On October 24, Facebook (FB) posted the biggest single day gain as the company managed to generate 14% of its revenues ($150M this quarter) from mobile, up from essentially 0% earlier this year. This increase in mobile monetization managed to boost a YoY revenue growth by 8% vs. 0% for the last quarter. However, a deeper look into the company's 10-Q reveals other issues still brooding within the world's largest social network.
Payments Declining Faster Than Expected
Facebook's payments segment is a royalty stream that Facebook receives whenever users make payments through the Facebook platform. For example, when a user purchases a virtual tool in FarmVille, Facebook receives a portion of that revenue. This segment is almost entirely comprised of payments made through Zynga (ZNGA) games. In fact, Facebook expects that 13% to 17% of its 2012 revenue will be derived from Zynga. At its peak, this segment drove $192M in revenues in Q2 2012. In the most recent quarter, the payments segment only generated $176M in total revenues, accounting for 14% of total revenues and an 8% decline QoQ. Morgan Stanley had anticipated $194M while JP Morgan had expected $186M from payments.
Global Monthly Active Users (MAU) Growth Slowing
Facebook's global MAU came in at 1,007M worldwide. Morgan Stanley and JP Morgan had previously put this number at 1,023M, which means Facebook came in 2% below expectations. What is concerning is that growth markets not including North America and Europe both missed expectations.
Monetization Outside North America Well Below Expectations
In North America, Facebook managed to grow its ARPU by an impressive 20% YoY at $3.36 per user, which could largely be attributed by its mobile revenues increases. However, in all other geographies, Facebook is seeing a substantial decline in ARPU growth. Europe saw a crawling 2% YoY ARPU growth at $1.37, which actually came in below last quarter's numbers of $1.43. Asia grew at a worrying pace of 2%, and the rest of the world grew at 4%. Even the most conservative analysts were expecting at least 10% growth in ARPU across these geographies. However, it is possible that mobile advertisements has yet to be adopted by countries outside North America.
Lock-Up Expiry and Tax Liability
The upcoming lock-up expiry has largely been priced in by the market, but many financial media sources are misreporting the dates. Here it is according to Facebook's 10-Q:
October 29, 2012
approximately 121 million shares underlying net- settled Pre-2011 RSUs held by then-current employees as of October 15, 2012 and approximately 53 million outstanding shares and approximately 55 million shares subject to stock options held by then-current employees as of October 15, 2012 other than Mr. Zuckerberg
November 14, 2012
approximately 773 million outstanding shares and approximately 31 million net-settled Pre-2011 RSUs not held by then-current employees as of October 15, 2012
The 10-Q also estimates a $2.6B tax liability at a price of $21.66.
Updates to My DCF Model
After reading through this latest 10-Q, I have made the appropriate forward-looking adjustments to Facebook's revenues. My current price target for the stock is $19.98 from $18.50 previous. Sensitivity to my model is shown below: