A Look at Facebook Earnings

This was sent to us by Brian Henry, Assistant Professor of Finance at Benedictine College and listener to the show. Thanks Brian!

At the end of 2015, some of your shows discussed more content from the community possibly showing up. I don’t know exactly what you meant by that, but I got bored the other day and was looking into Facebook’s earnings. Thought I would send you a quick written summary mostly from their earnings call, on how they had such a good quarter. If you want it for anything it is yours:

Facebook had a heck of quarter to finish out 2015, which has seen their stock price soar along with expectations. If you dig into their reports a lot of the discussion is on growth of their people. Lots and lots of people are using Facebook, Messenger, WhatsApp, etc. While MAUs (Monthly Active Users) are great, I wanted to look at how Facebook said they are converting their users into large profits.

Advertising is the vast majority of Facebook revenue, it made up over 97% of their total revenue last quarter. If you listen to the earnings call they go into detail about how they grew ad revenue by almost 32% from their 3rd quarter results. Both more impressions (more ads served up) and higher price per ad were cited.

More ads are the typical path for Facebook, or like revenue models online, to grow. Cost per click and different ad approaches tend to decline in per click/impression revenue over time. For instance, in the earnings call Facebook reported that ads on the right hand side of the PC browser page are decreasing in value per impression as people have learned to ignore them. When is the last time you looked over there when you were on Facebook? So they tend to depend on growing the user base, or increasing user engagement to grow revenue.

In this case though, Facebook seems to have started taking advantage of mobile in a way that no one else seems to have figured out. Mobile ad revenue was up 81% year over year and now makes up 80% of Facebook’s ad revenue, so the browser value of ads just is not as important to them anymore. They also said it was Facebook mobile and Instagram that were driving most of this. Also, price per ad went up 21% overall because the mobile ads are getting more per impression. That may follow other ad types downward over time, but for now it is working well. They highlighted a couple of ad campaigns including one for Shutterfly during the holidays as creating the higher value per ad on mobile.

Important things said during the call highlighted how well the shift to mobile is going. Of their top 100 advertisers, 98 are on Instagram. After that discussion they stated, “If we have high quality ads, those create a good user experience.” It seems as if Facebook will try to create high quality mobile ads, with high relevance. They feel that it will keep ads from hurting user experience even if they increase the number ads shown. This in turn will improve results for advertisers, and is increasing demand so far.

There are factors working against this success continuing, like the typical price decreases to ad types online over time. Plenty of ad blocker discussion has been had in recent months, and other apps are always trying to come in and steal away eyeballs, but for now Facebook seems to be firing on all cylinders.

Brian Henry
Assistant Professor of Finance
Benedictine College

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