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Facebook (FB) Q4 Earnings Beat Estimates, Ad Revenues Up Y/Y

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Facebook (FB - Free Report) reported fourth-quarter 2018 earnings of $2.38 per share that beat the Zacks Consensus Estimate by a whopping 21 cents. Moreover, revenues of $16.91 billion comfortably surpassed the Zacks Consensus Estimate of $16.40 billion.

Earnings surged 65.1% from the year-ago quarter on revenue growth of 30.4% (33.1% at constant currency).

Facebook estimates that more than 2.7 billion people now use its “Family” of services, which includes Facebook, WhatsApp, Instagram and Messenger, on a monthly basis. Moreover, more than 2 billion people use at least one of its services daily, on average.

Geographically, Asia-Pacific was the strongest region, with revenues growing 34% year over year, followed by the United States & Canada’s 32.5%, and Europe’s 27.7%. Rest of the World’s (RoW) revenues increased 23.6%.

Average Revenue per User (ARPU) growth was strongest in the United States & Canada, up 30.3% year over year, followed by Europe’s 23.9% growth. RoW and Asia-Pacific grew 13.4% and 16.5%, respectively. Worldwide ARPU increased 19.3% to $7.37.

Advertising revenues soared 30.2% year over year to $16.64 billion. Asia-Pacific and the United States & Canada were the strongest regions, growing 34% and 31.9%, respectively. Advertising revenues in the Europe and RoW grew 27.9% and 23.8%, respectively.

Payments and other fees jumped 42% year over year to $274 million, driven by sales of Oculus Go and launch of Portal.

Asia-Pacific: Fastest Growing Market

Daily Active Users (DAUs) were 1.523 billion, up 122 million year over year and 28 million sequentially, and represented 66% of MAUs. Asia-pacific was Facebook’s fastest growing market in the quarter, driven by growth in India, Indonesia and the Philippines.

Asia-Pacific DAUs increased 78 million year over year and 16 million sequentially to 577 million. RoW DAUs were 478 million, up 37 million from the year-ago quarter and 8 million sequentially.

DAUs in Europe increased 4 million sequentially to 282 million. On a year-over-year basis, the figure increased 5 million. U.S. & Canada DAUs were 186 million, up 2 million on a year-over-year basis and 1 million on a sequential basis.

Monthly active users (MAUs) were up 191 million on a year-over-year basis and 49 million sequentially to 2.320 billion.

Asia-Pacific MAUs increased 119 million year over year and 30 million sequentially to 947 million. RoW MAUs were 750 million, up 58 million from the year-ago quarter and 14 million sequentially.

Moreover, MAUs in Europe increased 6 million sequentially to 381 million. On a year-over-year basis, the figure increased 11 million. MAUs in the United States & Canada grew 3 million on a year-over-year basis but remained flat sequentially.

Facebook, Inc. Price, Consensus and EPS Surprise

Facebook, Inc. Price, Consensus and EPS Surprise | Facebook, Inc. Quote

Security Initiatives Getting More Focus

CEO Mark Zuckerberg stated that Facebook is taking help from experts to decide acceptability of content. The company is currently in the process of building an independent body that will hear people’s appeal over Facebook’s content decisions.

Facebook is also working on making its products and services end-to-end encrypted and ephemeral, so that user information will not be available for long.

Instagram, Watch & More

Facebook stated that Instagram has more than 500 million daily active users on Stories. Management expects to introduce ecommerce and shopping on Instagram. Notably, more than 90 million small businesses now use Facebook’s products.

Moreover, 400 million people use Watch every month. On average, people spend more than 20 minutes on Watch daily.

Facebook also reiterated its focus on messaging, which is growing rapidly. The company plans to roll-out payments on WhatsApp in some more countries.

Further, Facebook is heavily investing in augmented and virtual reality (AR and VR) as well as hardware to foster more community feeling and social interactions. The launch of hardware products like Portal and Oculus Quest are steps toward that direction.

Ad Revenue Details

Mobile ad revenues surged 36% year over year to $15.5 billion, contributing 93% to total ad revenues. Ad impressions served increased 34%, while average price per ad decreased 2% from the year-ago quarter.

Impressions growth was driven by higher Feed & Stories ads on Instagram and Facebook mobile News Feed. However, year-over-year decline in average price per ad reflects unfavorable mix shift toward Stories, which is a low monetized product.

Facebook stated that it has more than 7 million active advertisers across its services. Moreover, 2 million advertisers are using Stories to reach customers across the company’s family of apps.

In the reported quarter, Facebook expanded Automatic Placements, which converts feed ads into a format that works for Stories and delivers ads wherever they will get the best results.

Facebook also launched ads in Messenger Stories. This means advertisers can now easily buy Stories ads across Facebook, Instagram and Messenger.

The company also stated that Marketplace ads are gaining traction. Facebook is working on making these ads more relevant.

In fact, across all its platforms and formats, Facebook is using artificial intelligence (AI) to make ads more relevant and effective. In the reported quarter, the company developed new AI ranking models that help people see ads they’re more likely to be interested in.

AI is now used to identify and more quickly review ads that might breach Facebook’s policies related to fake news and misinformation. It was effectively used during the U.S. midterm elections.

Operating Details

In the reported quarter, costs and expenses jumped 61.8% year over year to $9.09 billion.

Marketing & sales expenses jumped 79.5% from the year-ago quarter to $2.47 billion. Marketing & sales expenses as percentage of revenues increased 400 basis points (bps) on a year-over-year basis to 14.6%.

General & administrative expenses surged 42.3% to $976 million. General & administrative expenses as percentage of revenues increased 50 bps to 5.8%.

Research & development expenses jumped 46.5% to $2.86 billion. Research & development expenses as percentage of revenues increased 190 bps to 16.9%.

Notably, Facebook’s employee base surged 42% year over year to 35,587. The company ended 2018 with more than 30,000 people working on safety and security, up from 10,000 people a couple of years ago.

Operating income of $7.82 billion grew 6.4% year over year. However, operating margin declined from 56.7% to 46.2%.

Balance Sheet & Cash Flow

As of Dec 31, 2018, cash & cash equivalents and marketable securities were $41.11 billion compared with $41.21 billion as of Sep 30, 2018.

Capital expenditures were $4.37 billion, driven by investments in data centers, servers, network infrastructure and office buildings. Free cash flow was $3.32 billion compared with $5.41 billion in the year-ago quarter.

Facebook bought back almost $3.5 billion of its Class A common stock in the reported quarter. In December, the company’s board of directors authorized the repurchase of additional stock worth $9 billion.

Guidance

For the first quarter of 2019, total revenue growth rate is projected to decline mid-single digit percentage (on a constant currency basis) compared with the fourth-quarter growth rate.

Facebook also expects that revenue growth rates will continue to decline sequentially throughout 2019 on a constant-currency basis.

Moreover, 2019 total expenses will grow approximately 40-50% more than 2018. Capital expenditures outlook reiterated at $18-$20 billion, primarily due to continued large investment in building data centers.

Conclusion

Facebook reported impressive fourth-quarter 2018 results, driven by solid ad revenues that benefited from impression growth on both Instagram Stories and Feed.

However, only Instagram Stories is now expected to be the key catalyst for impression growth in 2019. Moreover, Facebook needs to improve ad pricing to drive top-line growth. Further, Facebook’s plan to introduce commerce in Instagram is expected to be a major growth driver.

Moreover, the company’s plan to integrate messaging apps — WhatsApp, Instagram, and Messenger – is expected to take time (not before 2020). Zuckerberg believes that the integration will boost user experience by making the services more secure through end-to-end encryption.

However, uncertain microenvironment due to Brexit and the U.S. shutdown is a headwind. Additionally, continued mix shift toward Stories is expected to hurt ARPU. Moreover, aggressive investments into security and innovation on AR/VR and AI technologies are expected to negatively impact profits in 2019.

Zacks Rank & Key Pick

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

Twitter (TWTR - Free Report) , ASGN Inc. (ASGN - Free Report) and Wix.com (WIX - Free Report) are better-ranked stocks in the broader computer and technology sector. All the three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Twitter, ASGN and Wix.com are set to report quarterly results on Feb 7, 13 and 20, respectively.

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