http://www.forbes.com/sites/ericsavitz/2012/11/13/facebook-better-brace-yourself-its-mega-lockup-eve/?partner=yahootix

Facebook: Better Brace Yourself; It's Mega-Lockup Eve

Brace yourself.

Tomorrow, the lock-up agreement covering 777 million shares held by Facebook insiders will expire, making the giant pile of shares – which accounts for 36% of the stock outstanding – free trading.

It would seem safe to assume that more than a few of those shares are going to be cashed out, likely creating some significant pressure on the social network’s shares.

The good news is that this is the last major tranche of insider shares that will be freed of post-IPO trading restrictions. (Still to come: lock-up expirations of 156 million shares next month and 47 million more next May.)

While the flood of supply into the market will overhang the stock for a while here, this also represents a major milestone for the stock that should lead to a little more optimistic take from the Street. The large, looming lock-up expiration has been a key reason (although hardly the only reason) that some analysts and institutional investors have been bearish on Facebook’s stock.

Facebook shares fell 21 cents, or 1.1%, to $19.86 in Tuesday’s regular session, and slid another 19 cents, or 1%, to $19.67 in late trading.

Since the company’s one-day, post-earnings report 19.1% rally on October 24 to $23.23, the stock has been steadily receding, and now has given up almost all of the earnings driven rally; the stock had closed at $19.50 on the day before the company disclosed Q3 results.

http://www.bloomberg.com/news/2012-11-12/facebook-falls-below-19-amid-looming-lockup-expiration.html?cmpid=yhoo

( Stock had the bid hit after the Bloomberg story came out , in light of the Market Watch story concerning profit concerns ..... )

Facebook Falls Below $19 Amid Looming Lockup Expiration

By Ryan Faughnder - Nov 12, 2012 12:40 PM ET

Facebook Inc. (FB) shares fell to the lowest intraday price in three weeks on concern that shareholders will start selling their shares when a prohibition on the transaction expires.

The stock declined as much as 1.8 percent to $18.87, the lowest since Oct. 19. It had slipped 1.1 percent to $18.99 as of 12:15 p.m. in New York. Restrictions on the potential sale of 804 million shares lift on Nov. 14, followed by another 156 million on Dec. 14.

Facebook has lost about half its value since selling shares at $38 apiece in a May initial public offering. Current and former Facebook employees who have seen the value of equity compensation plunge can sell as lockups designed to prevent a flood of shares immediately after the IPO expire. The company showed in its most recent earnings report that it’s making headway generating revenue from mobile advertisements, keeping the stock from dropping more steeply.

“Buckling of the stock would occur because of lots of selling at the same time,” saidBrian Wieser, an analyst at Pivotal Research Group. “It seems like there’s enough demand to absorb this. Investors would have been a lot more nervous if third quarter numbers hadn’t come out well.”

Sales rose 32 percent to $1.26 billion in the period that ended in September, Facebook reported last month, beating analysts’ estimates. Profit excluding costs such as stock-based compensation and related payroll taxes was 12 cents a share, compared with the average estimate of 11 cents a share.

Another 47.3 million shares become available for trading in May. Shares held by Chief Executive Officer Mark Zuckerberg aren’t part of the tally because he has said he won’t sell before September of next year.

The first lockup on Facebook stock expired August 16, freeing up 271.1 million shares held by early investors including DST Global Ltd., Goldman Sachs Group Inc., Elevation Partners and Accel Partners.

http://www.marketwatch.com/story/facebook-stock-costs-will-wipe-out-profit-2012-11-12?siteid=yhoof2

By John Shinal

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 FacebookFB -0.40% 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.

FB 19.99, -0.08, -0.40%

That in turn will make its shares less attractive during that time to fund managers and other professional stock buyers who look for value as well as growth when choosing stocks.

Facebook’s massive stock-compensation bill shows the cost to common shareholders of the company’s generosity in handing out equity to employees, executives and early investors. Any net income Facebook might have generated in the near future already has been given away in advance, in the form of free equity, to these insiders.

Because new stock-compensation charges and related taxes will be incurred on Jan. 1, adding to the existing total, Facebook’s per-share earnings may continue to be wiped out by these costs beyond next year.

Facebook’s third-quarter results provided a snapshot of this effect, as those insiders who were free to sell their shares did so in large numbers, generating huge expenses for the company.

ReutersEnlarge Image

Mark Zuckerberg

The company reported that operating income fell 9% to $377 million in the quarter, hurt by surging expenses that included $179 million in stock-compensation costs. Further down the income statement, a $431 million quarterly tax charge for stock compensation swung Facebook to a loss of 2 cents a share, compared with a profit of 10 cents a year earlier.

Together these compensation charges and related taxes cost Facebook approximately 20 cents a share in the third quarter, net of a small, related tax benefit.

Each time insiders sell, or when Facebook issues new shares to pay for all or part of an acquisition (as it did when buying Instagram), the company’s compensation bill goes up.

Massively diluted stock

At the root of the problem for Facebook common stockholders is the massive share count. The company has about twice the number of shares outstanding as either Apple Inc. AAPL -0.77% or International Business Machines Corp. IBM -0.21% , even though those companies went public decades ago.

Shares outstanding
for tech companies

COMPANY	OUTSTANDING
Microsoft	8.42 billion
Cisco	5.3 billion
Intel	4.98 billion
Facebook	2.17 billion
Yahoo	1.18 billion
IBM	1.13 billion
Apple	941 million
Groupon	653 million
Amazon	453 million
Google	328 million

Data as of third quarter. Source: NYSE

Facebook also has more than six times the number of shares outstanding as Google Inc. GOOG +0.43% , which went public in 2004. (See accompanying chart.) Within the tech sector, only long-established bellwether names such as Microsoft Corp. MSFT -2.12% , Cisco Systems Inc.CSCO +0.21% , Intel Corp. INTC -0.17% and Oracle Corp.ORCL -0.16% have common shares that are more diluted than Facebook’s.

The amount of equity Chief Executive Mark Zuckerberg either kept for himself and employees or sold to pre-IPO investors — such as Goldman Sachs, Russia’s DST and several venture-capital firms — have diluted significantly the stakes available to retail investors in the public markets. On top of that, the company’s IPO was enormous, adding to its share count.

Now whenever insiders and employees sell restricted stock units, Facebook faces additional expenses and a portion of the related taxes owed on the sales. Close to another 800 million Facebook shares will become available for sale this week.

According to its latest filing, Facebook’s $2.3 billion in outstanding compensation costs will be recognized over a period of three years, for an average cost of $767 million per year.

As noted above, Facebook earned operating income of $377 million in the third quarter. In other words, it would take the company slightly more than two quarters of operations just to pay its existing stock-compensation costs.

That’s a hypothetical example, because Facebook could dial back its rate of spending and trade some amount of growth for higher operating margins. But given recent comments made by Zuckerberg, that’s unlikely. Facebook’s third-quarter operating expenses rose twice as fast as revenue.

In the absence of a reduction in spending, Facebook investors should get used to large compensation charges every quarter for at least the next three years, as the company works off its $2.3 billion stock-compensation bill. Those costs will make it much tougher for the company to generate net income.