It has been about a month since the last earnings report for Facebook (FB). Shares have lost about 9.3% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Facebook due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
Facebook Q2 Results Benefit From Solid User Growth
Facebook reported second-quarter 2019 adjusted earnings of $1.99 per share that beat the Zacks Consensus Estimate by 9 cents.
The company recorded legal expenses of $2 billion (which is not tax-deductible) related to the U.S. Federal Trade Commission (FTC) investigation of its platform and user data practices in the reported quarter. The company had provisioned $3 billion related to the legal matter in the first quarter.
Notably, in July, Facebook entered a settlement and modified consent order to resolve the FTC inquiry. The company is now required to pay a penalty of $5 billion.
Moreover, on Jun 7, a three-judge panel from the Ninth Circuit Court of Appeals issued an opinion in Altera Corp. v. Commissioner, reversing a U.S. Tax Court decision regarding the treatment of share-based compensation expenses in a cost-sharing arrangement. This resulted in a cumulative tax expense of $1.11 billion.
Including these expenses ($2 billion+$1.11 billion), GAAP earnings were 91 cents per share, down 47.8% year over year.
However, revenues of $16.89 billion comfortably surpassed the Zacks Consensus Estimate of $16.45 billion and rose 27.6% year over year. At constant currency (cc), revenues rallied 32%.
Asia-Pacific: Fastest Growing Market
Monthly active users (MAUs) were 2.414 billion, up 8.1% year over year. Daily Active Users (DAUs) were 1.587 billion on average, increasing 7.9% year over year and representing 66% of MAUs.
Asia-Pacific was Facebook’s fastest growing market in the quarter, driven by growth in India, Indonesia and the Philippines.
Asia-Pacific DAUs increased 12.6% year over year to 615 million. DAUs in Rest of the World (RoW), Europe and the United States & Canada increased 8.2%, 2.5% and 1.1% to 499 million, 286 million and 187 million, respectively.
MAUs in Asia-Pacific, RoW, Europe and the United States & Canada increased 12.2%, 8.2%, 2.4% and 1.2% to 1 billion, 782 million, 385 million and 244 million, respectively.
The company states that more than 2.1 billion people now use its “Family” of services, which includes Facebook, WhatsApp, Instagram and Messenger, every day on average. Moreover, almost 2.7 billion people use at least one of its services on a monthly basis.
Geographically, Asia-Pacific was the strongest region, with revenue growth of 30.1% year over year, followed by the United States & Canada’s 29.6%, Europe’s 24.5% and RoW’s 21.1%.
Advertising revenues rallied 27.5% year over year (32% at cc) to almost $16.62 billion. The United States & Canada and Asia-Pacific were the strongest regions, increasing 29.6% and 30%, respectively. Advertising revenues in RoW and Europe grew 21.1% and 24.5%, respectively.
Mobile ad revenues were $15.6 billion, contributing 94% to total ad revenues. Ad impressions served increased 33%, driven by ads on Instagram Stories and Feed, and Facebook News Feed.
However, average price per ad decreased 4% from the year-ago quarter due to unfavorable mix shift toward Stories ads and geographies like Asia-Pacific, where the monetization rate is low.
Average Revenue per User (ARPU) growth was strongest in the United States & Canada, increasing 28.4% year over year, followed by Europe’s 22.1%. ARPU in Asia-Pacific and RoW grew 16% and 11.5%, respectively. Worldwide ARPU increased 18.1% to $7.05.
Payments and other fees jumped 35.8% year over year to $262 million. The growth was primarily driven by sales of new products, Oculus Quest and Rift S.
Facebook to Form Privacy Committee
CEO Mark Zuckerberg stated that Facebook is going to have a privacy committee, headed by one of its most experienced leaders as chief privacy officer for product. The committee will supervise the company’s privacy program and controls. Moreover, an independent privacy auditor will be attached with this committee, who will not only report to this new committee but also to the FTC.
Notably, the company is facing antitrust investigation from FTC. The Department of Justice (DOJ) also began an antitrust review of market-leading online platforms in July.
Facebook will also invest in building tools that will review its products and data usage procedure as part of the privacy program.
Moreover, the company is taking help from experts to decide content acceptability as well as moving ahead to form an independent oversight board for decisions on content. The board is expected to be formed by the end of this year.
The company is also working to improve transparency related to elections globally. Toward the end of June, Facebook’s ad transparency tools were made available globally. Per the company, “These tools show who paid for an ad, how much they spent, and who saw the ad.”
Facebook is also working on making its products and services end-to-end encrypted and ephemeral, so that user information is not available for long.
Messenger app is now being rewritten from scratch to make it the fastest and most secure major messaging platform in the world. For the WhatsApp business, the company is developing new tools like product catalogues that entrepreneurs can use for free globally.
E-commerce & Payments Gaining Prominence
Facebook is taking initiatives to develop different tools, which will fortify its presence in the e-commerce and payments space. These efforts are focused on Instagram Shopping, Facebook Marketplace and the recently-announced cryptocurrency, Libra.
Zuckerberg stated that the company is continuing testing payments on WhatsApp in India. The product is expected to be launched in a few other countries in the near term.
Facebook is continuing with its closed beta of Checkout on Instagram. The company launched a new feature that enables Creators to tag products in their posts.
Moreover, Facebook continues to help advertisers reach their targeted audience. The company is helping advertisers shift to Stories, video and eventually messaging.
During the quarter, the company launched a number of tools for advertisers. During the National Small Business Week in May, Facebook introduced Automated Ads for small businesses. It also launched video editing tools for small and medium-sized businesses (SMBs).
Facebook also launched Dynamic Ads in Instagram Stories and started placing ads in Explore on the platform. Moreover, the company launched Branded Content Ads in Instagram that allow businesses to promote Creators’ posts as feed ads.
In the reported quarter, costs and expenses jumped 66.4% year over year to $12.26 billion.
Marketing & sales expenses rallied 30.1% from the year-ago quarter to $2.41 billion. General & administrative expenses skyrocketed 315.5% year over year to $3.22 billion. Also, research & development expenses rose 31.4% to $3.32 billion.
Notably, Facebook’s employee base increased 31% year over year to 39,651.
Operating income of $4.63 billion declined 21.1% year over year.
Balance Sheet & Cash Flow
As of Jun 30, 2019, cash & cash equivalents and marketable securities were $48.60 billion compared with $45.24 billion as of Mar 31, 2019.
Capital expenditures were $3.78 billion, driven by investments in data centers, servers, office facilities and network infrastructure.
Free cash flow was $4.84 billion compared with $2.84 billion in the year-ago quarter.
Facebook bought back shares worth almost $1.1 billion in the reported quarter.
The company still expects revenue growth rates to decline sequentially throughout the rest of 2019 at cc. The company expects ad targeting related headwinds to hurt its performance more in the fourth quarter of 2019 and 2020.
Moreover, 2019 total expenses are now expected to increase 53-61% from 2018, up from the previous guidance of 47-55%.
Capital expenditures outlook is now expected to be $16-$18 billion, down from the previous guidance of $17-$19 billion.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in estimates revision. The consensus estimate has shifted 5.74% due to these changes.
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.
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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