Share incentive scheme and development costs wipe out Facebook profit
If share incentive schemes are intended to reward staff for building bigger profits for shareholders, the Facebook scheme is an unmitigated failure. While revenues grew by 36% in the nine months to 30 September, profits have vanished completely.
Amounts charged in relation to the company’s share incentive schemes absorbed 43% of revenues – much of it in the research and development area. So unless Facebook achieves some magical results soon from its development team, the incentives will have been entirely counter-productive.
In fairness to Facebook, the share incentive charges are based on the perceived value of the incentives rather than on cash outlay by the company. The heavy charge this year stems from the fact that many of the shares will vest next month (six months after the IPO). Explaining the impact more fully, the company said:
“Our share-based compensation expense was materially affected in the second quarter of 2012 due to the terms of our RSUs granted prior to 2011, related to which we recognised a cumulative $986 million in share-based compensation expense in the period, despite the fact that these awards were granted and earned over several years.”
Accepting that the latest profit figure may have been distorted by timing factors, $986 million of cost is still one heck of a lot, irrespective of how many financial periods it was earned over.
Even without the share incentive charges, development costs almost doubled when compared with the same period in 2011.
Marketing costs too are eating into a bigger portion of revenues. Excluding any share incentive costs, the marketing and sales expenses absorbed 11.6% of revenue in the latest nine months compared with 9.6% in the corresponding period of 2011.
It all smacks of panic or very loose management. So it’s a good job the Facebook balance sheet is very strong with piles of cash swilling around and virtually no short-term liabilities to meet.
Bob Willott is editor of “Marketing Services Financial Intelligence”.