The much awaited earnings of Facebook (FB, Financial) are in. As expected, results came ahead of analyst expectations as the company reported $11.97 billion in revenue, translating into earnings per share of $1.69.
Revenue grew 49.1% year-over-year to beat the analyst consensus of $11.41 billion. Earnings per share came 30 cents ahead of Wall Street estimates as Facebook registered astounding 62.5% year-over-year growth.
Despite a high level of user penetration, monthly active users (MAUs) increased 13% to reach 2.20 billion. Moreover, Facebook continues to engage its users as daily active users rose 13% to reach 1.45 billion. Investors are ecstatic, with the stock is up aprocimately 7% in pre-market trading today.
Mobile ad business continues to foster revenue growth
During the quarter, total ad revenue grew 50% year-over-year, while mobile ad-revenue grew 60% to reach $10.7 billion. Note that mobile ad revenue contributed 91% towards the total ad revenue of the company. Revenue growth for the quarter was supported by 39% growth in ad prices and an 8% increase in ad impressions, or units.
It can be seen that most of the growth during the first quarter came from Europe followed by Asia-Pacific. As long as the growth from developed countries stays ahead of emerging economies, overall average revenue per user will continue to grow for Facebook.
The chart depicts a surprising data point. Despite high user penetration, revenue growth refuses to slow down. The chart shows that Facebook registered 49% year-over-year growth during the first quarter of 2017, and the company managed to replicate this growth during the first quarter of 2018. All in all, Facebook is showing no signs of slowing growth.
Active user growth is coming from emerging markets
Although active users grew by double-digits, most of this growth came from emerging markets.
“Daily active users on Facebook reached 1.45 billion, up 13% compared to last year, led by user growth in India, Indonesia and Vietnam,” said David Wehner on the earnings call.
As the company generated a mere $2.46 per user (ARPU) from Asia-Pacific during the quarter, this growth is not as lucrative as the early North American growth. Facebook generated $23.59 per user from the U.S. and Canada during the quarter, followed by $8.01 from Europe. See the graph below:
General Data Protection Act (GDPR) will have some impact on growth
The EU is forcing some additional disclosure and transparency regulation on Facebook in the form of the General Data Protection Act (GDPR). It will allow users to improve their understating of how Facebook utilizes user data. The GDPR applies to the EU only, but Facebook is going to extend these controls across all users, said Sheryl Sandberg, the chief operating officer of Facebook.
Moreover, Facebook went on to mention that GDPR can also have a negative impact on revenue, as it will limit targeted advertising, leading to reduction in efficacy of the ads and consequently the revenue.
Overall, the effect of GDPR should be muted as users aren’t going to leave the platform just because of an information popup. We are all familiar with how users respond to terms and condition agreements on the internet. It will be surprising if information sharing popup plays out differently.
How is Instagram doing?
Instagram is among the key contenders that will help Facebook sustain its revenue growth going forward. That’s why Facebook is planning to build its ecosystem around Instagram. “Over the next five years, we're focused on building out the business ecosystems around our apps like Instagram, WhatsApp and Messenger,” CEO Mark Zuckerberg said during the earnings call. Facebook also sees Instagram as the replacement of feeds going forward. Zuckerberg cautiously noted the following on yesterday's earnings call.
“One of the interesting opportunities and challenges over the coming years will be making sure that ads are as good in Stories as they are in feeds. If we don't do this well, then as more sharing shifts to Stories, that could hurt our business. But there's real upside here, too, if we do a good job. And we're leading the way here with Instagram.”
This clearly shows that Facebook sees Instagram as its primary revenue generator going forward. Although Facebook refrains from disclosing specific Instagram numbers, the segment seems to be doing well. The management distinctly mentioned Instagram as the driver of revenue growth alongside the Facebook feed in the first-quarter earnings call.
Answering a question about Instagram, Werner said that Instagram continues to grow nicely both from an engagement and a business perspective. It is worth mentioning that 25 million businesses use Instagram, of which 2 million are advertisers. In short, Instagram is material to Facebook’s total revenue, and it’s a key product for Facebook to sustain its revenue going forward.
Bottom line
Facebook sustained its revenue growth, clearly refuting the regulatory concerns facing its business model. The company continues to capture users, mostly in emerging markets now. However, developed economies like Europe continue to be the highest growth revenue generator for Facebook.
Regarding regulation, as expected, it’s coming in the form of additional disclosure and communication of data sharing practices. It can have some impact on Facebook’s ability to acquire new users while adding to operating expenses. However, the business growth will remain intact as users are not expected to leave the platform from additional disclosures.
Moreover, Instagram is one of the key assets for Facebook. Successful growth of Instagram will help Facebook maintain its revenue growth.
Disclosure: I have no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.
