Facebook's Q2 2013 earnings have blown away expectations on both topline revenues and bottom line earnings per share.
The beat came on a massive increase in mobile advertising, which was ~$656 million in Q2, up from $375 million in Q1.
Going forward, that big increase in mobile is going to give Facebook harder comparable numbers to beat in the coming quarters. Mobile wasn't part of the mix last year.
CEO Mark Zuckerberg played up the growth of Instagram on the call, and also underlined his belief that the U.S. imply doesn't produce enough engineers to fuel tech company hiring.
He also denied the accusation that teens are getting bored of Facebook.
Lastly, COO Sheryl Sandberg confirmed our report from yesterday that Facebook's video ad product is NOT yet ready for prime time. She declined to say when it might appear.
More details on the financials are at the bottom of this post.
EPS: 19 cents (expectation was 14 cents).
Total Revenue: $1.81 billion (expectations were $1.62 billion).
Keynotes of The Q2 2013 Earnings Call Conference:
CEO Mark Zuckerberg began the conference call.
"We now have more daily actives on mobile than on desktop ... soon we'll have more revenue on mobile than on desktop."
"Our mission is to reach the next 5 billion people."
FB added 45 million monthly active users during Q2. 700 million daily active users worldwide. Zuckerberg said.
"People are spending more time on Facebook than ever before." (Because of mobile.)
Teens are NOT abandoning Facebook:
"That just isn't true."
Zuck says he's done the research and the numbers bear him out.
On to Instagram. Video is a success, he says. (When he mentions "Kevin," he's presumably referring to Instagram CEO Kevin Systrom.)
FB now has 1 million active advertisers. They're still satisfied with ROIs. Zuck said.
"This quarter marks the end of our first year as a public company."
Happy IPO anniversary, everyone!
COO Sheryl Sandberg is spoke next.
"E-commerce companies increased their spend significantly."
Spend doubled in the second quarter. They have high click-thru rates. She mentioned mobile app install ads, as well. (My take: This is part of Facebook's push to position itself as a direct-response medium with robust ROI analytics.) Sheryl said.
"Every night 88-100 million people are using Facebook during the nightime hours while watching TV." (Sandberg seems to be addressing Twitter's moves into the social media/TV ad market here.)
Custom Audiences clients more than doubled, she said. (Those are the advertisers who use their own lists to target customers. It's one of Facebook's key pushes to demonstrate that ads on FB actually work.) Sheryl said.
"We have one of, if not THE, most effective mobile ad product."
CFO David Ebersam spoke next.
He said about Instagram:
"There are 130 million actives using the service."
Average price per ad on FB is up 13%. No. of impressions served is up, too.
He said.
"We were pleased to see King's rapid growth in Q2." (Note that the maker of Candy Crush Saga gets the first shout out — Zynga has yet to be mentioned! Ouch!)
Questions from analysts!
Question 1 is about effectiveness of ads in the news feed.
Sheryl answered:
"All four marketer segments are growing ... increased supply and increase in demand."
Question 2: Mobile app install ads.
Sheryl answered:
"All four segments are growing. Mobile app install ads are small but they're important and they're growing rapidly."
Question 3 is on Custom Audiences.
Sheryl answered: (Long answer about targeting. Bit dry, frankly.)
Question 4 is on monetization of Instagram!
Zuckerberg answered:
"Kevin (Systrom) has always been clear that we're building Instagram as a business. ... probably through advertising."
...focus will be to increase footprint of Instagram. Not at advertising point yet.
Sheryl also spoke: Says she wants to increase share of consumer packaged goods (CPG) marketers.
Question 5 is on growth of ad sales force and ad ops, particularly outside US.
Sheryl answered:
"Our growth was very strong across regions. ... we're up to over 40 offices, we have sales teams on the ground in 40 offices."
... [strong in Asia.]
Question 6 is on programmatic selling (that's FB's ad exchange, FBX).
Sheryl answered:
"FBX ... is actually a very small part of our business and sometimes people don't understand that."
(My take: Ouch! Hundreds of real-time bidding adtech execs just died a little inside. Previously, people thought this was worth hundreds of millions or maybe billions of dollars a year, eventually.)
Question 7 is on impression-based selling v. performance selling.
Sheryl answered:
"Advertisers are looking for discovery. ... We have a big brand opportunity ... up to 100 million engaged during primetime hours. ... T-Mobile did a campaigns ... used offer ads ... they had a 20X return on adspend. That's what we can do with impressions, taking it all the way through the funnel."
Ebersam is talking about capex. Not too dramatic.
Question 8 is on mobile. Why so lumpy?
Ebersam answers: ... News feed ad integration was a big, smooth success. Ad prices held up even though more inventory was supplied. ... clicks in system is still increasing, increasing supply, but cost per clicks for news feed ads increased anyway, Q-Q.
Question 9 is on mobile news feed ads, again. He wants a breakdown of how growth pricing works.
Ebersam answers:
"We're trying to find the right balance for each user."
Wants better creative so ads are more engaging. Everything contributed. Supply, demand, cost per click all went up.
"A nice balanced contribution from the variables."
Question 10: Video ads! Finally! What are the hurdles?
Sheryl answered:
"We have a current video ad product, because advertisers can embed a video in a page post ... demand is there ... we are exploring how to expand that but we don't have anything new to announce today."
(My take: Reports back in April that a video ad product was on its way were premature.)
Question 11: Platform strategy
Zuck answered:
"We've found the mobile app install ads work. People like them."
Question 12: Big picture question for Zuck, views on long-term aspirations.
Zuck answered:
"Yeh, I think we're early. ... reaching a billion people was this big rallying cry for the company for a long time. ... no one had ever built a service that had a billion people signed in ... the real goal is to connect everyone in the world..."
Question 13 is on 40% increase on y-o-y price per ad: please call out one of two enhancements that were contribs to that; challenging comps (comparisons or comparables) in second half of year?
Ebersam answered:
"Pricing is really strong all over. Comp: if you're looking at the percentage growth rates, last year the quarter didn't have much mobile revenue attached to it. Comps will get harder because old numbers had no mobile revenue in them."
Sheryl answered:
"E-commerce doubled year over year. Mobile app install ads saw a lot of growth."
(Sandberg is really hammering on those two areas.)
Question 14 is on e-commerce spend doubling. What drove it?
Sheryl answered:
"We've made a major investment in helping DR (direct response) marketers measure returns. ... their budgets are flexible around ROI .... They adjust to their budgets."
Question 15 is on hiring, are their pressures on finding talent? Also, what are the mix of advertisers and how are they growing?
Zuck answered:
"Hiring great people is one of the biggest challenges that any tech company has. We're doing really well ... but there's a systemic issue where our country doesn't produce the volume of engineers that companies want to hire. ... we have a strong program on colleges ... it's really important."
(My take: Zuck has barely restrained himself from going into a diatribe about immigration reform — he wants it relaxed so he can increase hiring of foreign engineers.)
Sheryl answered:
"CPG (consumer packaged goods), gaming, retail, these are categories where we're really strong."
She calls out GE's Instagram work.
Question 16: On adoption / targeting / programmatic.
Sheryl answered:
"We like having an ecosystem of PMDs and 3rd party sellers ... we'd like to see all sales channels continue to grow and thrive."
Question 17 is on Graph Search and Facebook Home. What have you learned?
Zuck: He's taking a long run-up to answer the question ... Instagram video is doing really well, it fits really naturally ... things like Home and GS are new use cases. ... I think of it more as a seed we're planting that will create a new pillar of the ecosystem ... [long term bets] ...
That's it!
+++
The stock took a big leap after the numbers came out, up 15% in seconds. FB has been trading around $26.30 all day. It's now above $30 for the first time in weeks.
Investor slides: see them here.
Here are the highlights from the press release:
The revenue gain came after Facebook for the first time signed up 1 million-plus active advertisers. Ad revenue was $1.6 billion. Mobile ad revenue is now 41% of Facebook's ad revenue. Payments revenue was $214 million. (Payments is turning out to be a not-very-interesting business for Facebook.)
Facebook for Every Phone passed 100 million users. FEP is Facebook's feature phone app, which is popular in developing countries. There are also now 100,000 Facebook apps available for users.
User numbers:
- Daily Active Users: 699 million, up 27%.
- Monthly Active Users: 1.15 billion, up 21%.
- Mobile MAUs: 819 million, up 51%.
- Mobile daily active users: 469 million.
- Mobile only monthly users: 219 million.
Here's a snapshot of the top and bottom lines:
Click Image To Enlarge
Click Image To Enlarge
Volume suggested a race to cover shorts was in play.
And despite the solid gains, Facebook stock still isn’t trading over its May 2012 IPO price of $38, a level not seen since the famously flawed debut.
Money Morning Chief Investment Strategist Keith Fitz-Gerald said.
“Bottom line to me is Facebook may prove to be a great short-term trading opportunity, but I remain absolutely convinced it has no place in a long-term investor’sportfolio. Where’s Eastern Airlines today? Where’s Palm Inc.? Research in Motion (Nasdaq: BBRY)? AOL Inc. (NYSE: AOL)? Myspace?”
While some investors get lured into this Facebook exuberance, here’s why Fitz-Gerald warns against it.
Sure, Facebook Earnings Weren’t Bad…
FB stock opinion aside, there’s no question this was the best Facebook earnings report since the company went public.
The social media giant posted earnings of $0.19 a share, a nickel better than forecasts, and up from $0.12 a year earlier. Revenue climbed to $1.81 billion, also beating projections of $1.62 billion, and up 53% from $1.18 billion a year ago.
The big question on everyone’s minds was how the Menlo Park, CA-based company tackled mobile. Facebook was late to the mobile arena and has been playing catch-up since. It finally appears as though it’s making headway.
Mobile advertising revenue accounted for roughly 41% of Facebook’s $1.60 billion in total advertising revenue in Q2, up from 30% in the first quarter.
RBC Capital Markets analyst Mark Mahaney told CNBC.
“They’ve taken three or four quarters to try to fix the mobile issue. They’ve gone from zero of their revenue being mobile to almost 50% now. That’s pretty good evidence that they’ve fixed the mobile issue.”
The mobile monthly active user tally at the end of the quarter was 819 million, up 51% year-over-year. Daily active mobile users averaged 469 million in June.
The overall daily active user count grew at a more modest pace, up 27% to 699 million on average for June, while monthly active users averaged 1.15 billion at the end of Q2.
The efforts stemmed from some deliberate Facebook moves to morph the company into a truly mobile-focused operation.
David Ebersman, Facebook CFO, told CNBC.
“The investments we have made over the past year are really paying off to position the company to thrive in a mobile world.”
But, Investing in FB Stock Still Isn’t Good…
We here at Money Morning give Facebook CEO Mark Zuckerberg the proverbial “pat on the back,” but we still don’t think these shares are a good “Buy.”
Fitzgerald said.
“From the headline hype this morning, you’d think that Moses had parted the Red Sea again, and that Zuckerberg was ready to walk on water, but I think if you look behind the numbers, a couple things are really apparent, things long-term investors can’t ignore. Number one, there really weren’t any comps last quarter, so it’s only natural that they have some big upside numbers to report, when coming off a low base. Number two, the company appears to have solved the mobile user problem, but I think they’re going to run up against competition for eyeball time and additional applications.”
The “comps” he’s referring to are the mobile growth and revenue numbers from previous quarters – which were so low, they make any growth now appear phenomenal.
While Facebook’s explosive growth phase saw phenomenal numbers that caught the eye of money-hungry Wall Street players and eager tech followers, that phase is over.
Fitzgerald said.
“The law of natural selection says there are only a finite number of people on this planet. And the first law of natural selection is that exponential growth can’t continue forever.”
As more social media businesses come to market, they’ll be going after Facebook’s customers – meaning that user base could not just plateau, but decrease.
For the company, without an increasing user base, the biggest long-term challenges remain: How to keep its user base spending, how to avoid trouble from the massive amount of personal data is has collected, and how to profit overseas.
The bulk of its revenue still comes from North America, and to a lesser extent Europe.
North American ad revenue slipped to 45% in Q2 from 48% in the prior quarter, perhaps a sign that Facebook is diversifying its geographical revenue reliance. But revenue per user in Asia, a key territory because it has the potential of offering explosive growth, was just $0.68 versus $3.76 in North America.
Facebook is still is spending a lot of cash on experimental ad formats, programs and platforms. Yet, many of these costly endeavors won’t stick.
So, Instead of Investing in FB Stock…
As for competitors, there are many and they are growing – but none are as intimidating as Google Inc. (Nasdaq: GOOG).
For all of last year, Facebook took in about $5 billion revenue, a little under one-tenth of what Google pocketed.
Moreover, in the mobile advertising business, Google reigns.
In 2012, Google took in more than half of all mobile ad revenue. That number is expected to swell to 56%, or $8.84 billion, this year.
Facebook earned just $470 million in mobile ad revenue in 2012. That number is expected to grow to $2.04 billion in 2013, but Facebook still remains a mere shadow in Google’s path.
So, great job Team Zuckerberg on a great quarter – but we’re still going to pass on investing in FB.
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