Facebook profit declines 79 percent on spending to lure advertisers

, Bloomberg

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Mark Zuckerberg

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 $64 million last quarter as operating expenses jumped 82 percent, Facebook said Wednesday. That outpaced a 40 percent revenue gain to $1.59 billion and raised concerns that margins will come under pressure. The stock fell as much as 8 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's more than the 33 percent increase projected by Pacific Crest Securities, and it underscores the urgency of capturing a bigger slice of the $6.97 billion U.S. mobile-ad market. Done right, the added investment will translate to profit growth, said Adam Schneiberg, a portfolio manager at BTR Capital Management.

"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."

Through Wednesday, Facebook's stock had climbed 76 percent from a record low close on Sept. 4.

Mobile-Ad Push

Facebook's increased investment is designed to help the company grapple with rising competition from larger rivals in the U.S. 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, who today upgraded his rating on the stock to buy from hold and raised his prise estimate to $36 from $30. "This is an expensive company to run."

Mobile contributed 23 percent of total advertising revenue, or about $306 million, according to Facebook. That compares with 14 percent in the third quarter. Analysts at JPMorgan Chase & Co. predicted mobile would contribute $384.2 million, or 27 percent of ad revenue, in the latest quarter.

'Big Transition'

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.

"We made this big transition, where now there are more people using Facebook on mobile every day than on desktop," Zuckerberg said. "More people are starting to understand that mobile is a great opportunity for us."

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