We wake up on Friday morning July 27, 2012 on the day following Facebook’s first earnings call, focusing on its fiscal Q2. By any stretch of the imagine the company did not print a pretty picture – even though it was a paint by number scenario, since anticipated earnings from the financial analyst community had already been set extremely low in expectations by way of Facebook’s IPO guidance before it launched.
For detailed earnings numbers and additional insights, scope out Newly Public Facebook Releases First Q2 Financials with Focus on Mobility.
In after hours trading last night the stock lost nine percent, ending up just under $25 a share. In early morning trading the stock is down as we write, to $22.65, an 11 percent drop overall. Before anyone becomes too bent out of shape – especially with some analysts beginning to float the nonsensical notion of the social media bubble bursting, we’d like to remind everyone that Amazon once fell to $9 a share (at which point it became a great buy) when the .com bubble burst, and survived quite nicely as a real company and an enormously successful global brand.
Back then the overall Internet bubble was truly absurd and truly huge. The social bubble – to the extent it exists today, and it does – is a minor issue generally speaking. Facebook’s fortunes will be made through mobility, and mobility is not a bubble scenario – it is a very real and firmly grounded next major growth of both enterprise and consumer technology. As long as mobility has upside – we’re speaking of a decade here, not a bubble-spike – so will Facebook and social media overall. That’s not to say that many social media sites won’t disappear and that the term “social media” won’t simply be subsumed into something else, but that discussion is for a different day – it will not impact Facebook’s existence – only its own long term business smarts or lack of them will do Facebook good or harm.
Given that Facebook met its “low expectation” numbers – which directly implies that the financial community already knew what was coming, why the drop? It isn’t a mystery – the company failed completely to offer any financial guidance for the next quarter and spoke superficially for the most part to the same issues it had covered during its IPO road show. One thing did stand out and was affirmed – mobility is going to play a major role in Facebook’s future from both a revenue and profit perspective – indeed, it is already doing so.
Zuckerberg was There
Mark Zuckerberg chose to make an appearance for Facebook’s first earnings report. No one commented, as far as we know, on how he was dressed (which is a good thing). Before going on, here is a six degrees of separation anecdote: this writer’s real estate attorney’s dentist is Mark Zuckerberg’s father – it is a small world.
Zuckerberg spent his time on the call primarily focused on mobility, though he didn’t shed any actual light on Facebook’s mobile plans – with one interesting exception. He noted that Facebook users who come to the site through mobile devices are more active than desktop users. He also noted that approximately 20 percent more mobile users are likely to use Facebook on any given day. Year over year, mobile users increased to 540 million from 325 million, a substantial 67 percent change.
Zuckerberg also noted – again without adding any real details - that the company is investing heavily on the overall mobile user experience and on mobile apps – though the company is only focused on iOS and Android (News - Alert) at this time (that will need to change once Windows Phone 8 kicks off, and given Microsoft’s own stake in Facebook). These are all good things to hear, though we hope that Facebook does a lot of heavy end user testing before rolling anything of mobile substance out the door. He noted that “Facebook is the most used app on pretty much any mobile platform. So when we think about what we want to do right now, we want to increase the depth gap of the experience in addition to just growing users."
Those are the right words but will Facebook be able to pull it off over a relatively short time frame? Realistically, the company needs to deliver proven results by the time its fiscal Q4 quarter and its fiscal year come to a close. Six months from now the story needs to have a happy ending – if it doesn’t Facebook will survive but it may lose its now dominant position.
So what is the exception we mentioned? Despite credible rumors to the contrary, Zuckerberg says that it doesn't make sense for Facebook to build its own phone. That may come as interesting news to HTC, which is the central vendor on the entire Facebook smartphone side of the rumors (refer to the following Bloomberg (News - Alert) report, Facebook Is Said to Work With HTC on Mobile Phone for Mid-2013, for more insight on an HTC (News - Alert)-Facebook smartphone).
For the record, we agree that it makes no sense for Facebook to deliver its own smartphone. Never the less, given the almost one billion Facebook users that exist, a very large percentage of them might very well be swayed by good marketing to purchase a Facebook-branded mobile device (with the implication being, of course, that it will be Facebook-optimized). HTC must certainly like the odds for itself here.
Sponsored Stories
The Facebook team on the call – which included Sheryl Sandberg, Facebook's COO, and David Ebersman Facebook CFO – next turned their attention to Facebook’s “Sponsored Stories.” Facebook itself defines them as follows: “These are posts from your friends or Pages on Facebook that a business, organization or individual has paid to highlight so there’s a better chance you’ll see them. They are regular stories that a friend or Page you’re connected to has shared with you.”
Ebersman pointed out that the traditional ad impressions delivered via the desktop business has grown slowly – much more slowly than actual subscriber growth. Zuckerberg and Sandberg on the other hand focused on sponsored stories during the call. They are the mechanism through which the company sells news feed updates from marketers. According to Sandberg, sponsored stories do multiple times better than ads on the right hand of a page (that one typically sees on a desktop). Rolled out about six months ago, sponsored stories currently bring in over $1 million a day, with about half of that delivered through mobile devices. That adds up to annual revenue of at least $365 million a year – keeping in mind that Facebook is still in the very early stages of using them.
“Sponsored stories and newsfeeds are the cornerstone of our mobile monetization strategy,” Sandberg noted. Sandberg also notes that Facebook is receiving strong interest from customers looking to buy sponsored stories on mobile devices.
No Guidance, But Mobile Ads Will Matter
There wasn’t much in the earnings call outside of the above. Notably lacking – and the key reason for the stock tanking – was guidance of any sort. Even when an analyst specifically asked about guidance, the responses circumvented the question. Lack of guidance scares financial analysts – it strongly suggests to them two things: that a company’s senior management team has no real visibility into its own business, either in the short term or long term; and that the company likely has something negative to hide.
Such a panic is unwarranted at this point. Facebook clearly wants to maintain low expectations without explicitly saying so – at this early stage of being a public company that is OK. It becomes far more worrisome if this is still the case at the end of its first full fiscal year – two quarters from now. Facebook did not make mention of how mobile ads (by which we mean sponsored stories) will factor into revenue – clearly they do not know what the numbers will be (although we know it is at least generating $365 million today) – or can be. We expect to hear much more at the next earnings call.
There is a very interesting report on Facebook mobile ads available from AdParlor that is well worth reading, especially for investors and marketers. Though we won’t detail it here, there are some very useful and positive nuggets we can pull out:
There are also a couple of nuggets on the flip side of the equation – and these are issues that likely give Facebook pause to offer any guidance at this point in time:
What can we conclude from the above? For the most part, that there is a lot of potential upside for mobile sponsored ads – Facebook is still in the early stages here, and has lots to learn and experiment with. Next quarter we’ll know more. For now that is exactly all that Facebook left us with yesterday evening.
At some point, Facebook will become a great buy. It wasn’t at $38, and we may have to wait until the next quarter to find a real bottom. Selling on this quarter’s news is not a useful strategy. Assuming the company lands with its teams demonstrating longer term business smarts – which for us includes also demonstrating how they can fully mine the end user data that a billion users provide (possibly for sale to TV advertisers – or possibly for use if Facebook buys a TV station – a great idea if managed properly), it will likely demonstrate a longer term, Amazon-like resilience.
We don’t yet know, and we need to show a bit of patience. But only a bit – the pedal hits the metal at the end of its first full year.