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Facebook profits dip

Company experiences revenue contraction for the first time as seasonality hits income.

Facebook's first quarter results have underwhelmed investors, showing a dip in revenues compared to the final quarter of 2011, a blow for the company just weeks before their expected IPO.

Year-on-year, growth slowed from 55 per cent in Q4 2011 to 45 per cent this quarter. In Q3 2011, the year-on-year revenue growth had been over 100 per cent. Gross revenues were also hit, dropping for the first time quarter-on-quarter by 7 per cent. The company reported a net income of $205m, down from $233m in the comparable quarter last year, a 12 per cent dip.

Each of these factors leads into the next. The slowing revenue growth lies at the heart of the weak quarter, but the reasons for it are unclear. Advertising formats were redesigned in February, while rates were cut outright in Europe, but neither of those are sure-fire causes. Either way, slow growth means that the company has started exhibiting seasonality; advertising as a sector usually experiences a slump in the first quarter, but prior to this season, Facebook's high growth may have masked that effect.

Slowing growth and a seasonal contraction will have both hit the company's net income, but so too will increased costs, since the company boosted stock options for its staff, as well as hiring new members and expanding infrastructure spending. The end result was to lower profits per share from 11 cents to 9.

The company's expenses do not reflect its two major purchases this quarter; $1bn spent on the photo sharing social network Instagram, and $550m spent acquiring 650 patents from Microsoft, which the software giant had itself bought from AOL just two weeks earlier. The Instagram also led to Facebook tentatively valuing itself, which will be noteworthy for investors eyeing its IPO; $700m of the buyout was made in 23 million shares, which gives the company a notional value of $77bn, at the lower end of the $75bn-$100bn range analysts expect for the IPO.

The biggest consistent success story at the company is user growth, which expanded unabated to 901 million active users (those who log-on at least once a month), an increase of a third on last year. Daily active users rose even faster, to 526 million, an increase of 41 per cent year-on-year. Active user growth is a more important measure of Facebook's health than registered user growth, since the company's 2 billion registered users are a significant proportion of the world's total networked population.

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.