Mark Zuckerberg’s push to make Facebook a mobile-first company seems to have paid off. Wednesday’s fourth-quarter earnings revealed that it now makes more than half of its advertising revenues from mobile devices, beating Wall Street’s forecasts and sending its stock up as much as 12 per cent in after-hours trading.
Hannah Kuchler and Tim Bradshaw reported from the earnings call as Zuck and his team talked about the opportunities in personalisation, messaging and artificial intelligence.
Facebook trounced expectations for the third quarter in a row, reporting better than forecast earnings and revenue thanks to strong growth in its mobile advertising business. Mobile ads now contribute 53 per cent of ad revenue, more than double what they contributed for the same quarter in 2012.
Total revenues hit $2.6bn for the quarter, above the consensus estimate of $2.1bn in revenue, and 76 per cent higher than the same quarter in 2012. Earnings per share hit 31 cents for the three months ending in December, better than the average forecast for 27 cents per share, and 82 per cent higher than in the same period the year before.
This time three months ago it was all going equally well for Facebook. Shares jumped in after-hours trading when it reported stellar third-quarter earnings. But all the gains – a whole $16bn – were quickly wiped out during the conference call, when Facebook revealed the number of younger teenagers was falling on the site.
Ever since, Facebook-watchers have debated where the teenagers are and whether it matters if they are bored by the social network.
Some background reading on the kids:
Investors also got angsty last quarter when Facebook’s chief financial officer said the company did not think it could increase the number of adverts in the newsfeed any further. But so far, that doesn’t seem to have damaged revenue growth, up 76 per cent in the fourth quarter year-on-year.
The Facebook call is go. Mark Zuckerberg, CEO, Sheryl Sandberg, COO and David Ebersman, CFO, are all on the line.
Zuck: “If 2012 was the year we turned our core product into a mobile product, 2013 was the year we turned our business into a mobile business.
I expect 2014 will be the year we begin to deliver new and engaging types of mobile experiences.”
Adding 172m monthly active users is like adding a whole small social network in a year. Twitter has 232m users, at the last count.
Now Zuck is talking about his broader goals of
“connecting everyone, understanding the world and building the knowledge economy”.
That means pushing more behind internet.org. He’s also talking about Facebook’s push into standalone apps, trumpeting Facebook Messenger, which has grown 70 per cent in the last three months. (cough Snapchat cough)
Instagram is moving carefully on ads, says Zuck, without providing any numbers.
Facebook is putting a lot of effort into measuring sentiment around its ads, through surveys. In the second half of 2013, sentiment about ads on mobile improved even as volume increased, while desktop remained stable. Click through rates also held steady. That suggests Facebook’s attempt to improve quality is working, says Zuck.
Facebook turns 10 next week. “What is ahead of us is even more exciting,” says Zuck, thanking his team.
Over to Ms Sandberg.
This is not only the first time Facebook crossed the 50 per cent threshold on mobile – it’s also Facebook’s first billion-dollar quarter on mobile, Sandberg says.
And mobile advertising revenue in the fourth quarter was almost the same as the total ad revenue for the same quarter the year before.
Unsurprisingly, Black Friday was the biggest mobile ad revenue day in the quarter, underlining the opportunity for advertisers to reach customers in-store on their mobile phones, she says.
A big new driver for Facebook ads: Mobile app install ads, launched a year ago and mobile app engagement ads last quarter.
“This is working even better than we hoped,” Sandberg says. Recent mobile ad network tests will take some time but are an “interesting area for us to explore”.
Sheryl stressing how Facebook has become a place for small businesses to sell too. Here’s some background on how social media is starting to woo mom ‘n pop stores.
Sheryl says Facebook is now making a “major investment” in data to measure the impact Facebook ads have on in-store sales.
“We are building the first global platform that lets marketers personalise their messages on a global scale – the biggest shift in marketing in generations.”
Improving “understanding of people” is again mentioned as a priority – which is presumably why Facebook was bidding against Google for the recent DeepMind machine-learning service.
Now over to CFO David Ebersman, who is running through the user growth numbers. Instagram has doubled its userbase over the last year.
So far shares are holding up – sitting 9 per cent higher than the close.
Mobile might be great but Ebersman says the number of ad impressions fell as more people used mobile. On the app, there is no “right rail” so fewer places to show ads.
Facebook paid tax at a 54% per cent rate in the fourth quarter – which Ebersman said was because of “inter company payments that occurred in international operations”. Was Facebook bringing money back from abroad?
Headcount increased 37 per cent – crikey. Thank goodness for infrastructural “efficiency investments” like the data centre’s open compute project. “We wouldn’t be able to deliver the profit we have” without them, he says.
Capex is taking a big hike this year, says Ebersman – increasing to $2bn-$2.5bn, driven by new build of Menlo Park HQ, Iowa datacentre and investment plans for Internet.org to increase internet penetration in emerging markets.
Question time. Who is going to ask about the teens?
No guidance for 2014 revenues.
Sandberg is asked more about small and medium-sized businesses. There are 25m SMBs with pages on Facebook – a group it’s hard traditionally to get online. Now the ad products are being simplified, too, converting more to becoming advertisers.
Zuck is talking about building “new and separate experiences”, referencing sharing “links, location, events”.
Over the next few years Facebook wants to build “a handful” of “great new experiences that give people new ways to share”, like Messenger and Instagram. “We’re going to keep on working on this over the next few years.”
Mark was asked about whether users are switching to messaging products and how Facebook can compete with this, especially in Asia where chat apps are crazy popular. He says historically Facebook had been about features like messages but now they are making messenger a stand alone app to give it room to “breathe” and add new features. Repeats stat that 70% more people are using it, but not focused on any particular country, he says.
Mark rebuts suggestion that Facebook wants to be Twitter by stressing public content. Says Facebook wants to be the place for all conversations – from messaging to public, news and TV related content.
Sandberg says that the autoplay video test is “very small” but marketers’ interest is growing. The real key in winning bigger advertisers is measurement -
“going client by client proving we can improve not only people’s happiness or brand affiliation but really ringing the cash register”. Still a lot of work to do with brand marketers, she says, despite progress made last year.
Zuck says Facebook is focused on increasing the quality of ads, not increasing the number of ads. Investing in quality appears to be the watchwords. Ebersman said they are still learning how to provide the best experience. Positive news from 2013 was that ramping up the number of ads did not turn people off Facebook.
Interestingly, I’m pretty sure Ebersman did not say they weren’t going to increase the number in the feed – which he did say last quarter.
Finally someone asks about THE TEENS
“David can talk about teens,” says Zuck, passing the buck.
And David says, not very much. No new data on teens.
They’ve learnt their lesson on that one.
So does that mean the problem hasn’t changed?
Post-teen share update: higher by 12 per cent.
Zuckerberg said graph search will be coming to mobile soon. That means searching Facebook for information other than friends. It is a “three to five year project” which needs a lot of investment in infrastructure.
Zuckerberg thinks folks making news and TV and films are “extremely interesting”.
Unclear if the feeling is mutual, The Social Network notwithstanding.
Zuck is asked about payments. On mobile, he says the natural evolution of payments is moving towards app install ads. “Because a lot of the goods people are buying in games are no marginal costs, developers’ economic incentives are to get more people into their flow to get as many people as they can to buy goods.”
He seems to be suggesting that Facebook’s mobile ads are main way to play the growth of virtual items, rather than taking another slice of developers’ revenues, who are also paying 30 per cent of all in-app payments to operating system makers Apple and Google.
Zuckerberg says thinking about making Facebook groups its own app. But warns that Facebook’s core growth will come from its main app as it is so massive. Any new investment will take years to grow to that size.
Jefferies asks for more on ads on third-party mobile apps, which Sandberg says is a “small test we just started”. No results yet. “We are very excited about the mobile app space in general…. It’s a small, important and growing space. When you look at off Facebook – really early test.”
Sheryl is going out of her way to dial down expectations about this one, which many analysts think could be a huge opportunity for Facebook to take on Google’s Adsense.
So Facebook has added almost $16bn to its market cap since the market closed. It is now worth more than four Twitters or 40 per cent of a Google.
“We don’t have any plans to go into the direct ecommerce market,” says Sandberg. Facebook would rather earn revenue from that market through ads – instead of competing with a really big segment of advertisers.
There should be a drinking game for the number of times Facebook execs say
“in a privacy-safe way”.
Sandberg said Facebook is growing offices globally, especially in Asia this year. She said the company has traditionally been “conservative” abroad, waiting until there is a strong userbase and a developed advertising market in the country. She was in Turkey last week.
Zuck is talking about Facebook’s artificial intelligence unit, instituted last year – and why it wanted to buy DeepMind.
It’s a 5-10-year play to understand “what the stuff that people write on Facebook mean” and transcribing a voice clip in messenger, says Zuck. “These are some pretty big tasks in AI that will need to be researched over time,” he says.
“The real value will be if we can understand the meaning of all the content that people are sharing, we can provide much more relevant experiences in everything we do.”
Talking of long-term roadmaps: The three-year plan is new kinds of sharing. The five-year plan is people using Facebook to solve problems, like graph search. Over 10 years, Internet.org will start to have a meaningful impact on bringing more people online.
That stock price is still up 12 per cent, you’ll notice.
Ebersman said the margins in the fourth quarter – of over 50 per cent – were seasonally strong. But doesn’t sound like it is definitely going to last – he stresses there is a lot of infrastructure to invest in.
More gushing remarks about ad relevance. It’s good apparently.
Zuckerberg is back on his favourite topic of creating ads you like as much as your friends’ pictures. He said a lot of improvement will be “incremental” as more advertisers come into the system, there are more options of what to show users and so they become more relevant. Sandberg said this is a “nice way to end the call” because Facebook is going to be all about personalisation at scale.
And that’s that for that earnings call.