Facebook has ammended their S-1 filing in advance of their upcoming Initial Public Offering (IPO). Highlights of the amendment are as follows:
* Revenue was $1.06 billion, which is up from $731 million from the first quarter of 2011. This was due to increased advertising on 901 million monthly active users (MAUs), which is up from 680 million at this time last year. However, revenue is down from the previous quarter. Facebook blamed this on a decrease in advertising after the holidays, which they called “seasonal trends.” Facebook also noted the high MAU figure as a potential problem as growth is expected to slow.
* Profits were $205 million for the quarter, down from $233 million for this quarter the previous year. This is largely based around increased research and development costs as well as a large increase in headcount. The company has increased headcount by 46%, adding about 1,100 workers and building data centres to handle increased data load.
* Zynga’s imprint on the company has decreased. According to the S-1, Zynga provided about 15% of Facebook’s revenue once advertising is taken into account. Facebook’s risk factors indicate that Zynga’s gradual move away from Facebook could put a damper on revenues as Zynga looks to take its users to its own native service. The Facebook/Zynga special partnership, which ends in 2015, was also a concern for Zynga when they filed their IPO as well.
* The full details of Facebook’s purchase of image editing software company Instagram were revealed. The company bought Instagram for $300 million in currency and 23 million shares in the company. If the deal fails to close, Facebook would be on the hook for $200 million in cash.
* Also of note was a purchase of $550 million of patents from Microsoft—patents that the latter had previously bought from AOL for $1 billion—which Facebook will license back to Microsoft.
* Founder Mark Zuckerberg owns about 28% of shares in the company. He also has proxy voting rights to a further 30.5% of shares, giving him 56.5% of voting rights within the company. However, there are indications that Zuckerberg is expected to sell a percentage of shares in the IPO (the total has been left blank). If Facebook values at $100 billion as expected by some measures, Zuckerberg’s shares would be worth about $28 billion. Should Zuckerberg pass away, it is noted that Zuckerberg’s shares would be transferred to people he designates.
Facebook is looking to become the largest Internet IPO in history. Similar companies have struggled since going public, with Groupon (NASDAQ:GRPN) and Zynga (NASDAQ:ZNGA) performing below their IPO stock prices.
Analysis: Analysts are practically shitting themselves over these numbers, expressing worry about Facebook’s IPO. While I tend to view tech sector IPOs with scepticism because they’re typically volatile (I would’ve advised against Google), anyone freaking out about these numbers is a speculative fool.
The difference between Facebook and Zynga is simply that Facebook is the total gatekeeper and Zynga happened to grow strong because of Facebook, not in spite of it. That perception never went away, and despite Zynga doing everything it can to establish itself as a gaming company by bringing in experienced developers, giving them the tools, and hoping their cutthroat management style doesn’t burn everyone out, the fact is that Zynga games are what people do while on Facebook to waste time. If Zynga were to leave Facebook tomorrow, someone else—maybe Gaikai?—would pick up the slack; Zynga would lose a lot of users; and ultimately, Facebook would win out. So while it’s an investor concern that Zynga is so tied in with Facebook, the former needs the latter the most.
Of note to me are the patents purchased from Microsoft in the AOL deal. Their licensing out to Microsoft tells me that this is a concerted effort to hurt Google, who Facebook lists as a primary competitor. We’ve talked a lot about patents here at Gaming Bus and have called for reform in the past, with Josh Moore and myself leading the charge in that regard. However, while the system remains broken, we might as well look at how it affects the few companies who are buying patents in bulk to use as leverage in pending litigation.
As for the coming IPO, ignore speculators who worry about short-term gains. These numbers indicate that Facebook is playing the long game, as they should. Investors who are looking for a steady, long-term stock to vest with in the tech sector should look into Facebook. They’re built to last, and though the asking price might be higher than some are comfortable with considering the company’s proposed valuation, they’ve got a strong enough foundation that they won’t suffer like Zynga, who relies on Facebook (and don’t be fooled into thinking otherwise); and Groupon, who were going bankrupt when they went IPO.