Facebook Releases Negative Report Before IPO
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Could Facebook’s cash machine be slowing down? That’s one possible conclusion observers can draw from the paperwork the company recently filed with the Securities and Exchange Commission. While it’s not likely to slow down investors, it’s not the best news to get so close to the social media giant’s IPO.
According to a quick item from David Angotti for Search Engine Land, Facebook reported that its net income fell 12 percent in the first quarter of 2012. Looking at the previous quarter’s total revenues, the latest quarter saw total revenues fall six percent, to $1.06 billion. That may not be cause for serious concern, however – especially when you consider that the previous quarter included the holiday shopping season, and Facebook makes its money from ads. Indeed, the company itself noted that the downturn was due to “seasonal trends.” Compare Facebook’s revenues to the year-ago quarter, and you see growth of 45 percent.
While those numbers should hearten investors, digging a little deeper reveals some cause for concern. As Angotti noted, “acquisition and operating expenses are rapidly rising.” Some of that can be attributed to the explosive growth in Facebook’s membership. The L.A. Times reported that Facebook is up to 901 million monthly active users as of the end of March. That represents more than 50 million new users in just three months.
Correct me if I’m wrong, but that many new users means Facebook needs to keep building on its infrastructure to make it scale properly: new machines, new software, and more skilled employees, in both technical and non-technical areas, to keep everything running smoothly. In fact, operating expenses have risen enough to make accountants put out whatever may be left of their hair after this tax season. Looking at the year-over-year figures, operating costs went from $343 million for the first quarter of 2011 to $677 million last quarter. That’s nearly double the expenses in just one short year!
But these aren’t the only new expenses facing the social media site. Last year, Facebook’s total acquisition costs came in at $68 million. Just this quarter, the company agreed to purchase Instagram, a relatively new but wildly popular photo sharing app, for $1 billion ($300 million in cash plus 23 million shares of stock). Facebook also spent $550 million acquiring rights to a patent portfolio from Microsoft. Observers expect the company to use these patents to help defend itself from a Yahoo lawsuit.
The messy legal situation could complicate matters. As the Wall Street Journal explains, Yahoo accused Facebook last month of violating 10 Yahoo patents covering online advertising and communications. The patents Facebook bought from Microsoft, according to WSJ’s unnamed source, “relate to fundamental Internet technologies, including email, instant messaging, Web browsing, Web search, online advertising, mobile technology and e-commerce.” In addition to the patents purchased from Microsoft (which the software giant originally got from AOL), Facebook has also recently bought 750 patents from IBM, and gone on the attack by countersuing Yahoo.