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Facebook posts a loss but makes gains on mobile ad revenue

The quick progress in mobile advertising — a key area of concern for investors — sent Facebook shares sharply higher in after-hours trading.

October 24, 2012|By Jessica Guynn, Los Angeles Times
  • Facebook recently celebrated reaching the milestone of 1 billion users with its 33rd hackathon, where Facebook employees stayed up all night brainstorming new features and products.
Facebook recently celebrated reaching the milestone of 1 billion users… (Dan Fletcher, Facebook )

SAN FRANCISCO — Wall Street called on Facebook Inc. to show it can make money from mobile, and Facebook got the message.

In swinging to a third-quarter loss of $59 million, the social networking giant for the first time disclosed how much revenue it took in from mobile advertising, reassuring investors that Facebook is figuring out how to capitalize on its growing numbers of users on smartphones and tablets.

Facebook said ads on the smaller screen accounted for $153 million in revenue, or 14% of all advertising revenue. The company didn't provide earlier mobile ad data, but analysts pegged it at about $45 million for the second quarter.

The quick gains in mobile advertising — a key area of concern for investors wary after Facebook's stock market debut in May and its rocky performance since then — sent shares sharply higher in after-hours trading. The company reported results after the markets closed.

Shares ended the day with an 18-cent gain to $19.50, about half the price of their initial public offering in May. But in after-hours trading, shares rose as much as $2.53 to $22.03.

Facebook's loss of 2 cents a share was a sharp turnaround from last year's third-quarter profit of $227 million, or 10 cents a share. Excluding one-time charges, Facebook earned 12 cents a share, a penny more than analysts had expected. Revenue grew 32% to nearly $1.3 billion.

Facebook executives said they stepped up third-quarter investments in tools to target users on mobile devices in an effort to reinvent the company as a "mobile first" operation.

"We are just getting started with mobile product and monetization," Chief Executive Mark Zuckerberg said during a conference call with analysts.

Facebook, like other companies, is rushing to follow users as they migrate from the desktop to smartphones and tablets. Today nearly half of Americans own a smartphone, according to research firm ComScore Inc. Underscoring the trend Tuesday, Apple Inc. introduced the iPad Mini to try to extend its share of the mobile market.

Still, Internet companies are struggling to shift their advertising to mobile devices quickly enough to capture as much revenue as they do on desktops.

Google Inc. and Microsoft Corp. reported disappointing earnings last week amid concerns over their ability to wring ad dollars from users on mobile devices. And this week, Yahoo Inc.'s new chief executive, Marissa Mayer, said Yahoo had squandered its opportunities on mobile devices and must evolve into a predominantly mobile company to survive.

A growing proportion of Facebook users are accessing the service from mobile devices. Facebook crossed the 1 billion threshold for monthly active users worldwide at the end of September. Six of 10 monthly active users were logging in from mobile devices. That's an increase of 61% from a year earlier.

That Facebook was able to make such swift strides in just one quarter surprised analysts. Facebook began showing mobile ads to users only in March. It made the ads widely available over the summer.

"Their early performance [in mobile advertising] suggests that they can make further gains going forward," Wedbush Securities analyst Michael Pachter said.

Zuckerberg called mobile a "much larger opportunity than most people realize" and predicted Facebook would eventually make more money on mobile devices than on desktops based on how much time is spent on each.

Facebook users log in more frequently and tend to be more engaged on mobile devices, he said. And, he reminded analysts, Facebook is still the most widely downloaded app on every smartphone platform.

Making as much money on mobile as on desktops is the main challenge facing Internet companies battling for ad dollars. Marketers have been slow to open their wallets, worried that users don't pay attention to ads — or, worse, get annoyed by them.

Analysts said it was unclear whether Facebook could continue to pepper its users' Newsfeeds on mobile devices with ads without alienating them.

Advertising revenue overall grew 36% to nearly $1.1 billion from last year's third quarter. Facebook Chief Financial Officer David Ebersman said that if foreign exchange rates had been stable, ad revenue would have grown 43%.

Desktop ad sales declined about 5% as more advertisers shifted dollars to mobile, he said.

Facebook's early success with mobile ads should take pressure off the stock, said Michael Yoshikami, chief executive of Destinational Wealth Management.

"Still, this stock requires huge faith," Yoshikami said. "Leadership needs to prove that their strategic plan can win against Google, a host of competitors and the ad-resistant mobile user."

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