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Facebook's Q1 Profit Demolishes Forecasts As Mobile Ad Sales Jump Again

This article is more than 9 years old.

Once again, it was all about mobile for the world's dominant social network. In a quarter notable mostly for the billions of dollars spent on acquisitions, Facebook managed to beat first-quarter earnings expectations by much more than enough to please investors, thanks to a huge jump in mobile advertising revenues.

The company earned a net profit per share of 34 cents a share before certain costs such as stock compensation--almost triple a year ago--on a 72% jump in revenues to $2.5 billion. Analyst had expected a 24-cent profit per share on $2.4 billion in sales, so even the GAAP profit per share beat the non-GAAP profit forecast--and in a quarter usually known for its weaker post-holiday revenues.

The apparent reason for the big surprise: mobile ad revenues, which reached 59% of ad sales, up from 30% a year ago. Ad sales overall rose an even more stunning 82%, to $2.27 billion.

Facebook's shares, down about 2.7%, to $61.36, at the market close, were up more than 3% about 15 minutes after the earnings release crossed the wires.

The results seem almost superfluous in a quarter when Facebook spent $21 billion to buy text message firm WhatsApp and virtual reality startup Oculus VR--except that Facebook's profits and growth are precisely what allows CEO Mark Zuckerberg to spend big on what he hopes will be the company's future. The strong quarter should allow him to continue to do just that.

The rapid rise of Facebook users on mobile devices like smartphones and tablets was especially striking, up 43% from a year ago to more than three-quarters of Facebook's overall daily active users. That positions Facebook well for an era of post-desktop online advertising, says James Borow, cofounder and CEO of the social marketing technology firm SHIFT. "They're uniquely positioned to capitalize on that," Borow said in an interview, especially since Facebook knows people's interests and preferences by their own actions. That's likely to provide more accurate ad targeting on mobile devices, especially since cookies, the software identifiers used on websites, don't work as well on mobile devices.

Mobile ads, driven by ads used to drive people to install mobile apps, weren't the only reason for the upside surprise. As Pivotal Research analyst Brian Wieser wrote in a note to clients, "Several new initiatives launched in the past year and a half have driven a significant volume of revenue into Facebook, including FBX [Facebook's ad exchange], mobile app install units, an active effort to court small businesses (who we believe are incrementally shifting spending away from Google and towards Facebook) and ongoing international expansion."

In any case, Facebook has become a core part of ad spending by now, Craig Elimeliah, VP and director of creative technology at the ad agency RAPP, said in an interview. "They've built a lot of good relationships with folks who are making the spending decisions, especially agencies," he said.

But he also noted that Facebook increasingly will face stronger competition from Twitter and other companies that are learning fast to provide marketers and agencies the ad formats and technologies they're looking for.

The key metrics for the quarter, from the release:

  • Daily active users (DAUs) were 802 million on average for March 2014, an increase of 21% year-over-year.
  • Mobile DAUs were 609 million on average for March 2014, an increase of 43% year-over-year.
  • Monthly active users (MAUs) were 1.28 billion as of March 31, 2014, an increase of 15% year-over-year.
  • Mobile MAUs were 1.01 billion as of March 31, 2014, an increase of 34% year-over-year.

One other notable bit of news: Chief Financial Officer David Ebersman is leaving later this year, to be replaced by David Wehner, former Zynga CFO before he decamped to Facebook in 2012.

The webcast of the earnings conference call is here starting at 2 p.m. Pacific live and later archived. Here are the highlights mainly from Zuckerberg and Chief Operating Officer Sheryl Sandberg, who handles the ad business:

"This was a busy quarter," Zuckerberg said on the call. (Really?) He outlined Facebook's recent shifts in strategy toward a portfolio of mobile apps, such as Instagram, Messenger, and especially Paper, the first app out of its Creative Lab.

Facebook has been working to improve tools for its news feed ads, now the key ad format, he said.

Sandberg said Facebook is off to and "outstanding start" in 2014, especially thanks to mobile. Sport Chek in Canada recently axed its print circular advertising and put it all in digital, the majority in Facebook, she noted.

Facebook is still looking to improve its ad products and tools. In ad targeting, 10 times more marketers are using its Custom Audiences targeting as last year. In measurement, improved tools are helping get more marketers interested as well so they can determine the impact of Facebook ads on sales. Premium video, ads on Instagram, and the recent test of a mobile ad network are all opportunities, she said--but interestingly, she added, they won't be significant revenue generators this year.

Shares were up more than 4% before the analyst Q&A:

Q: How is the relevance of ads doing? Sandberg said they're getting more relevant all the time, but "we have a long way to go."

Q: Will native apps become less important going forward than the open Web format you originally bet on in mobile? Zuckerberg: Timing matters a lot. There's nothing wrong with the technical standards of HTML5. I don't want to sound like we've walked away from this. But for the foreseeable future... native apps.

Q: How will Facebook apps move toward a communications ecosystem? Zuckerberg: People want to share all kinds of different content with all kinds of different audiences. Facebook historically has focused on friends and public content. Now you'll see us do more things in private content. That speaks to why WhatsApp and Messenger are both growing. They serve different use cases.

Q: Where do you end up in level of ad placements, which have been declining? Zuckerberg: I don't think we have a strategy to decrease ad impressions. As we shift toward news feed ads, the raw number decreases, but the value rises (as do ad prices) because they're more effective than those ads on the right side on the desktop Facebook.

Q: Growth across ad segments? Video ads are growing well, especially a click-to-play video ad, Sandberg said, because phones are getting better at playing video. But she said Facebook isn't pushing video ads too much yet until it sees how they're accepted by users.

Q: Breakout on different types of ads? Sandberg didn't get too specific, but said app install ads are not as big a revenue driver yet as you might think from all the attention on them (Twitter recently announced plans for one and Google yesterday said it's expanding them).