Latest Facebook S-1 Amendment Addresses Mobile Advertising Issues, Employee RSUs

By David Cohen 

Facebook late last night filed the sixth amendment to its S-1 filing with the Securities and Exchange Commission for its May 18 initial public offering, acknowledging the challenges of monetizing advertising on its mobile products, and announcing the grant of restricted-stock units to employees.

On the mobile front, the social network addressed the concerns that have been raised over the fact that more users are accessing Facebook via mobile devices, and it is limited in the number of ads it can pass through to those users.

While Facebook introduced sponsored stories for its mobile newsfeed at its Facebook Marketing Conference in New York Feb. 29, it must walk the fine line between including enough of them to produce revenue, but not running the risk of alienating its users and souring its user experience by running too many of them.

Facebook is able to limit the number of ads it places in the newsfeed for Web users because it can take advantage of the sidebar and run multiple ads there, but the sidebar is not an option in its mobile offering.

As a result, the company cautioned that its average revenue per user will likely decline, as its total daily active users are rising at a far more rapid rate than the number of ad units it is displaying to those users.

Revision No. 6 to Facebook’s S-1 is embedded below, but here are some excerpts related to its mobile advertising conundrum:

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 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.

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.

As for the RSUs it granted to employees, Facebook said the total number issued was 25,257,815, which it said would be worth about $796 million if its class-A common stock is priced at $31.50 per share. That figure is the midpoint in its IPO price range of $28 to $35 per share, meaning the value could fall anywhere from $707 million at the low end to $884 million at the high end, TechCrunch pointed out, and those figures will obviously fluctuate with the price of the stock when it begins trading.

TechCrunch added that the RSUs are what Facebook referred to as “employee refresher grants,” meaning that they are new, and do not replace prior RSUs, clarifying that RSUs are not actual shares, but contracts that promise actual shares upon a certain event, such as the IPO.

As we said, Facebook’s filing yesterday marks the sixth revision to its initial IPO filing Feb. 1.

In the first S-1 revision, filed Feb. 8, the social network revealed the details of its exclusivity agreement with game developer Zynga in explaining how 12 percent of Facebook’s revenues come from Zynga.

The second S-1 revision, filed March 8, confirmed details that had already been made public, such as Facebook doubling its line of credit, obtaining an additional bridge loan, and expanding the team of banks working on the IPO.

S-1 revision No. 3, filed March 27, disclosed Facebook’s acquisition of 750 patents from IBM.

The fourth revision, filed April 23, brought news that Facebook had officially topped 900 million monthly average users, along with the news that the company’s revenue rose in the first quarter of 2012 compared with the prior-year period, but costs and expenses saw a hefty increase, resulting in lower net income for the quarter.

And the fifth revision, filed May 3, outlined the details of the May 18 IPO, including the number of shares to be issued (337.4 million), the price range ($28 to $35), and other details.

[TechCrunch] Facebook’s Sixth Amendment to its S-1 Filing to IPO

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