Facebook Revenue Tops Estimates on Mobile, Video Ad Boom

Success Gives CEO Room to Invest in Virtual and Augmented Reality

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Credit: Bloomberg

Facebook on Wednesday reported quarterly revenue and profit that beat analysts' estimates on a boom in mobile advertising, boosted by newer ads on Instagram and video.

The owner of the world's largest social network reported $5.38 billion in first-quarter revenue, beating the $5.27 billion analysts projected. Profit excluding some items was 77 cents per share, the company said in a statement, compared to the 63 cents average analyst estimate compiled by Bloomberg. The company also said it's creating a new class of non-voting capital stock, subject to the approval of shareholders.

The company reported $1.51 billion in first-quarter net income, or 52 cents a share.

Facebook has been serving its 1.65 billion users more-immersive videos that play automatically, as well as opening up Instagram, the mobile photo-sharing app, to more advertising. The results show that CEO Mark Zuckerberg has the revenue and profits to invest heavily in future technologies like virtual reality and artificial intelligence that aren't lucrative yet.

With Instagram and video, "they've got these two huge tailwinds to their business," Mark Mahaney, an analyst at RBC Capital Markets, said before the results. "But if you own Facebook stock you're not buying it now because of what they can do with video ads or Instagram, you're buying it because of the potential with their long-term bets like virtual reality."

If approved by investors, the new class of shares mean Mr. Zuckerberg can still pursue ambitious projects even if Facebook's existing businesses falter.

"I'll be able to keep founder control of Facebook so we can continue to build for the long term," Zuckerberg said in a statement. "I see more bold moves ahead of us than behind us."

Facebook's main competitor, Alphabet, issued a special share class in 2014 that gives Founders Larry Page and Sergey Brin a similar mix of company control and freedom to back risky new technologies. While some of Alphabet's new bets have stumbled, Facebook must keep up to attract talented engineers capable of inventing new products and businesses.

The strong performance of Facebook's existing and emerging businesses is keeping most investors happy for now. Adding ads to Instagram is expected to drive $1.53 billion in revenue this year, or 15% of the company's ad sales, according to eMarketer. Facebook is expected to take about 18% of the $102.5 billion mobile advertising market this year, eMarketer said. The company has also been investing in live video streaming and media content, aiming to make Facebook more of a place to find out what's going on right now.

Chief Financial Officer David Wehner said the main drivers of Facebook's first-quarter results were video and mobile ads on the company's main Facebook app. He described Instagram as "still early."

Much of Mr. Zuckerberg's attention these days is focused on longer-term initiatives. At a developer conference earlier this month, he laid out a 10-year vision. In the next couple years, he said, Facebook's messaging products are going to usher in an age of talking to businesses through artificially intelligent bots, replacing the need to call them or download their app. Meanwhile, Facebook will work towards a future where virtual reality is at the center of social interactions, allowing people to hang out with anyone in the world via an Oculus headset and feel a sense of presence.

Longer term, Facebook is working on connecting the rest of the world to the internet using a mix of radio technology, lasers and drones, expanding the overall base of people who can use Facebook's services.

Not all the company's newer initiatives are going smoothly. Those who pre-ordered Oculus Rift virtual reality headsets this year complained of shipping delays. Attempts to spread the Internet through a "free basics" application in India were blocked by the government, which said the app violated net neutrality rules.

Facebook stock rose 7% to $116 in extended trading, after gaining less than 1% to $108.89 at the close in New York. The shares have climbed 4% so far this year.

-- Bloomberg News

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