FaceFool Again (Fool On You, That Is)

Posted 2012-11-12 15:39
by Karl Denninger
in Company Specific

In the "oh, you didn't read the S-1 and financials" category for today we have:

SAN FRANCISCO (MarketWatch) — At its current level of profitability, it will take Facebook Inc. until mid-2013 at the earliest to earn enough operating income just to offset its annual stock-compensation costs.
An analysis of the company’s latest securities filing reveals that unless Facebook (NASDAQ:FB) significantly improves its operating margin, these costs — which totaled $2.3 billion as of Sept. 30 — will be enough to prevent the social network from earning a bottom-line profit for at least two more quarters.

Why does this surprise anyone and why is it news now?

So-called "restricted stock units", otherwise known as "compensation paid in scrip" by the company, is not exactly a surprise. There was a time when options were the primary way this was done but the problem with options is that they can easily become worthless if the stock trades below the strike.

Unfortunately RSUs are not "free" either, especially when tax costs related to them wind up back on the company rather than the employee. It's common to hand equity to employees of a start-up, of course, since that tends to vest them with a stake in seeing the firm succeed.

But Facebook has done so in an exceptional fashion, and as a result the expenses are also going to be exceptional -- and put quite a bite on "earings" for some time to come.

Disclosure: The author owns PUTs.

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