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Facebook beats Street but expenses a worry

Jessica Guynn
USA TODAY

SAN FRANCISCO — Facebook stock (FB) skidded 3% Thursday even though it delivered a Street-beating second quarter with revenue, profits and user growth all exceeding expectations.

The only hitch: Expenses grew even faster.

The Menlo Park, Calif.-based social network reported revenue jumped 39% to $4.04 billion in the second quarter, up from $2.91 billion a year ago.

But that gain was outpaced by total costs which rose 82% from the same quarter a year ago.

Net income fell 9.1% to $719 million, or 25 cents a share, compared with $791 million, or 30 cents a share, a year ago.

Excluding certain expenses, Facebook said it would have earned 50 cents a share. Analysts had expected adjusted earnings of 47 cents.

Facebook shares, which have been trading near all-time highs, were down about 3% to around $94 in Thursday trading.

Investors are increasingly scrutinizing the expenses of technology companies such as Facebook and Google, said S&P Capital IQ analyst Scott Kessler.

Facebook warned investors earlier this year that costs and expenses would rise dramatically as it invests in long-term projects such as virtual reality, as well as in recruiting top engineers and building new data centers.

"People are worried about runaway, undisciplined, expenses and ultimately, unsuccessful expenses," Kessler said. "But here the proof is in the pudding. Facebook put up the growth numbers and that is what ultimately people want to see."

A growing number of advertisers are turning to Facebook to reach digital consumers, especially on smartphones and tablets. Mobile advertising revenue accounted for 76% of advertising revenue in the quarter. Research firm eMarketer expects Facebook to control 16% of the $69 billion mobile ad market this year. Google is expected to capture 35%.

Consumers continue to spend a lot of their time on Facebook. The number of users who check their account at least once a month grew to 1.49 billion from 1.44 billion last quarter. Of those users, 968 million check their account every day, up from 936 million in the first quarter.

"Facebook's rate of user growth actually picked up this quarter, which makes for a dramatic contrast with Twitter. In fact, Facebook added more daily active users in the U.S. alone in the quarter than Twitter added monthly active users globally," said Jan Dawson, chief analyst with Jackdaw Research. "Facebook growth shows no sign of slowing down, which is incredible when they're just shy of one and a half billion users."

Facebook is also making money from that growth in users, Dawson says.

"The Street must have been expecting something pretty outlandish to react as badly as it has, because this is a really solid set of results," he said.

Shares FB closed up 2% to $97 in regular trading on Wednesday. Facebook announced its second-quarter results after the close of trading.

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