Facebook Inc. (
reported impressive second-quarter 2014 results, which again
reflected its growing dominance in the mobile advertising market.
Earnings of 30 cents per share were much better than the Zacks
Consensus Estimate of 26 cents. Revenues also comfortably beat the
Zacks Consensus Estimate of $2.80 billion. Shares increased 5.51%
in after-hours trading.
Revenues (excluding the foreign exchange effect) surged 60.5% from
the year-ago quarter to $2.51 billion. The strong revenue
performance was aided by robust advertising revenues that jumped
67.4% from the year-ago quarter to $2.68 billion.
Advertising revenues were driven by increasing mobile engagement,
higher number of marketers, continuing investment in new products
and robust performance of its newsfeed ads.
Mobile ad revenues soared 151.0% year over year and accounted for
62.0% of ad revenues, up from 59.0% in the previous quarter. Ad
revenues from desktop increased 8.0% on a year-over-year basis.
Mobile-only Monthly Active Users (MAU) was 399 million at the end
of the second quarter compared with 219 million in the year-ago
quarter and 341 million in the previous quarter.
As of Jun 30, 2014, Facebook's MAU improved 14.0% year over year to
1.32 billion. Mobile MAUs increased 31.0% year over year to 1.07
billion. Daily Active Users (DAU) increased 19.0% year over year to
829 million. Mobile DAUs went up 39.0% year over year to 654
Ad impressions declined 25.0% on a year-over-year basis, primarily
due to lower ad volumes on mobile devices. However, average
effective price per ad soared 123.0% from the year-ago quarter
driven by favorable mix shift toward high-priced newsfeed ads.
Average revenue per user (ARPU) increased 32.0% year over year to
$2.24. India became the second largest Facebook using nation in the
world, after MAUs crossed 100 million in April. (
India: World's 2
Largest Facebook User
Payments and other fees increased 9.0% year over year to $234.0
million in the reported quarter. Payments revenues from games grew
approximately 1.0% on a year-over-year basis.
In April, Facebook launched a location tracking mobile app Nearby
Android-based smartphones. (
New App, Payments Service to Boost Facebook
During the quarter, Facebook announced a number of new features in
its F8 global developer conference, which reflected its continuing
focus on improving user engagement and monetization on mobile.
The social network announced a mobile ad network called Facebook
Audience Network (FAN), to deliver ads to third-party apps. The
network significantly expands Facebook's total addressable market
Facebook Offers New Features at F8
In June, Facebook launched Slingshot, a smartphone photo and video
sharing app, which was touted as a prospective competitor to
Facebook Releases Slingshot; Battle with Snapchat
The company updated its Paper app, which added special Trending
section highlighting news and photos. (
Facebook Updates Paper App with Trending
Total cost and expenses as percentage of revenues plunged to 52.2%
from 69.0% reported in the year-ago quarter. Research &
development, marketing & sales and general & administrative
expenses decreased 210 bps, 250 bps and 270 bps, respectively.
Lower-than-expected increase in operating expenses drove operating
margin, which improved from 31.0% in the year-ago quarter to 47.8%
in the second quarter. Net income was $788.0 million or 30 cents
per share compared with $331.0 million or 13 cents in the year-ago
Facebook Inc - Earnings Surprise |
Balance Sheet & Cash Flow
Facebook exited the quarter with cash & cash equivalents and
marketable securities of $11.45 billion compared with $12.63
billion in the previous quarter. The company generated $1.34
billion of cash flow from operating activities compared with $1.29
billion in the previous quarter. Free cash flow was $872.0 million
compared with $922.0 million in the last quarter.
Facebook recently agreed to acquire San Francisco-based video
advertising company, LiveRail. We believe that the acquisition will
enable Facebook to offer better quality video ads around the web in
the long run. (
Facebook to Boost Video Ads with LiveRail
Most recently, Facebook completed the Oculus VR acquisition. Oculus
acquired a couple of companies recently that will boost its product
portfolio in the long run (
Facebook's Oculus Acquires RakNet
Facebook expects to carry on with its investments for improving the
quality, engagement and value of its ads and products, which will
further boost advertisers' demand over the long term.
Management expects that year-over-year revenue growth rate will
decline due to tough comparisons through the second half of 2014.
Total expenses are expected to increase approximately 30.0% to
35.0% (down from 40.0% to 45.0%) for 2014. Capital expenditure is
likely to be in the range of $2.0 to $2.5 billion for 2014.
For 2015, Facebook expects operating expenses to jump significantly
due to acquisition costs related to WhatsApp and Oculus as well as
continuing investments on products, workforce and infrastructure.
The company believes that new initiatives and products like
Instagram, autoplay video and the FAN will take some time to
contribute meaningfully to revenue growth. However, Facebook
remains positive over their long-term growth prospect.
Facebook has gained significant traction in its mobile ad business
within a very short span of time. This combined with the massive
user base and its ability to track personal details over time makes
it a formidable force in the online ad market.
We believe that Instagram's growing popularity and the new
initiatives such as Internet.org will continue to boost Facebook's
user base in the long run. Moreover, the new products like
Slingshot and FAN will help the company to grow ad revenues amid
intensifying competition from Google and
However, overdependence on advertising revenues for growth can be a
headwind. We note that both WhatsApp and Oculus are long-term
growth opportunities. The Internet.org initiative is also long-term
focused. Hence, lack of revenue diversification remains a major
concern in the near term.
Moreover, higher investments on product and infrastructure
development will hurt profitability.
Currently, Facebook has a Zacks Rank #4 (Sell).
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