Facebook rockets 26% as mobile ads crush expectations

Facebook's ad revenue was $1.6 billion, an increase of 61% from a year ago

Facebook shares soared 26% in early trading Thursday, after beating expectations in Wednesday's earnings report.

Analysts seemed especially impressed by Facebook's advertising revenue.

"We believe 2Q marked an inflection point in advertiser demand and ad quality for Facebook, enabling the company to increase inventory while simultaneously realizing higher pricing. This is the first quarter we have seen such strong auction dynamics play out on Facebook’s platform and we believe it can continue as advertiser ROI improves," JP Morgan analyst Doug Anmuth said.

"Our short thesis on Facebook has centered on the tension we saw between user experience and revenue generation as usage of Facebook shifted to mobile.  We expected this challenge to be exacerbated by a splintering of social networking/communication apps by use-case and generations, as well as an increasingly aggressive threat to Facebook’s control of online identity/login by Google," said BTIG analyst Richard Greenfield.

"Even with growth expected to slow in 2014 and 2015, the base is so much higher than we anticipated exiting 2013.  While we are lowering our 2013-2015 desktop ad revenue estimates as usage fades, our mobile numbers have risen dramatically and simply cannot be ignored."

In the earnings report, Facebook posted revenue of $1.181 billion for the quarter, beating Wall Street's estimates of $1.62 billion, and up 53% from $1.18 billion in the second quarter of 2012. Adjusted earnings per share came in at 19 cents in the quarter, higher than the 14 cents a share that analysts had been expecting.

"We've made good progress growing our community, deepening engagement and delivering strong financial results, especially on mobile," CEO Mark Zuckerberg said in a statement in the report. "The work we've done to make mobile the best Facebook experience is showing good results and provides us with a solid foundation for the future."

Advertising revenue was $1.60 billion, or 88% of total revenue. It increased 61% from the same quarter last year. Mobile accounted for 41% of that revenue.

Revenue from payments and fees was $214 million for the second quarter of 2013, an increase of 11% from the same quarter last year.

GAAP net income was $333 million, compared to a net loss of $157 million for the second quarter of 2012, while non-GAAP net income for the quarter was  $488 million, up 65% compared to $295 million for the second quarter of 2012.

Monthly active users (MAUs) were 1.15 billion as of June 30, 2013, an increase of 21% year-over-year, while mobile MAUs were 819 million as of June 30, 2013, an increase of 51% year-over-year.

Daily active users (DAUs) were 699 million on average for June 2013, an increase of 27% year-over-year, while mobile DAUs were 469 million on average for June 2013.

Conference call remarks

After the release of the numbers, Zuckerberg got onto a conference call with investors to go over the quarter and to lay out his plans for the future of the company.

“We made some really good progress this quarter with the growth and engagement of our community, the release of new products like Instagram video and advertising growth, especially on mobile,” Zuckerberg said.

“When it comes to mobile I’m very pleased with the results.”

The company, he noted, now has more daily active users on mobile than on desktop, with nearly half a billion people using Facebook on their phones every single day. And soon mobile revenue will outpace desktop revenue as well.

So, what’s next for Facebook now that it has connected over a billion people? Zuckerberg outlined three goals he now has for the company:

1. Connect everyone, which is about connecting “the next five billion people” he said, not just those in developed countries and people who have smartphones.
2. Understand the world, which mean helping people share more than just data, but “building up long-term knowledge about the world, like what people are interested in, which restaurants are good, which hotels their friends have stayed at, and so on.”
3. Help build the knowledge economy, which means helping people build companies using information, including those gleamed from advertising tools.

While noting how happy he was that time spent on Facebook is still increasing, Zuckerberg also hit back on another narrative that has begun to form: that teens in the U.S. are losing interest in the network.

“This is difficult to measure perfectly since some young people lie about their age, but based on the best data we have, we believe we have fully penetrated the U.S. teen demographic for a while and the number of teens using Facebook on both a daily, and monthly, basis, has been steady over the past year and half.”

At the end of his comment, Zuckerberg made a note that it has now been a year since the company went public.

“This quarter marks the end of our first year as a public company, and I think we’ve created a good foundation for the future.”

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