Facebook posts big gains, but worries lie ahead

The social media site reports a strong quarter but raises concerns about future advertising and teens' engagement.

By MSN Money Partner Oct 31, 2013 3:26PM
Facebook logo (© Daniel Acker/Bloomberg via Getty Images)By Reed Albergotti, The Wall Street Journal

Facebook (FB) spooked investors with warnings that it may be nearing the limits of one of its most important areas of revenue growth.

After reporting strong third-quarter financial results Wednesday, Facebook executives told analysts that they may not be able to cram any more ads into users' news feeds and that U.S. teens are spending less time on the site.


Chief financial officer David Ebersman said Facebook doesn't expect to "significantly increase" the share of ads in a user's news feed from what it is now. The inclusion of ads into those feeds, last year, helped propel a big increase in Facebook revenue. Instead, Facebook will rely on improving the quality and relevance of the ads to drive up prices, he said.


Ebersman also said the number of U.S. teens using Facebook daily declined from the previous quarter. He called the decline "of questionable statistical significance" and said it is hard to measure the number of teen users on the network because their self-reported ages are unreliable.


Those worrisome signs overshadowed a better-than-expected earnings report that showed the company swinging to a profit on a 60% jump in revenue, topping $2 billion for the first time.


Mobile advertising, once a big question mark for Facebook, was a big contributor to the better-than-expected results. Facebook said 49% of its advertising revenue -- or roughly $881 million -- came from mobile devices, up from 14% of revenue a year earlier. Overall advertising revenue jumped 66%.


Facebook shares, which initially rose as much as 15% in after-hours trading, later lost those gains as Facebook executives discussed the results with analysts and investors. The shares fell about 1.6% from a 4 p.m. closing price of $49.01.


Debra Aho Williamson, an analyst for eMarketer, said the potential limit on ads in news feeds was meaningful. "They're still grappling with just how many ads they can display to users without irritating them," she said.


One area of potential growth is video advertising, which Facebook has yet to implement. But chief executive Mark Zuckerberg said a move to start showing those ads in the feeds remains stalled as the company is careful not to annoy its 1.2 billion members.


Facebook's mobile advertising business has been something of a drama over the past year. Investors soured on Facebook after its May 2012 initial public offering, in part over doubts about whether users and advertisers would stick with the social network as they spent more time on mobile devices.


Facebook silenced its critics in July when it announced a big surge in mobile ads in the second quarter. Its shares roughly doubled from late July to earlier this month. Wednesday's results were even stronger for Facebook's mobile business.


"The numbers tell us there is growing demand in the ad community for their mobile platform," said Anthony Wible of Janney Montgomery Scott.


Some analysts remained skeptical, noting that Facebook has discretion in where it places some ads, and can push them toward mobile. Facebook declined to comment on the issue.


In all, Facebook reported net income of $425 million, or 17 cents a share, versus a loss of $59 million, or two cents a share, a year ago.


Facebook also has been bolstering its ability to track users offline so that it can show advertisers that clicks lead to purchases. "The big knock on Facebook up until the second quarter was that it was unclear what the return for brand advertisers was," said Ron Josey, an analyst with JMP Securities. Josey said the thinks Facebook has largely resolved those doubts.


The result: The amount of money Facebook is generating from each user is growing at an accelerating rate, even as the user base expands.


Facebook generated an average of $1.72 from each of its users in the third quarter, up from $1.60 in the second quarter, and $1.29 in the third quarter of 2012.


Facebook's monthly active users grew to 1.19 billion, from 1.16 billion three months earlier. Another measure, daily active users, or people who use the product every day, also grew to 728 million in the third quarter, up from 699 in the previous quarter.


Analysts said the daily active user numbers and other so-called "engagement measures" will become more important if feed advertising reaches a ceiling. The longer people stay on Facebook, the more potential advertising inventory they create.


Zuckerberg said he wants Facebook to shift from a "push-based" service, where users view content that is directed at them, to a "pull-based" service, where people can search Facebook's user-generated information much like they search the Internet using Google (GOOG).


When one analyst asked about when Facebook will launch its much-anticipated video advertising, Zuckerberg didn't provide a date but said the company is careful not to annoy its members.


"We're trying to take our time to make sure that we do this in a very positive way, and I'm pretty confident that we will," he said. "But that's why you're seeing us take the process that we've had on this."


In August, The Wall Street Journal reported that Facebook planned to launch a video-ad service that would show members 15-second-or-less clips on both smartphones and the Web.


These ads are potentially lucrative, commanding as much as $2 million per day, ad executives familiar with the ads have said. Some advertisers anticipated a summer rollout, but Facebook has pushed back the rollout.


Chief operating officer Sheryl Sandberg said Facebook, in essence, already has video ads. "Anyone can embed video in page posts, and we're actually seeing very good results in particular around entertainment and media," she said.


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