MENLO PARK -- Facebook's latest earnings report showed faster sales growth and substantial progress in building its mobile ad business, but skittish investors drove its stock price down in late trading Wednesday.
The social networking giant reported revenue and earnings that slightly surpassed Wall Street's expectations, as mobile advertising more than doubled and overall sales grew at a faster rate than it has in two previous quarters, after showing signs of slowing over the summer.
"Today there's no argument. Facebook is a mobile company," CEO Mark Zuckerberg said during a conference call with analysts, after reporting that for the first time, the number of daily users who surfed the social network on smartphones and tablets exceeded those using desktop computers in the last quarter of 2012.
But Facebook's stock fell sharply, at one point dropping 10 percent below its closing price of $31.24, as it seesawed up and down in the hours after the company issued its report. Analysts said some investors may have decided to take profit from the stock's recent gains in value, while others may have been hoping for even better results.
"Expectations were pretty high," said Colin Sebastian of the Robert W. Baird investment firm, who noted that several analysts recently raised their estimates for the company. He also said some investors were probably spooked because Facebook executives said they plan to spend heavily on hiring more staff and developing new products in 2013, rather than focus on maximizing profit.
"That's going to give investors a little bit of pause," Sebastian said. But aside from those factors, he added, "it was a very good quarter."
Facebook reported net income of $64 million on sales of $1.58 billion for the quarter that ended in December. Revenue rose 40 percent from a year ago, while profit fell 78 percent as the company incurred charges related to employee stock options.
Earnings per share amounted to 3 cents, or 17 cents after excluding those one-time charges. That beat Wall Street's expectations for earnings of 15 cents a share, excluding one-time charges, on revenue of $1.53 billion.
Buoyed by new advertising products and a surge in holiday ad spending, Facebook's revenue growth outpaced the 32 percent rate it reported in two previous quarters. Its mobile ad business grew even faster, as mobile revenue rose to $305 million or nearly a fourth of the company's total ad business.
That's significant progress, according to analyst Josh Olson of the Edward Jones investment firm, who noted that Facebook warned investors last spring that it was making virtually no money from the growing number of users who access the service on smartphones and tablets.
"They said they were going to focus on mobile and they have executed there," Olson said. "They've built the mobile business from zero to 23 percent of the ad revenue mix in about nine months."
Underscoring the importance of mobile ads, Facebook said 680 million of its 1.06 billion monthly active members are using Facebook on mobile gadgets.
Zuckerberg announced the company's earnings just days after two of its biggest online rivals, Google (GOOG) and Yahoo (YHOO), issued strong financial reports of their own. While Google is still the industry leader in mobile advertising, experts say Facebook is starting to gain traction in key areas.
By inserting commercial messages into the news feed that appears on smartphone and tablet screens, Facebook garnered 18.4 percent of the money that businesses spent on mobile display advertising in 2012, according to research firm eMarketer, while Google had about 17 percent.
Google still commands more than 53 percent of the $4 billion mobile ad market, however, because it dominates another category of mobile ads -- delivering commercial messages when people submit Internet search queries on mobile devices. Facebook is developing its own search engine, but Google currently has about 93 percent of the mobile search ad business.
Some experts say the popularity of mobile gadgets will help Facebook because it's able to command far higher fees for its news feed ads than it charges for older-style advertising that it shows on the right-hand side of Facebook pages on desktop computers.
Brand-name advertisers are shifting to the news feed format, according to Lucy Jacobs of the San Francisco digital ad firm Spruce Media. She said the rate at which viewers click on those news feed ads has been increasing, which shows that users are responding to those messages.
During the conference call, Facebook Chief Operating Officer Sheryl Sandberg touted the early success of news feed ads as well as new Facebook programs that let advertisers reach targeted audiences and then track how often they lead to both online and offline purchases.
Facebook will focus on improving its ad programs in 2013, said Zuckerberg, who warned investors not to expect significant revenue growth this year from other sources, such as online retailing. Chief Financial Officer David Ebersman also reported that revenue from online games was unchanged from a year ago.
Contact Brandon Bailey at email@example.com or 408-920-5022.