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Facebook posts loss despite strong revenue growth

Zuck's first earnings report fails to impress

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On Thursday Facebook gave its first-ever earnings report since becoming a public company, and although it posted a loss, it generally met analysts' expectations and showed strong revenue growth, aside from some nagging weaknesses in the mobile market.

Wall Street was largely unimpressed, however, and Facebook shares began tumbling in after-hours trading following the earnings call.

Some analysts wondered whether CEO Mark Zuckerberg would participate in the call, after he was a no-show at Facebook's Boston IPO roadshow in May. He did, but he seemed uncomfortable, stammering through his prepared remarks and quickly yielding the floor to COO Sheryl Sandberg and CFO David Ebersman.

"Our goal is to help every person stay connected and every product they use be a great social experience," Zuckerberg, said. "That's why we're so focused on investing in our priorities of mobile, platform and social ads to help people have these experiences with their friends."

Zuckerberg said 995 million users were active on Facebook each month as of the end of June, an increase of 29 per cent from last year. Of those users, 552 million were active daily, an increase of 32 per cent. And 543 million users were accessing Facebook via mobile devices, an increase of 67 per cent year over year.

That last figure has troubled some analysts, who see the mobile market as a weak spot for Facebook. The company acquired Instagram in April to help assuage those concerns, Zuckerberg said, but it is also "investing very heavily" in its mobile apps for iOS, Android, and the mobile web.

"Facebook is the most used app on basically every mobile platform," Zuckerberg said. "We want to increase the depth of the experience in addition to just growing users."

Forget about those rumors of a Facebook phone, though. "Building out a whole phone wouldn't really make much sense for us to do," Zuckerberg said. (Aw, he's probably lying!)

Facebook's revenues for the quarter ending in June were $1.184bn, up a healthy 32 per cent from the same quarter in 2011. Ebersman said that the strengthening dollar had actually knocked a few points off that figure – it would have been 36 per cent, had exchange rates remained constant.

Revenues from advertising were up 28 per cent, and these accounted for $992m, or 84 per cent of the total. According to Sandberg, Facebook saw an 18 per cent increase in the overall number of ads delivered, which she attributed to user growth, particularly in Brazil, India, and Japan.

Ad delivery was weak in Facebook's own backyard, however. The number of ads delivered in the US was actually down 2 per cent over last year. Sandberg said that this was due to the fact that more users in developed markets are switching from PCs to mobile phones, where Facebook's advertising opportunities are weaker.

Sandberg also said the average revenue from each ad increased 9 per cent, owing to more clients using Facebook's social advertising products, including Facebook News Feeds and Sponsored Stories. The social network is working aggressively to educate clients about these higher-value offerings, Sandberg said.

Unfortunately, however, Facebook's revenue gains didn't translate into income. The company posted a loss of $157m for the second quarter of 2012, or 11 cents a share – a big drop from the $240m profit it reported for the previous year's quarter.

But things aren't as bad as they seem. Most of that loss is attributable to stock compensation charges related to Facebook's IPO. When it adjusted its earnings to remove those charges, the social network actually earned income of $295m, or 12 cents a share. That figure was about on par with what analysts expected.

Facebook's results come hot on the heels of a calamitous earnings report by Zynga on Wednesday, in which the online games maker posted a $22.8m loss for the three months ending in June.

Zynga's numbers had been widely viewed as a bellwether for Facebook's own earnings because of the companies' close relationship. Payments from Zynga games accounted for 12 per cent of the social network's revenue last year.

Facebook's revenue from payments and other fees was $192m for the second quarter, or 16 per cent of the total, Ebersman said – a figure he said was flat from the previous year. Yet again, Ebersman attributed this weakness to the shift from web to mobile devices. Mobile games generally don't use Facebook's payment system, he said.

Zuck & Company seemed to feel that was worse for Zynga than for Facebook, however. Zuckerberg said the company was focused on building out its Open Graph social platform to allow more developers to integrate social features into their products, beyond just games.

"You can view our business as an advertising and payments business, or you can view it that there are these companies that will transform various industries and we'll get a share of that revenue," Zuckerberg said.

Investors didn't seem to be buying it, however, and at one point during after-hours trading, Facebook's stock slipped to $23.75 per share, an all-time low. ®

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