Facebook Inc. (FB) reported fourth quarter and full year 2014 results. The Zacks adjusted earnings for the quarter was 32 cents. The Zacks Consensus Estimate for the reported quarter was pegged at 33 cents.
In the fourth quarter, the company reported GAAP earnings of 25 cents per share, up from 20 cents earned in the year ago quarter. For 2014, the company reported GAAP earnings of $1.10 per share, up from 60 cents earned in 2013.
Revenues
Revenues (excluding the foreign exchange effect) soared 53% from the year-ago quarter to $3,954 million comfortably surpassing the Zacks Consensus Estimate of $3,790 million. The growth was driven by strong advertising revenues. Revenues for the year increased 59% to $12.5 billion.
In the fourth quarter, advertising revenues (excluding the foreign exchange effect) soared 58% year over year to $3.7 billion. Advertising revenues were driven by increasing mobile engagement, higher number of marketers, continuing investment in new products and robust performance of its newsfeed ads.
Mobile ad revenues were $2.5 billion (up 108%) or 69% of ad revenues, compared with approximately $1.2 billion or 53% of ad revenues in the year-ago quarter. Ad revenues from desktop increased 1% on a year-over-year basis despite a slowdown in desktop usage.
Mobile-only Monthly Active Users (MAU) was 526 million at the end of the fourth quarter, representing 77.7% year-over-year surge.
As of Dec 31, 2014, Facebook’s MAU improved 13.4% year over year to 1.39 billion. Mobile MAUs increased 25.8% year over year to 1.19 billion. Daily Active Users (DAU) rose 17.6% to 890 million on a year-over-year basis. Mobile DAUs grew 34% year over year to 745 million.
Ad impressions, on the other hand, plummeted 65% year over year primarily due to lower ad volumes on mobile devices. However, average price per ad skyrocketed 335% from the year-ago quarter driven by redesigning of right hand column ads, offering higher value to marketers and therefore, resulting in higher effective prices.
Average revenue per user (ARPU) increased to $2.81 in the fourth quarter from $2.14 in the year-ago period.
Payments and other fees increased 6.6% year over year to $257.0 million. Payments revenues from games, however, dipped 10% from the year-ago period given the declining trend in desktop usage.
Non-GAAP operating margin was 58%, flat year over year. Non-GAAP costs and expenses were $1.6 billion, up 33.4% year over year. Research & development expenses increased 172% and marketing & sales expenses grew 114%. General & administrative expenses increased 26.4%.
Balance Sheet & Cash Flow
Facebook exited 2014 with cash & cash equivalents and marketable securities of $11.2 billion as against $11.4 billion at the end of 2013. The company generated $5.5 billion of cash flow from operating activities in 2014 compared with $4.2 billion a year ago. Free cash flow for 2014 was $3.6 billion compared with $2.8 billion last year. The company incurred capital expenditures of $517 million in the fourth quarter.
Guidance
Management expects total revenue in 2015 to be 5%, lower than the 2014 level. Total GAAP expenses are expected to increase 55–70% from 2014. In addition, total non-GAAP expenses will increase 50–65%.
Management expects stock-based compensation for 2015 in the range of $3–$3.3 billion. Amortization expenses for 2015 is expected to be within $700–$800 million
Our Take
Facebook has gained significant traction in its mobile ad business within a very short span of time. This, combined with the massive user base and its ability to track personal details over time, makes it a formidable force in the online ad market.
However, overdependence on advertising revenues for growth can be a headwind. We note that both WhatsApp and Oculus are long-term growth opportunities. The Internet.org initiative is also long-term focused. Hence, the lack of revenue diversification remains a major concern in the near term.
Moreover, higher investments on product and infrastructure development will hurt profitability.
Currently, Facebook has a Zacks Rank #3 (Hold).
Stocks to Consider
Some stocks in this sector worth considering include Healthstream Inc. (HSTM), Sohu.com Inc. (SOHU) and Borderfree, Inc. (BRDR). While Healthstream sports a Zacks Rank #1 (Strong Buy), Sohu.com and Borderfree carry a Zacks Rank #2 (Buy).
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