Facebook’s Payments Flatline

At a glace, Facebook appears to have realized an increase in payments revenue in Q4 2012; however, upon closer inspection we can see that payments revenue from the quarter was actually flat (barring a one-time accounting recognition). In fact, Facebook advised investors of this development in its 10-Q filing, where it remarked that an accounting change would recognize deferred revenue in the fourth quarter.

In its October 24 10-Q filing, the company explained that its terms and conditions provide for a 30-day claim period where a customer may dispute a virtual goods transaction. Facebook’s payments revenue deference stems from the company’s admission that it would not be able to reasonably or reliably estimate future refunds or chargebacks arising during the claim period, due to a lack of historical transactional information.1

Facebook’s 8-K shows $256 million in revenue from payments and other fees in the fourth quarter. Adjusting for the $66 million in deferred revenue, we can see that revenue remained essentially unchanged, compared both to the previous quarter and the year ago quarter. Assuming approximately $190 million in payments revenue in the quarter, Facebook saw only a 7% increase over the previous quarter, and a more modest 1% increase over the year-ago quarter.2

Facebook's payments revenue

During its earnings call, Facebook acknowledged that revenue from Facebook Gifts and Promoted Posts together contributed a modest $5 million to payments revenue in the quarter. Facebook’s recently introduced carrier billing may have also contributed to quarterly revenue by allowing the company to better monetize its web-based users. But it is unlikely these gains will offset the loss of payments revenue from platform migration.3

It is likely that Facebook’s deferred revenue across each region in unequal distribution. In the fourth quarter, Facebook claimed payments revenue of $149 million in North America, $66 million in Europe, $30 million in Asia, and $11 million in rest of world. By looking at previous quarters we can approximate the deferential effect on revenue: approximately $43 million in North America, $12 million in Europe, $10 million in Asia, and $1 million in rest of world.

Facebook's payments revenue by region

The outlook for Facebook’s payments business is depressed. Mark Zuckerberg spoke optimistically about the long term revenue potential for Gifts; however, he admitted that Facebook’s primary source of revenue remains advertising. Even on a regional basis, when adjusted for deferred revenue, Facebook does not appear to be making meaningful gains in any region, suggesting that Facebook’s payment business continues to stagnate relative to gains in advertising.

Sources

  1. Form 10-Q, Facebook Inc., 2012.
  2. Form 8-K, Facebook Inc., 2013.
  3. Facebook will be less able to effectively monetize its smartphone user base, due to competition from app markets vying for users’ in app purchasing activities, and transactional fees on payments. For example, Apple charges a 30% transactional fee for in app purchases on iOS devices, which would materially effect Facebook’s limited payments revenue opportunities on the platform.
  4. *Deferred revenue by region is estimated based on historical quarterly revenue from payments and other fees.