It might come as a shock to you, but the instant messaging sensation, WhatsApp was reported to have incurred an approximate loss of $200 million in the last two years. The financial results indicate that it was able to generate only $10 million in revenue in 2013, which is a considerably small amount compared to the massive loss that it incurred.
It is interesting to note that the USD 10 Million was generated out of charging only $1 for a year’s usage. This means that 10 million users paid up for the annual subscriptions. Since WhatsApp does not have any provisions for incorporating advertisements, these subscriptions are the only means of generating income.
The Financial Report
A Form 8-K/A was filed with the Securities and Exchange Commission to obtain the financial report for WhatsApp’s performance in 2014. This was filed to gauge the financial performance of the company in order to analyse the extent of improvements in revenue generation by comparing the pre-acquisition and post-acquisition scenario.
The report stated the following important information:
Revenue Earned (for 6 months ending June, 2014): USD 15.921 Million
Net Loss Reported (for 6 months ending June, 2014): USD 232.5* Million
Collective Loss Value for 2012 and 2013: USD 192.8 Million
Net Cash Used in Operating Expenses (for 6 months ending June, 2014): USD 13.5 Million
Net Operating Expenses in 2013: Less than USD 10 Million *USD 206.5 Million out of the reported net loss of USD 232.5 Million accounted for share-based compensation expenses and issuance of common stock below fair value.
WhatsApp Co-Founder’s Views
Brian Acton, a WhatsApp co-founder, had shared, “We’re the most atypical Silicon Valley Company you’ll come across. We were founded by thirty-something, we focused on business sustainability and revenue rather than getting big fast, we’ve been incognito almost all the time, we’re mobile first and we’re global first.” This was shared in an interview that was conducted a long time back but the views shared by him relate to the current scenario.
In order to generate the USD 10 million revenue last year, the company had to make pretty heft investments across the board. Some of the key stats of these investments and their outcomes are as follows:
- Research and Development Personnel (at the time of start-up):55 employees
- Value of R&D at the time of selling:USD 77 Million
- General and Administrative Costs:USD 18.6 Million
- Total Expenses for 2013:USD 149 Million
- Net Loss for 2013:USD 138 Million
The fact that the loss had tripled in value from 2012, is a cause of concern because such loss would have become unbearable if WhatsApp’s original management had decided to pursue it further. It seems that the acquisition by Facebook was a much needed relief from such financial stress (at least for the founders of the company). However, do not think that the company was burning its finances for nothing. As an outcome of WhatsApp’s rapidly increasing valuation, the company had used share based compensation to attract some of the best talents in the industry.
It would not be wrong for you to question the move by Mark Zuckerberg with respect to acquiring WhatsApp, especially in the current scenario where the reported loss values are quite substantial. But Facebook’s acquisition was never planned as a profit generating motive (at least it was not the primary agenda). The main focus was on getting the user base before considering profits. Facebook provided the following breakup for the acquisition amount that was given to WhatsApp.
- Amount Paid for the User Base:USD 2.026 Billion
- Amount Paid for the Brand:USD 448 Million
- Amount Paid for the Technology:USD 228 Million
- Amount for Miscellaneous Expenses:USD 21 Million
Based on these figures, it seems that Facebook has given USD 15.314 billion (remaining amount after deducting the above expenses from the total) as good will which serves as compensation for future growth, monetization opportunities that could be availed later, and strategic expansion prospects. All of these factors will bring in enhanced value for the company.
The initial deal offered to WhatsApp included USD 4 Billion in cash, USD 12 Billion in stocks and an additional USD 3 Billion being offered to the company’s founders in the form of restricted stocks. The reason behind the increase in the amount (resulting in a finalized acquisition amount of around USD 22 Billion) was that the stocks of Facebook had witnessed an increase in valuation.
The deal seemed to have worked out well for Facebook because the announcement of the acquisition itself led to an increase in stock value by 20%. This in turn increased the market value of the company to USD 208 Billion. The most important outcome of this acquisition was that Facebook received access to a collective user population of 450 million people and this was important for Facebook which was not able to catch up to the increased usage and preference for WhatsApp.
Mark Zuckerberg’s decision to overtake WhatsApp might be seen as a huge investment in a losing company, but it is acts like this that inspire business leaders to look beyond the current scenario and gauge the possibilities of the future. Investors have learnt to trust the logic of Silicon Valley by overlooking conventional measures of corporate value.
Mark had anticipated potential future growth at the time of acquisition. During a conference call, he said, “Services in the world that have 1 billion people using them are all incredibly valuable”. All of this makes sense logically, but financially speaking, it could take more than a millennia for Facebook to earn back the investment in WhatsApp by using the cross platform messaging app’s potential.
The report shared in the new filing indicates that Facebook paid approximately 2000 times the annual revenue for WhatsApp. Now this is something that could rock the foundations of every investor. However, considering Mark’s unconventional approach and superb success today, it’s better to trust the guy for his insight and vision.
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