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Facebook Earnings Beat; Profit Margin Falls Sharply

Daniel Acker | Bloomberg | Getty Images

Social media giant Facebook reported earnings and revenue that beat expectations on Wednesday but its operating margin fell sharply.

The stock bobbed between positive and negative in after-hours trading following the earnings announcement. (Click here to get the latest quotes for Facebook.)

During the fourth quarter, net income fell sharply to $64 million from $302 million in the year-ago quarter.

Excluding share-based compensation and related payroll tax expenses, and income tax adjustments, Facebook's profit was $426 million, or 17 cents per share, compared to $360 million for the same quarter in the prior year.

Revenue increased to $1.59 billion from the $1.13 billion a year ago it reported in its regulatory filings with the U.S. Securities and Exchange Commission before the company's initial public offering in May 2012.

During the quarter, mobile revenue, a closely watched figure, represented approximately 23 percent of advertising revenue, up from about 14 percent of advertising revenue in the third quarter of 2012.

Facebook's operating margin shrunk to 33 percent on a GAAP basis in the fourth quarter, compared to 48 percent a year ago.

Brian Wieser, an analyst at Pivotal Research Group said that "sticker shock" from higher expenses may have caused the initial stock drop.

"It is really expensive to service mobile advertising," he said. "The fact that 23 percent of ad revenues are coming from mobile means their operating expenses are going to be higher."

On the earnings call, Facebook CEO Mark Zuckerberg said the company made the decision to continue to grow its headcount, which means it will grow headcount faster than revenue. He added that it is not trying to maximize profits this year, but is planning for the long term.

Facebook plans to hire aggressively in 2013 and it will be a year of significant investment, CFO David Ebersman said on the call. As a result, he said they expect expenses to grow by around 50 percent this year.

The company listed Graph Search, a tool it recently released to help users find answers to many kinds of questions, among the products that it wants to invest in aggressively for its long-term business.

But don't expect a Facebook phone anytime soon.

"People keep asking if we're going to build a phone. We're not going to build a phone," Zuckerberg said on the call, adding that it doesn't make sense for Facebook.

Mobile monthly active users of Facebook jumped 57 percent to 680 million as of December 31, 2012. For the first time, the company said its mobile daily active users exceeded web daily active users.

"Mobile revenue was expected to be a little higher," said Aaron Kessler, an analyst at Raymond James. "They were 23 percent of the revenue, we were looking for that to be closer to 25 percent."

Facebook has ramped up its online advertising services in recent months, putting a greater emphasis on mobile ads and introducing capabilities that let marketers target Facebook users based on their Web browsing history.

In recent months, Facebook stock has rebounded, surging more than 75 percent from its all-time lows due in part to increased investor optimism about the company's ability to monetize its mobile user base. Despite the sharp uptick, shares are still trading below the company's IPO price of $38.

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