Smart approach to mobiles paying off
Facebook is reaping the benefits as advertising from mobiles soars, writes Vindu Goel.
If Facebook were a car, it just went from zero to 100km/h in six seconds.
The social networking company said on Wednesday that it had revved up its mobile advertising from virtually nothing a year ago to 41 per cent of its total ad revenue of $US1.6 billion ($1.7 billion) in the second quarter.
"Soon we'll have more revenue on mobile than desktop," said Mark Zuckerberg, Facebook's founder and chief executive.
Facebook's results elated investors, who sent the company's stock up nearly 17 per cent in after-hours trading.
Analysts said the strong performance dissipated concerns that the company could not adapt to the internet environment, in which users are relying more on mobile devices than personal computers to access the web.
Those concerns have dogged the company since its disappointing initial public offering in May last year, in which it sold shares at $US38 and then saw them fall by half.
"One of the biggest overhangs from their IPO is that this company had been blindsided by mobile," said RBC Capital Markets analyst Mark Mahaney. "They caught up. Instead of being behind the curve on mobile, they are ahead of the curve."
The company said it had net income of $US333 million in the second quarter. Excluding compensation expenses, profits were $US488 million, compared with $US295 million in the second quarter a year ago. Revenue soared 53 per cent to $US1.81 billion.
Facebook had particularly strong demand for ads that appear in its users' news feeds, the flow of updates from friends that they see when they log on. About 1 in 20 posts in the news feed is an ad and advertisers cannot seem to get enough of them.
The company expected those ads to continue to grow in the second half, chief financial officer David Ebersman said.
One concern for the future is whether Facebook will annoy its users if it significantly increases the number of ads in news feeds, said Debra Aho Williamson, an analyst with eMarketer. "How many ads will people tolerate?" she asked.
Mr Zuckerberg said Facebook's studies had shown that users were noticing ads more and the company was working to improve the quality and relevance of ads.
Facebook is also studying when and how to introduce video ads, which are expected to command at least several hundred thousand dollars each. Its chief operating officer, Sheryl Sandberg, said video was "tremendously important" for users as well as marketers. Videos made and shared through Facebook's new video feature in Instagram were growing quickly.
The profit results also show how its users are continuing to shift toward mobile phones and tablets. Although the total number of active monthly users worldwide grew slightly from the first quarter, to 1.15 billion, the number of people who use its mobile versions at least once a month grew 9 per cent to 819 million. Total ad revenue, a crucial measure watched by Wall Street, was $US1.6 billion, up 61 per cent from the second quarter of last year. Of total ad revenue, 41 per cent came from mobile, up from 30 per cent in the first quarter.
"I think this shows that all the questions that people might have had in the past about whether Facebook could monetise on mobile devices, they've settled definitively," Ms Williamson said. Users' preference for reading Facebook on the go has created special revenue opportunities, such as ads that prompt users to install mobile apps like games. But advertisers are generally willing to pay much less for a mobile ad than they are for the desktop.
The company's sharp revenue growth reflects increased competition among advertisers to reach Facebook's large user base, said Rob Jewell, chief executive of Spruce Media, a firm that helps advertisers buy ads on the social network and measure their effectiveness.
Facebook's ad rates are set through a bidding process, and Mr Jewell said his clients paid about 10 per cent more on average for ads in the second quarter than in the first. Ads in the news feed, both on the desktop and mobile versions of Facebook, were in high demand, with rates up about 75 per cent from the first quarter for both categories, he said.
"Facebook is the best channel for mobile app advertisers to purchase advertising," he said.
Facebook's strong second-quarter earnings contrasted with those of Google, which last week reported disappointing profits in mobile advertising.
While the two companies are not strictly comparable because Facebook is expanding its ads from a smaller base, Ronald Josey, an analyst at JMP Securities, said Facebook was doing well in mobile categories like ads prompting users to install new mobile applications. "This company is becoming more and more of a mobile company."