Facebook Beats Earnings Estimates But Costs Rise

Facebook may have beat earnings estimates and surpassed 1 billion users, but investors are still unsure about the company’s ability to grow profits.

The company reported fourth quarter earnings of 17 cents a share, excluding certain items, beating analyst estimates of 15 cents a share.  Revenues were $1.59 billion, compared with analyst estimates of $1.52 billion.  Revenue was helped by higher targeted advertisements to its users.

The social network also reported 1.06 billion monthly active users and 618 million daily active users (DAUs).  That was an increase of more than 25 percent compared with last year.   On mobile, Facebook grew monthly actives to 680 million people, an increase of 57 percent year-over-year. Mobile DAUs exceeded web DAUs for the first time, the company said.

However, the stock took a beating after-hours, dropping more than eight percent before recovering after investors got jittery about Facebook’s worsening operating margins.

The company’s operating margins shrank to 46 percent in the fourth quarter from 55 percent a year ago due to a jump in costs.  Facebook said costs and expenses, excluding share-based compensation, were $849 million.  That was an increase of a whopping 67 percent, compared with last year.  Research and development, including share-based compensation costs, made up 19 percent of expenses in the quarter, up from 11 percent a year ago.

During the quarter, mobile revenue, a closely watched figure, represented approximately 23 percent of advertising revenue.  That was up from about 14 percent of advertising revenue in the third quarter of 2012.  That was much higher than the 17 percent analysts were expecting.

However, investors are concerned that Facebook’s operating expenses are going to continue to increase because mobile ad revenue is expensive to service.

On the earnings call, CFO David Ebersman said they expect expenses to grow by around 50 percent this year and plans to hire aggressively in 2013 to grow headcount.

Facebook CEO Mark Zuckerberg said the company made the decision to continue to grow its headcount and that it is not trying to maximize profits this year, but is planning for the long term.

Oh, and if you are still wondering if Facebook is going to build a phone, they’re not.

“People keep asking if we’re going to build a phone. We’re not going to build a phone,” Zuckerberg said on the call, adding that it doesn’t make sense for Facebook.