Touting Mobile-Ad Growth, Facebook Earnings Slightly Exceed Expectations

Zuckerberg: 'Over the Long Run, We're Going to See More Monetization for Time Spent on Mobile'

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With investors watching to see if Facebook's ballooning mobile usage had slowed its revenue growth in the third quarter, the company nonetheless outperformed expectations that had been set for it.

Mark Zuckerberg
Mark Zuckerberg

Facebook reported adjusted earnings of 12 cents per share on revenue of $1.26 billion in the third quarter, coming in above analyst expectations of 11-cents-per-share earnings on $1.23 billion in revenue. Revenue climbed 32% over the same period last year, when it was $954 million, showing at least a temporary halt in the trend of revenue deceleration.

Facebook's revenue also rose 32% in the second quarter, but that was slower than the 45% it showed in the first quarter of the year and the 88% it posted between 2010 and 2011. While the company reported a $59 million net loss largely due to outlays made in stock-based compensation (compared to net income of $227 million a year ago), the stock was up over 10% in after-hours trading.

Facebook came charging out of the gate to address concerns about mobile, which have played a significant role in weighing down its stock.

"I believe that over the long run we're going to see more monetization for time spent on mobile than on desktop," said CEO Mark Zuckerberg, who pointed to the fact that desktop ads are mostly on the right rail, removed from users' news feeds, while mobile ads are integrated into their experience. "On mobile, we believe ads will be more like TV."

Mobile ads still only account for 14% of total ad revenue (or about $153 million of the $1.09 billion total), but it's a giant step in the right direction for the company, which first rolled out mobile ad products in March.

Facebook now has 604 million mobile monthly active users (well over half of its total user base of 1.01 billion), up from 543 million three months ago. (User growth largely came from Brazil, India and Japan, according to Chief Financial Officer David Ebersman.) The shift in Facebook consumption to mobile is problematic for the company, since it can only show ads in users' news feeds and, thus, significantly fewer than on the desktop. On the plus side, ads on mobile devices generate more clicks and thus earn Facebook money at a substantially higher CPM.

"Facebook is making a lot more money per impression on mobile, anywhere from 20 to 40 times more," said Rob Leathern, CEO of the Facebook ads company Optimal.

Facebook may also have benefited last quarter from more U.S. brand advertisers embracing its news feed ads -- which can run in both desktop and mobile and have higher click-through rates than right-rail ads -- though European advertisers lag, according to Simon Mansell, CEO of TBG Digital. Facebook reported today that news-feed ads now have a $4 million daily run rate, three-quarters of which is from mobile, up from $1 million last quarter.

Mr. Mansell also said that innovations, such as the partnership with Datalogix to show brand marketers how Facebook ads drive in-store sales, as well as new targeting using customer data such as emails and phone numbers, may have had more impact on revenue growth than mobile ad products.

"We haven't noticed a lot of incremental spend for mobile," he said. "It's more been cannibalizing the spend we've already been getting."

In a sense, Facebook was treading water over the last three months. While the company has announced a flurry of new ad products since the summer, including mobile app ads aimed at game developers, and the beginnings of a mobile ad network, these tools are new to market and likely had a minimal impact on the company's bottom line.

Mr. Ebersman said that ad revenue growth was driven by a 27% increase in ads delivered and a 7% increase in the price per ad. While Facebook acknowledged last quarter that the overall number of impressions delivered in the U.S. was down 2% in the U.S. from the previous year due to the increase in mobile usage, it provided no such breakdown this quarter, though Mr. Ebersman suggested the trend continues.

"The reduction in ads per user from engagement shifting to mobile was generally offset by product changes that increased ad inventory," he said.

While Chief Operating Officer Sheryl Sandberg touted its initial results and performance for marketers, Facebook's real-time ad exchange is also still nascent and likely didn't contribute much to the bottom line. According to a note by Dan Salmon of BMO Capital Markets, "[Facebook Exchange] revenue is unlikely to be material" in either the third or fourth quarters of this year, a conclusion he based on a recent panel discussion with 15 of the exchange's partners.

Ad revenue accounted for 86% of the total, while payments that are almost entirely generated by social-gaming companies made up the balance. Payments was a $176 million business, up 13% from last year but down 9% from the second quarter. A beleaguered Zynga, which today announced layoffs of 5% of its full-time staff, is the culprit, according to Mr. Zuckerberg.

"Gaming on Facebook isn't doing as well as I'd like," he said, before noting that payments from Zynga had fallen 20% from the previous year, while the rest of the gaming ecosystem was up 40%.

Mr. Zuckerberg also gave a prominent hat tip to Instagram, which now has 100 million users but doesn't generate revenue.

"Overall, people spend more mobile time on Instagram than Twitter," said Mr. Zuckerberg, referring to ComScore data that says Facebook's recent acquisition surpassed Twitter in mobile daily active users in August.

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