• by Mark Walsh  @markfwal, January 30, 2013

Facebook continued its comeback Thursday, reporting revenue growth of 40% in the fourth quarter on strong gains in mobile advertising.

The social networking giant posted adjusted net income of $426 million, or 17 cents a share, on revenue of $1.58 billion. That compares to a profit of $360, or 15 cents, on sales of $1.13 billion a year ago.

The company’s Q4 results topped analysts’ consensus estimate of earnings of 15 cents per share and revenue increasing 34% to $1.52 billion. The number of monthly active mobile users on Facebook increased 57% to 680 million, while monthly active users overall grew 25% to 1.06 billion from a year ago in the quarter.

"In 2012, we connected over 1 billion people and became a mobile company," said Facebook CEO Mark Zuckerberg, in the earnings announcement.

The solid earnings report is the latest sign of Facebook’s resurgence following its botched IPO last May amid lingering concerns about whether the company could monetize its rapidly growing mobile audience. It helped allay those concerns by reporting mobile revenue of $152 million in the third quarter, or 14% of total ad revenue.

The company also rolled out the Facebook Ad Exchange, a real-time bidding platform (RTB) allowing marketers to retarget ads on the social network based on their Web-browsing habits. Those and other initiatives, including its Graph Search announcement, have seen Facebook’s stock climb 76% since September.

Analysts were keen to see whether Facebook would sustain its mobile growth into the fourth quarter. Facebook reported that mobile ad revenue doubled to $306 million in the quarter, making up 23% of total ad sales of $1.33 billion.

Victor Anthony, an analyst at Topeka Capital Markets, had projected mobile ad revenue would more than double to $315 million, or 24% of overall ad revenue. Doug Anmuth of JP Morgan Chase -- one of Facebook's IPO underwriters -- forecast mobile ad sales reaching as high as $384 million, or 27%.

While mobile advertising is booming, Brian Wieser, senior analyst at Pivotal Research Group, pointed out that it also carries higher costs than traditional desktop advertising on Facebook, and is eating into margins. He noted that costs were 54% of revenues, minus certain expenses, compared to the 51% Pivotal had forecast.

Given the dramatic rise in users accessing Facebook via mobile, Zuckerberg emphasized that the company would continue pursuing a “mobile-first” strategy, in part because it can drive more revenue from mobile users.

Overall, advertising rose 41% in the quarter from the year-earlier period. Facebook’s ad business is benefiting from the higher prices ads in the news feed command. Ads in the newsfeed on both the desktop and mobile carried CPMs of over $5, while ads across the site had a 38-cent CPM in the fourth quarter.

Mobile newsfeed ads slipped 10% to $5.21 on average from the prior quarter, partly as a result of increased inventory from the iPhone 5 and iOS 6. The CPM for desktop newsfeed ads rose 35% to $5.37, per Facebook ad partner Spruce Media.

The firm also noted that more brand advertisers in the quarter shifted budgets from ads appearing on the right side of pages to sponsored stories and other ads in the newsfeed. JP Morgan's Anmuth estimated revenue from those ads more than doubled to $464 million in the quarter.

Advertisers and analysts have also been bullish on the early results from FBX. “The cost is really low, inventory is really abundant, the audience is incremental to existing options, and targeting is precise,” said Jared Belsky, EVP, at digital agency 360i. 

Facebook didn't disclose how much ad revenue FBX accounted for in the quarter, but COO Sheryl Sandberg said the system was serving 1 billion impressions a day in December and delivering conversion rates 36% higher than other retargeting platforms, citing data from ad partner Triggit.

Pivotal’s Wieser estimates revenue generated by FBX in the fourth quarter totaled $25 million, up from almost nothing in the third quarter. But as the platform gears up, he projects it could contribute at least $300 million in 2013.

Advertising overall accounted for 84% of Facebook’s revenue in the fourth quarter, compared to 86% in the prior quarter. Its payments business and other fees amounted to $256 million, up 36% from a year ago. With Zynga stumbling, Facebook has moved to diversify its e-commerce revenue to reduce its reliance on the social game maker.

On the conference call, Facebook CFO David Ebersman said payments revenue from games was essentially flat, while that from user-promoted posts and Gfits was about $5 million. He said sales from non-game initiatives like Gifts would remain “very small” through this year.

Despite beating Wall Street’s estimates, investors appeared less impressed as Facebook’s share price fell slightly in after-hours trading shortly after fourth-quarter results were posted.