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Facebook cautions investors of flat growth this year

Last updated on: April 24, 2014 17:25 IST

Facebook cautions investors of flat growth this year

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Facebook Inc has a message for Wall Street: Don't expect new revenue streams any time soon.

The world's No. 1 Internet social network delivered its strongest revenue growth in several years during the first quarter, as its mobile ad business gained steam.

But even as Facebook gave investors the good news, buoying its stock by roughly 3 per cent in after-hours trading, the company made it clear that other money-making efforts such as video ads and ads within its Instagram photo-sharing app would not bear fruit in the near future.

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Image: Mark Zuckerberg, Facebook CEO and founder laughs outside the Sun Valley Inn in Sun Valley, Idaho.
Photographs: Rick Wilking/Reuters

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Said Macquarie Research analyst Ben Schachter, "That will probably be the most disappointing statement to come out of the call. Many folks were anticipating a next leg of growth."

Facebook Chief Operating Officer Sheryl Sandberg told analysts on a conference call on Wednesday that Instagram ads, video ads and a nascent mobile ad network were all still in experimental phases and that none of them would make a meaningful contribution to revenue in 2014.

That may dash the hopes of some investors, who had expected Instagram to start generating revenue two years after Facebook acquired it for $1 billion.

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Photographs: Reuters

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Sandberg said, referring to the limited number of ads on Instagram, “We're very focused on consumer growth, and we move slowly and deliberately in monetisation.

We don't see the need or the urge to ramp this as quickly as we possibly can."

Facebook is also going slow with auto-play video ads. Facebook said earlier this year it would allow a small group of advertisers to display 15-second video ads on Facebook, but Sandberg said on Wednesday the company was still gauging users' response and was in no hurry to open the service up broadly to advertisers.

The comments are likely to cause financial analysts and investors to re-appraise Facebook's near-term prospects. In notes to investors released prior to Wednesday's earnings report, Morgan Stanley estimated that video ads could contribute $900 million to Facebook's top line this year, while Cowen & Co targeted $1 billion in video ad revenue. 

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Photographs: Robert Galbraith/Reuters
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Shares of Facebook remained up in after hours trading, even after the company warned that its advertising revenue growth would slow throughout the year, as it faces tougher year-on-year comparisons.

Investors are willing to give Facebook some leeway, given its strong performance building the mobile ad business, said Macquarie's Schacther.

"They've earned the benefit of the doubt, that even if it doesn't come this quarter, or the next quarter, that it will come," he said of the company's additional revenue opportunities.

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Photographs: Robert Galbraith/Reuters
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Turnaround

Facebook's newsfeed ads, which inject paid marketing messages straight into a user's stream of news and content, have ignited Facebook's revenue growth and bolstered its stock price during the past year.

The ads are ideally suited for the smaller-sized screens of smartphones and other mobile devices.

Facebook said mobile ads contributed 59 percent of its ad revenue in the first quarter, up from 30 percent in the year-ago period.

Facebook's overall revenue grew 72 percent year-on-year to $2.5 billion in the first quarter, above the $2.36 billion expected by analysts polled by Thomson Reuters I/B/E/S.

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Image: The loading screen of the Facebook application on a mobile phone is seen in this photo illustration taken in Lavigny.
Photographs: Valentin Flauraud/Reuters

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Facebook's first-quarter results underscore how far the company has come since its rocky 2012 initial public offering, when concerns about slowing revenue growth cut its stock price in half.

At the time, investors questioned Chief Executive Mark Zuckerberg's commitment to the financial side of the business, spooked by the hoodie-wearing founder's comments about that Facebook does not build services to make money, but rather that it makes money to build better services. 

 


Image: A man is silhouetted against a video screen with an Facebook logo.
Photographs: Dado Ruvic/Reuters

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