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The Next Way Facebook May Upset Wall Street

the wake of Facebook’s botched initial public and subsequent stock decline, pressure is building CEO Mark Zuckerberg to post solid results when the social giant reports second quarter earnings on Thursday.

With Zynga’s massive second-quarter earning’s miss, investors Facebook are fretting.

The social gaming company reported a quarterly loss of $22.8 million gamers spent less time playing Zynga’s household-name offerings Farmville and Mafia Wars. Worse yet, Zynga lowered its outlook the rest of the year, citing myriad challenges to growth, including mobile.

Zynga shares are reeling the negativity, hitting a fresh low Thursday and some 70 percent since it’s December IPO.

The numbers sent Facebook shares plunging as , ahead of the social network’s first-ever earnings announcement as a public company. That’s because Zynga is responsible some 12 percent of Facebook’s annual revenue — a growing percentage that is nearly Facebook’s sole income its payments platform.

For Mark Zuckerberg, a 29-year old wunderkind who’s had a notoriously ‘disruptive’ relationship with Wall Street, impressing investors after a weak pre-IPO outlook likely won’t be an easy task.

The first potential stumbling block: Accounting.

The company will incur a massive charge it lifts restrictions on employee stock in conjunction its second-quarter IPO. The company has warned that those could result nearly a billion dollars in added expenses — a sum nearly equivalent the $1.15 billion in revenue the company is expected to report in Q2, to analysts polled by Thomson Reuters.

That accounting item, as an “RSU” (restricted stock unit) expense, is a common headache newly-minted public companies, particularly for technology startups use stock incentives as a key recruiting and retention tool.

This is another area where Zynga hasn’t set a positive precedent. On Valentine’s Day, Zynga rang in its first earnings a public company with a crushing blow in the form of a $500 million RSU charge — an item contributed to a net loss of more than $400 million. Though the funds had been earmarked Zynga’s S-1 filing, investors were caught off- by the charge: Shares of the newly public company sank roughly 17 percent following results.

While an RSU-related charge could severely impact Facebook’s earnings, it’s a -time item at the bottom of many analysts’ lists of concerns, as larger and longer-term worries linger the company’s ability to monetize its user base and maintain growth.


Adapted and abridged from: CNBC, July 26, 2012.