Facebook’s first earnings report since going public will be crucial

Wall Street expects Facebook will report second-quarter earnings of 12 cents a share on revenue of $1.1 billion. Above, the webside on an Apple iPhone.
(Karen Bleier, AFP / Getty Images)

— After flopping on Wall Street, Facebook Inc. will get a chance this week to win over investors when it reports quarterly earnings for the first time as a public company.

The social networking giant is under intense pressure to show its business model can deliver solid growth and profits for shareholders. The key will be how Facebook, criticized for having a weak mobile strategy, will adapt as its nearly 1 billion users migrate to smartphones and tablets.

The Menlo Park company is expected to report Thursday second-quarter earnings of 12 cents a share on $1.1 billion of revenue. But it won’t be about just numbers. Investors want to hear from Chief Executive Mark Zuckerberg on the company’s earnings call with analysts.

“He just needs to get on the call and say he’s proud of the world-class team he has built to focus on generating revenue and he is going to let them do that,” Wedbush Securities analyst Michael Pachter said. “I don’t expect quantum leaps. I just want to see that Facebook is convincing advertisers that Facebook has value.”

Facebook won’t say whether Zuckerberg, who founded the social network in his Harvard dorm room, will talk to analysts. He has largely handed off financial responsibilities to Chief Operating Officer Sheryl Sandberg and Chief Financial Officer David Ebersman.

Their biggest challenge will be to address fears that the company’s advertising sales growth is slowing and that it has not figured out how to make money from its growing mobile audience.

Facebook disclosed in regulatory filings leading up to the IPO that advertising accounted for most of its $3.7 billion in sales last year. It also said that ad sales during the first quarter declined from the previous period, although they were up year over year.

Providing Wall Street some guidance could go a long way toward boosting the company’s fortunes since the botched IPO in May. Investors have remained bearish on the stock, and its stock market value hovers under $61 billion — well below the $100 billion Facebook’s bankers had originally hoped for.

“In reality, this earnings season will set the price of what the IPO probably should have been in the first place,” said Michael Yoshikami, chief executive of Destination Wealth Management, which does not own Facebook shares.

General Motors Co. dealt Facebook a heavy blow just days before the IPO when the automaker said it would stop placing paid ads there because there was no evidence that they helped sell cars. Now the two are in talks to bring GM back as a paid advertiser.

Facebook executives say they have redoubled efforts to help brands figure out what clicks with Facebook users. They are trying to make it easier for marketers to buy ads and develop ways for brands to better measure the effect of their Facebook campaigns.

They have also recently rolled out new advertising features beyond the traditional ads on the right side of the page and “sponsored stories” that turn up in users’ news feeds. The company last month launched an ad exchange that lets marketers track users on the Web and then targets ads on Facebook. And it has begun showing ads on Zynga Inc.'s website to test its strengths as an advertising network.

The new ad formats are still a work in progress, Facebook executives acknowledged in an interview in early July.

“People are wondering where their business is going and do they really know what their advertising business is going to be,” EMarketer Inc. analyst Debra Williamson said. “I am hoping to get more clarity, quite honestly.”

From the get-go, Facebook has approached the task of profiting from its users with caution, avoiding pop-up ads or campaigns that take over the screen.

Gokul Rajaram, an engineer who once ran Google Inc.'s lucrative AdSense engine, said in an interview this month that the company is working on making all ads as social as the interaction among friends on Facebook. He is now a product director for ads at Facebook.

The biggest question for Facebook is whether it can profit from mobile users. Shortly before its IPO, Facebook warned in a regulatory filing that users were logging on from their mobile devices in greater numbers — yet it makes almost no money from mobile ads.

Zuckerberg said this month at the Allen & Co. conference in Sun Valley, Idaho, that the most challenging part of his job is figuring out how to adapt Facebook for mobile devices.

Facebook launched mobile ads in February. In the last month it has begun to make it easier for marketers to reach mobile users. The company is letting advertisers buy individual mobile ads and is working on advertising that can target Facebook users based on data from the mobile apps they use.

The company doesn’t break out mobile advertising revenue, so analysts will scrutinize any mention of mobile ads and their potential to contribute revenue. A recent report from Facebook ad service AdParlor said click-through rates on mobile ads are 25 times better than on regular ads.

David Fischer, Facebook’s vice president of business and marketing partnerships, said the company had shifted to being a “mobile first” company and that the shift had been profound.

“With everything we talk about, mobile has to be at the center of it,” Fischer said. “It’s really important within the company that everyone recognizes the importance of it and that we march fast in that direction.”

Rajaram agreed.

“When you take a product to Zuck to review, the expected first thing you are going to talk about is the mobile version of the product. That applies to ads too,” Rajaram said.

Facebook is too big a force in the digital universe for marketers to ignore, said Greg Kahn, executive vice president and business development director at Optimedia International. Nearly all of his clients are experimenting with Facebook and how best to reach users.

“I think it’s dangerous territory to look at Facebook on a quarter-by-quarter basis. Whatever their earnings are today is not necessarily an indicator of where they are going to be long term,” Kahn said. “Facebook is making some thoughtful moves and talking to the marketing ecosystem about why it’s a good platform” for placing ads.