Commentary
Facebook's Q2 Earnings Report -- Or, It's Complicated
- by Catharine P. Taylor , July 27, 2012
So here we are on the day after Facebook’s first earnings report, and, once again, investors are dismayed. The stock seems to have steadied at this writing, but in after-hours trading after yesterday’s release, Facebook stock went to its lowest in its brief history. Clearly, it’s time to start calling Facebook over and find a new bright, shiny object.
Or maybe not. Only in the world of Facebook would a company exceed expectations -- even though, admittedly, expectations were modest -- and experience a 12% stock drop immediately afterward. But, as I’ve jawed on about before – maybe this is why my jaws are so goddamn sore – the thing you have to realize is that the investment community is the last place you should look when trying to figure out the potential of Facebook. It’s frankly too complicated for many of them to get.
I was chatting about this earlier in the day with Carrot Creative CEO Mike Germano. He noted, “A bunch of traders have absolutely no idea what’s possible.”
It’s probably not the most apt analogy, but the Facebook IPO and its aftermath seem like performance art, or maybe a reality show, specially designed for the business community. Whatever the case, what we’re watching is highly conceptual. It’s an experiment into how far a company and its executives can go in running counter to every expectation put before it by shareholders without losing its nerve. And man, is it a fascinating spectacle.
Case in point: CEO Mark Zuckerberg’s refusal to give guidance about the next quarter. True, this has been done before, by the company that Facebook has most often been compared to: Google. Google made it clear from the get-go – in its S1 --that it would never “give earnings guidance in the traditional sense.” But here’s where Zuckerberg is playing this game at a higher level: Facebook isn’t just not giving guidance; the first anyone knew that it wasn’t came yesterday. Whoa!
Whether this is a matter of policy, or a short-term decision, is entirely unknown. But Zuckerberg has to have known that not giving investors an idea of what’s in store for the third quarter would be interpreted as a red flag. One can only guess that he doesn’t care.
The guidance (or not!) issue has little to do with advertising, but if you listen to how Zuckerberg, COO Sheryl Sandberg and CFO David Ebersman conducted themselves on the earnings call yesterday, you’ll see the company’s approach to discussing its advertising revenue stream is part of the same general pattern. Read: Prognostication? We’re just not that into it.
Specifics about how mobile Sponsored Stories are performing, or how the Facebook Ad Exchange is doing, were nonexistent, unless you call a comment such as this one from Zuckerberg rich in detail: “Social ads and News Feed give us a clear path to building a strong business on mobile.”
Investors are also annoyed that Facebook’s operating margins are down – from 53% last year to 43% this year, which is attributed to a quadrupling of sales and marketing expenses. As CFO Ebersman explained, “At this earlier stage of our growth, investment is a top priority as opposed to managing for a target margin. Therefore you can expect us to continue an aggressive pace of investment, in R&D and infrastructure in particular.” In fact, he expected expenses in these areas to go even higher in the third quarter.
Yep, Facebook is doubling down.
But here’s the thing: in terms of running its business, Facebook is doing exactly what it needs to be doing. It’s the investors who don’t understand this. At a time when people are moving to mobile in unprecedented numbers – among other radical behavioral shifts -- do you really expect Facebook to hold back on the R&D? It would be corporate suicide.
Facebook is pushing Sponsored Stories in the News Feed, it’s building out a mobile ad model, it’s rolling out an ad exchange, and possibly, an ad network, it’s educating advertisers about how best to use it. There are entire revenue streams it hasn’t even explored yet. That none of these initiatives are mature enough to please investors is beside the point. Running the world’s biggest social network is speculative in dozens of ways, which is why it’s so damn complicated. It’s as though investors are measuring Facebook in feet and inches, but Facebook has decided to go with the metric system. An investor measuring Facebook using a yardstick just won’t get an accurate read.
Thus, what’s important for Facebook to do now is ignore how it’s being valued ,and keep pursuing its business in just the way it is now. And pay no attention to the shaken investors behind the curtain.
Catharine P. Taylor has been covering digital media and advertising for almost 15 years. Follow her on Twitter @cpealet.
Catherine...
It's boo.com, myspace, secondlife, dejavue, all over again. Sure, it will last longer... But the inherent nature of "social media" is that the "next" platform, inevitably replaces the last one. Or, as you put it so well, "a new, bright, shiny object. The ONLY survivors of the dot.com implosion are eBay and Amazon... Look at what is happening to Zynga... Wanna bet it'll be toast in 12 months?
Cheers/George
This article is abject nonsense, and (another) pathetic attempt to protect Facebook and wrap it in cotton wool. The reality is, that reality has set in for Facebook. To say that Facebook should ignore how its valued is an insult to the thousands of investors who have been duped, conned by a ridiculous launch price, which investor frenzy drove even higher. At pone point yesterday Facebook shares were worth 50% of their peak on launch day, less then 2 months after launch, that's a loss as great as dotcom crash proportions in a very short space of time.
The investment community is rightly extremely concerned about the financial viability of this business at the levels the share price hype suggests. Furthermore it clearly doesn't rate the (panic) moves Facebook is making to try to appease them. Furthermore it is concerned that Facebook might have to buy profits, as its capability for organic growth is very limited, largely by the calibre of its corporate strategists.
I'll listen to the market long before I'll listen to a blogger.
Hey there,
I'm obviously not so sure guys. Facebook is at close to a billion users, that's almost tenfold what MySpace ever accomplished. And the other thing not to be forgotten is that those users are interconnected with one another on Facebook, a much harder thing to disentangle than Boo, or AOL, or Yahoo. Social behavior is with us for the long haul, and while other platforms will continue to be invented -- Google+ anyone? -- that platform is actually a great example of why Facebook is so hard to beat. There are billions of people who have a relationship with Google, but was that enough to turn Google+ into a vibrant social network? No.
(Ironically, investors seem to want this company to be Google. Never will be, and to compare the two is the height of not understanding the space.)
Robert, I think their biggest mistake may have been to go public, but, from a business perspective, we all know how fast things are changing. To not be on top of major shifts in consumer behavior -- like mobile -- is career suicide. And I disagree with the assertion that the moves they are making are panic. They are actually pretty measured. If they weren't they would be taking steps to turn Facebook into a Times Square honky-tonk like MySpace became or selling hardware like a mobile phone, which, if you listened to the call, is not in their vision.
Lastly, I always love it when someone refers to me as "a blogger." A blogger is, at its core, someone who types stuff into a box, but the term says nothing about the experience that person brings to the party. You can disparage my columns all you want, but after 18 years in the business, my track record is pretty strong.
Thanks for reading,
Cathy
What is your 'business' Cathy?
What do you know about Facebook that financial experts obviously don't seem to know?
Firstly, Mr. Gilmour needs chill the f#ck out and be respectful to the author, who is greatly experienced in digital marketing.
Catherine, I work for a Facebook API partner, so live-and-breathe this stuff everyday. I am therefore acutely aware that I may become blinded by the volume of business that takes place everyday here and the amount of interest from brands to be more successful with their Facebook media investment. It's crazy busy. Unless one is in my (or your) position, however, I understand some the ignorance and negativity. The long and the short of it is that Facebook is the nucleus of the web and are building for the long term. That's what "investment" used to be, for the long term. Today it's all about how one can make oodles of money is the shortest possible time. George, I'll take your bet mate. 12 months??? Suggest you might all be better off learning more about the Facebook ad platform and the ecosystem of API partners that are driving real value for brands, rather than shrieking at the first sig of trouble.
Well Robert, I doubt me going over my c.v. will satisfy you, but what the hey: i started covering digital media in 1994, and before that was in advertising so I think that kind of immersion has some value and is a lot more immersion than most investors have. To get back to the column, part of the problem is that things are moving so fast in digital right now that the focus on short-term prognostications is becoming more and more a fool's errant, but, of course, that's what investors want. That's why, as I said above, perhaps Facebook's biggest mistake was going public. And thanks for rallying to my defense, Anthony;)
And by the way, all, I do appreciate comments, even when I don't like them!
Cathy
I.e., follow the Amazon model... Thing big, invest big in your business, ignore as best you can the short-term naysayers.