FB Q4 Earnings Surge on Mobile Ad Sales - Analyst Blog

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Facebook Inc. ( FB ) reported impressive fourth-quarter results, which reflected its growing dominance in the mobile advertising market. Mobile ad revenues were $1.25 billion, which comprised 53.0% of ad revenues, up from 49.0% in the previous quarter. Shares surged 12.1% ($6.47) in after-hours trading.

Revenues

Revenues (excluding the foreign exchange effect) surged 63.2% from the year-ago quarter to $2.59 billion, which comfortably beat the Zacks Consensus Estimate. The strong revenue performance was aided by robust advertising revenues that jumped 76.5% from the year-ago quarter.

Advertising revenues were driven by increasing mobile engagement, higher number of marketers, continuing investment in new products and robust performance of its newsfeed ads. New products and initiatives such as Internet.org, graph search, Instagram video, and Messenger 3.0 helped Facebook achieve significant traction over the last 12 months.

Facebook messenger was among the top most-downloaded applications on Apple 's ( AAPL ) iOS and Google 's ( GOOG ) Android in Dec 2013. Messenger users jumped 70.0% in the fourth quarter. The company launched Instagram for Microsoft 's ( MSFT ) Windows-based smartphones.

During the quarter, Facebook launched Instagram Direct, which allows users to send private photos and video messages. The company also reported that Facebook Groups are now being used by approximately 500 million people every month.

Mobile-only Monthly Active Users (MAU) was 296 million at the end of the fourth quarter compared with 157 million in the year-ago quarter and 254 million in the previous quarter. In fiscal 2013, daily users on mobile outnumbered desktop by approximately 200 million.

As of Dec 31, 2013, Facebook's MAU improved 16.0% year over year to 1.23 billion. Mobile MAUs surged 39.0% year over year to 945 million. Daily Active Users (DAU) increased 22.0% year over year to 757 million.

Ad impressions declined 8.0% on a year-over-year basis, primarily due to lower ad volumes on mobile devices. However, average price per ad soared 92.0% from the year-ago quarter driven by favorable mix shift toward high-priced newsfeed ads. Average revenue per user (ARPU) increased 39.0% year over year to $2.14.

Payments and other fees decreased 6.0% year over year to $241.0 million in the fourth quarter, as the company had recognized four months of revenues in the year-ago quarter. Payments revenues from games grew approximately 8% on a year-over-year basis.

Margins

Total cost and expenses as percentage of revenues plunged to 56.2% from 67.0% reported in the year-ago quarter. Cost of revenues, research & development, marketing & sales and general & administrative expenses decreased 610 bps, 290 bps, 90 bps and 90 bps, respectively.

The lower-than-expected increase in operating expenses drove operating margin, which surged from 33.0% in the year-ago quarter to 43.8% in the fourth quarter. Net income margin improved to 20.1% compared with 13.4% reported in the year-ago quarter.

Facebook reported earnings (including stock-based compensation and payroll tax expense related to it) of 20 cents per share, which improved considerably from 9 cents in the year-ago quarter, but missed the Zacks Consensus Estimate by a penny.

Balance Sheet & Cash Flow

Facebook exited the quarter with cash & cash equivalents and marketable securities of $11.45 billion compared with $9.26 billion in the previous quarter.

Facebook generated $1.23 billion of cash flow from operating activities compared with $955.0 million in the previous quarter. Free cash flow was $748.0 million compared with $666.0 million in the previous quarter.

Guidance

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. The company expects to continue increase its technical headcount in 2014.

Total expenses (including cost of revenues but excluding stock-based compensation) are expected to increase approximately 40.0% to 45.0% for 2014. Capital expenditure is likely to be in the range of $2.0 billion to $2.5 billion for 2014.

Our Take

We believe Facebook's solid fourth-quarter results will put the teenage fatigue issue on the backburner for some time. The company 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, going forward. We expect the company's international revenue per user to increase at a faster rate, going forward.  

Moreover, the new products will help the company to face intensifying competition from the likes of Whatsapp, Snapchat, Tumblr and Pinterest, going forward.

Currently, Facebook has a Zacks Rank #2 (Buy).



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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Earnings , Stocks

Referenced Stocks: AAPL , FB , GOOG , MSFT

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