Facebook earnings: The kids are alright

Regardless of whether teens will someday shun the social network, Facebook's fourth quarter will likely glow thanks to mobile ads and Instagram.

Facebook cake pops celebrating the company's ninth anniversary. Facebook

More than 15 months after closing its landmark billion-dollar acquisition of Instagram, Facebook may be finally ready to trot out its most prized possession and silence critics who questioned the purchase.

Wednesday, the social network will turn in its report card for the fourth quarter of 2013 and expectations are high. Analysts estimate adjusted earnings of 27 cents per share on revenue of $2.34 billion. Clearly, they believe in Facebook's ability to make more money, even as the noise about dwindling teen attention crescendos to a disquieting volume.

You see, even though the social network's stock price is holding steady in the $50s, and the company is coming off an exceptional third-quarter -- sales soared to $2.02 billion and it earned 49 percent of its advertising revenue from mobile products -- Facebook just can't distance itself from the reputation that it has become a no-fun zone for the next generation of social networkers.

The start of Facebook's teen problem is hard to pin down, but most of 2013 was punctuated by anecdotes, studies, media reports, and even admissions that there was an issue. Entrepreneur Josh Miller, who now ironically works for Facebook, made the topic a hot one with a widely circulated blog post in January of last year that included some observations about teen behavior, one being that kids use but don't actually like, Facebook. By February, Facebook formally disclosed to investors that its youngest users were substituting some of their Facebook time for time with other apps. Then the waffling began.

In May, Chief Operating Officer Sheryl Sandberg downplayed Facebook's trouble with teens. So too did CEO Mark Zuckerberg. In June, he insisted that teens were definitely not taking off for other networks. Not outright lies, per se, but not exactly the truth either.

Then, just three months ago, Chief Financial Officer David Ebersman finally confirmed suspicions when he said that the company did indeed notice, "a decrease in daily users, specifically among younger teens." Proof positive of a problem. Well, not if you ask Sandberg.

To make matters worse, Facebook made itself look desperate with a reported (rejected) $3 billion cash offer to buy Snapchat, the disappearing picture app seemingly most beloved by today's youngsters.

But none of that really matters anymore, at least from an investor perspective, because Facebook did one instrumental thing in the fourth quarter. It turned to its knight in shining armor, Instagram, for a helping hand in the revenue department. Instagram has 150 million active users, many of whom are teens who have glommed on to the picture and video-sharing app as their preferred social network.

In early November, more than a year after Facebook's purchase closed, the app's once pristine feed finally became a money-making zone for its parent company. RBC Capital Markets hypothesizes that, if Instagram finished the year with 175 million active users, then the app could have already earned as much as $317 million from ads. If all goes well, Facebook could make 10 percent of its revenue from Instagram by 2015, according to RBC's model.

The real fruits of the Instagram ad play will be quarters, if not years, away, but Facebook finally has the opportunity to change the narrative around its teen appeal. Facebook can say: The kids are alright, they're just being looked after elsewhere.

Of course, Facebook has other tricks up its sleeve. In December, the company began testing video ads that auto-play in News Feed. The units, priced for advertisers with TV-sized budgets, could bring in some serious cash as soon as next week's Super Bowl. And mobile, once Facebook's greatest weakness, is expected to be a continued source for strength for the social network. RBC projects that 55 percent of Facebook's advertising revenue in the fourth quarter will come from mobile products. The company is also experimenting with even more ways to sell ads on mobile, which promises more avenues for profit in 2014.

Facebook may be about as cool as electricity, but it looks as if the lights are on and everyone is home.

 

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