There are two kinds of companies in the Valley: those that make money, and those that don't have to. As the economy worsens, the former group behaves like firms in other sectors, making cuts and revising earnings expectations. For the latter group, living in a VC-backed candyland, it's as good a time as any to spend half a billion dollars on something fun.
So it was this week with two contrasting companies: Adobe [ADBE] and Facebook. Adobe announced Thursday that it will miss its earnings targets for its fourth quarter ending November 28th, 2008, and will implement a restructuring program that will eliminate 600 full time jobs worldwide. Facebook, meanwhile, tried to buy Twitter for $500 million, despite the fact that it doesn't make any money, and seems to need increasingly more capital to function.
Adobe's misfortunes are yet another indication that technology companies, usually insulated from larger economic fluctuations, cannot remain buoyant amidst the global economic crisis. The company had projected revenues of between $925 million and $955 million, but said Thursday that it would only achieve $912 to $915 million.
The gap in revenue Adobe attributes to weak sales of its new Creative Suite 4 software, which was released in October. To make up the difference, the company will eliminate 600 full-time positions, which an Adobe spokesperson says will affect "Everyone across the board, all regions, and all business areas." The cuts should should save Adobe tens of millions of dollars, much of which can be recorded in the fourth quarter of 2008. The spokesperson declined to say whether Adobe will re-hire any of those positions should the economy show signs of recovery.
Facebook's profligacy seems irrational by comparison. The company is predicted to earn revenues of only about $300 million this year, which is about the same as the overhead it takes to keep the office running, according to Michael Arrington. But that hasn't stopped the social network from reportedly trying to buy Twitter with a combination of cash and stock options. Twitter's CEO, Evan Williams, declined the offer.
Twitter doesn't make any money either; its revenues are close to zero. Both companies are well capitalized, but reports of Facebook's CFO flying around the world talking to sovereign wealth funds suggest that Facebook is growing too fast for its own good, and reaching a hunger for capital that US firms simply can't — or won't — surfeit. Twitter too is reportedly putting revenue at the top of its list of things to do, in anticipation of a weakening fundraising landscape. The company had previously said it would wait until 2010 to worry about making money.
While I don't doubt that juggernaut Facebook has its telescopes pointed in the right direction, it's hard not to second guess the company's prospects. If it is to ever become profitable, it will need to learn how to monetize a tool that gleans 3 out of 4 of its users from overseas, and sells famously ineffectual advertising space. Owning and managing another unprofitable Web entity would only exacerbate the problem. Had the buyout succeeded, 2009 might have been the year that Facebook was forced to come back down to earth.