Investors and analysts alike have been contemplating the real story behind Facebook's (NASDAQ: FB ) latest exorbitant acquisitions and how the company plans to make them profitable for the long term. Last week, Facebook held its first-quarter earnings conference call, and the company's leadership not only helped provide clarity about the vision behind the acquisitions, but also outlined how it plans to remain relevant for users and advertisers.
CEO Mark Zuckerberg emphasized that when Facebook pays such high prices for developing companies, it isn't focused as much on the price tag as it is on creating long-term value. Keeping in mind the long-term vision to connect the world, Zuckerberg has been acquiring and developing apps and technology that will help to further that mission. The company's current priority for Instagram, WhatsApp, and Oculus is growth; investors should not expect immediate results. As the subsidiaries grow their user numbers and effective influence on the way we communicate, the apps will then be monetized strategically through targeted and appropriate ads in order to bring in more revenue.
Facebook has 1.28 billion users and Instagram user numbers have increased 809%, from 22 million users to 200 million, since being acquired. Zuckerberg also pointed out that WhatsApp just reported its users at more than 500 million. Facebook hopes to successfully create a communications ecosystem based on sharing-specific information with targeted audiences on a mass scale over the long term.
On the horizon for Facebook is a shift to different apps that cater to the needs of specific conversations via information-sharing platforms. Zuckerberg highlighted that users, marketers, and small business owners have different uses for Facebook and corresponding content. While Facebook will still serve as a general place for communicating and sharing information, Instagram continues to serve as a platform for photos and video only, while Messenger and WhatsApp will cater to private conversations and private information sharing. For users who want to share more general information, like news and infographics, the Creative Labs division will create apps like Facebook's Paper.
Having a group of usable apps that serve their intended and targeted purposes will make Facebook an important competitor to tech and app giants Apple and Google over time. While Apple and Google have a stronger foundation in the app market, Zuckerberg pointed out that Facebook plans to present a competitive edge over them via the number of app installations -- including apps where Facebook can be used to sign-up or sign-in -- and the importance of revenue growth.
Ads and revenue
Facebook's first-quarter revenue came in at $2.5 billion, up 72% over the first quarter of 2013. Revenue from advertising was $2.27 billion, an 82% increase from the same quarter last year. Mobile advertising revenue represented approximately 59% of advertising revenue, up from approximately 30% of advertising revenue in the first quarter of 2013.
COO Sheryl Sandberg noted the contrast between user engagement with ads in the classic right column and those in the main newsfeed. As newsfeed ads have produced a higher amount of user engagement, ad prices have increased. Although some would be reluctant to embrace price increases, when thinking about businesses and marketers, it's the value of what is being returned that is more important. Facebook's targeted marketing system has been successful with businesses and brands in converting online users to paying customers.
Sandberg also noted that Facebook is working to expand the placement of auto-play video ads in its newsfeed to further increase user engagement. With core focus points of targeting, enhancing marketing tools, and more detailed performance measurement tools, Facebook plans to become the world's first platform for personalized marketing, giving the company an edge over competitors and the potential to further increase ad revenue.
Was it worth it?
Facebook isn't expecting any big returns or explosive expansions in the near term. The current focus is development and growth of technology and apps that will bring the bigger vision and mission to fruition while maintaining steady growth over time.
GAAP diluted EPS was $0.25 in the first quarter of 2014, up 178% compared to $0.09 in the first quarter of 2013. Non-GAAP diluted EPS for Q1 2014 was $0.34, up 183% compared to $0.12 in Q1 2013. Shareholders will more than likely continue to see continued growth in earnings, year over year, despite speculation and risky investments. A long-term buy and hold for Facebook shares would be an investing option to consider.
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