Facebook Inc. (FB:US) this week is getting its first crack as a public company to allay the growth concerns that have made it the second-worst performing U.S. technology initial public offering of 2012.
The shares have tumbled 24 percent since Facebook, the largest social-networking service, held a May 17 IPO marred by technical glitches and signs that its price was set too high. Executives, probably including Chief Financial Officer David Ebersman and Chief Operating Officer Sheryl Sandberg, will hold a conference call July 26 to discuss second-quarter results.
“This call is really critical for this company,” said Paul Argenti, a professor at Dartmouth College’s Tuck School of Business in Hanover, New Hampshire. “This is going to be an opportunity for them to really make a difference in terms of their investor relations strategy and set the record straight. They need to gain that momentum back and the exuberance that they lost as a result of the IPO.”
The call, at 5 p.m. New York time, gives management its first chance since May to make a case that Facebook deserves a higher price relative to earnings than 98 percent of the Standard & Poor’s 500. Shareholders will seek assurances that the company can keep users engaged amid rising competition from Twitter Inc. and Google (GOOG:US) Inc. and that it can overcome challenges making money from advertising on mobile devices.
AVG Technologies NV, a maker of security software, has dropped 33 percent in U.S. trading since it sold shares in an IPO this year. Facebook fell 2.4 percent to $28.07 at 9:31 a.m. in New York.
Sales probably rose 30 percent (FB:US) to $1.16 billion in the June period, according to analyst predictions (FB:US) compiled by Bloomberg. That would be the slowest growth rate yet disclosed by the company co-founded by Mark Zuckerberg in 2004 in a Harvard University dorm room.
Ebersman will probably be on the call, said Andre Sequin, an analyst at RBC Capital Markets in New York. It also makes sense to include Sandberg, who has a reputation for being a clear, persuasive communicator. Chief Executive Officer Zuckerberg played a lower profile during pre-IPO marketing meetings and may opt out of the call, Sequin said.
“He’s made it quite clear he’s much more interested in running the operation, and spending his time thinking about product development and the future of the company, than worried about this side of the process,” said Sequin, who has the equivalent of a buy rating (FB:US) on Facebook.
Ashley Zandy, a spokeswoman for Menlo Park, California- based Facebook, declined to discuss the company’s conference call plans.
Zuckerberg would provide valuable insight into the company’s vision and some shareholders will want to hear from him, said John Palizza, a lecturer at the Jesse H. Jones Graduate School of Business at Rice University in Houston.
“Zuckerberg should show up on the call, not necessarily to read the income-statement stuff, but to simply come on and make some strategic remarks, and be available to answer some strategic questions,” he said. “He should be there to show he’s engaged, he cares about the investor.”
With so much riding on the earnings, Facebook is probably spending several days preparing the release and script that will be read during the call, he said.
“Everybody in the world is going to be listening to this call,” Palizza said.
Several questions will probably center on the company’s challenges in mobile advertising. Facebook said in May that sales growth wasn’t keeping pace with user expansion as more members accessed the service with mobile phones. Zuckerberg, in an interview this month at the Allen & Co. conference in Sun Valley, Idaho, said his hardest job now is figuring out how to adapt Facebook for mobile devices.
Facebook has had little time to gain traction in mobile advertising, having just announced its inaugural mobile- advertising platform in February. Still, a recent report by Facebook ad service AdParlor said click-through rates on the mobile ads are 25 times better than on regular ads.
The company has taken other steps to heighten its appeal to advertisers. It’s testing a service that places ads alongside search results, and in June unveiled plans to use real-time bidding for ads on its site, a strategy that Google and other companies have used to successfully target ads.
While those efforts may spur growth in coming periods, analysts have curtailed projections for Facebook’s sales and profit last quarter. Analysts cut second-quarter sales estimates 3.5 percent in the past month, data (FB:US) compiled by Bloomberg show. The prediction for per-share profit, excluding some items, fell 10 percent.
“Expectations are muted in general,” said Brian Wieser, an analyst at Pivotal Research Group in New York.
Facebook officials will need to convey confidence without making promises they can’t keep, said Baruch Lev, a professor at New York University Stern School of Business and author of “Winning Investors Over: Surprising Truths About Honesty, Earnings Guidance, and Other Ways to Boost Your Stock Price.”
“The worst thing that can be done on a conference call is to disregard the past -- and just speak about castles in the air: ‘We expect this. We look forward to a great future,’” said Lev, who is based in New York. “Just baseless optimism and hype is the worst thing, particularly when there is uncertainty, like in the case of Facebook.”
Facebook hasn’t yet told investors how much guidance on growth metrics to expect. On one end of the spectrum is online retailer EBay Inc. (EBAY:US), which gives a full-year forecast for sales and earnings. On the other is Google, which provides no outlook.
Benjamin Schachter, an analyst at Macquarie Securities USA Inc. in New York, said he’d like Facebook to provide commentary on sales-growth prospects. That includes potential new ad platforms and charging for special editions of Facebook.
The company needs to be careful not “to create expectations that will disappoint,” said Michael Cusumano, management professor at the Massachusetts Institute of Technology Sloan School of Management in Cambridge, Massachusetts. “I would be humble, understate what they’ve done and hope in future quarters they will outperform those expectations.”
Another pitfall is letting quarter-to-quarter expectations keep Facebook from managing strategy for the long haul, said Kevin Landis, chief investment officer of San Jose, California- based Firsthand Capital Management Inc., which has $300 million under management, including shares of Facebook.
“I would rather see them take their time and get it right,” Landis said, “rather than seeing them rush and try to please the analysts community from one quarter to the next.”
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