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Facebook (FB): Mobile Revolution Could Weigh Near-Term Revenues

 October 10, 2012 01:48 PM

(By Mani) Well, Facebook Inc.'s (NASDAQ: FB) biggest problem – Mobile – is escalating by the passage of each day as the users of social networking giant are migrating to smartphones and tablets from desktop.

comScore reported that U.S. desktop usage (minutes) fell 19 percent and 11 percent sequentially, compared with August, down 14 percent year-over-year. The fall in desktop usage would hurt Facebook, which counts on desktop users for the majority of its revenue as its mobile monetization efforts are yet to bear fruit.

"This data suggests Street estimates (for Facebook) remain too high for 2013," Oppenheimer analyst Jason Helfstein said in a client note.

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Wall Street expects Facebook to earn 48 cents on a revenue of $4.91 billion for 2012, and 62 cents a share on revenue of $6.28 billion for 2013, according to analysts polled by Thomson Reuters. The consensus view calls for earnings growth of 12 percent and 29 percent in 2012 and 2013. Meanwhile, sales are predicted to increase 32.3 percent this year and 28 percent next year.

The analyst's observation implies that Facebook may not able to resolve its mobile issues fully even by the end of next year. Advertising revenues could drop if mobile engagement continues to grow, and Facebook is unable to monetize opportunities in mobile successfully.

Obviously, Facebook shares are in the red after the latest revelation. They dropped more than 2 percent on Wednesday to trade at $19.69.

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Since Facebook's first earnings call, analysts and investors have clamored for data points to better understand the impact of the mobile revolution on the company. Simply put, the mobile evolution has become the mobile revolution, occurring much faster than anyone predicted.

California-based Facebook, which recently touched the billion user mark, has seen a dramatic change in U.S. desktop usage since April as more users increase their time spent on smartphones. Moreover, this trend probably continues as carriers aggressively market family plans as part of their 4G offering.

"While mobile has seen nice M/M growth, monetization of mobile is estimated at 79 percent of desktop," Helfstein said.

A shift in users' game activity to mobile from desktop would hurt Facebook. When users migrate toward mobile, apps tend to be single purchases, which is not shared with Facebook. Moreover, apps tend to be advertising supported compared to Facebook credits.

In addition, a continued deceleration in social gaming would not bode well for the company.

"While we do not have a specific view on social gaming, Zynga's 2012 bookings guidance of $1.15B billion to $1.23 billion, represents growth of 3 percent year-over-year at the mid-point, a dramatic slowdown vs. 38 percent year-over-year in 2011," Helfstein noted.

Notably, Facebook currently does not have a clear strategy to monetize payments outside of gaming, such as sharing in physical or digital good sold through the site (products, movies, TV shows, games or eBooks).

Emphasis on HTML 5 was a mistake, but the company has aggressively launched new ad products. Facebook is now focused on developing higher quality native apps for iOS and Android. Facebook 5.0 launched in August 2012, with and Android version coming soon.

In addition, the launch of the iPhone 5 as a positive catalyst for mobile monetization, given its faster 4G data network. However, this will probably accelerate the shift away from desktops as the user experience will also be closer to desktop speed.

"We are lowering our near-term and long-term revenue forecasts by 2 percent and 9 percent for 2012 and 2013, respectively, and by 22 percent for 2018, our terminal year. Our revised revenue estimates are now 3 percent and 10 percent below FactSet consensus for 2012 and 2013, respectively," the analyst said.

Though the time spent on all Facebook platforms is hitting all-time highs, the company is going through a difficult transition to mobile, which will likely weigh on revenues for several quarters.



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