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Facebook Inc. (FB - Analyst Report) reported first quarter 2013 non-GAAP earnings of 12 cents per share, which remained flat on a year-over-year basis. However, including stock-based compensation and payroll taxes, Facebook earned 9 cents a share and beat the Zacks Consensus Estimate by a penny.

Quarter Details

Revenues for the quarter (excluding foreign exchange effect) jumped 38.2% year over year to $1.46 billion, ahead of the Zacks Consensus Estimate of $1.44 billion. Strong advertising revenues that surged 43.1% and a 14.5% jump in payments and other fees revenues drove the year-over-year growth. More importantly, mobile ad revenues comprised 30% of total ad revenues.

During the quarter, Facebook launched several new advertising products (Lookalike Audiences, Managed Custom Audiences and Partner Categories) for marketers. Moreover, integration with Apple’s (AAPL - Analyst Report) iOS and Google’s Android platform continued during the quarter. Facebook also announced the acquisition of Parse, which provides platform service for mobile apps.

Facebook’s average revenue per user (ARPU) increased 12.0% year over year $1.35. Ad impressions jumped 39% year over year while average price per ad increased 3% from the year-ago quarter, primarily driven by product changes.

Average price in the developed countries continued to increase strongly, with the U.S. and Canada increasing 25% from the year-ago quarter, primarily attributable to higher engagement and performance of news feed ads.

During the quarter, Facebook’s Monthly Active Users (MAU) improved 23% year over year to 1.11 billion. Mobile MAUs surged 54.0% year over year to 751 million. During the same period, Daily Active Users (DAU) increased 26% year over year to 665 million.

Facebook’s operating margin was 38.5% compared with 45.8% reported in the year-ago quarter. This significant decline was primarily driven by higher costs, which was 61.2% of total revenue, much higher than 54.2% in the year-ago quarter. This strong year-over-year growth in total costs were driven by headcount growth and costs incurred for infrastructure development.

Net income (excluding stock-based compensation, payroll tax expense and income tax expense) improved 8.7% from the year-ago quarter to $312.0 million in the reported quarter.

Facebook ended the quarter with cash & cash equivalents and marketable securities of $9.47 billion compared with $9.63 billion in the previous quarter. The company generated $441.0 million of cash flow from operations in the quarter compared with $681.0 million in the previous quarter.

Facebook expects to continue investments on improving quality, engagement and value of its ads, which will further boost advertiser demand in 2013. Total expenses are expected to increase approximately 50.0% in 2013.

Recommendation

We believe that Facebook has significant growth opportunities in the online advertising format. Facebook’s massive user base and its ability to track personal details over time make it a formidable force in the online ad market. Facebook can use this massive database to help advertisers target relevant ads going forward. The company’s expansion in the mobile segment is noteworthy.

However, a volatile macroeconomic environment and increased investments to expand mobile offerings are expected to hurt margins in the near term. Competition from Google and LinkedIn (LNKD - Analyst Report) could also pose headwinds for the company in the near term.

Currently, Facebook has a Zacks Rank #1 (Strong Buy).

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