Facebook Flexes Its Mobile Muscle Lifts Profit 90

If there were any doubts about Facebook's momentum after Twitter's disappointing financial outlook, they vanished yesterday when the social network exceeded earnings expectations with a third-quarter profit that jumped 90 percent from a year ago.

Marketers found a lot to like in Facebook's quarterly report. For example, CEO Mark Zuckerberg said in a conference call that the Menlo Park, Calif.-based company is now serving 1 billion videos per day and that its Instagram users are spending a generous 21 minutes per day on the service.

But the biggest news was about mobile ads. Daily active users on mobile jumped 39 percent from a year ago to 703 million. And revenue from mobile ads accounted for two-thirds of the company's advertising sales during the third quarter, up from 49 percent just a year ago.

Better Ads

"As our results show, our approach here is working," Zuckerberg said on the call. "To continue to deliver value for businesses, we’ve worked to improve the quality of ads in the newsfeed by reducing low-quality content and improving our targeting to show more timely and relevant content.”

Chief Operating Office Sheryl Sandberg said one goal within Facebook is to create better ways for marketers to measure the impact of mobile ads. “It's clear marketers and publishers need better tools for the mobile world. This is an industry problem that we believe we are well-placed to solve," she said.

Chief Financial Officer David Wehner sounded the only sour note in the call, saying he expects the company's costs to rise in 2015 to finance new projects. That will leave less cash as profits. The company's shares dove in after-hours trading on that news as some large shareholders took their profit. 

The stock, which closed at $80.77 shortly before the report, traded at $72.83 after the call. Even so, that's well above the 52-week low of $43.55 about a year ago.

Facebook's investment in new projects could be viewed more optimistically by investors during normal trading hours today. Or not. But it doesn't reflect a slump in business -- that's soaring. It's just a different use of cash on hand.

Two Left Standing

Ken Wisnefski, founder and CEO of online marketer WebiMax, said the report, combined with Twitter's soft forecast for fourth quarter revenue, made it clear that Facebook and Google are now the only real leaders in the fledgling mobile ad industry.

“It really shows Facebook has become essentially the mobile platform and is the main place for marketers to look at for mobile ads," he said. " Facebook has really become an ad platform. It’s really being mentioned with Google in that way.”

Wisnefski said he's even seeing companies diverting money away from Google and putting it into Facebook. "Not their whole budgets," he said, " but a portion of their budgets." 

The news about mobile ads so overshadowed the company's overall financial health that Facebook's net income -- the traditional focus of a quarterly earnings report -- had to wait for the middle of page 2 of the news release. But it was worth waiting for.

Nothing But Net

Profit jumped to $806 million, or 30 cents a share, from $425 million, or 17 cents, a year earlier. The company's operating margin widened to 44 percent from 37 percent. Overall revenue climbed to $3.2 billion, a 59 percent increase from the third quarter of 2013.

Excluding any one-time adjustments for such arcane items as share-based compensation and amortization of intangibles, Wall Street analysts were expecting a profit of 40 cents a share, according to analysts surveyed by FactSet. They got 43 cents.

Impressing the Street is important. Twitter didn't do that with its report on Monday. It surpassed expectations for profit and revenue, but its revenue outlook for the fourth quarter -- $448 million -- suggested a sagging audience. And that prompted at least four financial analysts to cut their forecast for Twitter shares.

Wisnefski said Twitter just isn't a social network that's designed for monetization. " People come and use it very quickly. It won’t really lend itself well to advertisers," he said. 

Title image by Frederic Legrand / ShutterStock