Facebook Inc. (FB), reporting its first results since selling shares to the public, posted a narrower profit margin as sales and marketing costs surged -- a sign that the company is chasing growth through higher spending.
Operating margin, excluding certain costs, was 43 percent in the second quarter, a decline from 53 percent a year earlier. Second-quarter revenue rose to $1.18 billion, Menlo Park, California-based Facebook said in a statement today. That compares with an average estimate of $1.16 billion, according to data compiled by Bloomberg. Profit excluding certain costs was 12 cents a share. Shares slid in late trading.
Marketing and sales expenses jumped more than fourfold to $392 million. Chief Executive Officer Mark Zuckerberg is spending more to increase the user base, which swelled to 955 million last quarter, and seeks to attract advertisers. The company rolled out its first mobile ads in March and announced plans in June for ads based on Web-browsing history.
“Ultimately, Facebook is just an advertising platform, and so advertisers go where people’s eyeballs are,” said Michael Pachter, an analyst at Wedbush Securities Inc. in Los Angeles. Based on the number of users Facebook has amassed, “they’ve built the third-largest country; it just happens to live on the Internet.”
Facebook reported a net loss of $157 million, or 8 cents per share. Facebook shares slumped to as low as $24 after the results were reported. It had dropped 8.5 percent to $26.85 as of the close in New York.
Today’s earnings report and conference call, scheduled for 5 p.m. New York time, gives management its first chance since May to make a case that Facebook deserves a higher price relative to earnings than about 98 percent of the Standard & Poor’s 500. Shareholders have been seeking assurances that the company can keep users engaged amid rising competition from Twitter Inc. and Google Inc. and that it can overcome challenges making money from advertising on mobile devices.
In the run-up to the mostly highly anticipated earnings release since Google Inc.’s inaugural report in 2004, analysts have been scaling back sales and profit projections. The average sales prediction was cut by 4 percent and the profit estimate dropped by about 10 percent since early June, according to data compiled by Bloomberg.
Chief among concerns is Facebook’s ability to make money from users on handsets. Facebook said in May that sales growth wasn’t keeping pace with user expansion as more members accessed the service with mobile phones. Facebook has had little time to gain traction in mobile advertising, having just announced its inaugural mobile-advertising platform in February.
Zuckerberg, in an interview this month at the Allen & Co. conference in Sun Valley, Idaho, said his hardest job now is figuring out how to adapt Facebook for mobile devices.
Early results on mobile ads show some promise, according to AdParlor, which provides ad services for Facebook marketers. Click-through rates are 15 times higher on mobile than on desktops, while the pricing is 30 percent less, according to AdParlor.
Facebook raised $16 billion in the May 17 IPO, the largest ever for a technology company. Yet its debut on the public market was marred by technical glitches, and the stock only managed to close above $38 on the first day of trading. The company had first proposed a price range of $28 to $35 before raising it to $34 to $38 just days before the IPO.
Facebook derives most of its revenue from advertising that reaches users as they post comments, put up videos or check on photos uploaded to the site by friends. The company also makes money when users pay for digital items on the site, including on games made by Zynga Inc. (ZNGA) Facebook shares were weighed down in earlier trading after Zynga announced yesterday earnings that missed analysts’ estimates.
The company is making progress in some areas, including online display advertising, which includes photos and other graphical elements. Facebook will have 16.8 percent of the U.S. market this year, after grabbing the top spot from Yahoo! Inc. last year, according to EMarketer Inc. in New York. Google will have 16.5 percent, up from 13.8 percent last year and Yahoo’s share will be 9.1 percent, down from 10.8 percent.
Users are also spending more time on the service. Average time spent online increased 5.1 percent to 400.2 minutes, or more than six-and-a-half hours, after a gain of less than 1 percent the previous month in the U.S., according to researcher ComScore Inc. (SCOR)