Social media giant Facebook, which reported a negligible profit on a generally accepted accounting principle (GAAP) base for 2012, will pump as much as $1.8 billion into capital spending this year and bulk up staff numbers to grow and gain advertisers.
However, with the growth come expenses, which are expected to increase faster than revenue, and will weigh on 2013 profits again. In the fourth quarter of 2012, Facebook astounded by spending $849 million, a 67% increase.
Despite the spending, investors are not shying away from the company, seeing it as a growth share, and are buying for future benefit. The group, which listed on the Nasdaq at $38 and became the only US company to ever debut with a market value of more than $100 billion, saw its shares close 1.46% higher at $31.24 yesterday, before losing ground to $30.14 in after-hours trade.
Big plans
Founder and CEO Mark Zuckerberg said during the conference call yesterday that Facebook is "at an interesting point in our evolution where there are lots of areas where we need to invest in".
Mobile, which analysts had worried the firm would not be able to monetise, grew during the quarter, showing Facebook's ability to generate revenue off the platform. Mobile revenue doubled from the third to the fourth quarters and is now 23% of advertising revenue, when it contributed nothing a few quarters ago.
Zuckerberg says Facebook needs to build the best mobile experiences, grow its platforms and create "a really strong" monetisation engine. "We can easily invest our entire engineering team just in building out the nuts and bolts of these areas today. But we also feel like there's an imperative to start planting seeds for tomorrow's businesses as well."
Facebook hopes that products like Graph Search, currently in beta, will grow up to be pillars of the Facebook service and businesses, which are its investment areas. "We feel like it's the right thing for our business, over the long-term, to invest... aggressively," says Zuckerberg.
As a result, Facebook will grow its headcount quickly in 2013, especially in product development, up from the 4 600 people it currently employs. "This will likely cause our expenses to grow at a faster rate than we expect to grow our revenue this year, which means that we aren't operating to maximise our profits this year. We're doing what we think will build the best service and business over the long-term."
Scaling up
CFO David Ebersman says Facebook spent about $1.6 billion last year, and in 2013 expects to increase this at a modest rate to $1.8 billion. The cash will go into servers, new data centres and network infrastructure to enable it to deliver "Facebook speedily and reliably to everyone around the world," he says.
"2013 will be a year of significant investments in areas we believe are critical to drive long-term engagement and monetisation, and we plan to continue to hire aggressively to accelerate product development and deliver new products for users and advertisers."
Total expenses, which were $849 million in the last quarter of 2012, due to staff and infrastructure, are expected to grow around 50% in 2013. "We believe this level of near-term investment is the right strategic decision to enable long-term value creation."
Facebook ended the year with $9.6 billion in cash and investments, which Ebersman says gives it "great flexibility and risk protection". However, on a GAAP base, although revenue grew year-on-year to $5 billion from $3.7 billion, the company's operating margin fell from 47% to 11% and net profit slumped from $1 billion to $53 million.
Comparing the last quarter of the year with 2011, revenue grew to $1.6 billion from $1.1 billion, but the operating margin moved down to 33% from 48% and net profit slumped to $64 million from $302 million.
Ebersman says Facebook is pleased with the progress it made in the quarter against its targets and ended the year with 1.06 billion people using the service, a 25% year-on-year gain.
"Q4 was the strongest of any quarter in 2012, and we view this as a validation of our recent investments in mobile News Feed ads, growing our advertiser base and launching new ad products."
Look to the future
Vestact analyst Sasha Naryshkine says "it's not about the numbers for the time being". However, he comments that the increase in spending was a "big surprise", although as Facebook is a "growth story", investors want to see it invest to stay ahead of the pack.
Naryshkine adds that Facebook has showed it can monetise its mobile platforms and investors are looking ahead. "You're not buying today's earnings."
Zuckerberg says: "We made the big transition where now there are more people using Facebook on mobile everyday than on desktop... There's no argument. Facebook is a mobile company."
Facebook needs to continue on its upward trajectory and capture more people in the advertising universe, adds Naryshkine.
Ovum principle analyst Eden Zoller adds the results "give cause for optimism and suggest the company is on the right track following its disappointing IPO [initial public offering] and the lacklustre two quarters that immediately followed".
"There will be growing pressure for Facebook to monetise Graph Search over the coming quarters and the most obvious way it could do so is via sponsored search."
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