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Facebook's Soaring Profits Propelled by Mobile Ads

Facebook's Soaring Profits Propelled by Mobile Ads

By Vindu Goel, The New York Times | Updated: 24 July 2014 09:26 IST

Once again demonstrating its mastery of the mobile computing wave, Facebook dazzled Wall Street on Wednesday by posting significant growth in revenue and profits for the second quarter, driven largely by ads shown in the news feeds of a billion Facebook users checking the service on their mobile phones.

Shareholders celebrated, sending the stock of the company to a record high in after-hours trading.

But Facebook's chief executive, Mark Zuckerberg, wasn't basking in what he modestly described as a "good quarter." Instead, he was looking ahead to the next wave.

In a conference call with investors, Zuckerberg warned that the company would be spending heavily for years on newer services like private messaging, virtual reality and Facebook search without any near-term prospects of making money from them.

"We think it is going to be years of work before those are huge businesses for us," he said. "I really can't underscore this enough that we have a lot of work to do. We could take the cheap and easy approach and put ads in and do payments and make money in the short-term, but we're not going to do that."

Right now, he doesn't have to.

Facebook, based in Menlo Park, California, said it had about 1.32 billion monthly users around the world in June, with more than a billion of those people using the service at least partly on mobile devices.

Revenue was $2.91 billion, up 61 percent from $1.81 billion during the same period last year. Net income was $791 million, or 30 cents a share, compared with $333 million, or 13 cents a share, a year ago. The company's operating profit margin hit a record 48 percent in the second quarter, reflecting increased cost efficiencies.

Mobile devices accounted for nearly two-thirds of Facebook's revenue, which at this point mostly comes from ads shown on the Facebook website and apps. However, the company is beginning to supplement that with ads on other sites.

"These are just phenomenal numbers," said Ben Schachter, an Internet analyst with Macquarie Capital. "The core business is so strong that it's buying them time to be more conservative and deliberate in bringing out new products."

Analysts had expected Facebook to report revenue of $2.8 billion. Wall Street had also projected that the company would post a profit of 32 cents a share, after excluding compensation-related expenses, according to consensus estimates collected by several services. On that basis, the company blew past the expectations with a profit of 42 cents a share, up from 19 cents a year earlier. The quarter's results sent Facebook shares up 5.6 percent in after-hours trading to more than $75, well above its highest closing price.

In the conference call, Facebook executives offered few details about the performance of nascent products like new video ads that play automatically in the news feed, image ads on its Instagram photo-sharing app or its experiments in mobile payments.

But Zuckerberg did get enthusiastic about Oculus VR, a maker of virtual reality headsets that Facebook bought for $2 billion in a deal that closed this week.

"We can help define what the next generation of computing is going to be. Virtual reality, augmented reality, will play into this in an important way," he said.

The Oculus purchase and Facebook's proposed $19 billion purchase of WhatsApp, the leading text messaging app, are examples of the kind of long bets Zuckerberg is making without expecting any immediate returns.

Richard Greenfield, an analyst with BTIG Research, said that investors would be patient because Facebook was trying to reinvent display advertising, making it a formidable rival to Google, the king of search ads.

"They are clearly focusing on the quality of the creative, getting more into video, doing things like Instagram ads, that have real emotional connection with users," he said. "I think they're just trying to temper expectations so that expectations don't get ahead of themselves."

Indeed, Facebook continues to gain ground in digital advertising, particularly in mobile.

The company accounted for 5.8 percent of the world's estimated $120 billion in digital ad revenues in 2013, and it captured 17.77 percent of mobile ad spending, according to the research firm eMarketer.

This year, eMarketer predicts, Facebook will garner nearly 8 percent of the world's digital ad revenue and 22.3 percent of mobile ad revenue, which the firm projects will nearly double globally as people turn increasingly to phones as their primary on-ramp to the Internet.

"If you're just out there fishing for new customers, Facebook is by far the most efficient channel," said Bob Buch, chief executive of SocialWire, a San Francisco company that helps retailers market on Facebook.

One long-running concern is whether Facebook users are tiring of the service and turning to other apps. In the U.S., the company's websites and apps account for about 1 out of every 6 minutes that people spend online, according to comScore data.

Facebook said that about 63 percent of its users logged on daily in June, roughly the same as at the end of the first quarter.

Melissa Parrish, vice president and research director at Forrester Research, said Facebook clearly did well last quarter. Her one complaint was that the company was essentially selling display ads and doing little to help marketers capitalize on the social connections of Facebook users. But "I suppose I'm being a bit of a tiger mom," she said. "My kids are getting all A's, and I'd really like to see them get all A-pluses."

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