It may as well have been a funeral.
How else to explain the 8.5% drop in share value in the leadup to Facebook's first-ever public release of quarterly financial results after the markets closed Thursday, followed by another after-hours hammering that shed another 11.2%. By the time it was all over, shares, already well below the IPO's $38 IPO baseline, were down over $5 to settle at an all-time low of $23.83.
The aggressively negative market response betrays quite a different story on the earnings side. The baseline numbers themselves, while not the blockbuster results investors would have liked, were hardly disastrous. The company reported $1.18 billion in revenue, a 32% increase over the year-ago period. Advertising income was 84% of that amount, or $992 million, up 28% in a year. Both figures narrowly topped earlier analyst estimates that had averaged $1.14 billion and $921 million.
On an unadjusted, Generally Accepted Accounting Principles-compliant basis, the company lost $157 million due to payroll tax and share based-compensation charges. This compares to a $240 million gain in Q2 2011. Adjusted for these special charges, Facebook's net income for the quarter was $295 million or $0.12 per share. In the year-ago quarter, it cleared $285 million and $0.12 per share. Facebook's pre-IPO filings confirmed net income of $1 billion on $3.71 billion in revenues for all of 2011.
Facebook investors look for hope — and answers
Unfortunately for Facebook, a relatively decent operational performance in its first quarter as a publicly traded company wasn't enough to placate investors still stung by the company's failure to launch following its IPO in May. Shareholders, spooked by alarming gaps in Facebook's plans to convert its legions of active users — now up to 955 million, 29% more than last year, with 552 million of them logging in daily — into sustainable sources of revenue, continue to shy away from what was once one of the most hyped stocks since the dot-com bubble burst.
They're steering clear not because Facebook has failed to any degree. Operationally, the company is clearly cash flow positive, has a huge user base, few direct competitors and a relatively long list of initiatives — from mobile app partnerships to social-enabled advertising — either in the works or already underway to grow the business. Dark shadows, however, are forming over the company's inability to convince investors that all these plans are more than mere promises.
As bellwether of the large-scale social media play, Facebook carries the future of social-based advertising on its shoulders. Advertisers, already skittish due to lingering economic weaknesses in North America, Europe and Asia, are becoming less willing to roll the dice on new and unproven marketing platforms. Facebook has largely failed to articulate its vision of how it intends to connect its massive user base with advertisers in a meaningful, profitable way. Until Facebook's promises of more effective mobile-enabled apps, social-enabled advertising, and an improved advertising delivery on mobile and conventional platforms are realized, it's all just talk.
What Facebook wants: revolution, not evolution
Although CEO Mark Zuckerberg did a good job laying out Facebook's go-forward strategy, there were no breakout revelations pointing to the kind of quantum improvements in revenue generation and overall growth that investors have been waiting for. What they got was a straightforward evolution of an existing strategy. While that may be sufficient for an average company with average prospects, it isn't enough to meet already lofty expectations for Facebook's future growth. The markets expected Zuckerberg to pull a rabbit out of his hat, and were instead shown the same old tricks. Instead, he bristled when pushed to share details on what comes next.
"I don't have any more plans that I'm going to share with you about our product road map," he told analysts gathered at the conference call.
Intransigence may have worked when Facebook was privately held, but it won't fly now. Not in the wake of turmoil at Zynga, previously one of the Facebook universe's most significant success stories, but more recently a sign that things may be taking a turn for the worse. The social media gaming company, whose products like FarmVille and Mafia Wars account for approximately 10% of Facebook's total revenue, reported a $22.8 million loss on Wednesday. The company represents a bellwether of sorts for the social gaming space, and its results were seen as a harbinger of bad news for Facebook given its tight reliance on Facebook as the foundation for most of its products. Zynga cited a "more challenging environment on the Facebook web platform," which could cast a chill on other developers looking for viable landscapes to focus their development efforts.
With investors heading for the exits in the absence of a truly revolutionary roadmap from the company they once tagged as the next big thing, Facebook has a limited amount of time to convince them the initial hype was justified. Lingering doubts that Facebook could become the next MySpace are slowly bubbling up to the surface.
Carmi Levy is a London, Ont.-based independent technology analyst and journalist. The opinions expressed are his own. carmilevy@yahoo.ca