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Why Facebook managed to grow its operating margins

Puneet Sikka

Why Facebook shows strong growth but the stock is still expensive (Part 4 of 5)

(Continued from Part 3)

Facebook attributes the increase in its operating margins to efficiencies

In the prior articles of this series, we’ve discussed how Facebook (FB) continues to grow its advertising revenues despite a larger revenue base. Facebook’s year-over-year advertising revenue growth of 82% in Q1 was much better than Yahoo’s (YHOO), Google’s (GOOG), and LinkedIn’s (LNKD), with only Twitter (TWTR) achieving higher advertising revenue growth rates. Plus, Facebook’s advertising revenue growth rate was the best in the last three years. Facebook also achieved a higher operating margin of 43% in Q1 2014 compared to only 26% in Q1 2013. Facebook attributed this increase to efficiencies created in infrastructure and administration along with some one-time benefits.

Why Facebook managed to grow its operating margins

Facebook mentioned that there were some one-time things that benefited the company in the quarter, particularly its cost of revenue as it continues to exit lease data centers and amend its supply chain. Facebook’s priority is to make investments that are high-quality that drive value and improve its business.

Management commented, “And as you can see looking back at the last couple of years and then our plans for this year, there has been a pretty steady rate at which we’ve been growing spend particularly in R&D and marketing and sales where we really want to focus on making sure we’re growing smartly and thoughtfully at a rate we can manage wisely and doesn’t get ahead of our ability to manage it.”

Facebook’s management also said, “On cost of revenue and G&A what you can see in the Q1 numbers is the fruits of a lot of labor trying to manage those parts of the business really efficiently and free up resources to invest elsewhere. So, I think we’ve always believed that Facebook has the opportunity to be a sustainably high margin business and we continue to believe that, noting that there were some individual items that helped us in Q1.”

Continue to Part 5

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