The second quarter earnings report from Facebook Inc. showed an increase of 39% in revenue, while an even bigger increase in expenses, eroded profits.
Revenue for the quarter ended June 30 of $4.04 billion exceeded the figure of $2.91 billion posted in the same period in the previous year. Consensus analyst forecasts had been for revenue of $4 billion.
The sting in the tail comes from the fact that total costs and expenses increased from $1.52 billion in the second quarter of 2014 to $2.769 billion during the same three months of 2015. Research and development costs increased to $1.17 billion from the $492 million reported for the previous year.
Facebook had advised in April that costs and expenses for 2015 could exceed the figure for the previous year by as much as 65% as it invests in data centers, long term initiatives including virtual reality, solar-powered drones and in increasing the staff complement. Costs and expenses increased by 82% during the second quarter of 2015, keeping pace with a similar percentage increase during Q1 of 2015.
Also, revenue from advertising of $3.827 billion grew by $1.51 billion to show an increase of 43% year-on-year.
During the quarter under review, Facebook had made concerted efforts to court the large advertisers which have been successful. The advertising capabilities of Instagram, the photo sharing app the company had acquired in 2012, has been increased with new formats and targeting options. The under 35 age group most courted by advertisers coincides with the age group that provides the majority of Instagram users. Facebook also said it would it would start sharing revenue from advertising with video creators in an effort to increase both the quality and the quantity of videos attracted by Instagram in order to attract a bigger slice of the corporate advertisers television budget.
The big increase of more than $1 billion in advertising revenue is an indication of the importance which advertisers place on showcasing their products to an audience that spends large parts of its time on social media sites such as Facebook. Analysts estimate that mobile users spend between 25% and 33% of their mobile active time on Facebook and its other mobile apps.
Facebook’s advertising revenue for the first half of this year of $7.147 billion means that Facebook could grab as much as 20% of the annual $69 billion corporate mobile advertising spend.
Shareholders felt the cost of the increase in the expense budget as net income dropped to $719 million, which relates to 25 cents per share compared to the 2014 figure of $791 million and 30 cents per share.
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