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Facebook First Quarter Profit Drops As Costs Almost Double
Perspective | 27 April 2012

Facebook, the social network planning an initial public offering, said first quarter profit fell 12 percent as operating costs almost doubled.

Net income fell to US$205 million in the three months through March, Menlo Park, California-based Facebook said in a regulatory filing. Sales climbed 45 percent to US$1.06 billion, a slowdown from 55 percent in the December period.

Expenses surged to US$677 million, reflecting higher costs of helping marketers reach Facebook’s growing user base, which swelled by one-third to 901 million last quarter. The company may struggle to reach EMarketer’s projection for 2012 sales of US$6.1 billion as it awaits the full impact of new tools aimed at wringing more money from advertisers, said Debra Aho Williamson, who helped construct the researcher’s estimate.

“Facebook has a pretty steep hill to climb to meet the expectations that we set out,” Williamson said.
Facebook may seek an IPO valuation of US$75 billion to US$100 billion, people with knowledge of the matter have said. The upper end of that range would value the company at about 25 times trailing 12-month sales, more than double Google ’s valuation when the search-engine operator went public in 2004.

Before last quarter, Facebook’s sales were already projected to gain at a slower rate this year than Google’s at the time of its IPO, according to data compiled by Bloomberg. At US$6.1 billion, 2012 revenue would be 64 percent higher than the US$3.71 billion reported in 2011. Google’s revenue more than doubled to US$3.19 billion the year it went public.

New Metric
Facebook unveiled a new metric that showed monthly revenue per user climbed 6 percent to US$1.21. The company valued its shares at US$30.89 apiece at the end of January, up from US$29.73 at the end of last year.

Facebook, which plans to raise US$5 billion in the largest-ever Internet IPO, also disclosed new information about recent acquisitions. To finance the US$1 billion purchase of Instagram, announced 9 April, Facebook used 23 million shares and US$300 million in cash.

Chief executive officer Mark Zuckerberg is rolling out new advertising services to step up competition with Google and Yahoo! and generate higher sales from the advertisers eager to reach Facebook’s user base. During the first quarter, Facebook said it would add mobile advertising along with new ads to reach users when they log off the company’s website.

Zynga Revenue
Facebook said 82 percent of its revenue came from advertising last quarter, down from 83 percent in the preceding period. The company also derived less revenue from gaming company Zynga, which contributed 11 percent of the total in the quarter, down from 13 percent a year earlier.

The number of daily active users rose to 526 million, an increase of 41 percent from a year earlier. Facebook’s employee base rose 46 percent to 3,539 from a year earlier.

“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.”

The company plans to list on the Nasdaq Stock Market under the symbol FB, according to the regulatory filing.

Sales had risen 55 percent to US$1.13 billion in the fourth quarter, and net income had climbed 20 percent.

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