How Facebook bucked the trend of disappointing earnings
In a tech-earnings season when nearly every big company delivered up disappointing numbers, hardly anyone expected Facebook to be the one bucking the negative trend. Within minutes after the company reported its second-quarter financial performance, investors and skeptics alike were reconsidering their outlook on Facebook.
Facebook said its revenue grew 53 percent in the quarter to $1.8 billion and its non-GAAP net income came in at 19 cents a share. Wall Street had been modeling $1.62 billion in revenue (which would have marked in increase of 37 percent) and 14 cents a share. In after-hours trading, Facebook surged as high as $31.89 a share, a 20-percent jump over Wednesday's closing price, before settling down at $30.95.
The news is not only encouraging for the company's longtime defenders, but for mobile advertising in general as well as for startups that may be considering an IPO. Facebook's long-awaited IPO was launched at $38 a share and dipped as low as $17.55 last September. The stock has recently been hovering around $25 a share, and the longer it can stay above the $30 mark the better it bodes for online advertising as well as investor appetite for other Web startups.
For more than a year after its IPO, Facebook has weathered bad news, reluctant advertisers, expectations of financial mediocrity among investors and a lot of anecdotal evidence that people under 25, among others, were drifting away from the site. Facebook responded by focusing on key areas like product innovation, better targeted ads and most of all its mobile product.
Last quarter, the company began to bear fruits of that work. Daily active users on mobile devices grew 60 percent to 293 million, while monthly active users grew 51 percent to 819 million. More importantly for investors, Facebook is getting better at monetizing mobile. Mobile ad revenue rose 75 percent from the previous quarter to $656 million, making up 41 percent of total revenue.
Overall, ad revenue, which is 88 percent of total revenue, grew 61 percent at an annual pace. That's up from 43 percent in the previous quarter and 28 percent in the second quarter of 2012. That Facebook is managing to accelerate ad-revenue growth even as it grows larger is one of the more encouraging signs from the earnings report.
Skeptics looking for nitpicking metrics to suggest signs of weakness were largely out of luck this quarter. Yes, active users in North America grew only 6 percent in the past year, but that was more than offset by 33-percent growth in Asia and 29 percent in other emerging markets. One of Facebook's less-heralded initiatives is its push into feature phones, which is broadening its membership base in developing markets.
At the same time, better targeted ads are helping the company wring out more revenue per user. Worldwide, ad-revenue per user grew 27 percent from the same quarter a year earlier. In the mature market of North America, it grew 42 percent to $3.67, or nearly three times the worldwide figure of $1.41. People may be grumbling about Facebook more, but somehow Facebook is getting more ad revenue from them.
The biggest reason for this, according to executives on the conference call, is the news-feed ads the company introduced last year to loud and persistent complaints. But they are working, especially on the mobile Web. CFO David Ebersman said that cost-per-click rates (which declined for Yahoo and Google this quarter) increased this quarter as the company put more ads into news feeds.
“We're seeing an increase in supply, but also a corresponding increase in demand,” said Sheryl Sandberg. That's partly because the news feeds ads – unlike the display and search ads of Google and Yahoo – are relatively new. But it's also because advertisers are increasingly convinced that they can engage with Facebook's users. Sandberg noted that direct marketers and e-commerce companies were especially encouraged by the ads' performance, and that advertisers in Asia were also showing stronger interest than they were a year ago.
The question for Facebook now is how long it can hold up this impressive performance. Ebersman cautioned that the growth rates in coming quarters may not continue to be as strong because news feeds ads were introduced in late 2012, which may dampen year-on-year comparisons. He also warned that investments may push expenses to grow faster than revenue in coming quarters.
One of the areas where the company wasn't so convincing was in dispelling concerns that Facebook is losing appeal among its non-core users. Mark Zuckerberg insisted that it “just isn't true” that teenagers are leaving the service, but the company has yet to offer convincing data that this is the case. Vague statistics like the 20 billion minutes per day that users spend in aggregate on Facebook don't dispel the perception that a core base of users are causing a disproportionate share of that figure, while the bulk of Facebook users find it less essential to their daily lives.
Even so, Facebook is showing it can keep its membership growing while extracting more ad revenue from them. The company may still be falling short of the high expectations many had of it early on, but on the other hand its second act is not as disappointing as many bears had assumed. Facebook is the first company to successfully monetize mobile ads on a significant scale. For now, that's an achievement that the company and its supporters are right to celebrate.