San Francisco — Facebook (Nasdaq: FB)
reported a plunge in fourth-quarter profit on higher spending
Wednesday, even while it made long-awaited progress luring advertisers
eager to reach mobile- device users.
Net income fell 79 percent to
$64 million last quarter as operating expenses jumped 82 percent,
Facebook said. That outpaced a 40 percent revenue gain to $1.59 billion
and raised concerns that margins will come under pressure.
The
stock fell 2.8 percent in German trading, paring a drop of as much as 11
percent in late U.S. trading as investors weighed near-term lower
profit against the prospect of future growth.
Still, the company delivered fourth-quarter results above Wall Street's expectations and
sought to show that it has finally transformed into a "mobile company"
after rising to dominance as a Web-based social network.
"Everything
was slightly better than expected," said Wedbush Securities analyst
Michael Pachter. "I don't see anything here that would make me want to
sell the stock."
The world's largest social media company earned
$64 million, or 3 cents per share, in the October-December period.
That's down 79 percent from $302 million, or 14 cents per share, a year
earlier when it was still a privately held company.
Revenue rose 40 percent to $1.59 billion from $1.13 billion, surpassing analysts' expectations of $1.51 billion.
Advertising
revenue grew 41 percent to $1.33 billion, increasing at a faster clip
than in the third quarter, when it climbed 36 percent to $1.09 billion.
Excluding
special items, mainly related to stock compensation expenses, Menlo
Park, Calif.-based Facebook earned 17 cents per share in the latest
quarter. Analysts polled by FactSet expected lower adjusted earnings of
15 cents per share.
Nonetheless, Facebook's stock fell $1.11, or 3.6 percent, to $30.13 in after-hours trading following the earnings report.
Chief
Executive Officer Mark Zuckerberg plans to increase expenses, excluding
certain costs, 50 percent this year to hire staff and roll out new
tools for advertisers. That’s more than the 33 percent increase
projected by Pacific Crest Securities LLC, and it underscores the
urgency of capturing a bigger slice of the $6.97 billion U.S. mobile-ad
market. Done right, the added investment will translate to profit
growth, said Adam Schneiberg, a portfolio manager at BTR Capital
Management.
“Wall Street tends to be forgiving of higher spending
during high-growth periods when new products are being built,”
Schneiberg said. “As long as eyeballs tune in and revenue keeps growing,
the Street will believe that at some point the company can flip the
switch on profitability.”
Facebook shares had advanced 1.5 percent
to $31.24 at the close in New York just ahead of the earnings
announcement, leaving them up 76 percent from a record low close on
Sept. 4.
Mobile-Ad Push
Facebook’s
increased investment is designed to help the company grapple with rising
competition from larger rivals in the U.S. market for mobile
advertising, predicted by EMarketer Inc. to surge 82 percent this year.
Google Inc. is projected to grab 57 percent of that market, and Facebook
will remain a distant No. 2 with 12 percent, EMarketer estimates.
“More
mobile revenue means way more spending on the operations of selling
ads,” said Brian Wieser, an analyst at Pivotal Research Group LLC, who
has a hold rating on the stock. “This is an expensive company to run.”
Mobile
contributed 23 percent of total advertising revenue, or about $306
million, according to Facebook. That compares with 14 percent in the
third quarter. Analysts at JPMorgan Chase & Co. predicted mobile
would contribute $384.2 million, or 27 percent of ad revenue, in the
latest quarter.
Facebook’s engineers are making improvements to
mobile applications, including those for Google’s Android software,
Zuckerberg said on a conference call. Better mobile services can boost
user engagement, he said.
‘Big Transition’
“We
made this big transition, where now there are more people using
Facebook on mobile every day than on desktop,” Zuckerberg said. “More
people are starting to understand that mobile is a great opportunity for
us.”
Facebook is investing in new products to attract users and
keep them on the site longer. Earlier this month, the company announced a
revamp of its search service that lets members find information on
people, places, photos and interests. The company also has upgraded its
mobile applications with new versions for phones running Google’s
Android software and Apple Inc.’s iPhone.
“We’re investing heavily
because we see big opportunities ahead for the company,” David
Ebersman, Facebook’s chief financial officer, said in an interview. “So,
we’re trying to invest to build the most valuable company we can for
the long term and to really invest in areas that can drive engagement.”
Narrower Margin
Zuckerberg
also said that he expects to hire aggressively, causing expenses to
grow at a faster rate than sales in 2013. The company had 4,619
employees at the end of last year, according to data compiled by
Bloomberg.
Facebook’s fourth-quarter operating margin declined to
33 percent from 48 percent a year earlier, while costs rose to $1.06
billion from $583 million.
Facebook reached 1.06 billion users
during the fourth quarter, up from 1.01 billion in the third quarter.
The number of mobile users was 680 million, up from 604 million in the
third quarter.
Analysts had been pushing up ratings amid growing
optimism for accelerated revenue growth. The proportion of analysts
covering Facebook with a buy rating has risen to 65 percent from 52
percent on Oct. 23, when Facebook posted third-quarter sales that beat
estimates, according to data compiled by Bloomberg.
“A lot of
these products are pretty new,” said Scott Kessler, an analyst at
S&P Capital IQ, who rates the stock a hold. “It’s just going to take
some time.”
- The AP and Bloomberg
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