Parsing the Call: Facebook Q4-2012

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Facebook (NASDAQ: FB) finalized its IPO year with an after market hours conference call on January 30, 2013. 2012 has been a turbulent year for Facebook. The stock began trading with a major issue on the Nasdaq exchange which delayed trading on the opening day. The stock price plummeted to a low of $17.55 over concerns about the ability of Facebook to monetize its users, but had rebounded to close at $31.24 before the earnings release and conference call on Jan. 30.

Facebook missed earnings expectations, reporting a $0.09 EPS, which was lower than the expected $0.11. CEO Mark Zuckerberg addressed this in his remarks stating, "…we made the decision to grow our head count quickly in 2013, particularly in product development. This will likely cause our expenses to grow at a faster rate than we expect to grow our revenue this year…" This was disappointing to investors as the stock price opened on Jan. 31 at $29.15, a precipitous drop.

The main topic of the conference call that investors were looking to hear a concrete answer on was monetization, particularly in the mobile space. Zuckerberg confirmed that Facebook is now officially a mobile company with Facebook getting more mobile traffic than desktop traffic. Facebook and Instagram, a Facebook acquisition, account for 26% of all time that people spend on mobile apps. There has not been an argument from anyone that Facebook has an enormous user base which is now at 1.056 billion monthly users, 680 million of which are monthly active users of the mobile platform.

Despite this expanding user base, Facebook is struggling to monetize their user portfolio. The glaring statistic is that while over half of active monthly users are on mobile, only 23% of the advertising revenue comes from mobile. While Facebook started 2012 with no revenue coming from mobile advertising, only 23% is not encouraging. Zuckerberg did acknowledge that 2013 will be spent with a greater focus on the mobile platform and he views it as a great opportunity for greater engagement with the user, and most importantly, he "think[s] we'll also be able to make more money for each minute people spend with us on their mobile devices."

Zuckerberg laid out a strategy for 2013 and that is to build a better mobile product, build around the social graph which is forthcoming, and build a strong monetization effort. In 2012 Facebook rolled out the ads news space which has been a revenue driver and this will be further refined during 2013 by better targeting of the audience through relevance, both preference and geographic. This will also be done through some defensive marketing tactics called Customer Audiences, which will allow firms to upload a customer list and target those customers on their Facebook pages. Additionally, Facebook is exploring other kinds of media for advertising to offer a richer experience to advertisers to showcase their products.

Facebook is also hoping to become one of the main ways that app developers are able to bring apps to consumers as well. This will be accomplished by having "app install ads" which allows users to install apps directly from the advertisement. In addition to this, Facebook is hoping to gain revenue from the "gifts" that people can send other users as well as the social graph, but Zuckerberg was careful to keep expectation low in these categories.

Overall, there was not a concrete strategy for further monetization. Zuckerberg was not able to say specifically how to increase revenue, particularly on the mobile platform. What was most striking was the use of the hope. Hope was used in reference to Instagram having met some undefined milestones. Instagram was a $1 billion acquisition which raised much ire from shareholders as being a high price to pay from a company that is unable to monetize its service. Hope was used in regards to Graph Search, which is the most recent product roll-out from Facebook and something which the firm is investing heavily in. Investing so heavily, that Zuckerberg is willing to sacrifice 2013 profits for by continuing to hire engineers to get this service up and running.

I did not like Facebook before the call. I dislike it more now. It seems to me that the executive team of Facebook is very unsure and does not have a clear strategy for raising revenue. Facebook needs to maintain a delicate balance by maintaining a positive user experience and this means keeping advertisers as unobtrusive as possible. Additionally, Facebook's main product is a very tricky one and that is user data. Facebook is in a position where it can offer up more data to advertisers, but this will be at the peril of user satisfaction. Facebook has shown a knack for overstepping this boundary so much so that even Zuckerberg's sister has cause to complain. This is all too tenuous for me. I will stick to firms with a clear defined product that has no issue coming to market and I recommend a sell on Facebook until management gives a concrete answer to improving revenue.

By Joe Morrison

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