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Facebook (FB) Up 10.1% Since Last Earnings Report: Can It Continue?

Zacks Equity Research

It has been about a month since the last earnings report for Facebook (FB). Shares have added about 10.1% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Facebook due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Facebook's Q1 Earnings Lag Estimates, Revenues Soar Y/Y

Facebook’s first-quarter 2020 earnings of $1.71 per share missed the Zacks Consensus Estimate by 1.6% but soared 101.2% year over year.

Revenues of $17.74 billion comfortably surpassed the Zacks Consensus Estimate by 2.6% and also rose 17.6% year over year. At constant currency (cc), the top line improved 19%.

Geographically, the Asia-Pacific was the strongest region as revenues grew 21.4% year over year followed by the United States & Canada’s 17.2%, Europe’s 16.5% and RoW’s 15.8%.

Average Revenue per User (ARPU) growth was highest in the United States & Canada, increasing 13.5% year over year followed by Europe’s 11.4%. ARPU in the Asia-Pacific and RoW grew 10.1% and 5.3%, respectively. Worldwide ARPU rose 8.3% to $6.95.

Facebook’s first-quarter results were better-than-anticipated. Despite a steep decline in advertising revenues in the last three weeks of March due to coronavirus pandemic, advertising revenues jumped 17% year over year (19% at cc) to $17.44 billion.

Management stated that ad revenues showed signs of stability in the first three weeks of April. Although the metric is steady on a year-over-year basis, trends reflect weakness across the company’s all user geographies due to coronavirus-related lockdowns.

However, Facebook didn’t provide any specific revenue guidance for the second quarter of 2020 as well as the full year due to aggravating macro-economic uncertainty related to coronavirus (COVID-19).

User Base Expands in Q1

Monthly active users (MAUs) were 2.603 billion, up 9.6% year over year. Daily Active Users (DAUs) were 1.734 billion, which increased 11% year over year and represented 67% of MAUs.

Family Daily Active People (DAP) defined as a registered and logged-in user who visited at least one of the Family products (Facebook, Instagram, Messenger and/or WhatsApp) on a given day, were 2.36 billion, up 12.4% year over year.

Family Monthly Active People (MAP) increased 11.2% year over year to 2.99 billion.

The above community metrics reflected increased engagement with Facebook products during the reported quarter as more and more people were compelled to stay at home due to the coronavirus (COVID-19) outbreak.

Asia-Pacific DAUs were up 13% year over year to 678 million. DAUs in the Rest of the World (RoW), Europe and the United States & Canada grew 13.5%, 6.6% and 4.8% each to 556 million, 305 million and 195 million, respectively.

MAUs in Asia-Pacific, RoW, Europe and the United States & Canada grew 11.4%, 10.8%, 5.7% and 4.1% each to 1.09 billion, 851 million, 406 million and 253 million, respectively.

Revenue Details

Asia-Pacific and the United States & Canada were the strongest regions, increasing 21.2% and 16.3%, respectively. Advertising revenues in RoW and Europe grew 15.7% and 15.6% each.

Facebook’s ad revenues benefited from sturdy growth in gaming and relative stability in technology and e-commerce, partially offset by massive declines in travel and auto. This trend continues in the second quarter as well.

Moreover, due to the overall softness in ad demand, the company generated sales at lower prices.

Ad impressions served rose 39%, driven by Facebook Mobile News Feed. However, average price per ad decreased 16% from the year-ago quarter due to a sharp drop in advertiser demand during the last three weeks of March.

Payments and other fees surged 80% year over year to $297 million. This growth is primarily attributable to higher sales of Oculus products.

Operating Details

In the first quarter, total costs and expenses inched up 0.7% year over year to $11.84 billion. However, as percentage of revenues, total costs and expenses were 66.8% compared with the year-ago quarter’s 78%.

As percentage of revenues, research & development and marketing & sales expenses declined 370 basis points (bps) and 230 bps, on a year-over-year basis, respectively.

However, as percentage of revenues, general & administrative expenses decreased to 8.9% from 27% reported in the year-ago quarter.

Notably, Facebook’s employee base was 48K at the end of the first quarter, up 28% year over year. The company hired 3,300     new employees in the reported quarter.

Operating income of $5.89 billion jumped 77.7% year over year. Operating margin expanded to 33.2% from 22% in the year-ago quarter.

Balance Sheet & Cash Flow

As of Mar 31, 2020, cash & cash equivalents and marketable securities were $60.29 billion compared with $54.86 billion as of Dec 31, 2019.

Capital expenditures declined 7.7% year over year to $3.66 billion. Facebook continues to invest in data centers, servers, office buildings and network infrastructure.

Free cash flow surged 37.4% year over year to $7.34 billion in the reported quarter.

Facebook bought back shares worth almost $1.2 billion in the reported quarter.

Guidance

The company expects to realize operational expense savings from certain areas, such as travel, events and marketing as well as from slower headcount growth in its business functions. Facebook is planning to hire at least 10,000 more people in product and engineering roles during 2020.

It expects total expenses for the current year between $52 billion and 56 billion, down from the prior range of $54-59 billion. Nevertheless, the revised escalation in operating expense is expected to hurt operating margin in 2020, due to sluggish revenue growth.

Moreover, in the ongoing year, Facebook expects capital expenditures to be $14-$16 billion, down from the previous guided range of $17-19 billion.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates revision.

VGM Scores

At this time, Facebook has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Facebook has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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