Can Facebook End The Year On A Strong Note After Mixed Q3?

Facebook (NASDAQ:FB) announced its third quarter results on Tuesday, October 30, reporting a 33% year-over-year increase in revenues to $13.7 billion. In addition, its operating income was up 13% to $5.8 billion, and net income was up 9% y-o-y to $5.1 billion. Accordingly, EPS was up 11% on a y-o-y basis to $1.76, which was slightly lower than market expectations. While the revenue growth was similar to previous quarters, margins continued to be lower on a y-o-y basis. Going forward we expect a similar trend to continue through the end of the year. We have summarized our full year expectations on our interactive forecast dashboard for Facebook where you can modify key drivers such as monthly active users (MAUs), average revenue per user (ARPU), segment revenues, margins to arrive at the expected EPS for the year.

Key Growth Metrics

Facebook’s average MAUs stood at 2.27 billion for the quarter, which was 10% higher on a y-o-y basis. On the other hand, the average revenue per user (ARPU) jumped 23% to almost $6 per user. However, despite the largely expected results, Facebook’s management has given modest guidance for the December quarter. It should be noted that the “modest” revenue guidance for Q4 still represents a 25-30% year-on-year revenue increase, but it is substantially lower than the 40-45% revenue growth through the first half of the year. In addition, operating expenses have been up by 50-60% through the three quarters of the year, which the company attributed to increasing investment in core product development and infrastructure areas such as safety and security, augmented reality and virtual reality, sales & marketing and content acquisition. This has driven operating margins lower by 4-5 percentage points – a trend which is expected to continue in Q4. Long-term operating profit margins are expected to be in the mid-30% range, per Facebook’s management.

We forecast Facebook’s total MAUs through the year to be around 13% higher on a y-o-y basis at just under $2.3 billion. Much of the MAU growth is likely to come from the Asia-Pacific and Latin America regions. Similarly, ARPU is also expected to be up in double digits for the full year. ARPU growth has been consistent across geographies, even though the revenue generated per user varies from $7-8 per user in Asia Pacific, Latin America and Africa, to $25 in Europe and over $80 per user in the U.S. & Canada.

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