After a slow start, Facebook Inc's (NASDAQ:FB) effort to squeeze more money from advertisers on mobile devices is starting to pay off.
The mobile boost helped revenue rise 32% in the quarter that ended on Sept. 30, to $1.26 billion, slightly topping Wall Street's expectations.
The social network, which faces mounting investor pressure about its growth, like in Q2 2012, recorded a quarterly loss of $153 million in sales from mobile advertisements, a category of business that didn't exist at Facebook seven months ago.
Shares of Facebook, which rose about 12% to $21.82 in after-hours trading on Tuesday, opened more than 20% higher at $24.12 on Wednesday, helped by some analyst upgrades.
Facebook Stock Price from October 18, 2012 through October 24, 2012 (Click Image To Enlarge)
On Facebook's earnings call, Chief Executive Mark Zuckerberg stridently defended the potential for the company's mobile business. He said.
"I think our opportunity on mobile is the most misunderstood aspect of Facebook today."
Mr. Zuckerberg added that he expects the company will ultimately make more money from user activity on mobile, based on time spent.
Facebook's third-quarter report card provides the first real glimpse into how the social network is trying to win the battle on mobile phones.
The company only began to roll out ads to its 604 million mobile users in March, through a program called "sponsored posts," which insert paid marketer messages into the home screen of its mobile apps.
Since the summer, Facebook has increased its inventory of those ads, and introduced new products, such as an app ad service. Last month, Facebook also began testing a version of a mobile ad network, which places Facebook ads inside other apps. In the third quarter, mobile ads were about $150 million or 14% of the company's advertising revenue.
Sheryl Sandberg, Facebook's chief operating officer, in an interview said.
"We've been very focused on getting more ads into news feeds—it's one of our primary priorities."
The rapid ascent of mobile has been a tricky challenge for Facebook and its peers.
While the proliferation of smartphones creates new opportunities, many Internet giants have floundered in their attempts to make as much money on mobile as the Web. The small screen of a cellphone poses design challenges for where and how to place ads. Meanwhile, advertisers, which are still trying to determine how to calculate the efficacy of digital ads, have been slow to spend as much on smartphones.
For many Web giants, the transition has been a costly one. Last week, Google Inc stunned investors with a weaker-than-expected earnings report. The search giant's revenue growth, excluding Motorola Mobility, slipped to 19%. Google managed to sell 33% more ads in the quarter but a larger portion were mobile ads, which are priced lower than Web ads.
Game maker Zynga Inc. which reports quarterly results on Wednesday, has several popular mobile franchises, such as "Draw Something" and "Words with Friends," but those games haven't made as much money Web-based games, like "FarmVille" and "CityVille."
As Facebook churns out new features, it runs the risk of creating a cluttered experience and alienating members.
Some analysts questioned whether Facebook will be able to sustain robust mobile ad sales. "Can Facebook really keep jamming ads on a page without upsetting its users?" said Jordan Rohan, a Stifel Nicolaus analyst. "When a company like Facebook introduces new ad formats, many users click on those ads with no commercial intent. That activity tends to subside within a number of months."
The rise in mobile ads managed to offset the sequential decline in the company's payments business, which includes the money it makes from Zynga's games. Revenue from the payments segment fell 9% from the second quarter to $176 million, as users spent less money on virtual goods. On the earnings call, Mr. Zuckerberg said gaming on Facebook "isn't doing as well as I'd like," but he said he was encouraged by the growth of the overall ecosystem. Several game makers, like Kixeye and Electronic Arts, have begun to take market share from Zynga.
Despite higher sales, Facebook's results were bogged down by the cost of paying employees in stock. Facebook recorded a net loss of $59 million versus a profit of $227 million for the year-ago-period.
Since its highly anticipated debut nearly six months ago, Facebook's stock has lost roughly half its value, amid large stock sales from early shareholders and worries that it will be crippled by the shift from desktop computers to mobile devices.
Colin Sebastian, a Robert W. Baird analyst said.
"By the evidence of one quarter, they are obviously showing some progress. But we still don't know which ad formats work and how much advertisers will pay, that's something we'll have to track over time."
For now, Facebook still makes the bulk of its revenue from the Web. In the last three months, the company introduced a number of new products:
- Gifts - a service to buy and send real-world gifts. Facebook CEO Mark Zuckerberg says that Gifts is a great opportunity to increase ecommerce on Facebook and is a logical first step.
- Collections - an image-sharing program similar to Pinterest.
- Offers - a promotion tool for virtual coupons. Facebook COO Sheryl Sandberg noted that the company had reintroduced Offers a month ago, which allows businesses to offer services or products to users. Once a user claims an offer, Facebook broadcasts that claim to the user’s friends. Sandberg noted that over 100,000 pages have created an offer and that 30% of claims came from mobile users.
- Promoted Posts - a feature just recently rolled out that will let individuals promote announcements to a larger group of friends for a fee of $7 per post. After you publish a post, a Promote button will let you pay to bump up its rank in the news feed — making it appear both higher in the feed, and to a larger portion of your friends. Unpromoted posts are typically only seen by 12-16 percent of your friends. Promoted Posts has already been rolled out to 20 other countries and is available to people with fewer than 5,000 total friends and subscribers. Sandberg said that 300,000 pages have created promoted posts since its launch in the second quarter.
COMMENTARY:
Mobile:
According to Facebook, mobile gives Facebook the opportunity to reach way more people than on the desktop, Zuckerberg says. People who use the mobile product use Facebook more frequently. People who use only desktop have a 40% chance of using Facebook, while those who use mobile have a 70% chance of using Facebook every day.
On engagement, Facebook revamped its iOS app because it was “just too slow,” Zuckerberg says. Since that change, Facebook has seen 80% increase in iOS Newsfeed items seen and a similar increase in Likes and engagement.
On monetization, he sees more opportunity for monetization on mobile than desktop long-term. “It isn’t proven yet but we’re committed to get there,” he says. Mobile ads are deeply integrated with the app rather than on the side like desktop ads.
Each product group owns their own monetization product now, which has improved monetization, Zuckerberg says.
“I want to dispel the myth that Facebook can’t make money on mobile."
Facebook CEO Mark Zuckerberg: There’s three main pillars of Facebook’s strategy:
- Making the best mobile products.
- Making the best platform for social apps.
- Monetizing better.
Gaming:
Zuckerberg says.
“Gaming on Facebook isn’t doing as well as I’d like.”
Payments from Zynga are down 20% from last year, but the rest of gaming is up 40% since last year.
Instagram:
Instagram had 27 million users when Facebook acquired it but now it has 100 million. Zuckerberg says.
“This is really a platform success story.”
News Feed Ads:
Revenue from News Feed is now $4 million per day (three-fourths of that is from mobile), up from $1 million per day in the prior sequential quarter. In comparing Facebook’s new ads, which are now placed in the News Feed, to the traditional ads in the site’s right-hand column, Sandberg said that the News Feeds ads are eight times more engaging with 10 times the ad recall.
The full transcript to the October 23, 2012 earnings call is listed below:
To say the least, I was very surprised that Facebook was able to exceed (albeit slightly) Wall Street analyst expectations for Q3 2012, and generate $153 million in mobile ad revenues to boot. In a blog post dated September 1, 2012, I commented on eMarketer's revision of Facebook's revenues for 2012 from $6.1 billion to $5.04 billion.
In a blog post dated October 18, 2012, I commented on a Wall Street Journal article that Twitter was beating Facebook handsdown in mobile advertising, but it now appears that Facebook is well on its way to kicking Twitter's butt in mobile ads.
Earlier this year, eMarketer had forecasted that Facebook would generate only $72 million in mobile ads for the entire year 2012, so their researchers need to go back to the drawing board and reforecast.
I am totally amazed how quickly investors can give Facebook's stock a spike of nearly 20% in a single day over the company's Q3 2012 earnings report. Mobile revenues are impressive given that it didn't start running mobile ads until late in the Q2 2012, but mobile is still only 14% of total ad revenues.
The fact that Facebook generated another loss for two consecutive quarters, shows you just how jaded some investors and anaysts are. Those revenue numbers are coming at great cost to Facebook as it fights to monetize mobile. There is only one quarter left, so it appears that Facebook will end up with a net loss.
Courtesy of an article dated October 24, 2012 appearing in The Wall Street Journal and an article dated October 23, 2012 appearing in Seeking Alpha
Hi tommy, yes i think you are right. There is only one quarter left, so it appears that Facebook will end up with a net loss.
Posted by: interest rate arbitrage | 11/20/2012 at 04:34 AM