Facebook empire building drives up costs

Facebook's investments in building out its empire beyond its original social network have pushed costs up by more than 80 per cent, squeezing margins in the first quarter.

The world's largest social network is pouring money into its "family of apps", which range from messaging app WhatsApp, acquired last year for $21bn, to photo-sharing app Instagram.

A hiring spree took its headcount up almost 50 per cent, while expenses were also lifted by stock-based compensation - much of it associated with the $21bn WhatsApp deal - and investment in physical infrastructure. Its longer term plans to connect the world to the internet through Internet.org and to develop virtual reality are also costing the company.

The 83 per cent increase in costs in the first quarter - to $2.6bn on a GAAP basis - came as a strong dollar dragged down revenue, leading the company to miss sales expectations for the first time in eleven quarters.

But Mark Zuckerberg, Facebook founder and chief executive said it was a "strong start to the year", as the group beat earnings expectations and would have surpassed consensus revenue forecasts on a constant currency basis.

He said Facebook had "evolved into a "family of apps", - a term he first used last quarter at the company's developer conference - with WhatsApp's 800m monthly active userbase, 700m using Facebook groups, 600m on Facebook messenger and 300m in Instagram.

Facebook had previously warned that costs would rise significantly in 2015 but it slightly lowered its guidance to predict a spending increase of 55 to 65 per cent on a GAAP basis, slightly below the prior guidance of 55 to 75 per cent.

Operating margins fell to 26 per cent from 43 per cent from the same quarter of 2014.

First quarter revenue of $3.5bn was lower than the consensus forecast for $3.6bn, but 42 per cent higher than in the same period the year before. Excluding the changes in foreign exchange rates, the company said, revenue would have risen by 49 per cent.

Facebook beat forecasts on earnings, with non-GAAP earnings per share of 42 cents, higher than the average analyst estimate of 40 cents, and 24 per cent above a year earlier. Net income was $933m on a GAAP basis.

The earnings come after Facebook's chief financial officer warned late last year that expenses would rise as it invested in projects for the near term, such as the WhatsApp and Instagram apps, and the longer term, such as Internet.org, its effort to help people around the world get online.

So far, only Facebook's main site and app have generated significant revenue but the announcement of a Facebook Messenger platform at the F8 conference last month in San Francisco, opening it up to other apps, was seen as the first step towards charging for services through the app.

The social network continued to grow its userbase, with the preferred metric of monthly active users up 13 per cent year-over-year to hit 1.44bn at the end of March. Of these, 936m log on to the site every day, of which 798m do so on their smartphone.

Facebook continues to rely more and more on mobile advertising, with about 73 per cent of its advertising revenue coming from adverts on the smartphone, compared with about 59 per cent for the same period the year before.

Shares in Facebook - up 44 per cent in the last year - were down about 2.4 per cent at $82.60 in after-hours trading in New York.

© The Financial Times Limited 2015. All rights reserved.
FT and Financial Times are trademarks of the Financial Times Ltd.
Not to be redistributed, copied or modified in any way.
Euro2day.gr is solely responsible for providing this translation and the Financial Times Limited does not accept any liability for the accuracy or quality of the translation