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Facebook (FB) Tops on Q4 Earnings Driven by Mobile & Video

Facebook, Inc. 's FB earnings streak continues with yet another better-than-expected quarterly performance. Facebook's fourth-quarter 2016 adjusted earnings of $1.24 per share and revenues of $8.8 billion easily topped the respective Zacks Consensus Estimate of $1.11 and $8.5 billion. This is Facebook's sixth successive quarter of earnings and revenue beat.

Mobile and live video efforts are paying off big time for the social media giant. Instagram is also emerging as a major cash cow with over 500,000 advertisers. CEO Mark Zuckerberg continued to emphasize on bringing more and more video content on to the platform. It has been investing on original content and said that it will keep doing the same this year as well.

As expected, Facebook continues to maintain a cautious stance on revenue and ad growth. Facebook again stated that ad revenues will continue to grow but will face tougher year-over-year comparisons in the current year. Moreover, as Facebook continues to ramp up investments, costs will increase. The company plans to go on a hiring spree this year and especially recruit engineers, which will further add to its costs. Well it's a no brainer that Facebook(or even any other company for that matter) will keep up with those dizzying initial growth rates as it gets bigger.

Quarterly Numbers in Details

Facebook reported non-GAAP earnings of $1.21 in the quarter, up 124% year over year. Revenues, excluding the impact of year-over-year changes in foreign exchange rates basis, increased 51% year over year.

Facebook's consistently expanding user growth remains one of its biggest growth catalysts. Facebook's monthly active users (MAUs) were up 17% year over year to a staggering 1.86 billion. In addition, at the end of the quarter, mobile MAUs were 1.74 billion, representing 21% year-over-year growth. Daily Active Users (DAUs) were 1.23 billion, reflecting 18% growth year over year while mobile DAUs were 1.15 billion, up 23% year over year.

Breaking down revenue components, advertising revenues were $8.629 billion, surging 53% year over year. Excluding the impact of changes in foreign exchange rates, revenues from advertising also increased 54% year over year. Advertising revenues were driven by increasing mobile engagement, higher number of marketers, and continuing investment in new products.

Mobile ad revenues in the quarter were $7.2 billion (up 61% year over year), contributing 84% to total ad revenues. Ad impressions grew 49%, driven by surging mobile ad impressions. Average price per ad increased 3% from the year-ago quarter. Average revenue per user was $4.83

Payments and other fees decreased 12% year over year to $180 million in the reported quarter owing to a reduction in payment revenues related to PC games. Management expects revenues from this segment to face further decline as PCs lose market share.

On the cost front, cost & expenses increased 29.3% to $4.2 billion, driven by increases in workforce and marketing expenses. However, robust revenue growth provided enough cushion to operating margins.

Non-GAAP operating income of $5.6 billion grew 58.9% year over year.

Facebook, Inc. Price, Consensus and EPS Surprise

Facebook, Inc. Price, Consensus and EPS Surprise | Facebook, Inc. Quote

Balance Sheet & Cash Flow

Facebook exited the quarter with cash & cash equivalents and marketable securities of $29.4 billion, up 59.7% year over year.

The company generated nearly $16.1 billion of cash flow from operating activities in 2016 compared with $10.3 billion in 2015. Free cash flow was $11.6 billion compared with $7.8 billion last year. The company incurred capital expenditure of $4.5 billion in the year.

Outlook

Non-GAAP expenses are projected to increase in a band of 47% to 57% while capex is expected to be $7 billion to $7.5 billion. The company expects 2017 to be a year of aggressive investments. The company plans to build more data centers as well as recruitmore engineers to fuel its AI & AR/VR technology ambitions.

Stock-based compensation is estimated in a range of $3.9 billion-$4.1 billion. The company expects amortization expenses in 2016 to be within $700 million-$800 million.

Final Word

We remain positive on Facebook as it works on becoming a tech powerhouse. Its chief Mark Zuckerberg aspires to make Facebook much more than just a social media platform. Last year, we got a glimpse of what Zuckerberg intends to do. He is betting big on AR/VR. At the company's Oculus Developer conference held in October last year, Facebook announced another $250 million investment to develop VR content ecosystem. It also announced some new products including Santa Cruz, a cheaper standalone VR headset with inside-out-tracking.

AI and AR/VR technology are fast emerging as lucrative business opportunities. According to a recent IDC report, global revenues of the AR/VR market are expected to grow at a CAGR of 181.3% from $5.2 billion in 2016 to over $162 billion in 2020. Recently, Facebook split Oculus into two separate units. While one division will focus on developing VR for mobile, the other one will focus on VR for PCs. He has roped in Hugo Barra to spearhead the company's VR efforts as well as head Oculus. A few days back, Facebook said that it will spend over $3 billion in the next 10 years on VR.

However, a couple of days back, Facebook was ordered by a Dallas court to pay $500 million to ZeniMax for copyright infringement. ZeniMax has slapped a $2 billion lawsuit against Oculus accusing it of stealing its intellectual property to boost its own VR research.

The company is also aggressively working on monetizing its subsidiaries, Messenger, Oculus and WhatsApp. Chatbots and "conversational commerce" are likely to be the strategies for Messenger and WhatsApp.

It is also making its presence felt in enterprise software by launching Workplace . Facebook also upped its ante in the social commerce area with the launch of Marketplace . It also acquired Nascent Objects to boost its hardware efforts.

However, Facebook was criticized for the dissemination of fake news on its platform, which said to have one of the reasons behind Donald Trump's win. Facebook has since then taken initiatives to curb the menace. It is availing the help of third parties for better verification of news and also considering the option of "labeling stories" that are flagged. Facebook said it will also scrutinize ads that promote bogus stories for monetary gains. Lastly, it said that it will work with the entire news industry to improve its fact checking systems.

As of now, all of these appear to be terrific growth engines but it will be one Herculean task for the company to actually make all of it work. Moreover, intensifying competition for users & ad dollars from the likes of Alphabet GOOGL , Snapchat and Twitter Inc. TWTR , and increasing investments threaten to thwart its growth prospects.

At present, Facebook carries a Zacks Rank #3 (Hold). Given the phenomenal growth in mobile ad business and video efforts, Facebook has vastly outperformed the broader market. In the past one year, Facebook's shares have generated a return of 18.89%, compared with the Zacks Internet Services industry's gain of 4.43%.

A stock worth consideration in the tech space is Jabil Circuit Inc , which carries a Zacks Rank #1 (Strong Buy). You can see .

A stock worth consideration in the tech space is Jabil Circuit Inc JBL , which carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank stocks here .

Jabil has an average positive earnings surprise of 45.61%.

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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 Nasdaq, Inc.


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

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