Facebook’s mobile ad push takes toll on profit

SAN FRANCISCO — The good news for investors: Facebook Inc. is quickly figuring out how to make money from ads on mobile devices.

The bad news: It hasn’t come cheap.

Advertising on mobile devices accounted for about 23%, or $306 million, of ad revenue in the fourth quarter, the Menlo Park, Calif., company said Wednesday. That was up from 14% in the third quarter, the first time Facebook broke out mobile advertising.

“We started off the year with no ads on mobile, and we ended with 23% of ad revenue coming from mobile in the fourth quarter,” Facebook Chief Executive Mark Zuckerberg told analysts during a conference call to discuss fourth-quarter financial results. “The numbers turned out even better than we thought.”

But the focus on mobile took a toll on margins. Fourth-quarter profit plunged 79% to $64 million as the giant social network’s financial results were dragged down by higher costs.

Wedbush Securities analyst Michael Pachter said investors are worried that runaway expenses are outpacing revenue growth. The company’s costs, excluding employee stock compensation, soared 67% to $849 million from a year earlier.

“I see nothing bad in this report,” Pachter said. “If there is any one thing that may cause heartburn, it’s the level of spending.”

And that spending will continue in 2013. Zuckerberg said Facebook would not seek to “maximize profits” and would instead heavily invest in mobile and other businesses such as search.

Eight months after Facebook’s overhyped initial public stock offering fell flat, Facebook’s relationship with Wall Street is still complicated. There’s a stubborn sense on Wall Street that Facebook could be doing more to milk revenue from its users on mobile devices, analysts said.

Signs that mobile ads were starting to gain traction have pushed up Facebook shares, which reached rock bottom in early September. As of Wednesday’s close of $31.24, up 45 cents, the stock had surged 42% over the last three months but still remains well below its IPO price of $38.

Wall Street has been critical of Facebook for being too slow to zero in on mobile. Mobile ads have become increasingly important as more Facebook users check their News Feed on their smartphones and tablets rather than on personal computers.

Still, Facebook approached ads on mobile devices with caution. The company did not want to alienate users who are more interested in catching up with friends than having their News Feed overrun with ads for products and services.

Zuckerberg said Facebook’s approach is paying off. The company is reaching more people, keeping them more engaged on the service and making more money from each minute people spend there. Facebook’s monthly active users grew 25% to 1.06 billion accounts. About 680 million of those users accessed Facebook on a mobile device each month, a jump of 57%.

And, in the fourth quarter, ads on mobile devices drove advertising growth. Ad revenue from personal computers grew only 10% in the quarter.

Zuckerberg pledged Facebook would design new formats that deliver even more targeted and relevant ads in people’s News Feeds.

Facebook is concentrating on News Feed because it’s the hub of activity. It has become the most natural and effective place to reach Facebook users on mobile devices and on the desktop, Facebook Chief Operating Officer Sheryl Sandberg said. She noted that 65% of Facebook’s advertisers are now placing ads in News Feed on mobile devices and on personal computers, up from 50% in the third quarter. Wal-Mart Stores Inc. delivered 50 million mobile ads over the Thanksgiving weekend to existing and potential customers, Sandberg said.

“We still have a lot of opportunity there [in mobile advertising],” Facebook’s chief financial officer, David Ebersman, said.

Revenue rose 40% to nearly $1.6 billion in the fourth quarter, above analyst estimates. Facebook said it earned $64 million, or 3 cents a share, compared with $302 million, or 14 cents a share, a year earlier.

“I don’t think any investors are going to unfriend Facebook for these numbers,” said Bill Burnham of hedge fund Inductive Capital.

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