Social Networking Reality Check: Facebook Already Is a Financial Success

Last Updated Jan 7, 2011 1:09 PM EST

One big reason Facebook will take a major investment from Goldman Sach's (GS) is because it gets money without having to divulge the amount of financial information that becomes necessary with an IPO. However, some of the data that it had to give potential investors has found its way into the hands of the Wall Street Journal and New York Times. The implications are impressive: Facebook could make $1 billion in profit this year. Not in sales. Profit. That starts to show just how strong the social networking segment will be.

According to the newspapers, in 2009, Facebook had significant financial success:

Last year, Facebook recorded revenue of approximately $2 billion, with roughly $400 million in profit, according to people briefed on the company's results. That is up from $220 million in earnings on $770 million in sales in 2009.
Unfortunately, profit and earnings aren't necessarily the same thing. Do reporters Andrew Ross Sorkin and Susanne Craig mean income from operations? Net income? Retained earnings? Their language is too imprecise to know.

Assume for a moment that the two use the terms to mean net earnings, as income from operations is hardly profit. If so, in 2009, Facebook kept 28.6 percent of its revenue as net earnings. In 2010, it was 20 percent.

To put this into perspective, I've dug out numbers from Apple (AAPL), Microsoft (MSFT), and Google (GOOG) public filings. All three have high revenue, strong profits, and have been in operation for extended periods of time.

  • For the first 9 months of 2010, Google had $20.9 billion in revenue and $7.4 billion income from operations, or 35.4 percent. Net income was $4.5 billion, or 21.5 percent.
  • In its fiscal year 2010, Apple had $65.2 billion in revenue and $18.4 billion in operating income, or 28.2 percent. Net income was $14 billion, or 21.5 percent.
  • In its fiscal year 2010, Microsoft had $62.5 billion in revenue and $24.1 billion in operating income, or 38.6 percent. Net income was $18.8 billion, or 30.1 percent.
Facebook's revenue is clearly far lower, but in the ballpark of these industry leaders. Furthermore, the revenue is growing quickly. As Mathew Ingram as GigaOM points out, even at current levels of net income and growth rate, Facebook could see $5 billion in revenue and $1 billion in net income this year.

Ben Worthen of the Wall Street Journal did an interesting analysis, comparing Facebook to Google's performance in 2004:

Through the first nine months of 2004, Google reported revenue of $2.2 billion and net income of $195 million. Through the first nine months of 2010, Facebook's revenue was about $1.2 billion and its income was $355 million, The Wall Street Journal reported, citing a citing a private-placement memo being distributed to potential investors in the company.
In 2003, Google had $1.5 billion in revenue and $106 million in earnings, which, in terms of company history, would be comparable to Facebook's 2009 numbers. The social networking company seems to have been behind in revenue, but far ahead in net income. Should it begin to ramp up its revenue -- as seems entirely likely -- this is a company that will become formidable financially, and not just in tech-flavor-of-the-month enthusiasm.


Image: Wikimedia Commons, public domain
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    Erik Sherman is a widely published writer and editor who also does select ghosting and corporate work. The views expressed in this column belong to Sherman and do not represent the views of CBS Interactive. Follow him on Twitter at @ErikSherman or on Facebook.