Facebook’s Q4 Earnings: Can Anyone Say “Mobile”?

Facebook’s numbers are in, and investors aren’t feeling it thus far.

As I told you this morning, the outlook was fairly optimistic — consensus expected a 34 percent boost in revenue from the previous quarter at around $1.525 billion, with an EPS of 15 cents. Facebook surpassed that revenue, coming in at $1.59 billion and an EPS of 17 cents per share. The street immediately proceeded to sell, trading down about four percent in after-hours.

“We think we delivered strong results this quarter,” CFO David Ebersman told AllThingsD on a call this afternoon. “It’s encouraging as validation for the recent investments we’ve made in monetization and in mobile as well.”

The biggest eyebrow raiser: Mobile accounted for 23 percent of ad revenue, up from approximately 14 percent in Q3.

“I just think the mobile number is really terrific for us,” Ebersman said. “It’s such a great foundation for us, given our belief that 2012 was a year of transforming ourselves into a mobile company. And that that’s really where the future is going to be.”

No kidding. The company has been playing up its mobile ambitions for the past year-plus, ever since the company’s S-1 filing to go public. (If you haven’t heard by now, mobile is the future!)

It’s true at least in terms of user activity: For the first time this quarter, daily active users on mobile surpassed that of Web visits to the site.

But on the earnings call, neither Mark Zuckerberg, COO Sheryl Sandberg nor Ebersman delved deep into which of Facebook’s new advertising products led the company to its leaps and bounds in mobile revenue.

Though there were hints. Zuckerberg said that the sponsored stories in the news feed were doing exceptionally well, and saw massive engagement returns compared to that of the traditional advertisements in the right rail (you know, the ones we’re used to seeing). That’ll mean a decreased return in right-rail ad engagement, Ebersman hinted, but also said that the shift to news feed ads and mobile will supplant the declining numbers from the right rail.

One big thing: When Facebook says it’s a “mobile first” company, that doesn’t mean it’s in the business of building a phone. As AllThingsD has reported in the past, Facebook has indeed dabbled in producing a proper Facebook phone — codenamed Project Buffy — with hardware partner HTC. But as of late, there haven’t been many rumblings on those plans.

Perhaps Zuckerberg’s denouncement of the Facebook phone was in earnest; after all, he used his strongest language to date in denying it. “We’re not going to build a phone,” were his exact words.

Still, that didn’t stop Facebook’s C-suite troika from trumpeting “mobile mobile mobile!” the entire call (ad nauseum, if you ask me).

Check out my notes below for the call’s highlights.

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(Earlier)

Howdy! Still waiting on hold, like the rest of Wall Street. Wonder who of Facebook’s C-Suite will show up today?

1:53 pm: This hold music isn’t terrible.

And the Street can’t seem to make up its mind: Shares are trading up, down, up, down in after-hours. Right now, FB is down about 1.5 percent.

1:59 pm: Worth noting that shares aren’t trading down as much as the last time Facebook hit its numbers.

Q3 saw an immediate 10 percent drop after the print hit. Oh, Wall Street. So fickle.

2:02 pm: Running a bit behind. Come on, y’all.

And here we go.

So Mark Zuckerberg, Sheryl Sandberg and Ebersman are all on the call. As has been tradition for the past few quarters.

Legalese. Please hold.

Zuckerberg stresses the shift to daily mobile users. “This is challenging for us to navigate…we started off the year with apps that weren’t as high quality as we would have wanted.”

“Today there’s no argument. Facebook is a mobile company.”

Whatever you say, Mr. Zuckerberg.

Zuck talks about mobile mobile mobile mobile. I expect this on every major Internet company earnings call henceforth.

Instagram doing great, Zuckerberg says. Skips past that whole terms of services unpleasantness of last year.

Next up, Platform talk and the social graph. Plays up Graph Search, with disclaimer of it being an early beta product.

“It’s good for lots of things that you wouldn’t use a traditional search engine for.” In other words, not Google.

“Down the line, this could potentially turn into a meaningful business for us.” Zuckerberg on Graph Search.

Take that, Goog.

Zuckerberg says App Install ads is off to a good start, but no specifics.

Plan for ad biz going forward involves improving targeting, designing better ads and working on custom audience targeting. You don’t say.

Zuckerberg wants to “temper near-term expectations” on payments biz — i.e. Gifts and Graph Search.

Guess Gifts ain’t off to a gangbusters start.

Expenses are likely to grow at a faster rate in 2013, due to increased expenditures in product development.

Headcount going to shoot up, too. Take a look at this quarter’s numbers, and you’ll see it already has.

2:12 pm: Now on to Sandberg.

Sandberg cites brands using Facebook ads during the holiday season as the strength of their performance. Yep. Spending through the rest of those ad budgets.

Ad strategy over the last quarter — building tools for “every type of marketer — brand, direct, local businesses and developers.”

Sandberg cites Walmart’s success in delivering mobile eyes over the holiday quarter. Michael Kors, too.

Quite the brand disparity, I’d say.

Talk about Facebook “Offers.” Nearly 42 million unique users claimed offers. Not bad.

Emphasis on Offers explains the Graph Search push into local and social discovery, by the by.

2:16 pm: Now to Facebook Exchange. Pay attention here.

FBX served 1 billion impressions daily, supported more than 1,300 advertisers per day.

App install ads seem to be doing well enough. Games getting the bulk of installations, but Sandberg thinks this will expand to other types of categories — travel, shopping and the like.

Talking up Facebook marketing campaigns. As an aside, I’ve heard it’s still tough for small-timers to use Pages to their advantage. Big brands probably still doing better.

Anyone counting how many times the word “mobile” has been uttered on this call? I’ve lost track.

Ads in news feed apparently drive 8x the amount of offline sales than those seen in the right rail, acccording to a study FB conducted with a partner.

In other words, news feed ads are important.

2:22 pm: Now on to CFO David Ebersman.

Going back over the numbers — big shift to mobile, growth of monthly and daily users globally.

All the numbers that Ebersman is citing “do not include Instagram, which continues to grow at an impressive rate.”

Ad revenue up in Q4 as strongest of all of 2012. Attribute that to the new ad products.

18 percent increase in avg. price per ad in the U.S. and Canada. That’s good.

Payments revenues from games were essentially flat year on year from 2011.

Expenses increased 67 percent, “driven primarily by headcount and infrastructure.”

That’s a lotta hiring.

Ebersman chats a bit about the stock lockups expiring. Expects taxes to go up slightly in 2013.

Expectations for payments in 2013 — still hopeful for games, “however, we still face a declining headwind … because games payments revenues still coming primarily from desktop users.”

2:28 pm: Come on, Zynga and others. Make that shift to mobile faster.

Total expenses expected to grow about 50 percent in 2013. Woof.

Now it’s Q&A time with the analysts.

Question from Doug Anmuth at J.P. Morgan — did FB open up more ad inventory for Q4? They saw a big jump.

Zuckerberg on measuring ad quality in the news feed: They look at “Likes” and the like. Ranking improvements made last year improved ad quality by 50 percent, Zuckerberg says.

Inserting ads resulted in about a 2 percent reduction in “Likes” and comments. Says it’s marginal, not too shabby.

A question on engagement. How do you measure it?

Zuckerberg: “We want the organic content to be the same basic types of content as paid content.”

In other words — “Yo, ad guys! Make better ads! We’ll help you. Don’t worry.”

Zuckerberg basically wants your news feed ads to not suck. Cites Instagram as a great model for native ads.

Now when are you going to monetize Instagram, Mark?

Sandberg on Facebook Exchange: Facebook exchange on Triggit drives 36 percent more conversions than ads anywhere else.

Hmm.

2:37 pm: Zuckerberg: Early on, didn’t expect to show everyone an ad every day. Mostly because quality wasn’t there. But now that they’re showing ads, the engagement didn’t take a big hit.

Translation: They can spend time improving quality, but it’s really not as bad as they thought it would be.

It’s more about good targeting and good ad formats now, says Zuckerberg.

A question about Graph Search vs Google. Dun dun dunnnnnnnn!

2:39 pm: Zuckerberg: Something we talked about when rolling out Graph Search is all the connections within Facebook. We’re just coming from a completely different place [than Google].”

Though that also implies that Google’s efforts to link people with the things they like using Google+ isn’t exactly up to snuff.

Question about video in the news feed. Remember that rumor that video would appear in news feed ads in the future?

Ah, a non-answer from Ebersman about video ads. Shucks.

Zuckerberg: For video ads, it’s not critical that Facebook hosts it. They could link out to others, for example.

Question: Talk about the relative ad load in the U.S. vs. Europe and Asia.

Also, why are mobile ads shooting up? Any particulars?

Ebersman adds little color. ARPU took off in the U.S. first, then rest of the world afterwards. Makes sense, because that’s where the rollouts were concentrated.

Again, non-answer on mobile. Basically, we make good products, so mobile ad revenue shoots up.

“We’re not going to build a phone.” Zuckerberg. That’s the strongest language he’s used in saying they aren’t going to build a phone. Ever.

Although still could be a Steve Jobsian feint!

Never say never, right?

A question about the right rail. Since it’s not working as well as news feed ads, how do you expect it to trend going forth?

Ebersman says Facebook doesn’t really consider it separate businesses. Not going to break it down.

Oh, and another “growth in mobile usage” comment. So reading between the lines, expect right rail revenue to decrease as mobile usage increases, as per Ebersman’s comments.

2:49 pm: Sandberg: “The click is not really the most important metric for us.”

Sandberg: In terms of our measurement capabilities — still really early.

As is everything Facebook is working on! Wonder how long the “we’re early in this” argument is going to fly.

Ebersman: “We want Facebook to be the default social infrastructure for mobile games.”

Wonder how Zynga, who is developing its own mobile social mesh, feels about that?

2:52 pm: The college kids love the Facebook, Ebersman says. And that’s good for our future.

Sandberg claims a strong position on mobile, particularly because of logged-in identity and the ability to serve relevant ads.

More questions about payments. Talk about health.

Ebersman on Payments: Note that this year as opposed to last year we have a little bit of revenue from non-game sources.

We still see a nice diversification in games.

In other words, it’s not all Zynga.

When will Facebook Exchange come to mobile, analyst asks?

Sandberg shuts him down. Nothing to share. Sorry, pal.

Ebersman saying Facebook still needs to help people understand how to actually use Gifts.

That’s confusing and not easy. Anecdotally, I’ve tried with a few of my friends and parents. They are confused.

2:59 pm: Zuckerberg: Android is a very dynamic and open platform, as long as Google keeps it that way.

The two companies don’t really have a “relationship where they really talk,” Zuckerberg admits.

In a nutshell: We dig Apple, our relationship is cool. Google and us, not so much. They better keep Android open. — Zuck

Them’s antagonistic words, Mr. Zuckerberg.

3:02 pm: And that’s a wrap!

What a way to go out.