Facebook has just filed a sixth amendment to its S-1 filing to IPO in order to provide more transparency about how the shift of its user base from the web to mobile is causing it to show fewer ads per user, which could hurt revenue in the long term. Facebook also granted about $796 million in restricted stock units to employees less than a week ago, which was in the previous S-1 amendment but wasn’t widely reported. I’ve excerpted the significant changes and embedded the whole S-1 below. Specifically, Facebook is warning investors that daily active user count is rising faster than the number of ads the site is showing, which it predicts will lead to a lower average revenue per user.
As we noted when Facebook originally filed, it hasn’t proven its ability to monetize mobile yet. It now has Sponsored Stories ads running in the mobile news feed, but it can’t show nearly as many ads in this format as it does on the web, where it often shows four to seven ads per page, though less prominently in the sidebar.
By injecting ads directly into the news feed, Facebook is meddling with one of the most addictive features of the site. If it shows too many ads, users could become less prone to frequent return visits, and might spend less time browsing the feed. The company must walk the tightrope, testing to see how many in-feed ads it can get away with.
While on the web it can keep ad presence in the news feed conservative, on mobile this is it’s only real revenue driver. Facebook may have to slowly ramp up the frequency of mobile feed ads in order to acclimate its users. Unlike other free mobile apps that plaster banner ads over content or force users through interstitials, Facebook is trying to pioneer a less obtrusive way to monetize mobile through ads. Unfortunately, investors may be weary of weathering the process with their money on the line.
Here’s the important changes to the S-1, in bolded to separate them from surrounding context in the first two instances below:
Page 14: “We do not currently directly generate any meaningful revenue from the use of Facebook mobile products, and our ability to do so successfully is unproven. We believe this increased usage of Facebook on mobile devices has contributed to the recent trend of our daily active users (DAUs) increasing more rapidly than the increase in the number of ads delivered. If users increasingly access Facebook mobile products as a substitute for access through personal computers, and if we are unable to successfully implement monetization strategies for our mobile users, or if we incur excessive expenses in this effort, our financial performance and ability to grow revenue would be negatively affected.”
Page 17: “Our culture also prioritizes our user engagement over short-term financial results, and we frequently make product decisions that may reduce our short-term revenue or profitability if we believe that the decisions are consistent with our mission and benefit the aggregate user experience and will thereby improve our financial performance over the long term. As an example, we believe that the recent trend of our DAUs increasing more rapidly than the increase in the number of ads delivered has been due in part to certain pages having fewer ads per page as a result of these kinds of product decisions. These decisions may not produce the long-term benefits that we expect, in which case our user growth and engagement, our relationships with developers and advertisers, and our business and results of operations could be harmed.
Page 57: “Based upon our experience in the second quarter of 2012 to date, the trend we saw in the first quarter of DAUs increasing more rapidly than the increase in number of ads delivered has continued. We believe this trend is driven in part by increased usage of Facebook on mobile devices where we have only recently begun showing an immaterial number of sponsored stories in News Feed, and in part due to certain pages having fewer ads per page as a result of product decisions. For additional information on factors that may affect these matters, see “Risk Factors—Growth in use of Facebook through our mobile products, where our ability to monetize is unproven, as a substitute for use on personal computers may negatively affect our revenue and financial results” and “Risk Factors—Our culture emphasizes rapid innovation and prioritizes user engagement over short-term financial results.”
Page 78, regarding the RSUS: “On May 3, 2012, we granted an aggregate of 25,257,815 RSUs. We will determine the fair value of these grants during the second quarter. If the fair value of our Class A common stock was $31.50, the midpoint of the price range set forth on the cover page of this prospectus, the aggregate grant date fair value would be approximately $796 million.”
The RSUS grant will serve as a reward for hard-working employees, and could be worth a ton if Facebook’s stock price pops and holders wait to sell them. It could also encourage employees to stick around after the IPO if they’re set to vest over a long period of time. Kim-Mai Cutler has deeper analysis about what this RSUS grant means.
I’ve learned that analysts at Facebook’s first IPO roadshow events have been especially concerned about how Facebook’s ad business will be impacted by the shift to mobile. Adding additional transparency to its S-1 is Facebook’s attempt to be up front with critics. By showing it recognizes the problem rather than sweeping it under the rug, investors could be more confident the company will come up with a solution.
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