Facebook Posts Strong Q1 Earnings But Stock Slips On Advertising Growth Guidance

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Facebook (NASDAQ:FB) posted strong first quarter results yesterday, with revenues increasing 49% year on year (y-o-y) to over $8 billion, beating Reuters’ compiled consensus estimates of $7.84 billion. This was driven by a significant rise in advertising revenues, which increased 51% y-o-y to about $7.86 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 net income grew by a whopping 73% y-o-y to $1.04 per share, easily beating consensus estimates of $0.87 per share.

Mobile Advertising Continues Growth

Advertising revenue, Facebook’s primary source of revenue, grew 51% to about $7.86 billion in the first quarter driven by growth in mobile ad revenues across geographies. Mobile ad revenues contributed 85% of total advertising revenues, up from 82% in the same period last year and 84% in Q4 2016. 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 14% and total ad impressions rose 32% in Q1 2017 over the same period last year.

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Another important aspect of Facebook’s advertising revenue growth was its growth in average revenue per user (ARPU), especially in North America. ARPU in North America grew at an impressive 37% y-o-y to over $17 per quarter, driving the company-wide ARPU up by 28% to $4.23 per quarter. fb-41

Facebook management reiterated 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. Investors took a cautious approach to this and Facebook’s stock slipped 2.5% in after-hours trading yesterday. The next wave of ad revenue growth is expected to come from price per ad and subscriber growth.

Impressive Free Cash Flow Growth

One of the impressive aspects of Facebook’s business model is its ability to consistently increase free cash flows. Despite a 12% increase in capital investments in Q1 2017 over the same period in 2016, Facebook’s free cash flows increased 61% y-o-y in the quarter to $3.8 billion. 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.

User Base Continues To Grow

In terms of engagement metrics, there was 17% y-o-y growth in Facebook’s monthly active users (MAUs) to 1.94 billion. To put this in perspective, this means that over 25% of the world’s population logs in to Facebook on a monthly basis. This ratio varies from about 65% in the U.S. and Canada to 15% 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 March 2017, the number of MAUs on Instagram, WhatsApp and Messenger were 700 million, 1.2+ billion and 1.2 billion, respectively.

fb-42The 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.

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