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Facebook: Fair Disclosure or Too Much Information?


Facebook reported excellent third-quarter earnings, but two management revelations spoiled the bulls' party.

Don't tell me 'cause it hurts
--"Don't Speak" (No Doubt)

Maybe Facebook (NASDAQ:FB) is a little too honest for its own good.

Yesterday, the company delivered truly outstanding third-quarter results:
  • Revenues rose 60% year-over-year to $2.02 billion, easily beating the $1.91 billion consensus.
  • Earnings came in at $0.25 per share, $0.06 ahead of consensus.
  • Mobile accounted for 49% of ad revenues, up from 41% last quarter.
  • Non-GAAP operating margin hit 49%, up from 42%.
It was all quite magical, and the stock quickly shot up to $57.98, an 18% gain from yesterday's close.

But on the conference call, Facebook CFO David Ebersman made a revelation that killed the bulls' party:

I want to say a few words about youth engagement on Facebook. As we've said previously, this is a hard issue for us to measure because self-reported age data is unreliable for younger users. So we've developed other analytical methods to help us estimate usage by age. Our best analysis on youth engagement in the US reveals that usage of Facebook among US teens overall was stable from Q2 to Q3. But we did see a decrease in daily users specifically among younger teens. We won't typically call out such granular data especially when it's of questionable statistical significance given the lack of precision of our age estimates for younger users. But we wanted to share this with you now since we get a lot of questions about teens.

So now, investors are freaked out about the idea of younger teens leaving Facebook -- even though the company saw a significant increase in the user count. Daily Active Users were up 25% year-over-year!

Is There Such a Thing as Too Much Information From a Public Company?

More information is usually a good thing.

One reason I enjoy writing about Apple (NASDAQ;AAPL) so much is that the company provides a wealth of information regarding sales, which makes it easy to analyze individual product lines like the iPhone and iPad. I can't think of another consumer technology company that provides as much detail. With too many companies, we're often reduced to trying to make sense of words like "strong" and "impressive" instead of an actual data set.

In this case, Facebook reported a very narrow piece of data -- a subset of the teen category -- that it described as "of questionable statistical significance." It wasn't remotely as cut-and-dry as a piece of financial data.

The big question is this: Is Facebook setting the expectation that it will make similar revelations in the future, even if the numbers aren't statistically significant?

This should be a source of concern, because without supplementary data, investors may be hit with unnecessary distractions.

For example, how much revenue comes from younger teens? And if these teens are leaving, could they be shifting attention to Instagram, which Facebook owns and is getting ready to fill with ads?

Who really knows?

But one thing we can be sure of is that the stock is reacting as if this is a major disaster. I mean, look at this mess:

Volume, Volume, Volume

Less controversial -- but equally damaging to the bulls' cause -- was Facebook's announcement that it would not significantly increase the number of ads in its News Feed going forward.

This is a useful piece of information because as the company said on the call, increasing ad volume has been key to boosting Facebook's revenue growth.

I wonder now if big Facebook bulls will modify their views. Will they go bearish? Or will they shift from celebrating ad-stuffing to praising the company for preserving the user experience?

The Forward Outlook

At least for the near-term, Facebook is in the penalty box.

But let's think about next quarter.

Will the stock be held hostage to data of "questionable statistical significance"? And what if the company refuses to comment on the topic? Will it stand accused of being evasive?

And on the Plus Side...

In the name of accentuating the positive, Facebook's incredible mobile ad revenue growth bodes quite well for the Twitter IPO.

Many people may assume that young teens leaving Facebook are headed for Twitter (NYSE:TWTR) which is considered cooler.

And back to Instagram. If the Facebook platform loses some teen revenues, will Instagram pick up the slack? Will Facebook be the old-people product and Instagram the young folks' one?

I guess we'll find out.

Twitter: @Minyanville

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Position in FB,AAPL
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