Facebook Reports $1.18 Billion Revenue, Mobile Progress

In its first earnings report as a public company, Facebook was able to boast that revenues are up and its new "sponsored story" ad product is delivering good results and the promise of a mobile advertising strategy for the future.

Facebook reported $1.18 billion in revenue in the second quarter, up 32% from the same quarter last year. Revenue from advertising was $992 million, representing 84% of total revenue and a 28% increase from the same quarter last year.

In Generally Accepted Accounting Principles (GAAP) terms, Facebook lost $157 million for the quarter, compared to net income of $240 million for the second quarter of 2011. However, this largely reflects share-based compensation and related payroll tax effects. With those factored out, Facebook's non-GAAP accounting puts net income at $295 million or $0.12 per share, compared to $285 million and $0.12 per share for the same quarter in the prior year.

Following a rocky IPO, Facebook is moving on to addressing questions about its advertising ad revenue model. While the Facebook user base continues to grow, now topping 955 million monthly active users, revenue is not growing quite as fast, partly because a greater percentage of those users are accessing the service over mobile devices, and mobile traffic has so far proven difficult to translate into advertising dollars.

Despite that, mobile represents "a huge opportunity for Facebook," CEO Mark Zuckerberg said. "We want to connect everybody in the world. We also think people are inherently social and having a device with you wherever you are creates more opportunities." Mobile users are more active Facebook users than those who visit over the website only, and Facebook will reap some of the value of those visits in the long run, he said.

The first encouraging sign of that is Facebook's success with sponsored stories, which are ordinary Facebook news feed posts that an advertiser pays to highlight, such as a favorable product review or mention. By boosting a post's placement in the news feed, Facebook makes it more likely that the friends and contacts will see it than if it were subject to the whims of the regular story ranking algorithm. A restaurant recommendation you see from a friend will be more powerful than any marketing message the restaurant could craft, Zuckerberg said, and this form of advertising is relevant to mobile because the news feed is the main thing people interact with when they access Facebook from their phones.

Other advertising messages that might appear in the margin of the screen when Facebook is viewed on the Web typically aren't displayed at all on a phone screen.

"Social ads in news feeds give us a strong path to building advertising on mobile," Zuckerberg said.

Zuckerberg also took a moment to emphasize how his company's mission stretches beyond facebook.com to enabling social experiences in all sorts of environments, such as music players like Spotify. "Our vision for our platform is bigger than what most people perceive," he said, meaning that it's more than just games embedded in Facebook but also includes Open Graph interactivity embedded in other websites. Some day, you might sit down in your car and have it give you recommendations about where to eat or where to shop based on your Facebook preferences and behavior, he said.

Before the call, The Wall Street Journal's David Benoit blogged that one of the things he was curious about was whether Zuckerberg would take an active role in leading the earnings call, or delegate to chief operating officer Sheryl Sandberg and chief financial officer David Ebersman.

As it turned out, Zuckerberg was not shy, laying out Facebook's grand strategies in an opening statement and answering many of the questions from financial analysts.

When one analyst asked how much Facebook would create integrated experiences, beyond software apps--perhaps an allusion to the rumored coming of a Facebook-branded phone, he said he was certainly interested in working with partners like Apple and with mobile developers to create much better integrated mobile experiences. But he said that would not include "building out a whole phone, which I think wouldn't make much sense for us to do."

Sandberg and Ebersman both reinforced the message about believing in the potential of sponsored story advertisements, although Ebersman repeatedly cautioned that the program was still at an early, experimental stage and he cannot forecast its impact on revenue.

Sandberg said currently fewer than half of the ads on Facebook incorporate any social features, but those that do enjoy a significantly better response, as supported by Nielsen research. That study showed that social ads are 55% more likely to be remembered than Facebook ads without a social component. They enjoy 98% better ad recall than ads on other online platforms, she said.

"Sponsored stories allow marketers to interact with their customers where their customers are spending their time," Sandberg said, and they are particularly relevant to mobile because "the news feed works exactly the same way whether you're on your desktop or on your phone."

Facebook began introducing sponsored stories as an option early this year, and it now also offers advertisers the opportunity to buy mobile-only campaigns. By the end of the second quarter, this product was already bringing in $1 million a day in revenue, according to Sandberg. At the same time, she said Facebook would be cautious about ramping up the frequency with which users are exposed to sponsored stories to preserve the quality of the Facebook experience.

Follow David F. Carr on Twitter @davidfcarr. The BrainYard is @thebyard and facebook.com/thebyard

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