Digging Through the Numbers, Facebook's Quarter Wasn't That Great

Facebook FB shares have risen some 20+ percent in Wednesday trading after reporting third quarter earnings that beat estimates and revenue growth that also beat estimates. However, after digging through the numbers and breaking down the accounting, it appears as though the report wasn't nearly as strong as initially thought.

Looking at the positives, Facebook reported a comparable EPS of $0.12 on expectations of $0.111, an 8.11 percent beat. Revenue also beat to the upside by 2.93 percent and adjusted net income also beat by 7.35 percent. On the surface, based on these headline numbers, the data also looked good. Also, with growing percentage of revenue coming from mobile in the quarter, investors may be thinking that Mark Zuckerberg has found the secret to mobile advertising. However, the internals of the report paint an equally negative picture of the company going forwards.

First off, the enterprise value of the firm dropped nearly $15 billion in the quarter as the stock price fell and the company added some $200 million in debt. Although revenues rose in the quarter, cost of goods sold also fell, boosting gross profit by 30.9 percent as compared to the third quarter in 2011 and 6.6 percent from the second quarter of 2012. These numbers, along with the revenue and earnings data, point to a strong report. However, the data gets worse very quickly from there.

Facebook added some $200 million in debt in the quarter, increasing long-term debt by 34.5 percent as compared to the second quarter of 2012 and 33.16 percent as compared to the beginning of 2012. Also, and very importantly in my opinion, research and development expense (R&D for short) fell 65.39 percent from the second quarter to the third quarter. Normally, one would like to see constant if not growing R&D expense for technology companies, as they need to be investing in the development of the next product. In addition, Capital Expenditures (CAPEX) fell 59 percent in the quarter.

Also, retained earnings, the earnings that company does not distribute and holds for future capital decisions, fell 2.2 percent from the second quarter to third and is down 0.69 percent from the beginning of 2012. In addition, goodwill, or the extra money spent on acquisitions above the fair value of the assets of the company, rose to $1.423 billion in the quarter from $100 million at the start of the quarter. It would be wise to assume that all of this increase was not due to the single purchase, but even so, Facebook overpaid for acquisitions by $1.323 billion in the quarter. That sounds a bit erroneous to me...

Looking at the cash flows, Facebook reported a net change in cash of $380 million, well below the increase of $816 million in the second quarter. However, stripping out the cash gain from a one-off tax benefit relating to the exercising of options by employees on stock-based compensation of $472 million, Facebook actually burned through $92 million in cash in the quarter. Also, continued sales of Treasury Stock, stock the company purchases and holds on its balance sheet but does not retire, bolster the company's cash position, which is dilutive to existing shareholders.

So what does this say about Facebook? There are both positives and negatives. On the positive side, user growth, revenue growth, and increasing percentage of ad revenue from mobile all look good. However, the lack of investment in R&D, the lack of CAPEX to keep existing assets functioning, the cash situation, the goodwill, and the increase in debt should all be worrisome. Also, current valuations are based on long-term sales growth of near 25 percent. This is high, not as high as Apple AAPL but still high compared to the long-term average of most companies near 5 percent. Thus, if Facebook cannot keep sales growth high, the stock could slide.

Date
ticker
name
Actual EPS
EPS Surprise
Actual Rev
Rev Surprise
Posted In: EarningsNewsHotIntraday UpdateMoversMark Zuckerberg
We simplify the market for smarter investing

Trade confidently with insights and alerts from analyst ratings, free reports and breaking news that affects the stocks you care about.

Join Now: Free!

Loading...