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Facebook beats Wall Street estimates; mobile gets traction

After a stellar three-month market run, the company posts better-than-expected fourth-quarter earnings, with 23 percent of its advertising revenue now coming from mobile. Investors still aren't completely satisfied.

Mark Zuckerberg Facebook
Facebook reported fourth-quarter earnings that handily beat Wall Street's expectations.

The social network came in with adjusted earnings per share of 17 cents and revenue that grew 40 percent to $1.59 billion compared to the year-earlier quarter. The company also reported 1.06 billion monthly active users and 618 million daily active users (DAUs); both figures are up by more than 25 percent against last year. On mobile, Facebook grew monthly actives to 680 million people, an increase of 57 percent year-over-year. Mobile DAUs exceeded web DAUs for the first time, the company said.

More important, Facebook's mobile revenue grew account for 23 percent of all advertising revenue in the fourth quarter, a much larger chunk than the 14 percent it reported last quarter and higher than the 17 percent figure some analysts predicted ahead of the report. Facebook made $1.33 billion in advertising revenue, accounting for 84 percent of its total revenue. The company made roughly $306 million from mobile ad revenue in the quarter, and took home $256 million from payments and other fees.

While its business appears to be growing nicely, Facebook is also spending more. The company's costs and expenses, excluding share-based compensation, were $849 million, an increase of 67 percent. 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.

Wall Street anticipated $1.53 billion in revenue and earnings per share of 15 cents. Investors and analysts have been eager to see how much more the social network can milk from its nascent mobile ad business and what sort of revenue potential they can expect from Graph Search, Facebook's structured search experience for finding people, places, photos, and interests.

In the fourth quarter, Facebook kicked off a number of product and advertising initiatives including mobile app install ads, with which third-party app developers can promote their own Android or iPhone applications to Facebook's mobile audience. The company also significantly expanded its Facebook Gifts product to reach all U.S. users just ahead of the holidays.

The quarter was fruitful for Facebook in terms of winning back favor with investors and analysts. Just 90 days ago, the social network was having trouble convincing anyone that its ad business could keep pace with users migrating to mobile en masse. But Zuckerberg assuaged fears when he touted that the company made 14 percent of its advertising revenue from mobile during the third quarter.

Facebook shares closed up 1.5 percent at $31.24 Wednesday. Immediately after it announced its earnings, the stock reversed course on news that Facebook's margins were worsening. Facebook lost more than 8 percent in after-hours trading before climbing back towards its close price.