A month has gone by since the last earnings report for Facebook . Shares have lost about 1.9% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Facebook due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
Recent Earnings
Facebook reported second-quarter 2018 earnings of $1.74 per share that missed the Zacks Consensus Estimate by a penny. However, the figure surged 32.1% from the year-ago quarter.
Revenues of $13.23 billion also lagged the Zacks Consensus Estimate of $13.40 billion. However, the figure soared 41.9% (38% at constant currency) from the year-ago quarter. Management stated that Instagram is growing more quickly than the core Facebook app.
Geographically, Asia-Pacific was the strongest region with revenues growing 47.6% year over year, followed by Europe’s 47.3% and Rest of the World’s (RoW) 42.8%. U.S. & Canada revenues increased 37.2%.
Average Revenue per User (ARPU) growth was strongest in Europe, up 39.5% year over year, followed by the U.S. & Canada’s 33.7% growth. RoW and Asia-Pacific grew at 29% and 23%, respectively.
Slowing User Growth & Grim Guidance Hurts
Monthly active users (MAUs) were up 228 million on a year-over-year basis and 38 million sequentially to 2.23 billion. However, the figure lagged the Zacks Consensus Estimate of 2.25 billion.
Notably, the user addition growth rate figure significantly slowed down compared with the first-quarter figure, when Facebook added 260 million users year over year and 67 million sequentially.
Daily Active Users (DAUs) were 1.47 billion, up 146 million year over year and 8 million sequentially, and represented 66% of MAUs. However, this figure also lagged the Zacks Consensus Estimate of 1.48 billion.
Moreover, the company’s cautious guidance hurt investor’s confidence. Facebook now expects expenses to increase at a faster rate as compared with revenues in 2019.
Heavy spending in areas like safety & security, Augmented Reality/Virtual Reality (AR/VR), marketing, and content acquisition is expected to hurt profitability. Operating margin is now projected to be in the mid-30’s range.
In the reported quarter, cost and expenses jumped 49.8% to $7.37 billion. Facebook’s employee base surged 47% year over year to 30K.
Although operating income of $5.86 billion grew 33.2% year over year, operating margin contracted 290 basis points (bps) to 44.3%.
MAUs & DAUs Growth Strong in Asia-Pacific
User addition remained strong in the Asia-Pacific region. Facebook added 138 million and 21 million users on a year over year and sequential basis, respectively, to reach a total base of 894 million users.
In Rest of World region, the company’s installed base increased 69 million from the year-ago quarter and 18 million quarter over quarter to 723 million.
However, Facebook lost 1 million users on a sequential basis in Europe, due to the introduction of GDPR. On a year-over-year basis, the company added 16 million users in the region.
MAUs in the U.S. & Canada region grew 5 million over the past year but remained unchanged sequentially at 241 million.
Management stated that 2.5 billion people per month use at least one of its four apps — Facebook, WhatsApp, Instagram or Messenger.
Asia-Pacific was the strongest region in terms of DAUs growth. Management stated that growth was strong in India, Indonesia and the Philippines. However, the company lost DAUs in Europe on a sequential basis, due to negative impact of GDPR.
Mobile Ad Revenues Continue to Grow
Advertising revenues soared 42.3% year over year to $13.04 billion. Asia-Pacific and Europe were the strongest regions, growing 47.4% and 47%, respectively.
Europe’s growth rate declined significantly (47% versus 60% in the first-quarter), due to rollout of GDPR and reduced currency tailwind.
Mobile ad revenues surged 50% year over year to $11.9 billion, contributing 91% to total ad revenues. Ad impressions served increased 21%, while average price per ad increased 17% from the year-ago quarter. The growth was driven by higher ads in feed on Facebook and Instagram.
Facebook’s focus on video push drove revenues. The company witnessed healthy growth in video ads among all advertiser segments.
Further, availability of tools like Ads Animator is expected to boost video growth. The company is also testing Video Creation Kit that provides advertisers with easy-to-use video templates for a wide variety of marketing objectives.
Moreover, Facebook is making it easier to run ads on Instagram and in Stories. Management stated that this strategy helped Overstock (OSTK - Research Report) to gain 18% increase in return on ad spend and 20% decrease in cost per acquisition. Notably, Facebook has also started testing Stories Ads in the core Facebook app.
Payments and other fees increased 22.9% year over year to $193 million.
Balance Sheet & Cash Flow
As of Jun 30, 2018, cash & cash equivalents and marketable securities were $42.31 billion compared with $43.96 billion as of Mar 31, 2018.
Capital expenditures were $3.5 billion, driven by investments in data centers, servers, network infrastructure and office facilities. Free cash flow was $2.8 billion compared with $5.1 billion in the year-ago quarter.
Facebook bought back almost $3.2 billion of its Class A common stock in the reported quarter.
Guidance: Revenue Growth to Decelerate
For the second half of 2018, Facebook expects revenue growth rates to decline. On a sequential basis, for both third and fourth quarter, revenue growth rates are expected to decline by high-single digit percentages.
Management expects currency to be a headwind. Moreover, lower level of monetization from Stories is anticipated to hurt top-line growth. Further, increasing number of choices is now available to users around data privacy that may have a negative impact on top-line growth.
Facebook projects total expenses to increase between 50% and 60%, up from the previous guidance of 45% and 60%, over 2018. Capital expenditure is expected to be $15 billion, driven by increased investment in data centers, servers, office facilities and network infrastructure.
Management expects tax-rate in the mid-teens range for 2018. However, for the third quarter this is expected to be 25-30%, due to a one-time charge related to a recent court ruling in the IRS vs. Altera case.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended downward during the past month. The consensus estimate has shifted -19% due to these changes.
VGM Scores
Currently, Facebook has a strong Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. The stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
Based on our scores, the stock is primarily suitable for growth investors while also being suitable for those looking for momentum and to a lesser degree value.
Outlook
Estimates have been broadly trending downward for the stock and the magnitude of these revisions indicates a downward shift. It's no surprise Facebook has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.
Image: Bigstock
Facebook (FB) Down 1.9% Since Last Earnings Report: Can It Rebound?
A month has gone by since the last earnings report for Facebook . Shares have lost about 1.9% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Facebook due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
Recent Earnings
Facebook reported second-quarter 2018 earnings of $1.74 per share that missed the Zacks Consensus Estimate by a penny. However, the figure surged 32.1% from the year-ago quarter.
Revenues of $13.23 billion also lagged the Zacks Consensus Estimate of $13.40 billion. However, the figure soared 41.9% (38% at constant currency) from the year-ago quarter. Management stated that Instagram is growing more quickly than the core Facebook app.
Geographically, Asia-Pacific was the strongest region with revenues growing 47.6% year over year, followed by Europe’s 47.3% and Rest of the World’s (RoW) 42.8%. U.S. & Canada revenues increased 37.2%.
Average Revenue per User (ARPU) growth was strongest in Europe, up 39.5% year over year, followed by the U.S. & Canada’s 33.7% growth. RoW and Asia-Pacific grew at 29% and 23%, respectively.
Slowing User Growth & Grim Guidance Hurts
Monthly active users (MAUs) were up 228 million on a year-over-year basis and 38 million sequentially to 2.23 billion. However, the figure lagged the Zacks Consensus Estimate of 2.25 billion.
Notably, the user addition growth rate figure significantly slowed down compared with the first-quarter figure, when Facebook added 260 million users year over year and 67 million sequentially.
Daily Active Users (DAUs) were 1.47 billion, up 146 million year over year and 8 million sequentially, and represented 66% of MAUs. However, this figure also lagged the Zacks Consensus Estimate of 1.48 billion.
Moreover, the company’s cautious guidance hurt investor’s confidence. Facebook now expects expenses to increase at a faster rate as compared with revenues in 2019.
Heavy spending in areas like safety & security, Augmented Reality/Virtual Reality (AR/VR), marketing, and content acquisition is expected to hurt profitability. Operating margin is now projected to be in the mid-30’s range.
In the reported quarter, cost and expenses jumped 49.8% to $7.37 billion. Facebook’s employee base surged 47% year over year to 30K.
Although operating income of $5.86 billion grew 33.2% year over year, operating margin contracted 290 basis points (bps) to 44.3%.
MAUs & DAUs Growth Strong in Asia-Pacific
User addition remained strong in the Asia-Pacific region. Facebook added 138 million and 21 million users on a year over year and sequential basis, respectively, to reach a total base of 894 million users.
In Rest of World region, the company’s installed base increased 69 million from the year-ago quarter and 18 million quarter over quarter to 723 million.
However, Facebook lost 1 million users on a sequential basis in Europe, due to the introduction of GDPR. On a year-over-year basis, the company added 16 million users in the region.
MAUs in the U.S. & Canada region grew 5 million over the past year but remained unchanged sequentially at 241 million.
Management stated that 2.5 billion people per month use at least one of its four apps — Facebook, WhatsApp, Instagram or Messenger.
Asia-Pacific was the strongest region in terms of DAUs growth. Management stated that growth was strong in India, Indonesia and the Philippines. However, the company lost DAUs in Europe on a sequential basis, due to negative impact of GDPR.
Mobile Ad Revenues Continue to Grow
Advertising revenues soared 42.3% year over year to $13.04 billion. Asia-Pacific and Europe were the strongest regions, growing 47.4% and 47%, respectively.
Europe’s growth rate declined significantly (47% versus 60% in the first-quarter), due to rollout of GDPR and reduced currency tailwind.
Mobile ad revenues surged 50% year over year to $11.9 billion, contributing 91% to total ad revenues. Ad impressions served increased 21%, while average price per ad increased 17% from the year-ago quarter. The growth was driven by higher ads in feed on Facebook and Instagram.
Facebook’s focus on video push drove revenues. The company witnessed healthy growth in video ads among all advertiser segments.
Further, availability of tools like Ads Animator is expected to boost video growth. The company is also testing Video Creation Kit that provides advertisers with easy-to-use video templates for a wide variety of marketing objectives.
Moreover, Facebook is making it easier to run ads on Instagram and in Stories. Management stated that this strategy helped Overstock (OSTK - Research Report) to gain 18% increase in return on ad spend and 20% decrease in cost per acquisition. Notably, Facebook has also started testing Stories Ads in the core Facebook app.
Payments and other fees increased 22.9% year over year to $193 million.
Balance Sheet & Cash Flow
As of Jun 30, 2018, cash & cash equivalents and marketable securities were $42.31 billion compared with $43.96 billion as of Mar 31, 2018.
Capital expenditures were $3.5 billion, driven by investments in data centers, servers, network infrastructure and office facilities. Free cash flow was $2.8 billion compared with $5.1 billion in the year-ago quarter.
Facebook bought back almost $3.2 billion of its Class A common stock in the reported quarter.
Guidance: Revenue Growth to Decelerate
For the second half of 2018, Facebook expects revenue growth rates to decline. On a sequential basis, for both third and fourth quarter, revenue growth rates are expected to decline by high-single digit percentages.
Management expects currency to be a headwind. Moreover, lower level of monetization from Stories is anticipated to hurt top-line growth. Further, increasing number of choices is now available to users around data privacy that may have a negative impact on top-line growth.
Facebook projects total expenses to increase between 50% and 60%, up from the previous guidance of 45% and 60%, over 2018. Capital expenditure is expected to be $15 billion, driven by increased investment in data centers, servers, office facilities and network infrastructure.
Management expects tax-rate in the mid-teens range for 2018. However, for the third quarter this is expected to be 25-30%, due to a one-time charge related to a recent court ruling in the IRS vs. Altera case.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended downward during the past month. The consensus estimate has shifted -19% due to these changes.
VGM Scores
Currently, Facebook has a strong Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. The stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
Based on our scores, the stock is primarily suitable for growth investors while also being suitable for those looking for momentum and to a lesser degree value.
Outlook
Estimates have been broadly trending downward for the stock and the magnitude of these revisions indicates a downward shift. It's no surprise Facebook has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.