Live Wrap: Will Facebook’s First-Quarter Earnings Beat the Bears?

Facebook (NASDAQ:FB) closed the regular session down 1.26 percent ahead of its first-quarter earnings on Wednesday. On average, analysts were looking for the social network to post earnings of $0.13 per share on revenue of $1.44 billion. The stock is down more than 11 percent since the end of January, when the company last reported, and is off more than 27 percent since its debut on the Nasdaq in May of 2012.

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Here’s a breakdown of the results. Check back during the call for updates! The stock was up less than 1 percent at 5:00 p.m. in post-market trading.

Mar. 31, 2012 Jun. 30, 2012 Sep. 30, 2012 Dec. 31, 2012 Mar. 31, 2013
Revenue ($) in millions 1,058 1,184 1,262 1,585 1,458
GAAP Diluted EPS ($) 0.09 (0.08) (0.02) 0.03 0.09
Non-GAAP Diluted EPS ($) 0.12 0.12 0.12 0.17 0.12

Mobile advertising revenue accounted for “approximately 30 percent” of total advertising revenue. This is up from 23 percent of total ad revenue in the fourth quarter.

 

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More highlights:

Daily active users increased 26 percent on the year to 665 million, monthly active users increased 23 percent to 1.11 billion, and mobile monthly active users increased 54 percent to 751 million.

Revenue from advertising was $1.25 billion, representing 85 percent of total revenue and a 43 percent jump year over year. Mobile advertising revenue accounted for “approximately 30 percent” of total advertising revenue. This is up from 23 percent of total ad revenue in the fourth quarter.

Average revenue per user increased 11.5 percent on the year to $1.35. GAAP operating margin declined sequentially from 33 percent to 26 percent. Non-GAAP operating margin declined from 46 percent to 39 percent sequentially, and is also down from 43 percent in the year-ago period.

Facebook announced that Chief Accounting Officer David Spillane is leaving the company. He will be replaced by Jas Athwal, the company’s corporate controller for revenue.

Recent Business Highlights (as outlined by Facebook)

  • Launched Facebook Home, a mobile experience for Android that puts people before apps and makes the phone a more social experience.
  • Instagram reached 100 million monthly active users in the first quarter of 2013.
  • Launched new advertising products such as Lookalike Audiences, Managed Custom Audiences, and Partner Categories, which help marketers improve their targeting capabilities on Facebook.
  • Continue to invest in our ad serving and measurement platforms:
    • Partnered with Datalogix, Epsilon, Acxiom, and BlueKai to enable marketers to incorporate off-Facebook purchasing data in order to deliver more relevant ads to users.
    • Enhanced ability to measure advertiser ROI on digital media across the internet through our acquisition of the Atlas Advertising Suite.
  • Appointed Susan D. Desmond-Hellmann, M.D., M.P.H., chancellor of the University of California, San Francisco (UCSF), to the company’s board of directors.

From the conference call:

Commentary from the earnings call:

Q: What’s your biggest hurdle with big marketers?

A: There are lots of types of big marketers. The thing about brand advertisers is that they got very used to TV and search, and we are a third thing. So we have to win those people client by client. Emphasis on the fact that all of the Adage 100 is using Facebook.

Q: There’s an urban myth that those under 25 are disengaging… is that true? Also, how well does mobile stack up to desktop?

A: We remain pleased with the high level of engagement. People under 25, we continue to have really high penetration rate in the U.S. and globally. The urban myth you referenced comes from surveys, which we take seriously, but our sense is that the concern is from the assumption is that this is a zero-sum game, which we don’t really believe.

I think it’s fair to say that News Feed ads perform really well on both mobile and desktop.

5:45 p.m.: Q: Any thoughts on the evolution of the platform? Any updates on Graph Search?

A: With the exception of Zynga, whose growth hasn’t been as awesome as everyone has hoped, the rest of the community is quite healthy. It’s a pretty diverse group.

We really want to be a source that developers can come to for distribution. People have always had good tools to do that organically, but recently the app install has shown some real traction.

Graph Search — we knew that in order to get it really good, we needed real-world data. We’re getting it to a state where we’re really happy with it before we roll it out to everyone. That could happen in the coming months.

Q: Any revenue guidelines? Will we see another inflection point in growth?

A: I think we’re still in the really early days of what we’re doing, particularly in mobile.

Q: On ad formats: Do you think you’ve optimized the ad formats yet, or is there more to do? Any business update on Instagram? Any thoughts on monetization?

A: I think there’s a lot of room to improve our ads. I don’t know if that means a different format, but it definitely means better quality. The content of the ad needs to be as good as the content they would see from a friend. Targeting will be where there is the most change in the short term.

Instagram is “really doing well.” Zuckerberg is excited about the business opportunity for Instagram — it is generating a lot of engagement.

Q: How can other geographies step up to become a more meaningful portion of sales and revenue? Did you meet your objectives in terms of hiring and expenses?

A: We have a really good competitive advantage, which is that people all around the world use Facebook. This means that a person, who also owns a small business, can competently use Facebook as an advertising platform without having to learn something new or complicated. This creates a low barrier of entry.

In terms of hiring, “I think we’re doing well.” Same with building out infrastructure.

5:35 p.m.: Q: What opportunities do you see when you think about tomorrow? (Specifically, is mobile “thinking about today and not tomorrow”?) And are there other ad formats that you are thinking about that are complimentary to engagement?

A: The trend in different form factors just means that people are sharing more in different ways. People want to stay connected. They are going to use whatever technology they have to enable that. (Zuckerberg mentions glasses!)

Tablets are growing very quickly, Zuckerberg thinks they will be important. The News Feed seems to be where the conversation is centered. Putting advertisements where the content is is key.

Our strategy isn’t to have a ton of different ad units.

5:30 p.m.: Q: Engagement was up, can you talk about what was driving it?

Geography: Can you talk about the difference between sell-through rate in the U.S. versus some of the international markets?

A: In terms of growth in engagement, you can see that it was strong in most parts of the world. Mobile is clearly a big part of that equation (again, mobile use is growing faster than overall use).

5:25 p.m.: Line is open for questions!

Q: “I was wondering if you could share with us the other mobile monetization initiatives that you are most excited about for 2013?”

“How have CPMs trended on a year over year basis?”

A: We are focused on increasing the quality of the experience for our users and advertisers. Sandberg mentions Custom Audiences.

Zuckerberg emphasis quality. What will drive the business over the long time is producing high-quality ads and delivering them to the right people, at the right time. News Feed redesign is mentioned — advertising content will be displayed in the same way that user content will be displayed.

5:20 p.m.: CFO is on the line. Time to justify the investment!

“We believe the aggregate ad revenue number is the most important metric of demand.”

Payments from games increased, even as Facebook distanced itself from Zynga (NASDAQ:ZNGA).

5:15 p.m.: Sandberg addresses the different between “clicks” and more holistic advertising metrics. This is where Facebook is trying to bridge online and offline data to gain better insight into consumer behavior.

When measured holistically, Sandberg points out, cost per acquisition costs 68 percent less on Facebook.

Sandberg also addresses how much Facebook has invested in order to maintain a high level of innovation. She highlights the success of Custom Audiences.

5:10 p.m.: Sheryl Sandberg is on the line to go over financials. (Check out the deck below.)

Sandberg highlights some individual successes that companies have had using Facebook as a marketing/advertising platform. Here, the emphasis is on working with these businesses to understand would-be customers.

Sandberg highlights that Budweiser managed to get a six times return on ad spend in a recent campaign.

5:08 p.m.: “I want to talk about monetization.” (So do we!) Zuckerberg suggests that monetization will be the result of Facebook providing good content. If Facebook is a recommendation engine (and, in many ways, it is) then its value proposition is based on how good its recommendations are.

Its ability to make good recommendations will be a function of how well it can leverage user data, a subject that Zuckerberg doesn’t directly touch on.

Zuckerberg says: “I want to be clear up front that we’re making these big investments because we think they are important things to build on.” R&D expenses are up 91.5 percent on the year.

5:05 p.m.: Zuckerberg says he is proud of Instagram, which has a community that is growing faster than Facebook’s (23 percent MAU growth on the year). From here, he slides into Facebook’s integration with the app ecosystem on both iOS and Android. “We’re starting to see real revenue through mobile app installs.”

5:00 p.m.: Welcome to the Facebook first-quarter 2013 conference call! Management remarks (script reading) begin with CEO Mark Zuckerberg on the line. He is here to emphasis the importance of the Facebook community, and the company’s stewardship of that community.

Facebook home is the first product to be addressed. “We know that on average people spend more than 20 percent of their time on Facebook apps.” Zuckerberg indicates that, exactly like the name implies, Facebook Home is meant to be the ‘landing page’ for hardcore users. No comments on low ratings from the Play Store.

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