Facebook Leaves Mobile Concerns in Dust With Sales Surge

Facebook Inc. was once mired in mobile-advertising doldrums. That was so 2012.

The world’s largest social-networking site reported first-quarter profit and revenue yesterday that blew past analysts’ estimates. Mobile accounted for 59 percent of advertising revenue, up from almost nothing at the time of Facebook’s initial public offering in May 2012.

Yet Facebook executives also said on a conference call yesterday that spending will increase for the rest of this year and initiatives such as photo-sharing application Instagram and video advertising won’t immediately contribute materially to revenue. That tempered the company’s stock performance today, with shares slipping less than 1 percent to $60.87 at the close in New York.

“Facebook posted another very solid quarter,” Ben Schachter, an analyst at Macquarie Securities USA Inc., wrote in a note today. Yet with the slow rollout of some services and ad products, there “will be some disappointment.”

Revenue in the first quarter rose 72 percent to $2.5 billion, beating the average analyst estimate of $2.36 billion, according to data compiled by Bloomberg. Net income almost tripled to $642 million, or 25 cents a share, from $219 million, or 9 cents, a year earlier. Profit excluding some items was 34 cents a share, topping the average estimate of 24 cents.

The results meant Chief Financial Officer David Ebersman, who announced his resignation yesterday, is leaving on a high note after helping the company rebound from a disastrous IPO to build up to a market capitalization of about $160 billion.

Mobile Slog

Facebook has 1.28 billion monthly active users, or almost half the world’s Internet population, up from 1.23 billion last quarter. The company has more than 1 billion monthly active users on mobile, with more than half of daily active users only connecting on mobile.

“Facebook’s business is strong and growing,” Chief Executive Officer Mark Zuckerberg said on a conference call yesterday. “It has been a busy quarter and a strong one.”

Even with its rising membership, making money on smartphones proved to be a challenge until recent quarters. Facebook had to deal with smaller screens and the emergence of other social applications designed specifically for phones. To build its mobile audience, the company poured money into developing products and bought Instagram. It is also testing a mobile-ad network.

EMarketer Inc. projects Facebook will capture 22 percent of the the $31.5 billion mobile ad market in 2014, up from 18 percent last year. That’s second to Google Inc., whose share is likely to fall to 47 percent from 49 percent, according to EMarketer.

Future Uncertain

Facebook is now seeking to make even more money on gadgets, agreeing to buy text messaging service WhatsApp Inc. for $19 billion and virtual-reality goggle maker Oculus VR Inc. for $2 billion. WhatsApp will bring 500 million consumers, though the company generates minimal revenue.

“The core of this business is very strong, and their biggest challenge will be sustaining their growth rate in this range,” said Martin Pyykkonen, an analyst at Rosenblatt Securities in New York. “We don’t know how big these new areas can be.”

Facebook is known for its stable management team, with only one top executive, former technology chief Bret Taylor, leaving since the IPO. Ebersman has been at Facebook for almost five years, while Chief Operating Officer Sheryl Sandberg has been there since 2008. Ebersman is leaving to work in the health-care industry, and will be replaced by former Zynga Inc. CFO David Wehner, who joined Facebook in 2012.

Leaving Rich

“He’s going to do something he really loves,” Sandberg said in an interview of Ebersman. She added that Wehner is “really strong, really strategic.”

Ebersman earned $10.5 million in compensation last year, mostly through stock awards, down from $17.5 million in 2012. He owns $47.8 million of Facebook shares.

To position the company for future revenue growth from its massive user base, Zuckerberg is building out a mobile portfolio that includes Instagram, Facebook’s Messenger service and Paper, a magazine-like news feature. Today the social network said it had also acquired fitness-tracking app Moves.

Instagram and Messenger, which each have more than 200 million users, are still “probably a few years away from being an important business for us,” Zuckerberg said on yesterday’s conference call. The priority is getting a billion people to use those services before focusing on making money from them.

Video, Wearables

Zuckerberg is also pushing the 10-year-old company into new businesses. Last month, the company released a video product to some of its partners, aiming for a slice of TV’s $66.8 billion ad budget. And Facebook agreed to buy Oculus for about $2 billion, a high-priced bet on the fledgling wearable-computing market. That deal was approved yesterday by the U.S. Federal Trade Commission.

In an even more far-out wager, Facebook said last month it is working to deliver connectivity via drones, satellites and lasers after purchasing Ascenta, a U.K.-based aerospace company.

Facebook closed the quarter with $12.6 billion in cash and marketable securities. Costs rose 32 percent from a year earlier to $1.43 billion, mostly from an increase in headcount and infrastructure expenses.

Before it's here, it's on the Bloomberg Terminal.