“A dozen letters, published a month after the May 17 IPO on the SEC’s website, depict a management team hesitant to disclose information and still guessing at even rudimentary aspects of its business just weeks before the company held the largest-ever technology initial public offering. Many of the issues raised by the SEC and now unnerving investors were foreshadowed in the then-private correspondence between the SEC and Facebook.
On the most critical issue facing Facebook’s future as a public company — whether it could make money from the soaring number of mobile users, who see fewer ads than other customers – - the letters show executives holding back crucial details until the SEC pushed for further disclosure.
Noting that Facebook was counting some mobile users twice, Jacobs wrote on March 22: “Please explain to us how you determined that your metrics are not overstated.”
Only eight days before the IPO, on May 9, did Facebook make clear in a filing that that daily mobile customers were increasing faster than advertising growth, potentially hurting revenue and profits. It was the strongest public signal that the IPO could fall short of its high expectations.
What investors didn’t see until a month after the IPO were the letters that pushed Facebook to disclose in detail such key financial challenges as decelerating revenue growth, user count and its dependence on gaming company Zynga Inc. (ZNGA) — all issues that arose in prominence after it became a public company.
By the end of February, the SEC had amassed a list of 92 matters on which it sought further information.
An area of concern: Facebook’s reliance on Zynga, which makes the five most popular games played on Facebook including “Texas HoldEm Poker.” When Zynga missed earnings estimates in July, Facebook’s stock tumbled 8.5 percent, underscoring their interdependence.
At first Facebook’s filing said Zynga accounted for 12 percent of 2011 revenue. After further prodding, Vetter said that Facebook last year got 19 percent of revenue from Zynga – -12 percent from processing fees of virtual goods and 7 percent from ads on pages generated by Zynga apps.
Jacobs also asked Facebook why it hadn’t included data on revenue generated by each user, a “key” indicator of performance. Vetter dismissed the request on March 7, saying that the company prefers to look at “overall growth in users” and “overall revenue in evaluating the business.”
Unswayed, the SEC carried out revenue-per-user calculations itself, which Facebook only then included in a revised filing on April 23.”
And so on.