User Growth Accelerates On Facebook, Even While Currency Impacts Earnings

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Facebook’s (NASDAQ:FB) top-line rose by 42% to $3.54 billion during Q1 2015, which came in slightly below market expectations. In addition, the planned increased in expenses impacted profitability, with non-GAAP operating margin falling to 52% as compared to 57% in the same period a year ago. However, we think the company saw a strong quarter in Q1, as the revenue growth was mainly impacted by currency headwinds. In currency-neutral terms, revenue growth was much higher at 49%. In addition, the sequential growth in Facebook’s monthly active user base accelerated to 3.6% in Q1 as compared to 3.0% in the previous quarter.

We believe there is significant long-term growth potential in Facebook’s businesses  in addition to the core FB platform.  These include Instagram, Messenger and WhatsApp, with user bases of 300, 600 and 800 million, respectively. Each is growing rapidly and, once monetized, will drive significant revenue growth in coming years. In addition, the search business (comprising for more than one billion mobile searches per day) represents potential opportunity currently untapped by Facebook.

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See our complete analysis for Facebook

Ad Revenue Growth Was Primarily Driven By Increase In Ad Pricing

During the first quarter of 2015, Facebook’s advertising revenues surged by 46% year over year in dollar terms and 55% in currency-neutral terms. As we expected, this was primarily driven by 285% rise in average ad pricing as the total number of ad impressions fell by 62%. [1] These price-volume dynamics were caused by changes in right-hand column ads and the shift towards mobile usage (where right-hand ads are not shown). Over the longer-run, we expect ad impressions to increase over our forecast period, in line with the user base and engagement growth on the platform. At the same time, we believe average ad pricing will continue to rise robustly in the coming years, owing to consistent improvement in the quality and relevance of ads. Facebook’s investments in several tools including Atlas, LiveRail, Audience Network, etc., will help in this direction.

Mobile advertising revenues grew rapidly by 82% during Q1 to comprise for 73% of the overall advertising revenues. Moreover, the mobile monthly active user base stood at 1.25 billion at the end of March, accounting for more than 85% of the overall monthly active user base. In comparison, the traditional PC ad business saw a 4% decline during the quarter. [1] We believe there is significant upside potential for mobile advertising on Facebook, mostly because the mobile platform is still highly under-penetrated within average brand advertising budgets.

The number of video views per day increased to four billion recently, as compared to three billion in the past quarter and one billion in September 2014. We expect this figure to continue to increase sharply, driven by the recent launch of spherical videos (that provide 360 degree videos) and embedded videos on Facebook platform. All in all, this will likely translate into higher ad pricing in the future.

Unlike advertising revenues, the revenues from payments and other fees decreased by 5% during Q1 2015 as reduced usage on desktop devices impacted gaming-related revenues. Challenges in this business are expected to persist throughout 2015.

Future Outlook — While Expense Guidance Has Been Tightened, Currency Headwinds Could Have A More Pronounced Impact During Q2

The management updated its guidance for expenses during 2015 — though earlier expenses (in GAAP terms) were forecast to rise by 55% to 70%, they are now expected to increase by 55% to 65%. In terms of non-GAAP, expenses could grow by 50% to 60% during the year. [1] With foreign exchange headwinds expected to worsen in the near-term, we believe this recent pruning of expenses will somewhat help curb the fall in margins during the year.

We are in the process of revising our $87.5 price estimate for FB’s stock.

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Notes:
  1. Facebook (FB) Mark Elliot Zuckerberg on Q1 2015 Results – Earnings Call Transcript, Seeking Alpha, April 22, 2015 [] [] []