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October 24, 2012

Facebook Delivers Second Earnings Call Since IPO Beats Analyst Estimates by a Whisker

By Tony Rizzo, TMCnet Senior Editor

The last time we covered Facebook’s reported quarterly earnings – which was the first time it did so after launching its IPO, it was not a pretty affair. The company delivered disappointing news, demonstrated a significant lack of insight into both its future business directions and its future revenue streams, failed to deliver any guidance, and caused a great deal of angst within the financial analyst community. We’re now three months down the road and Facebook’s (News - Alert) second ever earnings call is upon us and about to start as we write.

This time around there is a different dynamic in play. First and foremost, much of the initial disappointment that caused the stock to tank three months ago has now been baked into Facebook. We doubt that anything either Zuckerberg or his two key lieutenants – COO Sheryl Sandberg and CFO David Ebersman -- will say during today’s call can possibly disappointment anyone any further. Rather, analysts will begin to look for positive news that the company is going to figure out how to monetize its mobile users and how it can monetize the vast quantities of information it knows about its billion users’ wants, desires, likes and dislikes (with “likes” being the dominant issue).

Google’s (News - Alert) recent and disappointing earnings call has already given Facebook’s shares a small haircut, so we doubt there is any downside coming for Facebook on the share side today. In fact, we are very likely looking at a possibly solid buying scenario as Facebook launches the call. The immediate bottom line is that Facebook's profit and revenue both topped what analysts were expecting. More importantly, it looks like advertising revenue is growing.

CEO Mark Zuckerberg (News - Alert) put in another appearance (and wore a suit and tie), and provided some brief comments. Zuckerberg believes that the financial community does not fully understand the mobile opportunities that Facebook has available to it and that it will be able to tap into at an accelerating rate over the next few years. Zuckerberg believes that the move it made away from HTML5 and back to building native mobile apps has already begun to deliver much better user mobile engagement.

Zuckerberg believes that mobile ads will need to be active and much more like TV ads, that the Web model isn’t the right model. During his opening remarks Zuckerberg sounded both feisty and annoyed that the world is not convinced that Facebook cannot make money through mobility. He believes the case is exactly the opposite – that the real issue is that Facebook simply hasn’t started to really focus on mobility. He claims the same for gaming. Finally, he defended the company’s acquisition of Instagram, essentially for the same reasons – the company is simply in the early stages of moving towards thinking about revenue generation rather than the world’s greatest social networking site.

Sandberg next took the stage to speak to some financial details. Ad revenue is up 36 percent to $1.06 billion compared with a year ago, a much better year-over-year growth than the 26 percent Facebook reported in the second quarter.

Revenue from payments and other fees – dollars Facebook earns as a percentage fee on virtual goods that are offered through Facebook’s social gaming - increased 13 percent to $176 million. That isn’t a particularly hefty number of dollars relative to the revenue Facebook needs to generate to justify even its current valuation. Total revenue comes in at $1.26 billion, a 32 percent increase year over year – which is more or less what Facebook reported for Q2. Revenue growth of course continues to be the greatest concern all investors have had since the IPO and they continue to have. The company noted that total costs and expenses rose 64 percent to $885 million.

For the current quarter Facebook posted a loss of $59 million – or $0.02 per share, a significant but expected drop year over year. Last year the company posted a profit of $227 million -- $0.10 cents per share. Excluding stock-based compensation and other items earnings were $0. 12 cents a share – but this number beats consensus analyst estimates of $0.11 cents a share on revenue of $1.23 billion. That one penny makes all the difference and as we write at approximately 5:40 pm the stock is up almost 10 percent in after hours trading to $21.41 per share (the stock closed at $19.50 at the market’s close).

Facebook notes that 14 percent of advertising revenue came from mobile devices, a paltry number of dollars overall, especially considering the hot dynamics of the mobile market. But as noted earlier, Zuckerberg merely claims this is a case of Facebook not yet having ramped up its mobile plans. Clearly that is the case – though whether it’s a case of not having yet ramped up or not yet having been able to figure out how to earn those mobile dollars remains to be seen.

As the world already knows, Facebook hit one billion subscribers early this month, representing 26 percent growth year over year. Total subscribers as of the time of the earnings call are now 1.01 billion users. The far more important measure – the number of active users – did rise 28 percent to 584 million users. The number of active mobile users was 604 million, up a significant 61 percent.

Facebook appears to have provided some measure of stabilization – there is no sense of the great angst expressed during the last quarter. Of course Zuckerberg may be annoyed that the financial community hasn’t yet figured out how big mobile and Instagram will be for Facebook, but neither Zuckerberg, Ebersman or Sandberg provided any more real insight on revenue generation than they did the last time around.

Our sense of it, given the many potential opportunities Facebook has in hand – and regardless of how vague the management team continues to be about tapping into those opportunities – Facebook strikes us as a buy opportunity at this point in time. That the stock took a Google-based hit and that the stock has rallied today suggests that the investment world may be coming around to at least believing that Facebook is likely to prove itself a viable company with viable revenue streams.

This will no doubt prove to be the case over time. Facebook is a long term opportunity; it is not going to be a rapid turn-around company or stock. We certainly hope that the next quarter’s call demonstrates some real clarity on Facebook’s ability to monetize the opportunities ahead of it, especially on the mobile front. We’re particularly interested in the ad platform Facebook recently announced, and believe this holds a great deal of opportunity outside of mobility.

The bottom line today is that the current earnings call numbers at least demonstrate a more stable Facebook than we saw three months ago. Facebook is well worth watching.

Edited by Rich Steeves
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