Facebook Inc. (
reported third-quarter earnings (including stock-based
compensation and payroll tax expense related to it) of 17 cents
per share, which beat the Zacks Consensus Estimate by 4 cents.
Earnings per share improved considerably from 6 cents in the
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Revenues (excluding foreign exchange effect) surged 60.0% from
the year-ago quarter to $2.02 billion, which comfortably beat the
Zacks Consensus Estimate. Average revenue per user (ARPU)
increased 33.0% year over year to $1.72.
The strong revenue performance was aided by robust advertising
revenues that jumped 65.7% from the year-ago quarter. Advertising
revenues were driven by higher number of marketers, healthy
advertising demand scenario and robust performance of its news
Mobile comprised 49.0% of ad revenues, up from 41.0% in the
previous quarter. The sequential increase in mobile ad revenues
was driven by an increase in average price per mobile ad, number
of mobile users and ads shown per mobile user. Ad revenues from
the web decreased both sequentially and year over year.
Ad impressions were up 16.0% on a year-over-year basis, primarily
driven by increased user engagement and effects of reduction in
prices in the year-ago quarter. Average price per ad increased
42.0% from the year-ago quarter driven by favorable mix shift
from low priced web ads to high priced news feed ads (due to high
user engagement levels).
Average price in the developed countries continued to increase
strongly, with the U.S. and Canada increasing 60.0% from the
year-ago quarter, primarily attributable to higher engagement and
performance of news feed ads.
During the quarter, Facebook's Monthly Active Users (MAU)
improved 18.0% year over year to 1.19 billion. Mobile MAUs surged
45.0% year over year to 874 million. During the same period,
Daily Active Users (DAU) increased 25.0% year over year to 728
However, management remains cautious on Facebook usage among
teenagers, which was almost stable in the third quarter on a
sequential basis. At the end of September, Instagram had more
than 150 million monthly active users.
Payments and other fees surged 24.0% year over year to $218.0
million in the third quarter as revenues from games soared 18.0%
from the year-ago quarter.
Total cost and expenses as percentage of revenues plunged 660
basis points (bps) from the year-ago quarter to 63.5%. Cost of
revenues, research & development, marketing & sales and
general & administrative expenses decreased 40 bps, 100 bps,
170 bps and 350 bps, respectively.
The lower-than-expected increase in operating expenses drove
operating margin, which surged 660 bps on a year-over-year basis
in the third quarter. Net income margin improved to 20.9%
compared with 12.9% reported in the year-ago quarter.
Facebook exited the quarter with cash & cash equivalents and
marketable securities of $9.63 billion compared with $10.25
billion in the previous quarter. The company paid back its 1.5
billion term loan during the quarter. Currently, Facebook has a
$6.5 billion line of credit.
Facebook generated $955.0 million of cash flow from operating
activities compared with $1.32 billion in the previous quarter.
Free cash flow was $666.0 million compared with $1.05 billion in
the previous quarter.
Facebook expects to carry on with its investments for improving
the quality, engagement and value of its ads, which will further
boost advertisers' demand over the long term. To meet these ends,
management stated that Facebook will not increase the quantity of
ads as a percentage of news feed stories from the last quarter
Facebook expects payments revenue to decline in the upcoming
quarter on a year-over-year basis. The company had recognized
four months of revenues in the year-ago quarter.
Total expenses are expected to increase approximately 45.0% for
2013. Capital expenditure is likely to be $1.4 billion during
full year 2013.
Facebook's impressive third quarter results were marred by a
cautious outlook. The company's announcement of not increasing
news feed ad quantity and a decline in payments business dragged
down the shares in after-hours trading.
However, we believe that the teenage fatigue issue is the most
significant headwind for Facebook. In this regard, we believe
that the company's strategy of restricting ad quantity is a
positive step to increase user engagement.
We also believe that Facebook's recent decision to allow users in
the age group of 13 and 17 to make public posts is a positive
step. So far, posts made by teenagers could only be seen by their
friends and "friends of friends."
We believe that this is a clear cut strategy to combat rivals
such as Twitter as well as attract more advertisers, particularly
those targeting teenagers. Moreover, the recent partnership with
online ad-placing service Doubleclick is a significant positive
for the company going forward.
We believe that the company has gained significant traction in
its mobile ad business within a very short span of time. This
combined with its massive user base and its ability to track
personal details over time makes it a formidable force in the
online ad market. Its integration with
iOS and Google's mobile platforms is also commendable.
However, a volatile macroeconomic environment, increased
investments to expand mobile offerings and increasing competition
from the likes of
are expected to hurt margins in the near term.
Currently, Facebook has a Zacks Rank #2 (Buy).