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Facebook (FB) Q3 Earnings Top Estimates, Outlook Cautious
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Facebook, Inc. delivered strong third-quarter 2016 results driven by its mobile and live video efforts. Third quarter adjusted earnings per share of 88 cents and revenues of $7.011 billion crushed the respective Zacks Consensus Estimate of 77 cents and $6.923 billion. Notably, this is Facebook’s fifth successive quarter of earnings and revenue beat.
However, shares fell over 7% in the aftermarket session as investors’ concerns about revenues increased after Facebook adopted a cautious stance.
Facebook said that ad revenues will continue to grow but will now face tougher year-over-year comparisons in the current year. Ad load, which so far has been a leading factor driving ad revenues, will now cease to be so in the coming quarters and won’t be a big factor after mid-2017. Consequently, ad revenue rates will “come down meaningfully.” Moreover, as Facebook continues to ramp up investments, costs will increase. The company plans to go on a hiring spree next year and especially recruit engineers, which will further add to its costs.
All this was enough to make investors press the panic button. However, analysts observe that there is nothing unexpected here. Facebook (or even any other company for that matter) is unlikely to keep up with those dizzying initial growth rates as it gets bigger.
Quarterly Numbers in Details
Facebook reported non-GAAP earnings of $1.09 in the quarter, up 91% year over year. Revenues, excluding the impact of year-over-year changes in foreign exchange rates basis, increased 56% year over year.
Facebook’s consistently expanding user growth remains one of its biggest growth catalysts. Facebook’s gargantuan 1.79 billion monthly active users (MAUs) were up 16% year over year. In addition, at the end of the quarter, mobile MAUs were 1.66 billion, representing 20% year-over-year growth. Daily Active Users (DAUs) were 1.18 billion, reflecting 17% growth year over year while Mobile DAUs were 1.09 billion, up 22% year over year.
Breaking down revenue components, advertising revenues came in at $6.816 billion, surging 59% year over year. Excluding the impact of changes in foreign exchange rates, revenues from advertising also increased 59% year over year. Advertising revenues were driven by increasing mobile engagement, higher number of marketers, and continuing investment in new products. Facebook has over 4 million active advertisers and over 60 million active SMBs of which 85% are active on mobile.
Mobile ad revenues in the quarter were $5.7 billion (up 70% year over year), contributing 84% to total ad revenues. Ad impressions grew 50%, driven by surging mobile ad impressions. Average price per ad increased 6% from the year-ago quarter. Average revenue per user was $4.01
Payments and other fees decreased 3% year over year to $195 million in the reported quarter owing to a reduction in payment revenues related to PC games. Management expects revenues from this segment to face further decline as PCs lose market share.
On the cost front, cost & expenses (non GAAP) grew 36.5% to $2.885 billion, driven by increases in workforce and marketing expenses. However, robust revenue growth provided enough cushion to operating margins. Non-GAAP operating income of $4.156 billion grew 72.4% year over year.
Balance Sheet & Cash Flow
Facebook exited the quarter with cash & cash equivalents and marketable securities of $26.1 billion, up 41.8% year over year. The company generated nearly $9.8 billion of cash flow from operating activities in the first nine months compared with $5.8 billion in the same period last year. Free cash flow was $6.5 billion compared with $3.9 billion in the same period last year. The company incurred capital expenditure of $3.2 billion in the first nine months of the year.
Outlook
Non-GAAP expenses are projected to increase in a band of 40% to 45% while capex is expected to be $4.5 billion. Stock-based compensation is estimated in the range of $3.2 billion–$3.3 billion. The company expects amortization expenses in 2016 to be within $700 million–$800 million.
Facebook has clearly highlighted its ambitions of being more than just a social network. It outlined its plans for the next decade, with a strong focus on AI and AR/VR technology. Plus, Facebook has just started to monetize Instagram. Since it opened Instagram’s ad platform to worldwide advertisers last year, it has emerged as an important cash cow for Facebook. Again there were no exact numbers for the last reported quarter with regard to contribution from Instagram but Facebook said that the platform has now over 500,000 advertisers.
The company is also aggressively working on monetizing its subsidiaries, Messenger, Oculus and WhatsApp. Chatbots and “conversational commerce” are likely to be the strategies for Messenger and WhatsApp as well.
The company expects 2017 to be a year of aggressive investments. The company plans on building more data centersas well as recruiting more engineers to fuel its AI & AR/VR technologyambitions.
Moreover, as ad load contribution reduces, Facebook is aggressively promoting “Live” in order to boost its top line. It intends to capture the opportunity presented by ever increasing video viewing on social media platforms. Facebook added that since May this year, the number of live video has increased fourfold.
Also, it has forayed into enterprise software by launching Workplace. With Workplace, the social media giant is trying to break into the lucrative enterprise software market. Per a Jun 2016 Gartner report, global spending for enterprise software will grow 7% year over year to $367.5 billion in 2016. This is a lucrative opportunity for Facebook, given the higher margins involved. Facebook also upped its ante in the social commerce area with the launch of Marketplace. It also acquired Nascent Objects to boost its hardware efforts.
As of now, all of these appear to be terrific growth engines but it will be one Herculean task for the company to actually make all of them work. User growth and ad load have already reached a point where growth will now be more subdued. Moreover, intensifying competition for users & ad dollars from the likes of Alphabet (GOOGL - Free Report) and Twitter Inc ,and increasing investments threaten to thwart its growth prospects.
At present, Facebook carries a Zacks Rank #4 (Sell).
Groupon has an average positive earnings surprise of 31.07%.
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Facebook (FB) Q3 Earnings Top Estimates, Outlook Cautious
Facebook, Inc. delivered strong third-quarter 2016 results driven by its mobile and live video efforts. Third quarter adjusted earnings per share of 88 cents and revenues of $7.011 billion crushed the respective Zacks Consensus Estimate of 77 cents and $6.923 billion. Notably, this is Facebook’s fifth successive quarter of earnings and revenue beat.
However, shares fell over 7% in the aftermarket session as investors’ concerns about revenues increased after Facebook adopted a cautious stance.
Facebook said that ad revenues will continue to grow but will now face tougher year-over-year comparisons in the current year. Ad load, which so far has been a leading factor driving ad revenues, will now cease to be so in the coming quarters and won’t be a big factor after mid-2017. Consequently, ad revenue rates will “come down meaningfully.” Moreover, as Facebook continues to ramp up investments, costs will increase. The company plans to go on a hiring spree next year and especially recruit engineers, which will further add to its costs.
All this was enough to make investors press the panic button. However, analysts observe that there is nothing unexpected here. Facebook (or even any other company for that matter) is unlikely to keep up with those dizzying initial growth rates as it gets bigger.
Quarterly Numbers in Details
Facebook reported non-GAAP earnings of $1.09 in the quarter, up 91% year over year. Revenues, excluding the impact of year-over-year changes in foreign exchange rates basis, increased 56% year over year.
Facebook’s consistently expanding user growth remains one of its biggest growth catalysts. Facebook’s gargantuan 1.79 billion monthly active users (MAUs) were up 16% year over year. In addition, at the end of the quarter, mobile MAUs were 1.66 billion, representing 20% year-over-year growth. Daily Active Users (DAUs) were 1.18 billion, reflecting 17% growth year over year while Mobile DAUs were 1.09 billion, up 22% year over year.
Breaking down revenue components, advertising revenues came in at $6.816 billion, surging 59% year over year. Excluding the impact of changes in foreign exchange rates, revenues from advertising also increased 59% year over year. Advertising revenues were driven by increasing mobile engagement, higher number of marketers, and continuing investment in new products. Facebook has over 4 million active advertisers and over 60 million active SMBs of which 85% are active on mobile.
Mobile ad revenues in the quarter were $5.7 billion (up 70% year over year), contributing 84% to total ad revenues. Ad impressions grew 50%, driven by surging mobile ad impressions. Average price per ad increased 6% from the year-ago quarter. Average revenue per user was $4.01
Payments and other fees decreased 3% year over year to $195 million in the reported quarter owing to a reduction in payment revenues related to PC games. Management expects revenues from this segment to face further decline as PCs lose market share.
On the cost front, cost & expenses (non GAAP) grew 36.5% to $2.885 billion, driven by increases in workforce and marketing expenses. However, robust revenue growth provided enough cushion to operating margins. Non-GAAP operating income of $4.156 billion grew 72.4% year over year.
Balance Sheet & Cash Flow
Facebook exited the quarter with cash & cash equivalents and marketable securities of $26.1 billion, up 41.8% year over year. The company generated nearly $9.8 billion of cash flow from operating activities in the first nine months compared with $5.8 billion in the same period last year. Free cash flow was $6.5 billion compared with $3.9 billion in the same period last year. The company incurred capital expenditure of $3.2 billion in the first nine months of the year.
Outlook
Non-GAAP expenses are projected to increase in a band of 40% to 45% while capex is expected to be $4.5 billion. Stock-based compensation is estimated in the range of $3.2 billion–$3.3 billion. The company expects amortization expenses in 2016 to be within $700 million–$800 million.
FACEBOOK INC-A Price, Consensus and EPS Surprise
FACEBOOK INC-A Price, Consensus and EPS Surprise | FACEBOOK INC-A Quote
Final Word
Facebook has clearly highlighted its ambitions of being more than just a social network. It outlined its plans for the next decade, with a strong focus on AI and AR/VR technology. Plus, Facebook has just started to monetize Instagram. Since it opened Instagram’s ad platform to worldwide advertisers last year, it has emerged as an important cash cow for Facebook. Again there were no exact numbers for the last reported quarter with regard to contribution from Instagram but Facebook said that the platform has now over 500,000 advertisers.
The company is also aggressively working on monetizing its subsidiaries, Messenger, Oculus and WhatsApp. Chatbots and “conversational commerce” are likely to be the strategies for Messenger and WhatsApp as well.
The company expects 2017 to be a year of aggressive investments. The company plans on building more data centersas well as recruiting more engineers to fuel its AI & AR/VR technologyambitions.
Moreover, as ad load contribution reduces, Facebook is aggressively promoting “Live” in order to boost its top line. It intends to capture the opportunity presented by ever increasing video viewing on social media platforms. Facebook added that since May this year, the number of live video has increased fourfold.
Also, it has forayed into enterprise software by launching Workplace. With Workplace, the social media giant is trying to break into the lucrative enterprise software market. Per a Jun 2016 Gartner report, global spending for enterprise software will grow 7% year over year to $367.5 billion in 2016. This is a lucrative opportunity for Facebook, given the higher margins involved. Facebook also upped its ante in the social commerce area with the launch of Marketplace. It also acquired Nascent Objects to boost its hardware efforts.
As of now, all of these appear to be terrific growth engines but it will be one Herculean task for the company to actually make all of them work. User growth and ad load have already reached a point where growth will now be more subdued. Moreover, intensifying competition for users & ad dollars from the likes of Alphabet (GOOGL - Free Report) and Twitter Inc ,and increasing investments threaten to thwart its growth prospects.
At present, Facebook carries a Zacks Rank #4 (Sell).
A stock worth consideration in the tech space is Groupon Inc (GRPN - Free Report) , which carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Groupon has an average positive earnings surprise of 31.07%.
Confidential from Zacks
Beyond this Analyst Blog, would you like to see Zacks' best recommendations that are not available to the public? Our Executive VP, Steve Reitmeister, knows when key trades are about to be triggered and which of our experts has the hottest hand. Click to see them now>>