Like two peas in a pod, Facebook (Nasdaq: FB) is getting crushed today after earnings, down by as much as 17%, following in the footsteps of social gaming pal Zynga (Nasdaq: ZNGA), who got clobbered by 40% yesterday on its own earnings.

This is Facebook's first earnings release as a public company. Let's see how the debutante did.

Can I get your digits?
Total revenue in the second quarter jumped 32% to $1.18 billion. Of that total, advertising revenue was $992 million, or 84% of the total, while the remaining $192 million were from the payments and fees segment. Worldwide average revenue per user, or ARPU, came in at $1.28, a sequential increase from $1.21 last quarter and about on par with the $1.26 a year ago.

While not disclosed specifically, I calculate ad and payments ARPU to get a better feel for the monetization of each segment and how that's driving the overall business.


Q2 2011

Q2 2012

Ad ARPU $1.09 $1.07
Payments ARPU $0.17 $0.21
Worldwide ARPU $1.26 $1.28

Sources: SEC filings, author's calculations.

It's subtle, but you might notice that ad ARPU declined slightly while the rise in payments ARPU more than made up for it. The payments business is far from mature, but this is still a positive sign for that segment. Facebook hasn't broken these figures down geographically quite yet, which will probably have to wait for the 10-Q filing.

Payments revenue was up 3% sequentially, which is interesting since Zynga is the biggest contributor there and the game maker's online game revenue declined by just a hair sequentially. That's continued evidence that Facebook and Zynga are beginning to diverge slightly and that other developers are pitching in more to Facebook's payment revenue while Zynga shifts focus toward mobile games.

Thanks to the IPO, Facebook recognized a hefty $1.3 billion in stock-based compensation expense, a major contributor to the $157 million, or $0.08 per share, net loss that the social networker posted. On a non-GAAP basis, the company posted a $0.12-per-share profit, which was ahead of Street expectations.

The "B" word
The largest social network in the world now boasts 955 million monthly active users, or MAUs, flirting with the magical 10-digit threshold of a billion users. Of these, 552 million were active on a daily basis and 543 million are monthly mobile users. Unsurprisingly, the mobile subset is growing tremendously, increasing 67%, and has reached an all-time high penetration at 57% of the user base.

Source: SEC filings.

Facebook's efforts to ramp up mobile monetization are showing healthy signs, with the recent implementation of Sponsored Stories in mobile News Feeds, in addition to the desktop News Feed. CEO Mark Zuckerberg said that overall Sponsored Stories are now producing a run rate of $1 million in revenue per day, with roughly half of that coming from mobile.

These Sponsored Stories are an important initiative for Facebook's ad business, because they have higher click-through rates and fetch higher prices from advertisers because they're more engaging. This is because they're socially tied to a person's friends in some way, which is like the 21st century version of word-of-mouth marketing. They're far more effective than the traditional display ads on the right-hand column that users habitually ignore.

Putting Facebook in its place
Thankfully, I'm not the only one that thinks the rumored Facebook Phone makes no sense. Zuckerberg himself specifically said that it "wouldn't really make much sense for us to do." Instead, he wants to focus heavily on continued integration into other platforms, most importantly in Apple (Nasdaq: AAPL) iOS and OS X and Google (Nasdaq: GOOG) Android.

Facebook wants to be the social layer between the operating system and the app. Here's what Zuckerberg had to say in the conference call:

Now let's shift to platform. We believe one of the biggest opportunities we have is to create the identity and social layer that all new apps and websites can be built on top of. We think almost every product is better when you can experience it with the people you care about. So over time, we expect almost all of these products should naturally become social. Since there's no way we could ever build all of these ourselves, we're focused on building a successful platform, which enables developers to build great social experiences into their own apps by integrating with and exchanging information with Facebook.

This is the right strategy because that's exactly what Facebook's role should be. Clearly, Facebook wants to be more than just another app, but it also has no chance of making an entirely new mobile OS platform, so seeing heavy integration into existing ones is the perfect strategic balance.

Warmer... warmer...
The ad business needs to be improved, and Sponsored Stories is a good start but that's all it is: a start. While mobile ads are seeing some healthy signs early on, mobile payments are non-existent. There are reasons to have confidence that Facebook can migrate its ad business to mobile platforms, but it has nearly no chance of doing so with its payments business since it doesn't own the platform. That cut will continue going to Apple or Google.

Overall, the business continues to have potential, but I'm still in the "wait-and-see" camp. Shares have hit fresh all-time lows, and investors are rattled by the lack of visibility since Facebook didn't provide any type of financial guidance for the coming quarter or full year.

The good news is that its valuation is getting closer to the point of piquing my interest considering signs of improvement in its monetization strategy, but it's not there yet.

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