Facebook Earnings: Mobile Success Here, Video Ads Coming

Facebook beat expectations last week. Mobile ads are doing well, better than expected. Analysts are ecstatic.

Facebook’s Financials

Facebook’s Q2 revenues grew 53% over the year to $1.81 billion, ahead of market expectations of $1.62 billion. EPS of $0.19 was also significantly ahead of the Street’s target of $0.14 for the quarter.

By segment, revenue from advertising grew 61% over the year to $1.6 billion, while payments and other fees revenue grew 11% to $214 million. Among operating metrics, daily active users grew 27% over the year to 699 million. The monthly active user base grew 21% to 1.15 billion. During the quarter, mobile monthly active user base grew 51% to 819 million.

Facebook’s quarter helped prove its strength in the mobile ad industry. Mobile ad revenues grew to $656 million, compared with $375 million a quarter ago. Facebook has also managed to reach a wider mobile audience because of its app Facebook for Every Phone. Targeted at non-smartphones, the app was released in 2011 to help enable Facebook’s mobile offerings for people who do not have the more expensive smartphones. Recently, Facebook announced that it had more than 100 million users on this app. Facebook seems to have figured out the mobile strategy, and now it is looking to do more.

Facebook’s New Offerings

Facebook continues to work toward increasing user engagement. To help drive it, Facebook added enhancements to its Instagram acquisition. After enabling tagging and photo reel streaming earlier this year, it has now enabled video uploads to Instagram. The move was received very well by the market as Facebook reported an addition of 5 million videos to Instagram within 24 hours of introduction of the feature.

According to eMarketer, the U.S. digital video advertising market is projected to grow from $2.93 billion in 2012 to $4.14 billion this year. By 2017, the digital video advertising market in the country will be worth $9.06 billion, translating to a 25% annual growth rate. Analysts are waiting for social networking giant Facebook  (Nasdaq:FB) to enter this high-growth market soon.

Given Facebook’s wide reach, its video ads are expected to hurt the TV ad market. Though still a market speculation, Facebook’s 15-second video ads are expected to be part of a user’s news feed. The ads are expected to be expensive, priced at $1 million for the 15-second spot. The ads will be on autoplay, and Facebook will play no more than three ads daily per user. Avertisers are not deterred by the price tag because of the lure of Facebook’s massive user base. The ads were expected to hit the market this year, but market rumors now suggest that they won’t be appearing before the beginning of 2014. If successful, these ads could not only be a big source of revenue for Facebook, but also a threat to the TV ad industry as advertisers will be able to deliver more targeted ads and take advantage of Facebook’s analytics to command an improved return on investment.

Facebook’s Acquisitions

As part of Facebook’s acquihiring strategy, the company recently acquired some assets of UK-based Monoidics. Monoidics’ Infer Static Analyzer uses mathematical algorithms to improve mobile software by verifying the code for bug and ensure memory safety and security. Their clients included ARM semiconductor, Airbus, and Mitsubishi Electric. The acquisition will help control bugs on Facebook’s offerings of mobile apps.

Facebook was also working to make a massive $1.3 billion acquisition of social map app maker, Waze, but talks fell through. Analysts believe talks failed because Waze refused to agree to Facebook’s demand to move operations from Israel to California. Waze was recently bought by Google for an estimated $1.1 billion.

Facebook’s stock is trading at $34.93 with a market capitalization of $84.22 billion, up over the $34.88 reached on the announcement of results this week. These are the highest levels the stock has reached since its IPO when it listed at $38.00.