Facebook Posts Solid Q3 Earnings, Ad Revenues a Key Driver - Analyst Blog

Revenues

Revenues (excluding the foreign exchange effect) surged 57.8% from the year-ago quarter to $3.2 billion comfortably beating the Zacks Consensus Estimate of $3.1 billion. Robust advertising revenues (excluding the foreign exchange effect) that soared 63% from the year-ago quarter to $2.94 billion aided the strong revenue performance.

Advertising revenues were driven by increasing mobile engagement, higher number of marketers, continuing investment in new products and robust performance of its newsfeed ads.

Mobile ad revenues were $1.9 billion, up year over year from $881 million and accounted for 66% of ad revenues, up from 49% in the year-ago quarter. Ad revenues from desktop increased 11% on a year-over-year basis.

Mobile-only Monthly Active Users (MAU) was 456 million at the end of the third quarter, representing a staggering growth of 79.5% year over year.

As of Sep 30, 2014, Facebook's MAU improved 14% year over year to 1.35 billion. Mobile MAUs increased 29% year over year to 1.12 billion. Daily Active Users (DAU) rose 19% to 864 million on a year-over-year basis. Mobile DAUs grew 39% year over year to 703 million.

Ad impressions plummeted 56% on a year-over-year basis primarily due to lower ad volumes on mobile devices. However, average price per ad increased a staggering 274% from the year-ago quarter driven by redesigning of right hand column ads, offering higher value to marketers and therefore, resulting in higher effective prices.

Average revenue per user (ARPU) increased to $2.40 in the third quarter from $1.72 in the year-ago period.

Payments and other fees increased 13% year over year to $246.0 million in the reported quarter. Payments revenues from games, however, dipped 2% on a year-over-year basis given the declining trend in desktop usage.

Product Updates

In July, Facebook launched an Internet.org app for Airtel subscribers in Zambia offering basic free Internet connectivity along with 13 “free” services including Facebook, Google search, Wikipedia, a local news and job searching app, and AccuWeather.

Margins

Total cost and expenses as a percentage of revenues plunged to 56.4% from 63.5% reported in the year-ago quarter. Research & development expenses increased 70 basis points (bps) and marketing & sales expenses grew 10 bps. General & administrative expenses declined 40 bps. Cost efficiency drove operating margin, which surged from 36.5% in the year-ago quarter to 43.6%.

Balance Sheet & Cash Flow

Facebook exited the quarter with cash & cash equivalents and marketable securities of $14.25 billion compared with $11.4 billion in 2013. The company generated $1.25 billion of cash flow from operating activities compared with $950 million in the year-ago quarter. Free cash flow was $766 million in the third quarter compared with $666.0 million in the year-ago quarter. The company incurred capital expenditures of $482 million in the third quarter.

Guidance

Management expects total revenue in the fourth quarter to grow in the range of 40% to 47% year over year.

Management continues to expect total non-GAAP expenses to increase in the range of 30% to 35% for 2014.

For 2014, capital expenditure is expected around the lower end of the previous estimate, ranging within $2–$2.5 billion.

For 2015, the company expects non-GAAP total costs to increase approximately 50% to 70% over the 2014 figures.

Our Take

Facebook has gained significant traction in its mobile ad business within a very short span of time. This, combined with the massive user base and its ability to track personal details over time, makes it a formidable force in the online ad market.

However, overdependence on advertising revenues for growth can be a headwind. We note that both WhatsApp and Oculus are long-term growth opportunities. The Internet.org initiative is also long-term focused. Hence, the lack of revenue diversification remains a major concern in the near term.

Moreover, higher investments on product and infrastructure development will hurt profitability.

Currently, Facebook has a Zacks Rank #3 (Hold).

Other Stocks to Consider

Other stocks in this sector worth considering include Internet Initiative Japan Inc. (IIJI), Inuvo, Inc. (INUV) and LivePerson Inc. (LPSN). All have a Zacks Rank #2 (Buy).