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updated: 10/31/2013 8:30 AM

Facebook to limit news feed ads to win back teens

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  • Facebook Inc. will limit news feed advertisements that have driven revenue gains and said younger teens aren't using its website as much as they used to.

    Facebook Inc. will limit news feed advertisements that have driven revenue gains and said younger teens aren't using its website as much as they used to.
    Associated Press

By Bloomberg News

Facebook Inc. will limit news feed advertisements that have driven revenue gains and said younger teens aren't using its website as much as they used to.

The world's most popular social-networking service gave up most of its 18 percent stock increase in extended trading after Chief Financial Officer David Ebersman said on a conference call Wednesday that news feed promotions won't rise significantly. His comments followed third-quarter results showing sales that topped analysts' estimates as marketers spent more on ads targeting smartphone and tablet users.

Chief Executive Officer Mark Zuckerberg has been building features that make it easier for advertisers to reach consumers. He's seeking to strike a balance by making sure members aren't annoyed by marketing pitches while they check posts, pictures and other updates from their friends, even as Facebook aims to generate more ad revenue with higher prices and boost its user base of more than 1 billion.

"It's a fine line," said Brian Wieser, an analyst at Pivotal Research Group in New York who has a hold rating for the shares. "They want to manage the user experience. They don't want to overwhelm consumers' use of Facebook with advertising."

Facebook said revenue in the latest quarter surged 60 percent to $2.02 billion, exceeding the average analysts' projection for $1.91 billion, according to data compiled by Bloomberg. Sales from mobile promotions made up 49 percent of total ad revenue in the third quarter, surpassing 41 percent in the prior period and analysts' prediction for 45.6 percent.

Teen Users

While usage among U.S. teenagers was relatively stable during the quarter, there was a decrease among younger teens who log on daily, Ebersman said.

The shares of Facebook, based in Menlo Park, California, rose 2 percent to $50 at 7:17 a.m. before the markets opened after reaching as high as $57.98 yesterday in extended trading, before Ebersman's comments. The stock had gained 84 percent this year through yesterday.

"Given the high stock price, given the high valuation, there is room for disappointment," said Scott Kessler, an analyst at S&P Capital IQ in New York who rates Facebook the equivalent of a hold. "The expectations, seemingly, have gotten very substantial."

Profit, excluding stock-based compensation, currency effects on revenue and other items, was 25 cents a share, the company said in a statement yesterday, compared with analysts' average prediction for 19 cents.

Mobile Strategy

Net income was $425 million, or 17 cents a share, in the third quarter, as the social-networking service continued to invest in equipment, staff and services. That compared with a loss of $59 million, or 2 cents, a year earlier.

During the call with analysts, Ebersman said the percentage of ads on Facebook's news feed, including on mobile and desktop, was "modestly higher" in the third quarter from the previous period. The percentage of promotions is just one of the three main tools for expanding ad revenue, and is the least important, he said.

"One is just growth in users," Ebersman said. "Second is growth in demand, which plays out into pricing."

Facebook had 1.19 billion users during the quarter, up from about 1.15 billion in the second quarter. The number of mobile users rose 6.7 percent from the prior period to 874 million.

'Paying Off'

"The investments we're making in mobile in particular are really paying off," Ebersman said in an interview. "Mobile is already important, and we think it's going to increase in importance because it's where people are spending so much time."

Facebook, which didn't roll out mobile ads until early 2012, has been upgrading its offerings. Earlier this month, the company said it was expanding a service to let companies target users based on their online activity outside of the social network. Facebook's Instagram is set to start selling promotions.

"The good news for Facebook is that over 70 percent of its usage is mobile, yet only 49 percent of revenue comes from mobile, suggesting further upside," said Paul Sweeney, an analyst at Bloomberg Industries.

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