Facebook’s first-quarter finances underwhelm as IPO nears

SAN FRANCISCO — The rapid growth of Facebook Inc. showed signs of slowing in the first quarter, potentially cooling investors’ fervor just weeks before the company’s hotly anticipated initial public stock offering.

Facebook generated $1.06 billion in sales, the second quarter in a row sales topped $1 billion. That represented a 45% jump from a year earlier but a 6% decline compared with the fourth quarter.

The financial performance, the company’s most anemic since at least 2010, fell below analysts’ expectations. Its expenses in the first quarter almost doubled from a year earlier, easily outstripping the rise in sales over the same stretch.

The decline in revenue compared with the fourth quarter occurred despite Facebook’s monthly active user count rising to 901 million as of March 31 from 845 million as of Dec. 31.

“Facebook definitely has its work cut out for it if it’s going to meet our estimate of $5 billion for ad revenue this year,� EMarketer analyst Debra Williamson said.

EMarketer expects Facebook to generate $6.1 billion in total revenue in 2012, up from $3.7 billion in 2011. Facebook makes most of its money from online ads and in February began rolling out new ads for marketers that target users of its website and mobile users. Williamson said Facebook had not yet seen a sales boost from the new ads, which probably will come later in the year.

The social networking giant said in a regulatory filing Monday that its advertising business typically declines in the first three months of the year. Marketers make bigger ad buys to reach holiday shoppers in the fourth quarter. The overall U.S. online advertising market fell to $8.9 billion in the first quarter, down 3.2% from a year earlier, according to EMarketer.

Net income slipped 12% to $233 million as expenses surged to $677 million from $343 million a year earlier as Facebook invested in its data center operations, hired employees and marketed its services. It had 3,539 employees as of March 31, up from 2,431 a year earlier.

And though Facebook is adding users at a rapid pace, it saw a 12% decline from the fourth quarter in average revenue per user.

“Facebook’s first-quarter numbers are awful,� said Sam Hamadeh, chief executive of PrivCo, which researches private companies. “They’re worse than the worst-case scenario of at least flat sequential revenues with the fourth quarter.�

But Lou Kerner, founder of the Social Internet Fund, downplayed the significance of Facebook’s results. Facebook is expected to hold the largest Internet IPO in history next month, raising as much as $10 billion and achieving a valuation that could top $100 billion.

“Few investors are buying Facebook for first-quarter results,� Kerner said. “Facebook is trying to dominate a massive new sector — social media — and is willing to forgo short-term revenue growth and profitability.�

GreenCrest Capital analyst Anupam Palit said quarterly results could slightly dampen investor enthusiasm, “but we still expect overall sentiment to be strong.�

Investors, looking to buy into high-growth Silicon Valley stocks, have been eagerly awaiting Facebook’s stock market debut. They are the ones most likely to be disappointed by the slowdown in growth.

Michael Yoshikami, chief executive of Destination Wealth Management, said he did not expect demand would lessen for Facebook shares, which have rocketed on the secondary market. But, he said, investors “need to embrace a slowing growth model.�

The Facebook filing also provided more insight into its $1-billion purchase of mobile photo-sharing app maker Instagram. Facebook said it paid for Instagram with 23 million shares of stock and $300 million in cash. That means Facebook has set its own value at just under $77 billion. Facebook also said it would compensate Instagram with $200 million in cash if the government blocked the deal.

Also Monday, Facebook revealed it paid $550 million for the majority of a patent portfolio that Microsoft acquired from AOL for $1 billion, its second major buy of patents since Yahoo sued Facebook last month, accusing it of patent infringement. Facebook countersued Yahoo this month.

“If you are a significant player in this landscape, you have to have patent protection,� BGC Partners analyst Colin Gillis said. “Facebook realizes it’s a target.�

Facebook also continued to raise its profile in Washington. It shelled out $650,000 on lobbying in the first quarter, up more than 32% from the fourth quarter.

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