Net income fell 79 per cent to $64 million last quarter as operating expenses jumped 82 per cent, Facebook said yesterday. That outpaced a 40 per cent revenue gain to $1.59 billion and raised concerns that margins will come under pressure. The stock fell 2.8 per cent in German trading, paring a drop of as much as 11 per cent in late US trading 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 per cent this year to hire staff and roll out new tools for advertisers. That’s more than the 33 per cent increase projected by Pacific Crest Securities LLC, and it underscores the urgency of capturing a bigger slice of the $6.97 billion US 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.”
Facebook, based in Menlo Park, California, slipped to the equivalent of $30.30 in German trading at 9:53 am Frankfurt time. The shares had advanced 1.5 per cent to $31.24 at the close in New York, leaving them up 76 per cent from a record low close on September 4.
Facebook’s increased investment is designed to help the company grapple with rising competition from larger rivals in the US market for mobile advertising, predicted by EMarketer Inc. to surge 82 per cent this year.
Google Inc is projected to grab 57 per cent of that market, and Facebook will remain a distant No. 2 with 12 per cent, EMarketer estimates.
“More mobile revenue means way more spending on the operations of selling ads,” said Brian Wieser, an analyst at Pivotal Research Group LLC, who has a hold rating on the stock. “This is an expensive company to run.”
Mobile contributed 23 per cent of total advertising revenue, or about $306 million, according to Facebook. That compares with 14 per cent in the third quarter. Analysts at JPMorgan Chase & Co predicted mobile would contribute $384.2 million, or 27 per cent of ad revenue, in the latest quarter.
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.”
Profit excluding some items was 17 cents a share. That compares with analysts’ prediction for 15 cents. Analysts had projected $45.8 million in profit on sales of $1.52 billion, according to data compiled by Bloomberg.
Facebook is investing in new products to attract users and keep them on the site longer. Earlier this month, the company announced a revamp of its search service that lets members find information on people, places, photos and interests. The company also has upgraded its mobile applications with new versions for phones running Google’s Android software and Apple Inc. (AAPL)’s iPhone.
“We’re investing heavily because we see big opportunities ahead for the company,” David Ebersman, Facebook’s chief financial officer, said in an interview. “So, we’re trying to invest to build the most valuable company we can for the long term and to really invest in areas that can drive engagement.”
Zuckerberg also said that he expects to hire aggressively, causing expenses to grow at a faster rate than sales in 2013. The company had 4,619 employees at the end of last year, according to data compiled by Bloomberg.
Facebook’s fourth-quarter operating margin declined to 33 percent from 48 percent a year earlier, while costs rose to $1.06 billion from $583 million.
Facebook reached 1.06 billion users during the fourth quarter, up from 1.01 billion in the third quarter. The number of mobile users was 680 million, up from 604 million in the third quarter.
Analysts had been pushing up ratings amid growing optimism for accelerated revenue growth. The proportion of analysts covering Facebook with a buy rating has risen to 65 percent from 52 percent on Oct. 23, when Facebook posted third-quarter sales that beat estimates, according to data compiled by Bloomberg.
“A lot of these products are pretty new,” said Scott Kessler, an analyst at S&P Capital IQ, who rates the stock a hold. “It’s just going to take some time.”