Facebook (NASDAQ:FB) released its first quarter earnings after the closing bell on Wednesday. The company reported that 1QFY15 earnings came in at $0.42 per share on revenue of $3.54 billion, just ahead of analysts expectations of $0.40 per share on revenue of $3.56 billion.
The result is a solid if unexciting quarter for the social media giant whose stock was trading up 1.22% at $84.64 at the closing bell, but fell about 1.5% in after-hours trading following the release.
Revenue of $3.54 billion represents a 42% increase over the same period last year, Facebook said this would have been 49% were it not for the impact of the high dollar. More than half of Facebook’s revenue comes from foreign markets.
The company also reported expenses climbed 83% in Q1 as R&D costs increased 133% and sales and marketing spend nearly doubled.
The number of daily active users (DAUs), a key metric for digital firms, was also higher than expected, coming in at 936 million a 17% increase year-on-year and ahead of Wall Street’s best estimate of 920 million.
Despite this quarters mixed results, analysts remain upbeat about Facebook for the rest of the year. The first quarter is traditionally a weak one for advertising revenues, but the social media giant reported an increase in the number of advertisers using its various platforms.
1QFY15 data also showed that Facebook is continuing to increase its share of the mobile market along with increased click-through rates, suggesting the company is getting smarter at targeting its users.
Facebook has previously warned that 2015 would be a year of heavy investment as it steps up efforts to expand its product portfolio, which includes messaging service WhatsApp, photo-sharing website Instagram and virtual reality headset maker Oculus Rift.
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Faceboom ad revenue growth slows
Ad revenue for the quarter fell below analysts estimates of $3.39, coming in at $3.32 billion, despite a range of new ad products being launched. Facebook opened up its Audience Network and updated Atlas platform to advertisers in the final quarter of 2014. Mobile now accounts for 73% of revenue compared to 69% last quarter.
Improvements to its LiveRail platform which allows publishers, broadcasters and app developers to sell their ad inventory in a smarter and safer way across multiple devices isn’t expected to yield results until the second half of the year.
Facebook’s re-launch of Atlas, the advertising platform it bought from Microsoft Corp (NASDAQ: MSFT). will eventually allow advertisers to target and measure the performance of ads right across the web, not just on Facebook properties. The technology also provides an automated ad-buying tool, allowing marketers to buy ads targeting Facebook users as they browse the web and use different apps.
Challenging Google’s Display Dominance
Atlas should allow Facebook to challenge Google’s traditional dominance of the digital advertising space. With many ad executives saying Atlas gives marketers better targeting capabilities and more detailed information about ad campaigns than Google is currently able to provide them.
“What Facebook is doing is potentially more powerful than what Google can currently do,” Rishad Tobaccowala, chief strategist of advertising at Publicis Groupe SA said.
The Cookie Crumbles
Online advertising has long been reliant on “cookies”, a small piece of code placed on a user’s computer which tracks them as they browse the web. The problem with cookies is that they are notoriously unreliable and they don’t work on mobile devices and tablets.
This creates a problem for advertisers as smartphone use increases. With Atlas, Facebook hopes to solve the problem by linking ad interactions back to each Facebook users account across desktops, mobile devices and third party apps.
Atlas gives advertisers the ability to see when and where a customer first came into contact with a product. For example, a customer may well have bought a product on their desktop, but now advertisers can see that same customer first viewed the product on her mobile device two days earlier.
This functionality has been available on Facebook owned properties for sometime, the introduction of Atlas now extends their ad serving across third party apps and websites.
Traditional marketers have shied away from advertising on mobile due the limitations of cookie data tracking. Facebook’s innovative approach should allow advertisers to increase their mobile ad spend.
Joining the dots between online and offline
But Atlas can do more than track users behavior online, it can also track offline behavior. For example, if a customer buys a dress in store and volunteers her email address in exchange for access to exclusive special offers at the checkout. Facebook can now tie that information back to a Facebook ID, allowing the retailer to see when and where the customer first saw its ads online.
Facebook ID’s are fast becoming the “Holy Grail” of internet marketing, according to Antonio Garcia-Martinez, vice president of ad-tech company Nanigans. A former Facebook employee who worked on Facebook’s advertising platform until 2013.
These improvements should allow Facebook to increase its share of global advertising spend. Particularly social video advertising which currently stands at roughly $300 billion annually. In the final quarter of 2014 Facebook tripled the number of videos viewed each day on its site.
As a result of these platform developments much of Wall Street remains bullish about Facebook, with 47 of the 55 analysts that cover the stock rating them a buy, with seven recommending a hold while just one recommends selling. Analysts have set a price target of $92.67, representing an upside of 10.53% on its current price.
As Facebook becomes smarter at targeting ads and advertisers become aware of the benefits of using Facebook’s ad serving technology, we should see a strong performance from the stock in the second half of the year.
The company is also showing stronger monetization and engagement, as well as increasing its user base despite being the biggest social media platform. Facebook now boasts more monthly active users than the population of China.