Mobile Ads Fuel a Jump in Profit at Facebook
SAN FRANCISCO — Perhaps Facebook’s chief executive, Mark Zuckerberg, should ditch the hoodie and dress up as a mobile phone for Halloween.
Facebook’s chief, Mark Zuckerberg. The company’s third-quarter earnings beat expectations.
After all, that’s how half of his company’s users connect to the social network and where half of its advertising revenue comes from.
He just has to be careful not to scare away the kids because the youngest ones are already starting to go elsewhere.
Facebook, which operates the largest online social network, reported Wednesday that its profits doubled in the third quarter, to $621 million, after excluding expenses related to stock options.
The company’s revenue rose 60 percent, to $2.02 billion, compared with last year’s third quarter. Most of that, about $1.8 billion, came from advertising.
Perhaps most important for Facebook’s future as an advertising-driven company in a world of iPads and Android smartphones, the company noted that mobile ads accounted for 49 percent of its advertising revenue, up from 41 percent in the second quarter. Facebook said prices for mobile ads remained high, and users were clicking on them in their news feeds more frequently.
That bodes well, analysts said, for its smaller rival, Twitter, which takes a similar approach to mobile ads and is preparing to sell stock to investors in an initial offering as soon as next week.
Clark Fredricksen, a vice president with eMarketer, a research firm, said Twitter would benefit from Facebook’s efforts in mobile because the larger company had been investing heavily in educating marketers and users about mobile ads.
“Facebook has been a major force in helping advertisers and users get more comfortable with seeing and buying mobile ads,” he said.
Other big Internet companies like Yahoo and AOL are benefiting less from mobile ads, he said, because their ads are fragmented across various sites and are less appealing to advertisers.
The Facebook results beat Wall Street’s expectations for both revenue and profits, and cemented the company’s position as the leading platform for mobile display ads for products like games and sugary snacks. (Google, which eMarketer estimates will account for roughly half of the world’s $118 billion in digital advertising this year, is still the overall leader in mobile ad sales because of its dominant position in search ads.)
But Facebook, whose stock has doubled in the three months since its last earnings report, also tried to temper expectations for endless fast growth.
In a conference call with analysts, the company’s chief financial officer, David Ebersman, warned that the company would not keep increasing the percentage of ads in its users’ news feeds, especially for mobile users.
“This is important because increasing ads in News Feed has been a meaningful driver of our revenue growth in 2013,” he said. “So this should be factored into your expectations for next year.”
Although he did not disclose how many ads Facebook was showing its users, the company said this year that roughly 1 in 20 posts sent to users’ news feeds were ads.
Shares of Facebook, which were down slightly in regular trading to $49.01, initially soared about 12 percent in after-hours trading following the earnings report. But the stock quickly lost the gains as investors digested the results.
LinkedIn, another leading social networking company, issued a similar warning late Tuesday, saying that its sizzling growth rate could not continue — hardly surprising, given the law of large numbers, but still a shock of cold water to investors. LinkedIn shares fell more than 9 percent on Wednesday.
Mr. Ebersman also confirmed an observation made by outside researchers that teenagers were using Facebook less. Although the overall engagement of teenagers remained stable, he said, younger teenagers were indeed using the service less.
It’s unclear how big a problem that will be for the company since those younger users are in part flocking to Instagram, a photo-sharing service owned by Facebook that just began showing ads this month.
“Facebook is the obvious audience for advertisers looking to reach mobile users,” Mr. Fredricksen said. “They are capturing market share by leaps and bounds on an annual and quarterly basis.”
Ronald Josey, a senior research analyst following the Internet industry for JMP Securities, said Facebook’s results were solid. “They’ve learned mobile,” he said. Clearly they have the right product for advertisers.”
But even before Mr. Ebersman’s comments, Mr. Josey predicted that the company would put a damper on the exuberance that has doubled the price of the company’s stock in the last three months. “They are going to try to temper expectations,” he said.
The company also continued to add to its user base slightly. In the third quarter, 1.19 billion people used the site at least once a month, up from 1.15 billion in the second quarter.
Facebook is expected to account for 5.41 percent of the $117.6 billion global digital ad market this year, up from 4.11 percent last year, according to eMarketer.
Facebook’s presence in the mobile ad market is growing especially quickly. The company will account for 15.8 percent of worldwide mobile ad spending in 2013, according to eMarketers, up from 5.35 percent last year.
Mark Mahaney, an analyst with RBC Capital Markets, said Facebook posted its highest profit margins in a year and half and built on its mobile strength.
“But you can’t keep accelerating forever,” he said.