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Technology / Data

Facebook growth slows; shares plummet

Facebook

The social network has had massive pressure on its shoulders to prove its initial $104bn valuation.

The company’s $16bn IPO made it the largest technology IPO in history with shares initially priced at $38. Yet, skeptics were proven right as Facebook reported disappointing figures in its first earnings report since its IPO, causing shares to tumble below $24.

The company reported a net loss of $157m in the second quarter compared to a net income of $240m in the same quarter a year ago.

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The company’s second quarter loss was largely affected by share based compensation expenses for employees in the wake of its IPO, which totalled $1.3bn.

Facebook’s revenue growth was the slowest since its first quarter in 2011. The social network’s revenue was up by 32% totalling $1.18bn compared to $895m in the second quarter of 2011, however, its capital expenditures more than tripled to $413 million in the second quarter.

Income loss for operations was $743m compared to income from operations of $407m in the second quarter of 2011.

Mobile has been a primary rough spot for Facebook as the company’s expenses increase in its attempts to solidify its mobile standing.

The company invested in several new mobile products this year including a new Facebook Camera app for the iPhone after purchasing Instagram for a hefty £1bn and a new version of its mobile messenger app for iOS and Android. Facebook also launched its global application centre and plans for Facebook integration with the next version of Apple’s iOS and OSX.

"Our goal is to help every person stay connected and every product they use be a great social experience," said Mark Zuckerberg, Facebook founder and CEO. "That’s why we’re so focused on investing in our priorities of mobile, platform and social ads to help people have these experiences with their friends."

Facebook monthly active users totalled 955 million by the end of June 2012, an increase of 29% year-over-year. However, mobile monthly active users continue to make up the majority with 543 million by the end of June this year, an increase of 67% year-over-year.

The company reported that when it came to advertising on its site 49% of companies had a return on ad spending 5x or better.

While some analysts remain pessimistic about Facebook’s future after its reported earnings, others say the results should be viewed in the context of the Internet market as whole.

"The results reveal some positive data that Facebook is heading in the right direction, in particular there are impressive statistics on return on investment in advertising, which 49% of audited campaigns returning 5x spend," said Vanessa Barnett, technology and media partner at international law firm Charles Russell. "This is impressive. Alongside that Facebook continues to innovate for users, for example, purchasing Instagram, launching Facebook Exchange – all steps towards success and growth."

Russell points out that Facebook’s narrow profit margin is difficult to fully determine because of the challenge of moving into mobile ads.

"There will be many Facebook ‘Grinches’ that linger on the two key negatives (margin down from 53% to 43% and that costs and expenses up by almost 300%) but their schadenfreude would be entirely misplaced," says Russell. "Margin will for the moment be trickier because there is less space on mobile to view ads. Costs and expenses are obviously up because of payments arising out of employee share schemes and the IPO."

"The high level picture is that revenue is up, hitting 1.18 billion dollars," she adds. "That is a business success, whichever way you cut it."

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