Fri, Feb 01, 2013 - Page 15 News List

Facebook net income plunges amid higher spending

STRATEGY:Facebook’s chief executive said that the firm’s engineers are improving its mobile applications, as it increased investment to grapple with competition

Bloomberg

Facebook Inc reported a plunge in fourth-quarter profit on higher spending, even while it made long-awaited progress luring advertisers eager to reach mobile-device users.

Net income fell 79 percent to US$64 million last quarter as operating expenses jumped 82 percent, Facebook said in a statement on Wednesday.

That outpaced a 40 percent revenue gain to US$1.59 billion and raised concerns that margins will come under pressure.

The stock fell 3.5 percent in late trading after an initial decline of as much as 11 percent as investors weighed near-term lower profit against the prospect of future growth.

Chief executive officer Mark Zuckerberg plans to increase expenses, excluding certain costs, 50 percent this year to hire staff and roll out new tools for advertisers.

That is more than the 33 percent increase projected by Pacific Crest Securities LLC, and it underscores the urgency of capturing a bigger slice of the US$6.97 billion US mobile-ad market.

Done right, the added investment will translate to profit growth, said Adam Schneiberg, a portfolio manager at BTR Capital Management.

‘FORGIVING’

“Wall Street tends to be forgiving of higher spending during high-growth periods when new products are being built,” Schneiberg said. “As long as eyeballs tune in and revenue keeps growing, the Street will believe that at some point the company can flip the switch on profitability.”

Facebook, based in Menlo Park, California, slipped to US$30.16 in after-hours trading on Wednesday.

The shares had advanced 1.5 percent to US$31.24 at the close in New York, leaving them up 76 percent from a record low close on Sept. 4 last year.

COMPETITION

Facebook’s increased investment is designed to help the company grapple with rising competition from larger rivals in the US market for mobile advertising, predicted by EMarketer Inc to surge 82 percent this year.

Google Inc is projected to grab 57 percent of that market, and Facebook will remain a distant No. 2 with 12 percent, EMarketer estimates.

“More mobile revenue means way more spending on the operations of selling ads,” said Brian Wieser, an analyst at Pivotal Research Group LLC, who has a hold rating on the stock. “This is an expensive company to run.”

Mobile contributed 23 percent of total advertising revenue, or about US$306 million, according to Facebook.

That compares with 14 percent in the third quarter.

Analysts at JPMorgan Chase & Co predicted mobile would contribute US$384.2 million, or 27 percent of ad revenue, in the latest quarter.

Facebook’s engineers are making improvements to mobile applications, including those for Google’s Android software, Zuckerberg said on a conference call.

Better mobile services can boost user engagement, he said.

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