Facebook Inc. (FB) reported second-quarter earnings (including stock based compensation and payroll tax expense related to it) of 13 cents per share which beat the Zacks Consensus Estimate by 4 cents. Reported earnings also improved considerably from the year-ago quarter loss of 8 cents per share and increased 44.4% sequentially.
Quarter Details
Revenues for the quarter (excluding foreign exchange effect) surged 54.2% from the year-ago quarter to $1.83 billion and surpassed the Zacks Consensus Estimate of $1.61 billion. Sequentially, revenues increased 24.9%.
The strong revenue performance was aided by robust advertising revenues that rose 62.5% from the year-ago quarter. More importantly, mobile ad revenues comprised 41.0% of total ad revenue, up from 30.0% in the previous quarter. Facebook’s advertising revenues were driven by higher number of marketers, healthy advertising demand scenario and robust performance of its newsfeed ads.
Moreover, revenues from payments and other fees also jumped 11.5% from the year ago quarter to $214.0 million. Revenues from this segment remained flat sequentially.
Facebook’s average revenue per user (ARPU) increased 25.0% year over year to $1.60. Ad impressions jumped 43% year over year, while average price per ad increased 13% from the year-ago quarter, primarily driven by increased user engagements and reduction in price.
Average price in the developed countries continued to increase strongly, with the U.S. and Canada increasing 40% from the year-ago quarter, primarily attributable to higher engagement and performance of newsfeed ads.
During the quarter, Facebook’s Monthly Active Users (MAU) improved 21.0% year over year to 1.15 billion. Mobile MAUs surged 51.0% year over year to 819 million. During the same period, Daily Active Users (DAU) increased 27% year over year to 699 million. The "Facebook for Every Phone" initiative recorded more than 100 million active users.
Facebook’s non-GAAP operating profit increased 54.4% from the year-ago quarter to $794 million, while margins remained flat at 43.5%. Including stock compensation and payroll tax expenses related to it, operating income came in at $562.0 million
The company reported a 52.3% year-over-year increase in costs and expenses on a non-GAAP basis. Including stock-based compensation and payroll taxes related to it, costs and expenses decreased 35.1% from the year-ago quarter to $1.25 billion.
Non-GAAP net income (excluding stock-based compensation, payroll tax expense and income tax expense) improved 65.4% from the year-ago quarter to $488.0 million or 19 cents per share in the reported quarter. Including stock-based compensation and its related adjustments, net income came in at $333.0 million or 13 cents per share.
Facebook ended the quarter with cash & cash equivalents and marketable securities of $10.25 billion compared with $9.47 billion in the previous quarter. The company generated $1.32 billion of cash flow from operations in the quarter with free cash flow of $1.05 billion. The company reported capital expenditures of $268.0 million during the quarter.
Facebook expects to continue to invest for improving quality, engagement and value of its ads, which will further boost advertisers’ demand in 2013. Total expenses are expected to increase approximately 50.0% in 2013. Moreover, the company expects its newsfeed ads to be one of the primary revenue drivers. Facebook expects to spend $1.6 billion during the fiscal 2013 on capital assets.
Recommendation
Facebook reported robust second-quarter results on the back of its growing advertising business. We believe that Facebook has significant growth opportunities in the online advertising format.
Moreover, the company has gained significant traction in its mobile ad business as well. This combined with its massive user base and its ability to track personal details over time makes it a formidable force in the online ad market. Its integration with Apple’s (AAPL) iOS and Google’s (GOOG) mobile platforms is also commendable.
However, a volatile macroeconomic environment and increased investments to expand mobile offerings are expected to hurt margins in the near term. Additionally, increasing competition from Google and LinkedIn (LNKD) are significant near-term headwinds.
Currently, Facebook has a Zacks Rank #2 (Buy).
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