Following Facebook’s IPO, it is necessary to evaluate the company’s $68B market capitalization. Whether Facebook is able to meet investor demands in terms of revenue growth is uncertain. Before we can assess Facebook’s growth potential, we must assess its current revenue and profitability.1
More importantly, we must begin to grapple with changing dynamics in Facebook’s advertising outlook, specifically in terms of the rise of mobile adoption, and growth in Facebook’s secondary revenue sources, specifically the growth in its payment platform.
Facebook’s user statistics and revenue
As of December 2011, Facebook claims 845 million monthly active users (901 million according to its April IPO roadshow presentation) and 483 million daily active users, for year-over-year growth of 39% and 48%, respectively. Half of its user-base primarily or exclusively accesses the website from mobile devices, with 425 million mobile monthly active users.
Facebook’s revenue has been increasing year-over-year since 2007. It made $153 million in revenue in 2007 with a $138 million loss, and $272 million in 2008 with a $65 million loss. Facebook first saw profitability in 2009, with net income of $229 million on $777 million in revenue. Facebook’s 2010 revenue grew to $1.97B with net income of $606 million, and again grew to $3.7B with net income of $1B in 2011.
Facebook’s advertising business
Facebook generates revenue primarily from advertising. The company allows advertisers to target its 453 million daily active users by age, location, gender, and interests. Advertisements are bought either directly or through relationships with advertising agencies. Costs are measured by impressions delivered or the number of clicks by users.
According to its S-1 filing, Facebook’s quarter-over-quarter advertising revenue growth appears to be decelerating. While Facebook’s yearly revenue has been increasing since the March 2010 quarter, the company saw $872 million in advertising revenue in the March 2012 quarter, a 7.4% quarter-over-quarter decline from $943 million in the December 2011 quarter.
Facebook’s advertising revenue may be affected by seasonality. Facebook saw an 87% increase from March 2010 to March 2011; 83% increase from June 2010 to June 2011; and a 77% increase from September 2011 to September 2011. The December 2011 quarter shows a 43% increase from the year-ago quarter, and the March 2012 quarter shows a 36% increase from March 2011.
The deceleration in advertising revenue growth from successive year-ago quarters suggests that revenue may be approaching a plateau (where year-over-year growth slows to a modest rate). If the June 2012 quarter adheres to the deceleration trend, then it might indicate that Facebook has plucked the low-hanging fruit, and that the company will have to invest more to induce advertising revenue growth.
Facebook also faces a corollary challenge: the uptake in mobile usage. As more of Facebook’s user-base shifts its primary usage to mobile, Facebook will be less able to generate advertising revenue (currently Facebook generates an inconsequential amount of revenue from its mobile products). While the company has indicated a willingness to pursue advertising on its mobile products, the mobile advertising market remains largely untested.
Therefore, while Facebook’s historical revenue cost (primarily advertising revenue cost) has hovered around 26% of revenue, the company may be forced to increase spending, and/or innovate on its advertising products (including mobile), in order to stave sequential deceleration in revenue growth.
Facebook’s payments business
Facebook has augmented its revenue by growing its payments business. Payments represents primarily the sale of virtual goods with Facebook Credits; Facebook demands 30% of sales transactions by way of a processing fee. Facebook’s payments processing accounted for $550 million in revenue in 2011 ($188 million in the December 2011 quarter).
Facebook’s payments business continues to grow to a larger portion of its overall business. Payments increased from 2% of 2009 revenue, to 5% in 2010, and again to 15% in 2011. As of July 1, 2011, Facebook Credits payments are mandatory for all Facebook developers accepting payments. Facebook’s filing shows that in the March 2012 quarter, its payments business comprised 18% of total revenue.
A full 12% of Facebook’s 2011 revenue was derived from Zynga Inc., the majority via Facebook Credits payments processing. While revenue from Zynga on Facebook might be slowing, Facebook’s dependency on Zynga is increasing. Facebook estimates that 19% of its March 2012 quarter revenue will derive from payments processing fees from Zynga.
Facebook has recently announced mobile operator billing for its mobile web platform. The company hopes to streamline transactions, making it easier for hundreds of millions of mobile users to make web app purchases. This may help Facebook to grow payments revenue by targeting the lion’s share of its mobile user-base.
Facebook’s apparent revenue deceleration may be exacerbated by two factors: a nearing plateau in advertising revenue growth, and the uptake of mobile as the primary means of accessing the social network. Having picked the desktop advertising low hanging fruit, Facebook may be forced to innovate rapidly and boldly to maintain its revenue growth.
Facebook will also have to augment advertising revenue. While display advertising is profitable on the desktop, its effectiveness on mobile platforms, like iOS and Android, is less certain. Facebook has indicated it intends to pursue advertising on mobile platforms; however, the company has also demonstrated a (necessary) willingness to pursue alternative revenue sources, especially payments processing.
Perhaps Facebook’s greatest asset is the long-term focus of its founder and CEO, and executive team; the company seems poised to continue its “social mission” to make the world more open and connected. Whether Facebook will be able to satisfy short-term investor demand with sustained sequential revenue growth remains less certain.
- S-1/A – Registration Statement, Facebook Inc., 2012.