Facebook Delivers Positive Earnings Surprise, Especially From Mobile

Facebook, Inc. (NASDAQ:FB) shares jumped in price after hours yesterday based on better than expected third quarter 2012 financial results. The news about mobile advertising, usually a concern among Facebook skeptics, was especially promising.

In fact Facebook’s press release led off with statements from Facebook CEO and Founder Mark Zuckerberg such as “As proud as I am that a billion people use Facebook each month, I’m also really happy that over 600 million people now share and connect on Facebook every month using mobile devices” and “People who use our mobile products are more engaged, and we believe we can increase engagement even further”.

Reported monthly active users were 1.01 billion as of September 30, 2012, an increase of 26% year-over-year . Of this, mobile monthly active users were 604 million – an increase of 61%.

Mobile generated 14% of all advertising revenue during the third quarter. Although revenue from mobile has not been disclosed separately before, the total dollars generated from mobile ads has almost certainly increased dramatically even compared to the second quarter. This reflects the success of Facebook’s aggressive push into mobile advertising.

Revenue for the third quarter ($1.26 billion) increased 32%, and income from operations was $377 million. Interestingly, the bottom line was a loss of $59 million due to an effective income tax rate of 116%. The culprit was stock-based compensation expense, part of which is not tax deductible. If the stock-based compensation expense and related income taxes were eliminated, the effective tax rate would have been 40%.

For now, Facebook is pleased to tout its third quarter success, especially with mobile. And hopefully the stock price will eventually more than recover from its huge drop since the IPO. Over the near term, there will likely be selling pressure on FB as lock-up agreements on large numbers of shares expire. Longer term, the question is whether the growth in advertising revenue can continue. This is especially true in mobile where the number of ads displayed on relatively small screens may already be detracting from the user experience.

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