10.23.12

Facebook Earnings Beat Expectations, All Eyes to Mobile

Facebook reported solid revenues and profits, but it now has to build a mobile business and regain investor confidence.

Facebook reported revenue Wednesday of $1.262 billion and earnings per share of 12 cents. Both these figures beat analysts’ expectations and the company’s stock gained more than 8 percent in after-hours trading following the announcement. 

Having pulled off a huge, controversial IPO and conquered the world of social media, Facebook now confronts a more prosaic question: can it make money from advertising on cellphones? Mark Zuckerberg’s statement accompanying the earnings announcement mentioned mobile the same way Obama and Romney talk about “Israel” or “small business” or “education”: frequently and enthusiastically. But in the case of Zuckerberg, his mobile optimism—“I’m also really happy that over 600 million people now share and connect on Facebook every month using mobile devices”—may finally be matching up with reality.

Mobile is clearly where the growth is. Facebook’s monthly annual users rose 26 percent from the third quarter of 2011. The total user base stands at 1.01 billion, a 16 percent jump year over year, and mobile users are more than 60 percent of that giant total—some 604 million, an increase of 61 percent over the year.

And while the money Facebook is getting from its huge user base is not growing as quickly, it is still growing. Advertising revenue is up 36 percent year over year, picking up the pace from 28 percent in the previous quarter. Total revenue growth remained steady at 32 percent—the same growth rate reported in the second quarter. Facebook is settling into maturity, transitioning from the hypergrowth in revenue typical of hot technology companies in their early years to a more steady expansion, at a stable or even slowing rate.

But Facebook is facing what can be called the “Google disease.” When you’re the next big thing, and you’re a genius, and growing like topsy, nobody really keeps much of an eye on expenses. What’s the point about worrying about nickels when you’re bringing in dollars? 
 
At Facebook, this quarter, we learned that costs and expenses are rising much more rapidly than revenues. Costs and expenses (including share-related compensation) were up 64 percent in the 3rd quarter of 2012 from the 3rd quarter of 2011—they grew at twice the rate of revenues.

From a revenue perspective, like Google, Facebook is essentially a one-trick pony. Advertising revenue was 86 percent of total revenue. If it’s harder to sell mobile ads, and Facebook is increasingly becoming a mobile experience, the pressure is on to find other revenue sources besides advertising. For example, Facebook recently introduced a service through which it sells and delivers real goods.

The first challenge is to get its advertising revenue to match, or even approach, the more mobile composition of its users.

But the first challenge is to get its advertising revenue to match, or even approach, the more mobile composition of its users—only 14 percent of total advertising revenue came from mobile this quarter.

The market clearly likes what it is seeing—or at least it was expecting something worse. But the challenges remain: there is little reason to think that Facebook will get a handle on its cost growth. Zuckerberg, who already struck gold with a combination of knowing what users wanted and the engineering prowess to make it work, now needs to become a mobile-revenue magician. That’s a tough nut to crack for any company dependent on advertising—even Google. Facebook’s stock is still almost 45 percent below the IPO price. Operating margins fell in the quarter. Still, the company has one major asset—aside from global dominance: $10.5 billion in cash sitting on its books.