Facebook Q3 Earnings Feed the Mobile Bulls

Facebook (NASDAQ: FB  ) bears, beware. The bulls are out in force today, sending shares up by as much as 24%, after the social networker put up third-quarter earnings last night, with the company specifically going out of its way to address one of its biggest pain points since going public: mobile.

Total revenue rose 32% to $1.26 billion, but a larger increase in costs drove operating margin down to 30%. Facebook's GAAP net loss was $59 million, or $0.02 per share. On an adjusted basis, the bottom line was $311 million, or $0.12 per share.

Mobile money
The company attributed 14% of its ad revenue to mobile, which translates into a little over $150 million -- or about 12% of total revenue. Mobile monthly active users, or MAUs, soared 61% over the past year to 604 million, meaning 60% of the total 1 billion MAU base actively use the company's various mobile apps.

Source: SEC filings.

On the conference call, Mark Zuckerberg talked about the company's mobile opportunities at length. Echoing comments he made at TechCrunch Disrupt last month, he said most people misunderstand how beneficial mobile platforms will be for Facebook. It was certainly true at the beginning of the year that Facebook didn't make money on mobile, but that was "because we hadn't started trying yet." He wants to put this fear to rest.

Thanks to the breathtaking rise of smartphone adoption, Facebook can reach more users via its mobile apps. Mobile users are on Facebook more frequently, which in turn will translate into continued improvements in monetization trends.

Zuckerberg had also recently conceded that betting too heavily on HTML5 was Facebook's biggest mistake as a company. During the quarter, Facebook updated its Apple (NASDAQ: AAPL  ) iOS app, rebuilt using its native language for substantial performance improvements. That's translated into an 80% increase in iOS News Feed loads and a 20% boost in iOS engagement, as measured by "likes" and comments. Facebook also found its service integrated directly into iOS and OS X Mountain Lion as it becomes cozier with the Mac maker.

The results are an encouraging start for Facebook's mobile strategy, which is only just beginning. As fellow Fool Eric Bleeker points out, investors should still add a side of skepticism along with the cautious optimism, because the fact of the matter is that its mobile ad platform is so new and one quarter does not a successful business make.

Especially when you're talking about transitioning from the tried-and-true display ad business where Google (NASDAQ: GOOGL  ) remains king, despite its recent earnings sell-off. After all, Big G's display ad business was healthy.

Zynga pains
Payments and fees revenue rose a modest 13% to $176 million, and Zuckerberg admitted that gaming on Facebook's platform isn't going as well as he had hoped. Zynga (NASDAQ: ZNGA  ) is playing a big part of this, with payments revenue from the game maker declining 20%. Zynga alone was 43% of payments revenue, down from 62% a year ago. This decline in Zynga payments revenue is likely twofold: Zynga continues to actively diversify away from Facebook's platform toward mobile, and it's also simply been having monetization troubles of its own lately.

Zynga's The Ville title on Facebook's platform was launched in June, and Zynga just announced yesterday that it has already decided to axe the game along with a dozen others. Not only was The Ville specifically cited as a factor for its full-year guidance cut, but it's also the subject of a copyright infringement lawsuit from Electronic Arts (NASDAQ: EA  ) . The Ville just seems like it's more trouble than it's worth for everyone involved.

On the bright side for Facebook, the non-Zynga portion of its payments platform jumped 40% from last year, which helped partially offset declines from Zynga.

It's only just begun
Facebook has launched a whole slew of new products aimed at improving monetization, including Custom Audiences, Facebook Exchange, Offers, Promoted Posts, and Gifts. These are all geared toward improving ad quality and targeting for marketers. Ad prices rose 7% thanks to ramping up ads in the News Feed.

Overall, this was a solid quarter and a sign that Facebook truly can monetize mobile usage of its popular service. Mobile revenue going from nil to 14% of ad sales in just over six months is quite an accomplishment, and this is just the beginning. That's a double-edged sword, though, since it's an encouraging sign of what the future may hold, but this is still uncharted mobile water -- with plenty of risks.


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