Facebook reported its Q2 2014 earnings, blowing away expectations on the top and bottom lines. Revenue went up 61% to nearly $3 billion and earnings per share were $0.42 — 12 cents more than analysts predicted.
Facebook's gross margins increased dramatically. In essence, the company makes way more in sales this year than it used to, but its cost-base for generating those sales increased only modestly. Income from operations was a staggering $1.4 billion — this time last year it was just $562 million.
The stock went up and flirted with $74, a rise of 4%, after the market closed, hitting an all time high.
People underestimate how huge Facebook is. Even at this late stage of the game, it added 41 million new members last quarter. There are no other apps out there that are accomplishing anything even close to that.
Here are the highlights:
- Revenues: $2.91 billion (analysts were expecting $2.81 billion). That's a nice beat.
- EPS non-GAAP: $0.42 (analysts were expecting $0.32) that's also a good beat.
- Monthly active users (MAUs): 1.32 billion, up 14%.
- Mobile MAUs: 1.07 billion, up 31%.
- Mobile revenue was 62% of ad revenue.
To give you a better idea of just how well-run a business Facebook has become, here's the top of the income statement. I've highlighted the way margins are expanding dramatically:
And now for some charts!
Revenues: (Remember when people used to say Facebook has stopped growing?) Sales were up 61%:
This is where that revenue comes from. America and Europe leading the way:
Here's the picture regarding the users. Facebook added 41 million users last quarter:
Facebook's mobile-only base is still growing:
Ahead of the call with analysts, Facebook played light classical music.
Here's our live coverage of the call with CEO Mark Zuckerberg, COO Sheryl Sandberg and CFO David Wehner.
Zuck: This was a good quarter for us. ... 63% of users visit daily. 650 million use FB on mobile every day. 1 in 5 mins on mobile is on FB. ... but there is still room to grow.
"The growth of our community on mobile is producing better results for our business partners."
Connecting everyone: Internet.org. ... running tests in more countries. ... 3 mm people are connected to the internet who had no access before.
Apps: 12 bn messages a day on FB. 300 mm MAUs on Messenger. Ultimately, Messenger will be an imp business.
Instagram: Still building.
Understanding the world thru "public content". 1 bn search queries are made every day on FB. A great milestone. ... 800 mm people are now connected to public figures ... 3bn interactions on FB during World Cup ...
"1 bn people use FB on their phones every month." Applinks is now being used by hundreds of apps. Audience Network: "We've received a lot of interest from developers."
Knowledge economy: 1.5 mm active marketers on FB. ... improvements to reducing low quality content. Goal is to make ads as interesting as content.
Sandberg: Mobile ad revenue grew 151%. Still growing advertiser base, still capitalizing on mobile.
Small businesses: India SMB roundtable ... [anecdote] a man sold his house to start his business. FB is his leading marketing channel. He gets a 5X return on adspend. He now has 150 employees in 3 offices. ... forming an SMB advisory council.
Gillette launched Vector 3 razor in India. A feature-phone only campaign. (Most users in India are on feature phones.) Reached 63% of the target audience.
World Cup: 350 mm people generated 3 bn interactions. ... 91 of Ad Age 100 use Facebook.
Video ads: We've run about a dozen campaigns. Early data is promising. Rollout is slow but careful. IG is slow but careful as well.
LiveRail acquisition: We have a lot to do here. We're investing in tools to improve the relevance of video ads across the web.
Wehner: $872 million free cashflow.
More than 800 mm people use FB every day.
Both IG and Messenger have passed 200 MAUs and continue to grow nicely.
People are actually seeing fewer ads on Facebook as users move to mobile, but the price of each ad is rising.
He warns of increased costs later this year and in 2015 from acquisitions of Oculus and WhatsApp, and from investment in infrastructure projects like Internet.org.
Warns of difficult comps ahead.
Questions!
[We seem to be having difficulty getting the analysts on the line!]
On LiveRail:
Sandberg: we think we can use it to expand video ads to mktrs and publishers outside of Facebook. Audience network: Early days ... we really only have some advertisers in our network.
Any commentary on breadth of mobile ad revenue and mobile app installs? Is FB adspend eating TV adspend?
Sandberg: I do think people think mobile app install ads are all our revenue and they're not, they're only part of the revenue. It's broad-based, brand advertisers of all kinds use ads. Mobile app installs ads are growing. But we see our opportunities in mobile ads as much broader than just installing apps.
Clients are just realizing the creative opportunity in FB ads. Progressive insurance is an example.
People used to think TV was for storytelling ... starting to realize FB is for that too. [Clearly, FB is continuing its assault on TV ads.]
The buy button:
Sandberg: We're just streamlining the process. Commerce is an important growing part of our business. We're not going to sell products.
Zuck: We will clearly do work in payments to accept payments on platform ... but our main biz is advertising ... if we do payments it will be supportive to that ... M and WA over time and IG ... there is lot of work to set up the foundation to have a business community in those ... years of work before they are huge businesses for us. IG and M are where FB was in 2006. ... importance of setting up a community first. ... so we gave away all those things for free. .... 30 mm businesses use Pages ... analytics are free ... only later did we layer ads on top of that ... when we say "ramp over time" we really do mean that ... not something you'll notice in a short period of time.
Sandberg: Underlines that brand advertisers launch products all the time — it's not just the world cup.
Applinks & search:
Zuck: Applinks too early to say ... search is a multiyear effort ... which of a friends' friends work at a certain company? No one else can do that. ... we have 1 trillion posts, more than any other search database that's out there. ... links will take a while to play out before they are monetize-able.
Ad pricing:
Wehner: News feed ads is driving the overall pricing trend ... we see that reflected in the price ... right-hand rail ads: There will be fewer of them and that will drive pricing.
Zuck is sounding a little bit impatient with analysts today. He did NOT like this question about David Marcus joining FB to run Messenger. He came from PayPal. WSJ has a good account of the exchange:
... why is a payments-background guy running messaging apps? Sandberg says Chinese companies are using FB to reach a global audience. And, since FB wants to connect the world, that includes China. That was it. As for Marcus, Zuck says he just thinks it is a good higher. There will be some overlaps between the Messenger app and payments over time, yes. But again, there is so much groundwork still to build the foundation, stop asking. FB isn’t going to thrust ads into Messenger — not happening cheaply, he says. Get that out of your models. Zuck can’t be clearer.
MarketWatch described it this way:
Analyst: “Are we looking at it wrong? Is there any reason why he wouldn’t be more focused on payments?”
Zuckerberg responds: “I think he is just a real talented product generalist and he has done a number of different things including ran and built a messaging company.”
Then Zuck snapped at the next analyst question on WhatsApp user trends:
Zuck: “The deal hasn’t closed. We have nothing to say.”
Ouch!
Question on privacy and Zuck's philosophy:
In the old days of emails ... there was no space where you could share with just your friends. ... creating that space that had the kind of privacy no one had seen before ... interested in creating new private spaces where you can express things you otherwise wouldn't be able to ...
Zuck wonders what the limits are to photo sharing. How many more photos are we going to share? Obviously still a way to go there ... but he seems to see messaging as an ever-mutating space with more potential than photos.
Oculus:
Zuck: We're really excited about this ... acq just closed ... this hits on a diff part of our strategy ... the way i organize my remarks every quarter are around these 10 year goals ... the biz yr talking about are further out than you think, this one is even further out. ... when FB was founded smartphones had only just been invented ... FB was built on someone else's foundation ... wants a diff rel with the next platform ... we can define what the next gen of computing will be ... we're also going to spend a lot and invest in a bunch of these things to do it right in the long term. ... it's not that we're going out and investing in new strategic priorities but we're going to invest v heavily in the ones we have.
Exclusive content?
Zuck: We do have exc content we just don't pay for it. This week for instance Shakira hit her 100 mm fan moment on FB. ... you're not going to come to FB to watch a movie ... we're mostly focused on driving success for partners news channels ... or individuals and public figures on FB ...
Search: 1 bn searches a day, which is awesome and we're proud of it. ... people search a little bit less on mobile. ... we did a lot of work on that ... if you want to go and find that Shakira video i was just talking about I don't know the product will deliver it but it will soon ... it's an ongoing thing .... there are a lot of Qs that only Facebook can answer.
And that's all, folks!
This was the context going into the call:
Facebook won the World Cup, no matter which numbers you're looking at. There were 1.2 billion posts and comments made on Facebook during the games. That might translate into an uptick in monthly active users.
Facebook acquired LiveRail, a video adtech firm, and it also began running video ads in users' news feeds. Analysts were looking for any guidance on the amount of revenue that video ads create.
Facebook also created its Audience Network product, which allows clients to run ads in other apps using Facebook as a targeting mechanism.
Similarly, Facebook now lets advertisers use Facebook as a targeting mechanism on web sites other than Facebook.
And Facebook began testing a "buy" button in Facebook ads. That's just a test, so it probably won't be a big deal today.
However, the overall theme here is that Facebook continues to bolt on new revenue-driving products, so investors wanted news of how they're contributing to the business.
