Facebook Posts Strong Q3 Earnings But Stock Falls On Guidance

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Facebook (NASDAQ:FB) posted strong third quarter results on Wednesday but the stock fell over 7% on news that advertising revenue growth is likely to “come down meaningfully” going forward. [1] The social media giant’s revenues increased 56% year on year (y-o-y) to over $7 billion, beating Reuters’ compiled consensus estimates by $90 million. This was driven by a significant rise in advertising revenues, which increased 59% y-o-y to $6.8 billion. However, this was slightly offset by a decline in Payments & Other Fees collected in the quarter, which was impacted due to a reduction in games played on the Facebook platform on PCs. In terms of the bottom line, the company’s adjusted net income grew by a whopping 91% y-o-y to $1.09 per share, easily beating consensus estimates of $0.97 per share.fb-20fb-21
Advertising Revenue Growth To Come Down

Advertising, Facebook’s primary source of revenue, grew 59% to over $6.8 billion in the third quarter of 2016 driven by growth in mobile ad revenues across geographies. Mobile ad revenues contributed 84% of total advertising revenues, up from 70% in the same period last year. Mobile ad revenues grew both because of an increase in frequency of ads shown in News Feed and the price per ad. The average price per ad increased 6% and total ad impressions rose 50% in the Q3 2016 over the same period last year.

Facebook management stated that advertising growth is likely to come down meaningfully in 2017 because the company is going to focus on keeping ad impressions at sustainable levels. Therefore, the next wave of ad revenue growth is expected to come from price per ad and subscriber growth.
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Impressive Free Cash Flow Growth

One of the impressive things about Facebook’s business model is its ability to increase free cash flows faster than its top line. Despite a 40% increase in capital investments in Q3 2016 over the same period in 2015, Facebook’s free cash flows increased 76% y-o-y in the quarter. This should help the company continue to make investments into newer areas such as its internet.org venture, virtual reality, augmented reality and artificial intelligence.fb-22

User Base Continues To Grow

In terms of engagement metrics, there was 4.5% sequential growth each in Facebook’s daily active users (DAUs) and monthly active users (MAUs) to 1.18 billion and 1.79 billion, respectively. To put this in perspective, this means that over 15% of the world’s population logs in to Facebook on a daily basis. This ratio varies from about 50% in the U.S. and Canada to 8% in the Asia-Pacific region. Facebook’s monthly active user base remained strong across all platforms, including Instagram, WhatsApp and Messenger. At the end of September 2016, the number of MAUs on Instagram, WhatsApp and Messenger were 500+ million, 1+ billion and 1+ billion, respectively.fb-26

The company reiterated the growing importance of video in content consumption on the Facebook platform, which should also help its advertising revenue in the long term. We expect that Facebook will continue to account for a larger share of the rapidly growing digital ad market going forward, as its product offerings have become highly popular with businesses of all sizes. Facebook’s long-term outlook looks strong on the back of strong monetization opportunities on its platforms across geographies as well as inroads into newer areas such as VR.fb-24

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Notes:
  1. Facebook Q3 2016 Earnings Transcript []