Facebook moving fast on mobile, and spending tons on everything

The social network showed for a second time that mobile can be a major cash cow. Too bad it takes money to make money.

James Martin/CNET

Risk. What risk? Facebook's ballooning mobile audience is proving to be anything but a bubble-bursting group. Chief Executive Mark Zuckerberg today told analysts that the social network's laser-focus on mobile is paying off handsomely -- the result, in part, of accidental good fortune.

"There's no argument, Facebook is a mobile company," Zuckerberg told investors after the company reported fourth-quarter adjusted earnings per share of 17 cents and revenue of $1.59 billion , which was slightly ahead of what Wall Street had expected.

Yes, there's apparently no place like mobile for Facebook. The company said it saw monthly active mobile users jump 57 percent year-over-year to 680 million people in the fourth quarter. And its daily active users on mobile eclipsed desktop users for the first time in the company's history.

Facebook also said it generated 23 percent of its fourth-quarter advertising revenue -- or $306 million -- from mobile. That's double what the company made from mobile last quarter and an impressive percentage considering that Facebook's mobile ad units rolled out just this past June.

Lucky Facebook In the third quarter , Facebook had 604 million people per month using the network on mobile devices. The ever-expanding audience contributed 14 percent to the social network's ad revenue for the quarter, which amounted to roughly $152.6 million. The 604 million people also represented 61 percent year-over-year growth, a mobile migration that would have alarmed investors had Facebook failed to prove that it could monetize members' on-the-go eyeballs.

"A couple of quarters ago mobile revenues were zero percent of our ads revenue," Chief Financial Officer David Ebersman said. "Now we're up to 23 percent and believe there's a lot of growth ahead of us."

In short, Facebook seems to be having little problem monetizing attention as users migrate en masse to the company's mobile apps. The surpise, as Zuckerberg said a few times, is that Facebook threw up ads in the news feed without kick-starting a revolt, something most of us probably assumed would be the case. People hate ads, right?

"One of the big drivers of [mobile revenue] was that as we rolled out ads in news feed, we found that it barely affected the level of engagement on Facebook," Zuckerberg said. "We thought that we could make this work over time without a big impact if we spent a long time tuning the ads, but the numbers turned out even better than we thought without much tuning."

Facebook expected news feed ads to send people fleeing and thought it would need to double-down on ad quality. But that didn't happen, so the company felt so confident that it upped the number of ads it served. Without any fine-tuning, Facebook noticed a marginal "2 percent" engagement dip after pumping up the volume on ads.

More simply put: Facebook got lucky with news-feed ads, aka "Sponsored Stories," and people have yet to flinch. Sponsored Stories, which COO Sheryl Sandberg has called the cornerstone of Facebook's mobile monetization strategy, are status updates that brands and advertisers pay to promote more widely inside the feed on Facebook.

Facebook's semi-accidental success with news-feed ads, should you believe Zuckerberg, Ebersman, and COO Sheryl Sandberg, suggests that once the social network actually figures out how to make the ads better -- through improved targeting and better formats, according to Zuckerberg -- mobile news feed ads will lead to far fatter profits.

A new concern
Investors, however, aren't entirely sold. Even if Facebook's mobile risk, which weighed on the stock for several months after it debuted in May, seems like a distant nightmare, there's another problem: Facebook is spending like crazy.

The social network's costs and expenses, excluding share-based compensation, were $849 million, an increase of 67 percent from the same quarter a year ago. Research and development, including share-based compensation costs, made up 19 percent of expenses in the quarter, up from 11 percent a year ago. Overall, operating margins narrowed to 46 percent in the fourth quarter from 55 percent in the last quarter of 2011, and profit fell 79 percent.

Hello, sticker shock. The shop-till-you-drop costs gave investors cause for immediate concern and contributed to stock volatility in after-hours trading. Shares are currently down roughly 3 percent from Facebook's $31.24 Wednesday close.

But it gets worse. Zuckerberg warned that Facebook would whip out its credit cards and go on a product and personnel spending spree in the year ahead. In what amounted to a verbal slap in the face, he said Facebook expects "expenses to grow at a faster rate than we expect to grow our revenue this year, which means that we aren't operating to maximize our profits this year."

"[Facebook] said spending excluding stock-based compensation would go up 50 percent [in 2013]. That suggests [Facebook] will grow spending by $1.4 billion," Wedbush analyst Michael Pachter told CNET. "[Facebook] needs 28 percent revenue growth just to keep net income flat."

Which means Zuckerberg, perhaps feeling emboldened by the early success in tackling the mobile problem, might try Wall Street's patience for a while longer while he continues to expand his empire.

 

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