Facebook Climbs Toward Profitability

Facebook dominates the social networking landscape when it comes to membership and mindshare, but many have speculated that the company’s focus on user growth has strained its ability to ever turn a profit. On Tuesday, those concerns were momentarily quieted as Facebook announced that it’s now free cash flow positive.

This doesn’t mean the social network is a profitable operation yet. Rather, the cash it generates from advertising and other forms of revenue now exceed the cost of servers and other capital expenditures required to keep Facebook running. One-time costs, like the reported $50 million acquisition of Friendfeed last month, and operational expenses like personnel, are not included in this equation. Outside investments in the company, like the $200 million it raised from Digital Sky Technologies in May, are not accounted for either.

Facebook has never disclosed its revenues, but board member Marc Andreessen recently told Rueters that the site is on track to generate over $500 million in revenues this year.

The same day it announced its cash flow milestone, Facebook said it has added 50 million users in the past two months — bringing its total user base to 300 million and its signup rate to roughly 806,000 users per day.

That’s a huge amount of traffic to support, and the site’s accumulating stockpile of photos, videos, and other content requires an ever greater number of expensive servers. This was a serious problem for Facebook as recently as March, when my colleague Spencer Ante reported that it was seeking $100 million in debt financing directly related to server costs. Now, it appears that economies of scale are working in the company’s favor: the more members it attracts, the less it has to pay to support each one.

This is a positive note for new CFO David Ebersman, who came from Genentech in June, to start his career at Facebook. But his work has just begun. The next two priorities at Facebook are likely to be creating new sources of revenue — such as virtual goods and customized ad campaigns — and taking the company public.

Facebook’s announcement is also a positive sign for the broader social networking space, long derided by critics as a business high on hype and short on real profits. With the poster child of social sites well on a path to profitability, venture capitalists and strategic buyers will be more likely to bet big on Facebook’s smaller rivals.

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