Facebook Recorded Healthy Growth Across Most Metrics During Q2

Facebook (NASDAQ:FB) delivered a strong quarter in Q2 2015, with top-line growth of 39% and healthy growth across user metrics. However, its GAAP operating margin dipped to 31% as compared to 48% in Q2 2014, owing to a planned increase in operating expenses. The company’s top-line growth is expected to slow in the coming quarters, owing to difficult year-over-year comparisons, currency headwinds, as well as a decline in the PC gaming business. At the same its margins could continue to slip as its expenses (in GAAP terms) are forecast to rise by 55% to 60% during the year. However, we believe the company’s long-term growth outlook remains strong as it has multiple growth levers, including Messenger, Whatsapp, Instagram, Search, Oculus, etc. We believe each of these platforms will contribute significantly to the overall revenue stream in the coming years.

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Advertising Business Recorded Strong Growth, Helped By Solid Performance On Mobile Devices

Facebook’s advertising business grew by 43% in dollar terms during the second quarter; in currency-neutral terms, the growth rate was notably higher at 55%. ^[1] This was primarily driven by the robust performance of the mobile platform, where ad revenues rose by 74% year to year  to comprise 76% of the overall ad business. In contrast, revenue from the traditional PC advertising business fell by 8% during the quarter. We expect continued strong growth in mobile ad revenues during the coming quarters, helped by secular trends towards mobile advertising and the company’s growing capabilities in this area.

In terms of geographic performance, strong demand within the North American and APAC regions, where ad revenue increased by 55% and 48%, respectively, lifted the overall business for the company. In contrast, Europe and the rest of the world region saw lower growth rates at 30% and 22%, respectively, due to currency headwinds. ^[1] With the company recently launching its ‘Facebook Lite’ app in emerging markets, we expect the company to accelerate its business in the developing regions in the coming years.

Regarding the breakup between total ad engagements and average price per ad engagement:  Though average price per ad strengthened by 220% annually, the total ad engagements decreased by 55% during the quarter. ^[1] These price volume trends were caused by the redesign of right-hand column ads, and by increased mobile usage (where right-hand column ads are not shown). While this trend is expected to persist, we believe these figures could narrow in the coming quarters, owing to difficult year-over-year comparisons.

User Metrics Grew At A Healthy Pace

Facebook’s monthly active user (MAU) count rose by 3.5% sequentially to 1.49 billion at the end of the second quarter. This represented slight slowdown as compared to 3.6% sequential growth in the prior quarter. Mobile MAU rose by 23% annually to 1.31 billion, which comprised about 88% of the overall MAU base.

Facebook’s daily active users (DAU) were seen at 968 million in June. The ratio of DAU to MAU was seen at 65%, which represented healthy engagement levels. In comparison, the same ratio for Twitter stands at around 45%. The user base on Facebook Events and Groups also rose to 450 million and 850 million respectively.

Long-Term Outlook Looks Strong

With monthly active users on Instagram, Messenger and WhatsApp now having surpassed 300 million, 700 million and 800 million respectively, we believe these platforms represent sources of long-term growth for the company. In addition, with more than 1.5 billion searches taking place on Facebook per day, we believe the same will also contribute to top-line growth in the coming years. We believe Instagram could start contributing significantly to the overall revenues during 2015, as the company is adding new ad formats on the platform and its extending its advertising reach across additional international markets. And within the Oculus business, the company could start rolling out VR (Virtual Reality) headsets as soon as the first quarter of 2016. This adds to the company’s growth outlook in the coming years.

We are in the process of revising our $87.80 price estimate for the company’s stock.

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1. Facebook (FB) Mark Elliot Zuckerberg on Q2 2015 Results – Earnings Call Transcript, Seeking Alpha, July 29, 2015 [↩] [↩] [↩]