Facebook Shows Slowing Growth as IPO Nears

Joel Anderson  |

As Facebook (FB) rapidly approaches its May IPO, which, based on the press it's getting, should be the most highly anticipated event since the debut of the wheel, the company made what is most likely its last earnings report prior to going public. Any hope by founder and CEO Mark Zuckerberg that the final weeks before the day he becomes a billionaire many times over would go smoothly appear to have been dashed as the company showed declining profits amid growing expenses.

Increased Costs, Lower Revenue

Facebook saw revenues decline 6 percent from Q4 2011 to $1.06 billion in the first quarter of 2012, with the company citing "seasonal trends" as the culprit in a regulatory filing. However, the slowing growth has many analysts raising a red flag.

"We are seeing slowing growth [at Facebook], which is never a positive thing," said Lou Kerner, founder of the Social Internet Fund.

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Facebook is also showing increased expenses as it grows past 900 million users worldwide. The company is building data centers and hiring engineers to handle the expanded user base. Facebook saw a 97 percent increase in total expenses year-over-year for Q1. Facebook also spent $550 million to purchase patents from Microsoft (MSFT) on Monday that Microsoft recently purchased from AOL (AOL). The move was to better deal with an ongoing legal dispute with Yahoo (YHOO). This also comes in the wake of Facebook's megadeal to acquire hipster-chic photo editing app Instagram for $1 billion. Neither purchase occurred during Q1, so they weren't included in this earnings report.

User Growth Slowing Sharply

The last two quarters have also seen a sharp decline in user growth, with Q4 2011 showing a year-over-year decline of 39 percent and Q1 2012 showing a drop of 33 percent. This could be a sign that Facebook's pool of potential new users is rapidly declining. The company's also suffering from an increase in mobile users. While this improves the level of saturation Facebook shows in people's lives, it's also much less lucrative in terms of all-important ad revenues. One the whole, Facebook showed a year-over-year decline of 12 percent in net income for Q1, from $233 million to $205 million.

Effect on IPO?

It seems unlikely that anything can stop the freight train of the Facebook IPO, and the company is more than likely going to be valued at more than $100 billion on its first day of public trading. But the reality for Facebook is that, sooner or later, it will be asked to back up the major hype surrounding the company with cold, hard cash coming in, and these slowing earnings have clearly given some doubt that the Menlo Park, CA company can do this.

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