Facebook blew everyone away with their first quarter earnings announcement on Wednesday April 27, 2016. The social media monster has been busy barring its teeth and flexing its muscles, with an increase of 10 percent above the estimated earnings per share. What is the reason for this impressive show of power?
One word: Mobile.
People on the go are the main push behind their success, with 82 percent of their ad revenue coming from mobile. Facebook’s monthly active users also beat the projections, with 1.65 billion overall. Of these individuals, 1.51 billion are reported to be checking in on their smartphone.
It wasn’t all that long ago that the analysts were wondering whether the popular social site would be able to monetize its platform and become profitable. When they filed for an IPO (initial public offering) in 2012, there were doubters who felt that even though they had raised an impressive amount of investors prior to going public, Facebook had a tough road convincing advertisers to buy into their revenue model.
Even their opening day on the stock market was considered a disappointment and some people thought their future looked a little shaky. In fact, 4 days after their debut, there were accusations and law suits concerning the transparency of the information for their IPO, with one class action suit claiming a loss of 2.5 billion.
Fast forward a few years and look at them now. On May 25, 2012, after their first full week of trading, their stock closed at $31.91. Today, following their earnings announcement, they opened at $120.79. Quite the contrast!
This report on CNBC gives the low-down on the earnings report.
Tech giant Facebook crushed analyst estimates when it reported first-quarter results on Wednesday.
The company reported adjusted first quarter earnings of 77 cents per share on revenue of about $5.38 billion. Analysts had expected Facebook to report earnings of about 62 cents per share on $5.26 billion in revenue, according to a consensus estimate from Thomson Reuters.
In fact, Facebook’s earnings per share figure was 10 percent better than the highest estimate of 41 Wall Street analysts.
Shares in the company jumped more than 9 percent in after-hours trading following the announcement. If Facebook were to open at those levels on Thursday, it would easily exceed its all-time high share price of $117.59.
Facebook also said it was proposing the creation of new class C shares. If the proposal is approved, shareholders would get two C shares for each class A or class B share they own. This would potentially allow Facebook CEO Mark Zuckerberg to sell some of his shares while still maintaining control of the company.
“We’re focused on the long term, and that’s the main reason for today’s proposal,” Zuckerberg said at the top of the company’s earnings call. “Facebook has always been a founder-led company so we can focus on our mission and build long-term value.”
Zuckerberg has previously pledged to give most of his wealth to charity — largely through the Chan Zuckerberg Initiative.
“This proposal is designed to create a capital structure that will, among other things, allow us to remain focused on Mr. Zuckerberg’s long-term vision for our company and encourage Mr. Zuckerberg to remain in an active leadership role at Facebook,” the company said in its earnings release.
Zuckerberg said his control over Facebook has allowed it to successful turn to mobile and make bets on acquisitions like Instagram “that were very controversial initially, but were good decisions for our community and our business.”
“Facebook has been built by a series of bold moves, and when I look out at the future I see more bold moves ahead of us than behind us,” he said.
The adoption of the proposal is subject to the approval of Facebook shareholders at its 2016 annual meeting of Stockholders in June, the company said.
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As you can see from the infographic from Leverage New Age Media, the above social media platforms are growing in active users, but mobile use is Facebook’s “cash cow.”
Another interesting announcement on Wednesday that added some extra spice to the already zesty earnings was the creation of a new class of stock by Facebook, named C stock. As opposed to the A and B class stock, the level C stock comes with no voting power. This is so that the CEO, Mark Zuckerberg, will remain the majority stock holder and he and his wife, Dr. Pricilla Chan, will be able to pursue their goals for the company’s future.
This New York Times article explains the C shares in more detail:
Facebook on Wednesday proposed a new class of stock, known as C shares, in a move meant to allow Mr. Zuckerberg to maintain control of the Silicon Valley company. The creation of the new class of shares allows the chief executive to preserve his voting power at Facebook, even as he begins an effort to give away the majority of his stock for charitable purposes.
Facebook said the move was “not a traditional governance model,” but it added that “Facebook was not built to be a traditional company.”
The proposal speaks to a very Silicon Valley ethos where company founders often reign supreme — and where corporate structures have shifted to accommodate that philosophy. Over the past decade, more tech companies have adopted two classes of stock so that their founders can cement their voting power at the firms. In 2012, Google announced that it was creating a third class of shares to prevent its founders’ voting power from diminishing.
Mr. Zuckerberg on Wednesday cited the Silicon Valley mantra of founders in explaining the new class of stock, calling Facebook a “founder-led company.” In a conference call, he added, “Facebook has been built on a series of bold moves. When I look out on the future, I see more bold moves ahead of us, not behind us.”
The social network on Wednesday also reported robust first-quarter earnings that show the results of Mr. Zuckerberg’s leadership. Facebook said sales rose 52 percent to $5.3 billion from a year ago, while profit increased to $1.5 billion, tripling from $512 million a year earlier. Excluding certain items, profit was 77 cents a share, far surpassing Wall Street expectations of 62 cents a share.
Facebook’s shares, which are up more than 33 percent over the past year, soared 9 percent in after-hours trading.
Facebook said it began considering a third class of stock last August when a committee of three directors — Erskine Bowles, Susan Desmond-Hellmann and Marc Andreessen — started evaluating the company’s capital structure. In December, Mr. Zuckerberg and his wife, Dr. Priscilla Chan, announced the creation of a limited liability corporation to which they would give 99 percent of their Facebook shares during their lifetimes for charitable purposes.
Mr. Zuckerberg’s philanthropic plan posed an issue for his long-term control of Facebook. Mr. Zuckerberg, who is chief executive, owns almost 4 million Facebook class A shares and 468 million, or 85 percent, of its class B shares, giving him overall voting power of 60 percent. But if he were to give away 99 percent of his Facebook stock over time, his voting power at the company would decline to less than 50 percent.
The new C shares effectively allow Mr. Zuckerberg to maintain 60 percent of voting power while still giving away large amounts of stock. Under the proposal, all holders of Facebook stock will get two C shares for each A or B share that they own. Importantly, the C shares come with no voting power. Holders of A shares are entitled to one vote per share, while holder of B shares have 10 votes a share.
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