Facebook profit declines 79% on spending to lure advertisers

Facebook Inc. reported a plunge in fourth-quarter profit on higher spending, even while it made long-awaited progress luring advertisers eager to reach mobile-device users.

Net income fell 79% to $64 million last quarter as operating expenses jumped 82%, Facebook said yesterday. That outpaced a 40% revenue gain to $1.59 billion and raised concerns that margins will come under pressure. The stock fell as much as 8% as investors weighed near-term lower profit against the prospect of future growth.

Chief Executive Officer Mark Zuckerberg plans to increase expenses, excluding certain costs, 50% this year to hire staff and roll out new tools for advertisers. That’s more than the 33% increase projected by Pacific Crest Securities LLC, and it underscores the urgency of capturing a bigger slice of the $6.97 billion U.S. mobile-ad market. Done right, the added investment will translate to profit growth, said Adam Schneiberg, a portfolio manager at BTR Capital Management.

“Wall Street tends to be forgiving of higher spending during high-growth periods when new products are being built,” Schneiberg said. “As long as eyeballs tune in and revenue keeps growing, the Street will believe that at some point the company can flip the switch on profitability.”

Facebook, based in Menlo Park, California, retreated 6.9% to $29.10 at 9:35 a.m. in New York, and earlier touched $28.74 for the biggest intraday decline since Sept. 24. Through yesterday, the stock had climbed 76% from a record low close on Sept. 4.

Mobile-Ad Push

Facebook’s increased investment is designed to help the company grapple with rising competition from larger rivals in the U.S. market for mobile advertising, predicted by EMarketer Inc. to surge 82% this year. Google Inc. is projected to grab 57%  of that market, and Facebook will remain a distant No. 2 with 12%, EMarketer estimates.

“More mobile revenue means way more spending on the operations of selling ads,” said Brian Wieser, an analyst at Pivotal Research Group LLC, who today upgraded his rating on the stock to buy from hold and raised his prise estimate to $36 from $30. “This is an expensive company to run.”

Mobile contributed 23% of total advertising revenue, or about $306 million, according to Facebook. That compares with 14% in the third quarter. Analysts at JPMorgan Chase & Co. predicted mobile would contribute $384.2 million, or 27% of ad revenue, in the latest quarter.

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