Facebook's massive $1.3 billion turnaround was all old-school economics

Facebook just reported great quarterly financials and the stock market stamped its second quarter with a massive Like button, pushing the company’s stock up almost $12 billion dollars.

How?

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The new-economy Internet company did it the old-fashioned Business 101 way: increasing income and radically decreasing expenses. A quick look at the company’s consolidated earnings statements of operations shows exactly how.

Cost of revenue is up, but that’s the only major expense category to be up from 2012 to 1013.

Facebook research and development: down a staggering $361 million dollars, from three-quarters of a billion in 2012 to just over a third of a billion in 2013. Facebook marketing and sales expenses: down a healthy $123 million from almost $400 million in 2012. Facebook general and administrative costs: down $290 million from almost half a billion in 2012.

All told, Facebook’s expenses of running the business of the world’s largest social network were down almost $700 million, year-over-year, from Q2 2012 to Q2 2013, turning a $743 million loss from operations to a $562 million income from operations.

That’s a $1.3 billion turnaround.

Of course, it’s helped by the fact that the year-ago quarter was probably Facebook’s most expensive ever as Facebook built out its offerings and spent heavily to make its post-IPO months successful. But still, impressive.

“God bless Sheryl Sandberg,” I overheard one Facebook follower say when she heard the news, speaking of Facebook’s chief operating officer.

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At the same time, Facebook increased the numbers on the positive side of the ledger, growing income from negative territory to a healthy $331 million in net income.

Sadly for Facebook shareholders, not all of that $1.3 billion swing shows up in Facebook’s profit. You do, after all, have to pay taxes when you make money, as opposed to building up tax credits when you lose money. But you can bet all that hard-nosed gritty old-fashioned business work of reducing costs and building revenues is the big reason Facebook is Wall Street’s darling today.