) reported flat year-over-year earnings growth in the second
quarter of 2012. The social networking platform provider earned 12
cents per share in the quarter that exceeded the Zacks Consensus
Estimate by three cents.
However, including stock-based compensation, payroll taxes and
income tax adjustment, Facebook lost 8 cents per share compared
with earnings of 11 cents per share in the year-ago quarter.
Facebook's revenue jumped 32.3% year over year to $1.18 billion,
slightly ahead of the Zacks Consensus Estimate of $1.15 billion.
The year-over-year growth was driven by strong advertising revenue
(84% of the total revenue) that climbed 28% year over year to
$992.0 million. Facebook generated the rest of the revenue from
payments & other fees in the quarter.
The strong upside in advertising revenues was primarily driven
by an 18% increase in the number of ads delivered based on growth
in the user base and an increase in average number of ads per page
from the prior-year period.
However, strong growth in mobile user base continued to hurt Ad
impressions, particularly in the US, where number of ads delivered
decreased 2.0% year over year in the quarter.
Average price per ad increased 9.0% year over year, primarily
aided by a 20% increase in CPMs in US due to the roll out of
sponsored stories in news feed during the quarter for PC and mobile
users. Price per ad growth was also strong in Asia and rest of the
world, which fully offset a decline in Europe.
Monthly Active Users (MAU) improved 29% year over year to 955
million at the end of June 30, 2012. Mobile MAUs surged 67.0% year
over year to 543 million at the end of quarter. During the same
period, Daily Active Users (DAU) increased 32.0% year over year to
Average revenue per user (ARPU) was $1.28 in the quarter, up
double-digits in the US, Asia and rest of the world. ARPU grew 8.0%
in Europe in the quarter.
However, this healthy growth in revenue and user base was
partially offset by higher costs and operating expense in the
quarter, particularly due to stock-based compensation, which
totaled $1.3 billion in the quarter. Excluding this effect,
operating expenses shot up 60.0% year over year to $669.0 million,
driven by headcount growth and costs incurred related to
Facebook's operating income increased 8.0% year over year to
$515.0 million. However, including stock-based compensation and
payroll-tax expenses related to share based compensation, the
company reported an operating loss of $743.0 million.
Net Income was up 3.5% year over year to $295.0 million.
However, including stock-based compensation, payroll-tax expenses
related to share-based compensation and income tax adjustments, the
company reported net loss of $157.0 million in the quarter.
Facebook ended the quarter with cash & cash equivalents of
10.19 billion. The company generated $242.0 million as cash flow
from operations in the quarter.
Facebook expects operating expenses to increase at a much faster
rate compared to the second quarter in the second half of this
year. The company expects steep rise in research & development
expenses mainly due to continued investments in product development
for mobile segment and infrastructure.
We believe that Facebook has significant growth opportunities
from increasing online advertising spending as compared to
traditional formats. Facebook's massive user base and its ability
to track personal details over time make it a formidable force in
the online ad market. Facebook can use this massive database to
help advertisers target relevant ads going forward.
However, increasing competition is the primary headwind for
Facebook over the long term. Besides competition from Google+,
Twitter, Orkut in its core markets, Facebook is also competing
against small regional platforms, which not only limit its
expansion opportunities but also hurt its profitability.
Facebook is facing significant competition in the display
advertising market from
). Rising concerns over the effectiveness of Facebook ads as
compared to Google's AdSense has been a headwind lately. As per
eMarketer, Google is set to grab the #1 position in the display ad
market by the end of 2013. We believe that Google's increasing
popularity has the potential to limit Facebook's ad revenue growth
Further, Facebook's popularity is based on the engaging apps
from its third-party developers, particularly
). However, Zynga's narrow product portfolio has been primarily
blamed for a waning interest in social games on the platform.
Zynga's low-paying customer base and stiff competition from other
established players are also hurting its top line. This does not
bode well for Facebook, as the company earns the majority of its
non-ad revenue from Zynga.
Apart from increasing competition, lack of visibility around
mobile monetization remains a concern. Although Facebook has made a
number of acquisitions (such as Snaptu, Instagram) to enhance its
mobile offerings, we believe that lack of adequate ad coverage for
the mobile platform will continue to hurt its revenue earning
capacity going forward. Moreover, continued investments to expand
mobile offerings are expected to hurt margins in the near term.
We remain Neutral over the long term (6-12 months). Currently,
Facebook has a Zacks #3 Rank, which implies a Hold rating in the
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