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Facebook Sales Beat Forecasts, but Expenses Increase Even Faster

Facebook Sales Beat Forecasts, but Expenses Increase Even Faster

By Vindu Goel, The New York Times | Updated: 29 January 2015 09:49 IST

When Mark Zuckerberg warned investors three months ago that Facebook's expenses were going to rise sharply, he really meant it.

The company reported Wednesday that revenue increased 49 percent in the fourth quarter compared to the previous year, exceeding Wall Street's expectations. But expenses rose even faster, up 87 percent from the same quarter a year ago, driven in part by a huge increase in stock payouts to employees.

"We're very pleased with the growth of our business," Zuckerberg, Facebook's chief executive, said in a conference call with investors to discuss the results.

The social network, which makes most of its money by including advertising in the news feeds of its users, said about 69 percent of its advertising revenue came from mobile devices, which have become the most common way people tap into the service. Facebook reported that it had 1.39 billion monthly users worldwide in December, up 3.2 percent from September.

"It's a little bit of same old, same old," said Debra Aho Williamson, an analyst with the research firm eMarketer, who has followed the company for years. "They continue to make mobile a bigger part of their business."

Facebook said that it had revenue of $3.85 billion in the fourth quarter, compared to $2.59 billion a year ago. Net income was $701 million, or 25 cents a share, up from $523 million, or 20 cents a share, in the previous fourth quarter.

After excluding certain expenses, the company's profit was 54 cents a share. On that adjusted basis, Wall Street had expected the company to earn 49 cents a share on revenue of $3.77 billion.

Facebook's share price was down about 2 percent in after-hours trading after the results were announced. The stock is up more than 40 percent over the last year.

Although Facebook does not charge its users for its services, the company still manages to make a great deal of money from them by selling advertising targeted to each person's habits and interests.

The company said it brought in an average of $9 in revenue per American and Canadian user during the quarter. European and Asian users are much less lucrative, while newer areas of focus for the company, like Africa, bring in virtually no revenue. Overall, the average Facebook user was worth $2.81 to the company in the quarter.

Video, which Facebook began highlighting last summer, was particularly strong in the quarter, the company said, with users viewing 3 billion videos a day.

"In just one year, the number of video posts per person grew 75 percent globally," said Sheryl Sandberg, Facebook's chief operating officer, during the investor call.

Williamson said that the video numbers, while impressive, were subject to manipulation, since Facebook announced last year that it would give higher priority to video when deciding what to show people in their news feeds. "If Facebook wants there to be more video on the platform, they can just tweak the algorithm to show more video," she said.

Still, Jan Rezab, chief executive of Socialbakers, a social media analytics company, said companies were posting far more video on Facebook and were putting it directly on the platform instead of using links to Google's YouTube service. That tends to speed up the playback and encourages viewing when companies pay Facebook to show the clips to targeted groups of Facebook users.

Sandberg said the company still anticipated huge opportunities to sell more ads, and was investing heavily in measurement technology to prove to advertisers that the platform delivers results.

At the same time, Facebook is in no rush to make money from the separate services it owns, including Instagram, a photo-sharing service which has 300 million users, and WhatsApp, which has 700 million.

Zuckerberg compared the life stage of those services to the early days of Facebook, when the focus was on getting more people to use the service, not making money.

"It's really important to get this right and not rush it," he said. "The most important thing is to help people and businesses connect, create business opportunities and then you get a small amount of the value that you are creating."

Last quarter, Zuckerberg surprised investors by warning that the company was going to increase its investment in long-term projects that might not generate much revenue, like the virtual reality technology it acquired when it bought Oculus VR and the cellphone-messaging service provided by WhatsApp, a startup that Facebook bought for nearly $22 billion.

Facebook said that expenses in the fourth quarter were $2.72 billion. Although spending on equipment increased, the company also handed out nearly $900 million in stock-related compensation to employees in the quarter, more than triple the amount in the same period in 2013. (Most of the stock expense was related to the purchase of WhatsApp, which closed in October.)

The company also noted that it was feeling the effects of the strong dollar, which will result in 5 percent lower revenue in 2015 compared to what it would have been at 2014's exchange rates.

Robert Peck, a technology stock analyst with SunTrust Robinson Humphrey, said he was pleased to see that Facebook had different potential revenue streams.

"Not only do you have this core business that is growing extremely well, but you have these near-term incremental levers you can point to, like video and Instagram," he said.

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