Facebook's Stock Get a 20 Percent Boost With Improved Ad Sales

Facebook's second earnings report as a public company came in just above Wall Street estimates, but that was enough for investors to give shares a nice boost. Investors were obviously waiting for a sign of positive movement in earnings.

Late on Tuesday, the social network reported sales of nearly $1.3 billion for its third quarter, up 32% from the same period last year.

A Hefty Tax Bill Obscured Earnings

Facebook's earnings for the quarter were complicated by a hefty tax bill related to the company's equity compensation for employees. The company took a $431 million income tax provision for the quarter, representing an eye-popping 116% effective tax rate.

The tax bill pushed Facebook to a net loss of $59 million, compared with a gain of $227 million in the year-ago quarter. Stripping out the tax bill and other equity compensation expenses, Facebook had net earnings of $311 million, slightly ahead of analysts' expectations.


The company's biggest problems it its sluggish transition to mobile. The site wasn't built with mobile in mind -- it was created in 2004 -- and its first round of mobile apps were sluggish. An new iOS app launched in August , but Facebook still isn't showing mobile users as many ads as it would if accessed on a desktop.

User Trends

A total of 14% Facebook's ad revenue came from mobile in the third quarter, the company said. Its mobile customer base rose 61% from last year, to 604 million active users.

Overall, monthly active users grew 26% over the year to just over 1 billion. Facebook pulled in $1.1 billion serving ads to those users -- up 36% from last year.

New User Monetization Efforts

In September the social network unveiled Facebook Gifts, a feature that lets users send friends real, physical goods. This isn't part of the quarter Facebook is currently reporting -- it released a "Promote" feature to a small group of U.S. users. The experimental program lets Facbook users pay a fee, currently around $7, to promote important pictures or announcements.


Zynga, the game maker accounts for a significant portion of Facebook's sales. Zynga has scaled back its outlook for 2012, citing problems including "reduced expectations" for certain games and delays in launching new titles. Zynga announced plans to cut 5% of its roughly 3,000 employees.

Problems for Zynga means problems for Facebook. Zynga accounted for 14% of Facebook's revenue in the first six months of 2012, including payment processing fees, direct advertising, and outside ads shown on pages generated by Zynga apps.

Payments revenue from Zynga declined 20% in the latest quarter compared to last year.

More Pressure on The Cost of Doing Business

Also of concern in Tuesday's report: It's getting more expensive for Facebook to do business. Excluding some compensation expenses, Facebook's operating margin shrank to 42%, down from from 51% a year ago.