Markets Don't Like First Facebook Earnings

Widely anticipated report shows Facebook beat ad revenue expectations, but shares tumble amid fears of slower growth

By George Winslow -- Broadcasting & Cable, 7/26/2012 6:08:17 PM

In a widely anticipated event that marked Facebook's first earnings report since its IPO, the social media company reported higher total revenues and higher advertising revenues than expected. But non-GAAP earnings per share (EPS) only met the $0.12 EPS that analysts have expected and its shares slumped in after-market trading as traders worried about a slowdown in its growth curve.

By 6 p.m. ET, the stock had fallen 10.6% in afterhours trading and was down 8.5% for the day to around $24, way below the $38 IPO price.

In the earnings call, Mark Zuckerberg, founder and CEO, addressed those concerns by stressing that the company was working to increase its revenue opportunities. He pointed directly to new products in mobile and its work to make Facebook ads more social as examples of how the company planned to continue to grow.

Overall revenue climbed 32% from a year earlier to $1.18 billion in the second quarter of 2012, with a 28% bounce in advertising to $992 million. Non-GAAP net income, which excluded share-based compensation, came in at $295 million, the same as a year earlier, or about $0.12 a share. But it took a $157 million loss for the quarter, mainly due to the costs of share-based compensation, a major shift from the $240 million profit in the second quarter of 2011.

The company also reported increased usage, with monthly active users (MAUs) hitting 955 million as of June 30, 2012, an increase of 29% in the last year and daily active users (DAUs) were 552 million on average for June 2012, an increase of 32%.

Mobile MAUs were 543 million as of June 30, 2012, a 67% year-over-year bounce from 325 million in the second quarter of 2011. The mobile numbers are particularly important because users are increasingly shifting their time to mobile devices.

In the run-up to the report, the market had been jittery about the results. Facebook's stock had not traded above $28 since its IPO and it fell on early trading on Thursday, July 26, after Zynga reported disappointing results, with lower than expected revenues and earnings per share, which it blamed on declining interest in Facebook games. Zynga also slashed its 2012 financial targets.

Zynga shares have lost nearly 70% of their IPO price from December. Zynga's prospects are important because Facebook gets over 10% of its revenue from the company.

The AP reported that "on average, analysts are expecting Facebook to post earnings of 12 cents per share on revenue of $1.16 billion, according to a poll by FactSet," which indicates that Facebook beat both the revenue consensus and met the EPS consensus.

In the mobile area, Zuckerberg and Facebook COO Sheryl Sandberg pointed to their new Sponsored Stories product for news feeds in the mobile space. That product, Sandberg said was already producing a run rate of about $1 million a day even though they only began aggressively pushing it in June.

Directly addressing market concerns that Facebook needs to tap into the consumer shift to mobile usage, Zuckerberg noted that in addition to new products like Sponsored Stories, Facebook was the most popular app in the mobile space and they wanted to work closer with app developers so that Facebook would be more closely integrated into mobile.

He shot down, however, speculation that it might follow in Google's or Apple's steps by launching its own phone. "Building out the whole phone...wouldn't make sense for us," currently, he said.

Sandberg also highlighted their efforts to demonstrate very high returns on investments in Facebook ads and their work to make it much easier for advertisers, particularly small businesses, to advertise.