Facebook Plays The Long Game As Revenue Climbs While Profits Fall

Facebook is doing a bit of empire building - and that ain't cheap. In the fourth quarter of 2012, Facebook profits fell sharply even as revenue continued to grow.

In the fourth quarter, Facebook reported $1.59 billion in revenue, up 40% from the previous year and topping Wall Street estimates that revenue would rise to $1.52 billion, a 34% increase. But in spite of that growth, Facebook's profits shrank by 79% as the company significantly increased its spending.

Delivering on the promise of agressively monetizing its mobile efforts, 23% of total ad revenue came from Facebook's mobile apps in the fourth quarter. The company rounded out the year with $1.33 billion coming from ads.

"2012 was a big year for us," said Mark Zuckerberg, Facebook founder and CEO on Wednesday's earnings call with analysts and journalists. "There are now more people using Facebook on mobile every day than on desktop"

Growth In Spending To Continue

Zuckerberg noted that Facebook will continue to hire aggressively and build out its products, projecting its expenses to increase by 50% as it invests in a variety of near-term projects: 

Highlights Of Facebook's Q4 2012 Results

  • At the end of 2012, Facebook grew to 1.06 billion monthly active users (MAUs)
  • On average, Facebook had 618 million daily active users in December 2012
  • Fourth quarter costs and expenses were $1.06 billion, an increase of 82% from the fourth quarter of 2011. 
  • 680 million people accessed Facebook from mobile devices in December 2012
  • On New Year's Day, 600 million people uploaded photos to Facebook
  • Facebook ended 2012 with 4,600 employees
  • Revenue from user-promoted posts and Gifts is "very small" and isn't expected to grow dramatically
  • In December 2012, 59% of users logged into Facebook on an average day 

Apparently investors aren't sure know what to make of Facebook's long-game strategy as it plays catch-up in mobile. In after hours trading, Facebook shares fell around 2.9%. 

Does Facebook Have It Figured Out?

But is Facebook's "trust us" approach really going to end well? Well, given that Facebook went into 2012 essentially inept at mobile, it does seem like things are finally coming together. As smartphone and tablets continue to eclipse the social network's desktop presence, it is slightly ahead of the game - even if it began behind.

Facebook wasted a lot of time building its mobile apps in HTML. It dragged its feet launching an iPad app (no, really... why did that take so long?). But since the company has respectably grown its mobile ad revenue in Q4, Facebook is proving that it knows how to make money where it counts. But it needs to move fast in monetizing that massive mobile captive audience .

Moving Fast On Mobile And Admitting Mistakes

The company was realistic about how its more gimmicky revenue streams like user promoted posts and Gifts weren't drumming up much cash, so it does sound like Zuck's head is on straight. Still, how long will Facebook need to empire build - and pour money into product development and talent - before investors start seeing returns?

The fact that the company is fracturing its own product with some odd spin-off clones remains a bit disconcerting. But Facebook's commitment to building out Nearby, its location check-in feature, could prove huge for mobile revenue, even if it's in the midst of an identity crisis.

Since Facebook basically told us to wait and see, the first quarter of 2013 will be the real crucible here. But Facebook's stock has recovered a good chunk of its value from the rock-bottom levels of mid-2012. Zuckerberg is learning from the company's missteps, like saying the biggest mistake was "betting on HTML5" in his first post-IPO public appearance. By the end of 2012, Facebook was iterating fast. 

Considering that Zuckerberg and co. delivered on their Q3 promises and refocused around what counts, Facebook's vision of a sustainable, mobile-driven revenue model sounds like it just might bear fruit.

Image by Taylor Hatmaker