Facebook Inc. (FB) reported earnings of 17 cents in the fourth quarter of 2012, which improved 13.3% from the year-ago quarter and jumped 41.7% from the previous quarter. However, including stock-based compensation and payroll taxes, Facebook reported 9 cents per share, which missed the Zacks Consensus Estimate by a couple of cents.
Revenues
Revenues (excluding foreign exchange effect) jumped 42.2% year over year and 22.4% sequentially to $1.61 billion, much ahead of the Zacks Consensus Estimate of $1.53 billion. Year-over-year growth was driven by strong advertising revenue (84.1% of the total revenue) that surged 43.4% from the year-ago quarter and 18.8% from the previous quarter to $1.35 billion.
The strong growth in advertising revenue was primarily driven by Facebook’s expanding customer base. A number of companies such as Michael Kors, online shopping site JackThreads, and Pepsico (PEP) selected the Facebook platform to launch and promote products.
Average revenue per user (ARPU) increased 11.6% year over year and jumped 19.4% sequentially to $1.54. Ad impressions jumped 46.0% year over year, primarily driven by faster impression growth in developing markets of Asia and Latin America. Facebook’s decision to lower market reserve price in these regions increased the number of ads posted.
Average price per ad decreased 4.0% year over year, primarily due to lower price rates in the Asian and Latin American markets. Average price in the developed countries continued to increase strongly, with the U.S. and Canada increasing 18% from the year-ago quarter.
Monthly Active Users (MAU) improved 25% year over year and 4.9% sequentially to 1.06 billion in the reported quarter. Mobile MAUs surged 57.4% year over year and 12.6% from the previous quarter to 680 million. Mobile only MAUs (mobile users who accessed Facebook solely through mobile apps or mobile website) increased 170.7% year over year and 24.6% sequentially to 157 million.
During the same period, Daily Active Users (DAU) increased 28.0% year over year and 5.8% sequentially to 618 million.
Mobile revenue (19.6% of total revenue) jumped 95.2% sequentially to $311.0 million, which represented 23.0% of advertising revenue. During the quarter, Facebook launched a new way for advertisers to buy guaranteed ad impressions. The new format helped Wal-Mart (WMT) deliver 15 million mobile ads to its existing and potential customers over the Thanksgiving weekend.
The company also launched a new Facebook app for Google’s (GOOG) Android operating system during the quarter.
Facebook generated $256.0 million from payments & other fees that include $66.0 million additional revenue as the company recognized revenue from four months of payments transactions for accounting reasons.
Margins
Facebook’s operating margin was 33% compared with 48.5% reported in the year-ago quarter. This significant decline was primarily driven by higher costs, which was 67.0% of total revenue, much higher than 51.5% in the year-ago quarter. This strong year-over-year growth in costs was driven by headcount growth and costs incurred for infrastructure development. However, on a sequential basis operating margin expanded 310 basis points (bps), primarily due to modest increase in total costs.
Net income (excluding stock-based compensation, payroll tax expense and income tax expense) improved 18.3% from the year-ago quarter and 37.0% sequentially to $426.0 million in the reported quarter.
Balance Sheet & Cash Flow
Facebook ended the quarter with cash & cash equivalents of $9.63 billion compared with $10.45 billion reported in the previous quarter. The company generated $681.0 million as cash flow from operations in the quarter compared with $250.0 million in the previous quarter.
Outlook
Facebook expects to continue investments on improving quality, engagement and value of its ads, which will further boost advertiser demand in 2013. However, Facebook expects revenues generated through payments from the games platform to remain subdued. Facebook games are mostly desktop based and declining desktop usage in the developed markets is expected to hurt its top-line growth in 2013. Non-games payment (revenues earned from promoted posts and gifts) is expected to remain small in 2013.
Capital expenditure is expected to be around $1.8 billion in 2013 due to continuing investments in servers, new data and network infrastructure. Total expenses are expected to increase approximately 50.0% in 2013.
Our Take
We believe that Facebook has significant growth opportunities from increasing online advertising spending on mobile devices compared to traditional formats. Facebook’s massive user base and its ability to track personal details over time make it a formidable force in the online ad market. Facebook is using this massive database to help advertisers target relevant ads going forward.
Moreover, Facebook’s growing market share in mobile segment, improving visibility around mobile monetization, new products such as the recently launched Graph Search and continuing investments in infrastructure development will boost growth. This will also help it compete against companies such as Google and LinkedIn (LNKD) going forward.
However, increasing investments may hurt profitability in the near term.
Currently, Facebook has a Zacks Rank #2 Rank (Buy).
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