Facebook Needs a Friend
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
On the 26th of July Facebook (NASDAQ: FB) reported its second quarter results; they were largely in line with Wall Street’s estimates. Of course that wasn’t good enough for investors who had been hoping for better news, and Facebook’s stock sank. Shares were down in afterhours trading nearly 10%, setting a new low, nearly 40% below Facebook’s May initial public offering. The much hyped Facebook IPO was not as successful as hoped, shares dropped immediately and the lukewarm second quarter has not put Facebook’s financial woes to bed. Facebook’s results certainly didn’t mirror Google’s first quarter as a public company, when they doubled revenue and profits.
Facebook generated $1.18 billion in revenue during the quarter, up 32% from first quarter. They also posted a $157 million loss for the quarter. However this loss was mostly due to one-time compensation costs of $1.3 billion tied to their IPO. The analyst’s consensus was that Facebook would earn $1.15 billion in revenue and have a 12 cent per share profit, not counting the compensation costs. Backing out the compensation costs, Facebook did indeed have $295 million or 12 cent per share in adjusted earnings. In the second quarter of 2011, before they were public, Facebook reported a profit of $240 million.
Facebook now has 955 million active users and average revenue per user continues to grow. However most of Facebook’s growth is coming from international markets where the average revenue per user is far lower than in the US. This in turn is because most international Facebook usage is coming from mobile devices which Facebook makes far less money on. Facebook's CFO stated that overall ad impressions are down because of the shift to mobile as are payments from social gamers because on mobile fewer virtual goods are sold. Facebook delivered 2% fewer ads to US based Facebook users because of this shift to mobile.
Total revenue from advertising was $992 million, representing 84% of total revenue; however, Facebook did not break down advertising by mobile and non-mobile. Facebook continues to push mobile and local, Mark Zuckerberg said that mobile users are 20% more likely to use Facebook every day. He continued stating that sponsored stories are bringing in over a million dollars a day in revenue with over half of that coming from mobile users. Facebook COO Sheryl Sandberg called local the holy grail of the internet and said that 7 million businesses already use Facebook Pages.
Then Zuckerberg sought to reassure investors stating that building a profitable mobile platform is a priority for the company. Facebook is also going to continue to heavily invest in their business that ended the quarter with 10.2 billion dollars cash on hand. However total expenses nearly quadrupled from this time last year and without revenue and profits rising to match expenses this could be an issue in the long run.
We have had several rounds of rumors regarding a Facebook built phone and in regard to the rumors Zuckerberg said that it “"wouldn't make much sense for us" he also added that Facebook is the most popular app on every smartphone platform. If indeed Facebook is not working on a Facebook phone this leaves them with just their mobile applications for mobile revenue. However it also eliminates the potential nightmare that building a Facebook smartphone could have become.
Facebook is not the only social network in town, although they are the largest by far. Google (NASDAQ: GOOG) has Google Plus and while it does not have the user base that Facebook does Google has been pushing Google Plus like nobody’s business. Google accounts now come with Google Plus and Android phones now come with the Google Plus app. Google is also the largest web based advertiser in the world. They have demonstrated over nearly a decade that it is possible to build a sustainably profitable tech company from ads. With Google going ever more social they will no doubt bring their advertising expertise into ever greater competition with Facebook. Facebook also faces competition from the likes of Twitter, whose micro blogging format Facebook has replicated somewhat over the years but not enough to make Twitter irrelevant.
Another sign of weakness for Facebook comes from one of the company’s that makes most of their money through Facebook, Zynga (NASDAQ: ZNGA). Zynga reported a 23 million dollar quarterly loss despite a 19% rise in revenue. Zynga said changes made by Facebook have resulted in a 34% drop in user engagement on Zynga games. Zynga also had a delayed launch for their newest game, the Ville. Zynga’s stock dropped nearly 40% in afterhours trading following the release of their earnings.
The poor results from Zynga are not only a bad sign for them but for Facebook. Facebook gets more than 10% of its revenue from Zynga. Zynga’s poor performance combined with their attempted diversification away from Facebook and Zynga will not provide Facebook with the revenue they used to.
Web based advertising and social gaming will grow into cash cows for Facebook as a substantial percentage of their users will continue to use computers to access Facebook. However mobile is the future, especially internationally, and local is the key to unlocking mobile revenue. As seen in their earnings call the execs at Facebook know that local is their Holy Grail, they just have to find a way to leverage their user base and vast amount of personal information. Advertising for local businesses that already have Facebook Pages, in real time when users are close by and fit the businesses demographic is a simple first step toward a sustainable mobile future.
ded004 has no positions in the stocks mentioned above. The Motley Fool owns shares of Facebook and Google. Motley Fool newsletter services recommend Facebook and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.