Social media giant reports drastic slowdown in revenue growth in second quarter of 2012
Facebook Inc reported a drastic slowdown in revenue growth and offered no financial forecasts to ease worries over the prospects for boosting advertising in its first earnings report as a public company, sending its shares to a record low.
Facebook executives pointed to early signs of success in new advertising services, but the lack of a detailed financial outlook went over poorly with investors hoping for evidence that the company could soon reverse the continuing slowdown in its business.
"The question is, do you get a re-acceleration in the business at some point?" said Oppenheimer & Co analyst Jason Helfstein. "Because they didn't give you guidance, you're going to have to wait to find out what happens."
Shares of Facebook, which have shed a third of their value since their haphazard May debut at $38, broke below $24 in frenzied after-hours trading. The social networking pioneer was the first American company to debut with a market value of more than $100bn.
Mark Zuckerberg, the 28-year-old chief executive who created Facebook in his Harvard dorm room, said the company was seeing encouraging results from newly introduced advertising services and that Facebook now has a "clear path" to building a strong mobile business.
"Mobile is a huge opportunity for Facebook," said Zuckerberg, noting that the company was investing "very heavily" in improving its mobile apps.
The company, which competes with established Web companies such as Google Inc and Yahoo Inc, said its capital expenditures more than tripled to $413m in the second quarter.
Facebook's finance chief also said operating expenses in the second half of the year would increase significantly compared with the rate in year-ago period.
"At this early stage of our growth, investment is a top priority as opposed to managing for a target margin," said CFO David Ebersman.
Facebook posted a net loss of $157m, or 8 cents a share, in the second quarter after taking hefty stock compensation charges related to its IPO. That compared to net income of $240m, or 11 cents, in the year-ago quarter.
Excluding the charges, Facebook said it earned 12 cents a share, in line with Wall Street's forecast.
Facebook has raced through eight years of break-neck growth that was to have culminated with its May initial public offering.
Instead, its share price has headed south as investors questioned its valuation of more than 50 times earnings and its longer-term ability to sustain growth as users migrate to mobile devices.
Monthly active users grew to 955 million at the end of the second quarter, up from 901 million at the end of March. But mobile monthly active users surged 67 percent year-on-year to 543 million users, adding further pressure on Facebook's business, which only recently began to offer limited forms of mobile advertising.
Facebook's Ebersman noted that advertising "impressions" lagged user growth during the second quarter but that new social ads, which appear directly in Facebook users' "newsfeeds", were driving up ad rates.
The average price of a Facebook ad increased 9 percent during the quarter, Ebersman said, driven primarily by the United States where rates jumped 20 percent with the company's newly released social ads.
"It's a positive, but it's still early," said Ken Sena, an analyst with Evercore Partners, about the performance of Facebook's new ads.
"We won't likely be seeing much material impact any time soon," he said.
The stock price is also likely to come under further pressure, Sena warned, from the imminent expiry of a stock lockup imposed on many Facebook employees after the IPO. That could bring a flood of new shares to the market.
Facebook reported revenue increased 32 percent in the second quarter to $1.18bn, a hair above the average analyst forecast of $1.15bn according to Thomson Reuters.
Facebook's growth rate in the second quarter was the slowest since the first three months of 2011, the earliest period for which the company has disclosed information about its revenue growth.
"They beat, but the Street was looking for more and that's why I think shares turned lower after an initial bounce," said Michael Matousek, a senior trader at US Global Investors Inc, which manages about $3bn.
"The big question with the stock is how it will monetize its billion or so users. A lot of people think they can't convert those users to money.
On Wednesday, social games leader Zynga - which accounts for over one-10th of Facebook's revenue and faces the same challenge of earning off mobile users - stunned investors after slashing its 2012 earnings forecasts.
That helped wipe 9 percent off Facebook's value during regular trading on Thursday.
Zynga and Facebook were among a bevy of hot tech prospects that went public in 2011 on the back of renewed dot-com mania gripping Wall Street. They, along with fellow 2011 debutante Groupon Inc, have since gone into a tailspin.
Zuckerberg, who owns just north of half a billion shares, saw $2.7bn of his paper wealth evaporate on Thursday, taking into account the after-hours dive.
Goldman Sachs, lead adviser on the IPO and the largest institutional shareholder with 41.6 million shares or a 6.6 percent stake, shed $222m. Fidelity, the largest US fund, which owns 19.8 million shares, saw $106m go up in smoke.
Executives told analysts on a conference call that Facebook aimed for closer integration with popular gadgets such as Apple Inc's iPad and iPhone but Zuckerberg dismissed widespread reports that it would design its own smartphone.