Is anyone really surprised by Facebook's financials?

Is anyone really surprised by Facebook's financials?

Summary: Facebook posted losses of $157m for the last three months, and its share price is dropping. Considering how over-hyped its IPO was and its lack of traction in making significant mobile revenue, what's unexpected about this?


Facebook's second-quarter figures on Thursday weren't pretty: a $157m (£100m) loss is a bad start for your first public earnings report.

The social-networking company's share price subsequently tanked, dropping below $24 before the end of play yesterday — a 37-percent cut in value since its IPO in mid-May. When the markets opened this morning, the share price continued to fall and is now sitting at $22.79.

Can Facebook figure out a way to make real money?

That might not have been very good news for Facebook or its shareholders, but it can hardly have come as a shock.

At the time of its IPO, Facebook was generally rated to be overvalued. Here's the problem: it has hundreds of millions of users, but is taking its own sweet time working out how to monetise them. As a case in point, it can't decide what to do to make money off its mobile users — and this situation endures.

Think about it for a second: if a company with a price-to-earnings ratio of 122 reports low earnings, that means it's banking on massive future growth. How Facebook will achieve this is less clear.

If you look at that $157m loss a little more closely, you'll find net income was dragged down by compensation payments: that is, for shares it promised to issue before its IPO and has now delivered. If you discount that, Facebook showed a profit of $295m — essentially flat in comparison with $285m in second quarter 2011.

That profit should be more worrying than the loss for anyone with money in the company, especially if Facebook starts looking like it's seeing a slowdown in new users. Why? Because if user numbers begin to slow and profit is flat, the only real way to improve the situation is to cut costs, and that can only achieve a certain amount.

Given that ads drive most of the company's revenue, it sorely needs to improve its mobile takings. Its second-quarter figures revealed that mobile users increased 67 percent year-on-year and hit a total of 543 million per month — but this doesn't seem to be directly translating into revenue.

Mobile users

For example, Zuckerberg revealed that by the end of June, Facebook's Sponsored Stories feature was driving around $1m in revenue per day, with a little over half of that coming from mobile. Doing some rough sums, 90 days at around half-a-million dollars per day is $45m. That isn't a whole lot of beans from more than half-a-billion monthly mobile users.

Facebook recently introduced 'Featured Stories' (a type of 'social ad') to the news stream on desktops and mobiles in a bid to monetise the mobile experience. But this won't be enough on its own to sustain significant growth.

This doesn't seem to have escaped Zuckerberg's attention. Soon after its floatation, the company rolled out new versions of its mobile apps for iOS and Android. And then three months of fixes for those apps.

"We have a lot of interesting things going on here. There are a lot of challenges, and these are the types of problems that we like to work on. We're working hard to staff up across the company, especially in the technical groups," Zuckerberg said in the recent financial call.

Let's be clear: I don't think Facebook is in any real trouble right now. But sooner or later, the rate at which it adds users will slow to a near standstill. At that point, it will have to work out how to cut costs and better make money out of every aspect of its business.

If a business with nearly a billion — 955 million — active monthly users can't work out how to make money effectively, alarm bells should be ringing.

Topics: Social Enterprise, Mobility

Ben Woods

About Ben Woods

With several years' experience covering everything in the world of telecoms and mobility, Ben's your man if it involves a smartphone, tablet, laptop, or any other piece of tech small enough to carry around with you.

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  • Disgusted is more like it...

    That deuce-bag Zuckerberg stole the idea from someone else. What's next? A Facebook OS? So lame. Bring back Myspace. More customizable options.
    • "What's next? A Facebook OS?"

      No...a Farcebook phone. Just what the world needs.

      But...there are probably enough pathetic people in the world who will "just have to have one".

      And the little creep who runs the company will laugh all the way to the bank...again.
    • Yes FB Sucks but...

      FB is where everyone is. Let's say Google+ becomes the next FB as FB was to mySpace. Or everyone move from FB to mySpace. How practical is it for you, your friends, your relatives. to move? Not everyone will move at once. So you have to play both sides of the fence. And it gets real dicey.

      For practicality FB would have to screw up big time for a mass Exodus.

      Now if FB can make a profit with their current user base and it never increases. The new users replace the FB users that die or get fed up and delete their profile.

      Can they survive? Or do they have to keep growing to survive?

      I would guess that with a stagnant user base their storage costs will continue to climb. FB sucks at nearly everything they do. e.g. site usability, HTML and CSS, advertising management, smartphone apps.

      There is one exception, adding massive amounts of storage on the fly.

      There biggest expense should always be storage. If they some day get it together they will find more ways to leverage the information they have stored. The longer someone is with FB the more they learn. For example Identifying trends may increase revenue. They will have a many very targeted advertising markets. FB could do just fine. FB, percentage wise is is gathering more information than Google. Information is $$$. At this rate FB will own the advertising market. Well if they don;t screw it up. Big IF.

      Google understands this. At the current rate FB will know more about you than Google. Google cannot let this happen.

      Google just announced Google Fiber. They are going in to the ISP Biz. Their rates are very attractive. $300 for the rest of your life or $25 a year. Read their privacy policy. They are going to to take everything they can get.

      Google Fiber says the sites you visit and the contents of the data flowing to and from your Fiber "will not be used by other Google properties without your consent."

      Sounds OK, most people will buy it. Except right before they made that statement they had already said Privacy is governed by their blanket Privacy Policy. That policy basically says if you use their services, you are giving them your consent.

      Google will crush FB and they will slowly die. I f they don't first bleed to death from continually shooting themselves in the foot.
      • it is not real estate however

        So people can easily change from "living at fb" to "living somewhere else". Something cool & new appears (actually, "new" might be more important than "cool"), and then - boom - in a short time hundreds millions users are leaving for that new coast.
  • It's more and more put up with than embraced these days

    Most of my friends and I seriously don't like Timeline. My musician friends were never happy with Facebook being so inferior to MySpace in musician support (which boosted the fortunes of Bandcamp and the like), and they became much less happy a few months back when Facebook decided to charge bands a fee to have everyone who "Liked" them automatically see all updates on their band pages -- otherwise only a random portion of their fans will see the updates.
  • look what happened

    look what happened to AOL, Netscape ,My space,could happen maybe not soon but eventually.
    I think Google is smart to diversify as they are doing.
    preferred user