Facebook's (FB) recently filed S-1 amendment has led to the gnashing of bones. This week it was reported that both first-quarter revenue and profits were down 6% and 32%, respectively, from the fourth quarter. In contrast, before its IPO in 2004, Google had sequential revenue growth of 27%. FB's revenues year over year were still up 45%, but earnings disappointed, down 12%. These are tough numbers to hit the "like button" over.
How to read the weak quarter? Some have suddenly questioned FB's very nature as a growth stock. Some see it as a reflection of bad management or a flawed business model. Facebook claims seasonality.
To take a more benign view, I think this meaningful, more than seasonal deceleration of revenue lies in the geography of recent growth. And it offers both peril and promise.
Yes, FB may be berthing its IPO barge this year to soak the suckers, but in the long term the company has some interesting mojo brewing. FB's gallop to leadership in Brazil, Indonesia, Malaysia, and Cyworld's South Korea over the past six months is remarkable and makes me a guarded optimist, but there are intense conversions that must take place.
Remember, the financial weakness of the March quarter contrasts with the robust growth in monthly active users now total 901 million -- up from $680 million a year ago-and daily active users, now up to $526 million (up from 372 million last year). This growth has a distinct international cast.
A regional breakdown suggests that growth in those affluent areas of highest penetration in the world may soon plateau. Yes, the March 2012 quarter saw a nice jump in yr/yr in U.S. monthly users -a genuine achievement. But the U.S./Canada region now has a penetration of 54% of the population, with yr-yr annualized penetration growth coming in at 7.2%. The Australia/Oceania region saw a 13.3% growth in monthly users, taking penetration to 39%. That yr/yr rate of penetration came in at 4.6%. The early adapters and low-hanging fruit are gone.
Meanwhile Asia, Latin America, and Africa still have small penetration percentages -- 4%, 22% and 3% respectively-and fantastic growth rates. India and Brazil had MUA growth of 107% and 180%, respectively. But these emerging area that offer lower click income, require infrastructural build-outs, and are generally more phone-centric markets.
Clearly Facebook has positioned its IPO at this transitional year, with bread and circus for the investment public as they implement an ambitious, global strategy. Facebook is prepping for a three front war:
- Bringing the fight to Google (GOOG) in search and advertising.
- Recasting mobility via "Buffy" for certain Asian and African markets to staunch Apple's (AAPL) dominance in the emerging world.
- Developing its "credits/virtual goods economy" (which presently stands as a distinct revenue stream) into a robust e-payment system as that fragmented sector gels around resolved security. This will put FB into conflict with ISIS [i.e Verizon (VZN), T-Mobile and AT+T (T)], and Google's own undercooked Wallet, but Facebook has interesting ties to Asian carriers with their "Facebook plans" and French Telecom in francophone Africa that might help them steal a march in more foreign lands.
All three of these battlefronts are contests. Only the second one strikes me as winnable at this point. Expect to see Yahoo (YHOO), Nokia (NOK), and Blackberry (RIMM) further marginalized as FB, GOOG, AAPL, and ISIS for the crown jewels. I'll explain more later.
(For those of you who haven't heard of ISIS: it's the NFC mobile payment system that was founded by Verizon, T-Mobile, and AT&T. It is allegedly rolling out its "Isis Mobile Wallet" in select testing areas mid-year. It now been backed by Visa (V), Mastercard (MA), American Express (AXP), Discover (DFS), Capital One, Chase (JPM) and Barclaycard, so it's safe to say "the heavies" are on board.
The group has been accused of actively blocking Google Wallet on certain Verizon phones. "Buffy, the HTC/Facebook phone, might experience a similar situation if it wants to expand its reach into a broader e-payments solution.)