35 before raising it to $34 to $38 just days before the IPO.

The value of Zuckerberg’s stake plunged to $12.1 billion today from $13.7 billion yesterday, according to the Bloomberg Billionaires Index.

Sales increased 32 percent to $1.18 billion, topping the average estimate (FB) of $1.16 billion, according to data compiled by Bloomberg. Monthly active users rose to 955 million, exceeding the 950.1 million prediction by analysts surveyed by Bloomberg.

The revenue increase was dwarfed by a surge in spending on marketing and sales, which ballooned to $392 million. The company reported a net loss of $157 million, or 8 cents a share, and profit excluding certain costs of 12 cents a share.

The second-quarter operating margin, excluding certain costs, was 43 percent, a drop from 53 percent a year earlier, amid a fourfold surge in sales and marketing expenses.

Yesterday’s report and conference call -- the most highly anticipated earnings release since Google Inc.’s inaugural figures in 2004 -- gave management its first chance since May to make a case that Facebook deserves a higher price relative to earnings than 98 percent of the Standard & Poor’s 500.

Twitter, Google

“A little bit of earnings guidance, a little bit of optimism about future performance would have been nice,” said Jordan Rohan, analyst at Stifel Nicolaus & Co. in New York, who has a hold rating (FB) on Facebook. “Facebook trades at a premium to many companies, including Google, and is only growing at a slightly faster pace than companies like Google.”

Shareholders sought assurances that the company can keep users engaged amid rising competition from Twitter Inc. and Google and that it can overcome challenges making money from advertising on mobile devices.

Facebook said in May that sales growth wasn’t keeping pace with user expansion as more people access the service with mobile phones. The number of ads delivered in the U.S. decreased 2 percent last quarter even as the number of daily users increased 10 percent, Chief Financial Officer David Ebersman said on the conference call.

Mobile Challenges

“Ad impressions continued the recent trend of growing more slowly than users as more of our usage is on mobile devices,” Ebersman said. “This trend is particularly true in markets such as the U.S., where smartphone use is expanding rapidly.”

Facebook has had little time to gain traction in mobile advertising, having just announced its inaugural mobile- advertising platform in February.

Zuckerberg, who gave opening remarks on the call, said mobile is a key area of focus for the company. Mobile users, who make up more than half of the membership, are more active than counterparts who use only the desktop version, he said.

“Mobile is a huge opportunity for Facebook,” Zuckerberg said. “Our goal is to connect everyone in the world. And over the next five years, we expect 4 or 5 billion people to have smartphones. That’s more than twice as many people as have computers today.”

Early Promise

Early results on mobile ads show some promise, according to AdParlor, which provides services for marketers. Click-through rates are 15 times higher on mobile than on desktops, while the pricing is 30 percent less, according to AdParlor.

Owing to the success of new services, Facebook should boost both mobile and desktop advertising revenue in the future, Chief Operating Officer Sheryl Sandberg said on the call. Still, the company must educate companies about how to best advertise on a social service, still a relatively new avenue for marketers, she said.

“It took a long time for the TV market and advertising to be truly understood, it took a long time for search, and I think we’re still in that learning curve with a lot of our clients,” Sandberg said. “If our ads work -- and we continue to make our ads work and they work for advertisers and our users -- we’ll be able to educate the market over time.”

Facebook derives most of its revenue from ads that reach users as they post comments, embed videos or check photos uploaded to the site by friends. The company also makes money when users pay for digital items, including on games made by Zynga Inc. (ZNGA) (ZNGA) Facebook shares were weighed down in regular trading yesterday after Zynga announced earnings that missed estimates.

Progress Made

Facebook is making progress in certain areas, including online display advertising, which includes photos and other graphical elements. Facebook will have 16.8 percent of the U.S. market this year, after grabbing the top spot from Yahoo! Inc. last year, according to EMarketer Inc. in New York. Google will have 16.5 percent, up from 13.8 percent last year and Yahoo’s share will be 9.1 percent, down from 10.8 percent.

Users are also spending more time on the service. Average time spent online increased 5.1 percent in June to 400.2 minutes, or more than six-and-a-half hours, after a gain of less than 1 percent the previous month in the U.S., according to researcher ComScore Inc. (SCOR) (SCOR)

To contact the reporter on this story: Brian Womack in San Francisco at bwomack1@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net