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Facebook’s Profit Triples, Outpacing Forecasts and Its Peers Facebook Plans New Stock Class to Solidify Mark Zuckerberg’s Control
(about 4 hours later)
SAN FRANCISCO — For most tech companies this financial earnings season, it has become a game of survival of the fittest. By that score, Facebook may outlast the others. SAN FRANCISCO — Mark Zuckerberg nurtured Facebook from a dorm room idea into the world’s biggest social network. Now the company is taking steps to ensure its founder remains in charge.
On Wednesday, the social network said sales in the first quarter rose 52 percent from a year ago to $5.3 billion, while profit increased to $1.5 billion, tripling from $512 million a year ago. Excluding certain items, Facebook’s profit was 77 cents a share, far surpassing Wall Street expectations of 62 cents a share. 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 also announced a new class of nonvoting stock, called Class C shares, which the company said was aimed at ensuring that Mark Zuckerberg, the chief executive, would remain in “an active leadership role.” Facebook said the move was “not a traditional governance model,” but it added that “Facebook was not built to be a traditional company.”
“We’re focused on our 10-year road map to give everyone in the world the power to share anything they want with anyone,” Mr. Zuckerberg said in a statement. 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.
The results were a far cry from the disappointing numbers posted in the past 10 days by Facebook peers like Twitter, whose advertising business showed signs of stumbling on Tuesday, or Alphabet, the parent company of Google, which missed analysts’ estimates for revenue last week. 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.”
Other tech companies have also recently reported a string of weaker-than-expected results, including Microsoft and Apple. And some of the companies are having to cut deep; last week, Intel said it planned to eliminate 12,000 jobs to deal with the downturn in demand for personal computers. 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, in contrast, has figured out how to wring billions of dollars from its members on mobile devices and other platforms, making the company’s revenue-generation machine unstoppable. The company said 82 percent of its advertising revenue came from mobile devices in the first quarter. Facebook’s shares, which are up more than 33 percent over the past year, soared 9 percent in after-hours trading.
And while the growth in new users on Facebook has slowed in recent years, the total is still getting larger. Facebook said 1.65 billion people visited the site on a monthly basis, up from 1.44 billion a year earlier. More than 1.5 billion people are monthly mobile-only users, up from 1.25 billion a year ago. 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.
Shares of Facebook surged more than 6 percent in after-hours trading. 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.
That means Mr. Zuckerberg, as the majority owner of Facebook shares, will obtain a large amount C shares that he can then donate without diluting his voting power in the company.
“It is a rational, if somewhat eyebrow-raising way, for founders to distribute wealth without giving up operating control of the company,” said Lise Buyer, founder of the Class V Group, which advises start-ups on initial public offerings. “This structure will continue to allow Facebook to make decisions that may not always look great in the short term, but may pay off for investors over time.”
Facebook’s C shares may trade at a slight discount to A shares, which would still have one vote. Most investors currently hold A shares, which only have about a quarter of the overall shareholders’ voting power, so they may not be forgoing much if they choose to sell their A shares versus their C shares.
“It’s almost like voting Republican in Massachusetts — you can do it, but it won’t affect the outcome,” said Rick Kline, a partner in the technology and capital markets practice of law firm Goodwin Procter.
Investors getting new C shares will not gain economically because the same proportion of new stock will be given to all holders.
Mr. Zuckerberg might have a more difficult time convincing shareholders to accept the new class of shares were his company not doing so well. Facebook’s financial results on Wednesday were a far cry from the disappointing numbers posted in the past 10 days by peers like Twitter, whose advertising business showed signs of stumbling on Tuesday, or Alphabet, the parent company of Google, which missed analysts’ estimates for revenue last week.
Facebook, in contrast, has figured out how to wring billions of dollars from its members on mobile devices and other platforms, making the company’s revenue-generation machine unstoppable.
The company said 82 percent of its advertising revenue came from mobile devices in the first quarter. In addition, Facebook is starting to spin up revenues in Instagram, the photo-sharing application, and is testing advertising on Facebook Messenger, the messaging service for which the company recently introduced automated customer service “bots.”
And while growth in new users on Facebook has slowed in recent years, the total is still getting larger. Facebook said 1.65 billion people visited the site on a monthly basis in the first quarter, up from 1.44 billion a year earlier. More than 1.5 billion people are monthly mobile-only users, up from 1.25 billion a year ago.
Facebook’s other big bets like WhatsApp, the messaging service, and Oculus, its virtual reality play, have yet to pay off with immense new revenue streams. But Facebook is comfortable gathering a critical mass of users — nearly a billion in WhatsApp’s case — and then introducing advertising later on when it makes more sense.
“To me, this is like Google 10 years ago,” said Mark Mahaney, an Internet analyst at RBC Capital. “They really had such momentum, and they’re proving how valuable they are to both advertisers and consumers.”