Is this the first sign of trouble for the Facebook IPO?
The social media giant, now in the final weeks before its long awaited IPO filing, announced Monday that first-quarter profit and revenue has slipped since the end of 2011.
Facebook (Nasdaq: FB) disclosed in a regulatory filing that profit fell 32% from the previous quarter to $205 million. Revenue dropped 6% to $1.06 billion. Sales were up 45% -- slower than the 55% sales growth in the last quarter.
Expenses surged on costs related to data center building and workforce growth as the company manages its increasing subscriber base that's climbed to 901 million users worldwide. Expenses soared to $677 million - nearly double what they were a year ago.
Facebook also blamed the drop on "seasonal trends" in advertising and user growth in regions that bring in less revenue per subscriber.
"Our costs are growing quickly, which could harm our business and profitability," the company said in the filing. "Providing our products to our users is costly and we expect our expenses to continue to increase in the future as we broaden our user base, as users increase the number of connections and amount of data they share with us, as we develop and implement new product features that require more computing infrastructure, and as we hire additional employees."
Will Investors Back Off Facebook?
The profit and revenue slide has triggered concern about Facebook's forecasted earnings.
"Facebook has a pretty steep hill to climb to meet the expectations that we set out," Debra Aho Williamson of EMarketer Inc. told Bloomberg News.
EMarketer projected 2012 sales of $6.1 billion.
"It was a faster slowdown than we would have guessed," Brian Wieser, an analyst with Pivotal Research Group, told Reuters. "No matter how you slice it, for a company that is perceived as growing so rapidly, to slow so much on whatever basis - sequentially or annually - it will be somewhat concerning to investors if faced with a lofty valuation."
The data shows that Facebook's post-IPO days won't match its previous meteoric rise in popularity. Investors who bank on the same rate of growth will be disappointed-and could change their attitudes toward the Facebook IPO.
"The biggest issue is the realization that Facebook is not going to have an easy time meeting high expectations of the public market," Jeff Sica, chief investment officer of SICA Wealth Management, told Reuters. "It will affect how people look at the IPO. I'm still encouraging people to participate in the IPO, under the acknowledgement that it could be a bumpy ride. There are high expectations and I hate high expectations."
Facebook to Market in May
Recent rumors have slated May 17 as the Facebook IPO date.
Facebook will make a grand entrance with a value around $100 billion. It seeks to raise $10 billion at a $100 billion valuation, give or take a few billion dollars.
The actual timing of the IPO depends on how quickly the U.S. Securities and Exchange Commission completes reviewing the initial public offering paperwork, which just became more involved following Facebook's recent acquisition of Instagram.
Besides the $1 billion Instagram deal announced April 9, Facebook just agreed to pay Microsoft Corp. (NASDAQ: MSFT) $550 million for patents that the software company just purchased from AOL.
AOL announced April 9 it sold more than 800 patents and related applications to Microsoft for $1 billion at an auction, and gave Microsoft a non-exclusive license to the patents it retains.
AOL's patent portfolio includes fundamental social-networking patents, highly coveted in the tech world.
Had a Facebook "enemy" - such as Yahoo! Inc. (NASDAQ: YHOO) - gotten hold of the property, CEO Mark Zuckerberg and friends could have been hit with more lawsuits. Yahoo already has launched an all-out patent assault on Facebook.
The AOL deal also kept the patents away from Google Inc. (Nasdaq: GOOG), which has been trying to build up its Google+ social networking site.
"Besides the two deal partners and shareholders, Facebook is the number-one beneficiary," Florian Mueller, an independent intellectual property analyst and consultant, told CNNMoney. "An independent AOL or any other buyer would have picked Facebook as the first target, but Microsoft is a friend. Google once again missed out on a unique opportunity."
News and Related Story Links:
- Money Morning:
Facebook IPO: Where's the Love, Mark Zuckerberg?
- Money Morning:
Buy, Sell or Hold: When to Buy Shares of Facebook
- The Wall Street Journal:
Facebook's Growth Slows as IPO Nears
- CNNMoney:
AOL surges 42% on $1 billion patent deal