Facebook reveals revenue, profit slide ahead of IPO

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SAN FRANCISCO (Reuters) - Facebook Inc reported its first quarter-to-quarter revenue slide in at least two years, a sign that the social network's sizzling growth may be cooling as it prepares to go public in the biggest ever Internet IPO.

The company blamed the first-quarter decline, which surprised some on Wall Street, on seasonal advertising trends.

"It was a faster slowdown than we would have guessed," said Brian Wieser, an analyst with Pivotal Research Group.

"No matter how you slice it, for a company that is
perceived as growing so rapidly, to slow so much on whatever basis -
sequentially or annually - it will be somewhat concerning to investors
if faced with a lofty valuation," Wieser said.

Facebook is preparing to raise at least $5 billion in
an initial public offering that could value the world's largest social network at up to $100 billion.

"The biggest issue is the realization that Facebook is
not going to have an easy time meeting high expectations of the public
market," said Jeff Sica, chief investment officer of SICA Wealth
Management, which manages more than $1 billion in client assets, real
estate and private equity holdings. "It will affect how people look at
the IPO."

Investors are still likely to sign up in droves for the
IPO; However, growth concerns may make some investors less likely to
keep the stock over the long term, he added.

"I'm still encouraging people to participate in the
IPO, under the acknowledgement that it could be a bumpy ride," Sica
said. "There are high expectations and I hate high expectations."

The company, founded by Mark Zuckerberg in a Harvard
University dorm room in 2004, surpassed 900 million monthly active users
in the first quarter and said its full-time staff grew by about 1,100
employees to 3,539 in the past 12 months, according to an updated filing
with the U.S. Securities and Exchange Commission on Monday.

Facebook also disclosed that it has agreed to pay
Instagram $200 million if the company's recent deal to buy the
photo-sharing start-up for about $1 billion does not go through.

Facebook said it paid $300 million in cash for
Instagram, along with 23 million shares of Class B common stock. It said
the fair value of its Class B common stock was $30.89 per share as of
January 31.

Spending roughly doubled over the past 12 months,
outpacing the 45 percent revenue increase during the period, it said.

Net income slid 12 percent to $205 million in the
quarter, from $233 million a year earlier at the rapidly expanding
company.

Facebook said its advertising business, which accounts
for the bulk of its revenue, typically slows down in the first three
months of the year. The rapid advertising growth may have "partially
masked" such trends to date, and seasonal impacts may be more pronounced
in the future, it noted.

Revenue, which totaled $1.06 billion in the three
months ended March 31, declined 6 percent from the fourth quarter. It
was the first quarter-on-quarter drop since at least 2010.

"It was bound to happen. You are going to see a
slowdown," said Anupam Palit, an analyst at GreenCrest Capital LLC,
noting that it is harder to double revenue when the base is larger.

But he also said Facebook has not worked out how to
make more money in some international markets where it is growing the
fastest, such as Brazil, India and the Philippines.

"They have not cracked international markets yet, while
others like Google do very well internationally," Palit added.

Apart from slowing growth, Facebook is also grappling with other issues. Yahoo
Inc is suing it for patent infringement even as the social networking
company tries to beef up its intellectual property arsenal. On Monday,
it said it would pay $550 million for hundreds of patents from Microsoft
Corp.

PAYMENTS HINT

Facebook gets most of its revenue from advertising, but has a Payments business centered around Facebook Credits, a virtual currency used mainly to buy virtual goods within social games.

However, the company hinted at a possible an expansion of Facebook Credits into other areas.

Facebook gets a cut of up to 30 percent from virtual goods sales on its platform.

"In the future, if we extend Payments outside of games,
the percentage fee we receive from developers may vary," the company
said in its IPO filing on Monday.

Some investors expect e-commerce to be a major area of
expansion for Facebook. Some industry experts said that if Facebook
Credits were used for purchases of physical goods, the company's cut
would have to be a lot lower than 30 percent.

(Reporting By Alistair Barr and Alexei Oreskovic; Editing by Gary Hill and Richard Chang)