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Facebook First-Quarter Profit Drops; Costs Almost Double

April 23 (Bloomberg) -- Facebook Inc. said it will list its shares on Nasdaq OMX Group Inc.’s U.S. exchange, according to a regulatory filing. (Source: Bloomberg)

Facebook Inc. (FB), the social network planning an initial public offering, said first-quarter profit fell 12 percent as sales growth slowed and marketing costs more than doubled.

Net income dropped to $205 million in the three months through March, Menlo Park, California-based Facebook said yesterday in a regulatory filing. Sales climbed 45 percent to $1.06 billion, a slowdown from 55 percent in the December period.

Expenses surged to $677 million, reflecting higher costs of helping marketers reach Facebook’s growing user base, which swelled by one-third to 901 million last quarter. The company may struggle to reach EMarketer Inc.’s projection for 2012 sales of $6.1 billion as it awaits the full impact of new tools aimed at wringing more money from advertisers, said Debra Aho Williamson, who helped construct the researcher’s estimate.

“Facebook has a pretty steep hill to climb to meet the expectations that we set out,” Williamson said.

Facebook may seek an IPO valuation of $75 billion to $100 billion, people with knowledge of the matter have said. The upper end of that range would value the company at about 25 times trailing 12-month sales, more than double Google (GOOG) Inc.’s valuation when the search-engine operator went public in 2004.

Photographer: Aaron Tam/AFP/Getty Images

Facebook in Hong Kong on February 2, 2012. Close

Facebook in Hong Kong on February 2, 2012.

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Photographer: Aaron Tam/AFP/Getty Images

Facebook in Hong Kong on February 2, 2012.

Before last quarter, Facebook’s sales were already projected to gain at a slower rate this year than Google’s at the time of its IPO, according to data compiled by Bloomberg. At $6.1 billion, 2012 revenue would be 64 percent higher than the $3.71 billion reported in 2011. Google’s revenue more than doubled to $3.19 billion the year it went public.

New Benchmark

Facebook unveiled a new benchmark that showed monthly revenue per user climbed 6 percent to $1.21. The company valued its shares at $30.89 apiece at the end of January, up from $29.73 at the end of last year.

Facebook, which plans to raise $5 billion in the largest- ever Internet initial public offering, also disclosed new information about recent acquisitions. To finance the $1 billion purchase of Instagram, announced April 9, Facebook used 23 million shares and $300 million in cash.

Chief Executive Officer Mark Zuckerberg is rolling out new advertising services to step up competition with Google and Yahoo! Inc. (YHOO) and generate higher sales from the advertisers eager to reach Facebook’s user base. During the first quarter, Facebook said it would add mobile advertising along with new ads to reach users when they log off the company’s website.

Zynga Revenue

Facebook said 82 percent of its revenue came from advertising last quarter, down from 83 percent in the preceding period. The company also derived less revenue from gaming company Zynga Inc. (ZNGA), which contributed 11 percent of the total in the quarter, down from 13 percent a year earlier.

The company said it may extend payments outside of games, and charge developers different fees than the 30 percent currently paid by Zynga and other sellers of virtual goods.

The number of daily active users rose to 526 million, an increase of 41 percent from a year earlier. Facebook’s employee base rose 46 percent to 3,539.

“Our costs are growing quickly, which could harm our business and profitability,” the company said in the filing. “Providing our products to our users is costly and we expect our expenses to continue to increase in the future as we broaden our user base, as users increase the number of connections and amount of data they share with us, as we develop and implement new product features that require more computing infrastructure, and as we hire additional employees.”

The company plans to list on the Nasdaq Stock Market under the symbol FB, according to the regulatory filing.

Sales had risen 55 percent to $1.13 billion in the fourth quarter, and net income had climbed 20 percent.

To contact the reporters on this story: Brian Womack in San Francisco at bwomack1@bloomberg.net; Lee Spears in New York at lspears3@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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