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Facebook has strong quarter, but CFO predicts gloom for desktop games

UPDATE Facebook's desktop games business is now officially in "decline" and unlikely to bounce back, says the CFO -- plus some thoughts on Oculus from CEO Zuckerberg.
Today, Facebook released its results for its financial third quarter of 2014, which covers the period from July 1 to September 30, 2014. The company's revenues grew to $3.2 billion for the quarter, a 59 percent increase year-on-year. $2.96 billion of that came from advertising, a 64 percent increase year-on-year. The company beat analyst estimates; it was expected to turn in earnings of $3.12 billion. However, its stock is so far very slightly down in after-hours trading. Facebook continued to add mobile users, with 703 million daily active mobile users for the quarter, a 39 percent increase year-on-year. The service overall had 864 million daily active users, a 19 percent year-on-year increase. Monthly active mobile users were 1.12 billion, a 29 percent increase, as compared to 1.35 billion monthly active users overall. For the first time this year, revenue from payments and other fees, which includes the money Facebook makes from games played on its site, grew as compared to the prior quarter. Revenue in the segment was $246 million, though it's just a drop in the bucket as compared to the company's ad revenue, as you can see in the chart below.

Facebook's first decline in desktop-based game revenues

During the company's investor call, CFO David Wehner painted the bleakest picture yet of the company's desktop-based games business, saying, "Total payments and other fees revenue was $246 million, up 13 percent versus last year. However, payments volume from games, which represents the substantial majority of our payments and other fees revenue, declined 2 percent compared to last year, notably for the first time, and we expect this trend to continue as desktop usage continues to decline." On mobile, Facebook doesn't serve as a games platform but instead as a network and promotional service, and thus does not see a cut of revenue from in-game payments, which instead goes to the platform holder.

What's up with Oculus?

There was no mention of Oculus VR in its earnings release; however, the company's R&D budget grew substantially year-on-year, from $369 million to $608 million for the quarter. Without a more detailed breakdown, however, there's no way to tell what slice of that represents the work of Oculus, and it's worth noting that the company's R&D efforts have generally expanded. During the investor call, Wehrner did say that Oculus was in the R&D mix, but didn't offer details on its slice of the pie. At the Oculus Connect event last month, Oculus execs, including co-founder Palmer Luckey and John Carmack repeatedly said that being acquired by Facebook had allowed it to hire more aggressively as compared to the pre-Facebook era. During the company's earnings call, co-founder and CEO Mark Zuckerberg's prepared statements touched on Oculus VR in discussions of Facebook's 10-year strategy -- as opposed to three- or five-year strategy. "It's still early for Oculus," Zuckerberg said. "As I've said before, with Oculus, we're making a long-term bet on the future of computing." We've broken out Zuckerberg's thoughts on Oculus into a separate story, as he shared a slice of his vision for its VR technology over the next decade.

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