3 Takeaways From Facebook’s Recent Earnings Report

Let’s take a closer look at the recent quarterly earnings report of Facebook and examine the company’s strong points and one weak point that could impede Facebook’s progress in the near future.

May 4, 2014 at 2:00PM

Facebook's (NASDAQ:FB) first-quarter earnings report was released last week, and it beat analysts' expectations. The main improvement Facebook showed involved a staggering rise in mobile, as explained in a recent Fool article. This leap, however, wasn't the only improvement the company had last quarter. To explore the driving force behind Facebook's growth in earnings, below are three charts that show how well the company has done in the past quarter. One of them, however, also suggests the company's growth could curb in the coming quarters.  

It starts with mobile
The company's mobile usage had a dramatic rise in the first quarter -- a 43% jump in daily mobile users, year-over-year. Moreover, the company's advertising revenue spiked by 82%. The main takeaway here is that Facebook found a way to make a hefty profit from mobile -- an accomplishment that not too many Internet companies were able to reach.  

According to Facebook's CFO, David Ebersman, who plans to leave the company in September, the rise in mobile use resulted in a 17% drop in Facebook's ad impressions (mobile doesn't have rail ads). Moreover, other online companies such as Google (NASDAQ:GOOG) recorded a decline in operating profit from 29% in the first quarter of 2013 to 26.7% in the first quarter of 2014. One reason for the decline in profitability was the rise in mobile use. The company's 9% fall in cost-per-click is partly related to higher mobile usage in the past quarter year-over-year. 

Conversely, Facebook's operating profitability grew by 43% year-over-year. Further, the company's net earnings per monthly active user, or MAU, steadily rose over the past several quarters, as indicated in the chart below. 

Fb Net Profit Per Mau

Source: TechCrunch 

This means Facebook made more money from its users in recent quarters. The rise in mobile use is also related to the improved engagement in the past quarter. 

Better engagement
One reason for the rise in profitability was the improved engagement from the company's users. The chart below shows changes in user engagement, which is calculated as the percent of daily active users, or DAUs, from total MAUs. 

User Eng Fb

Source: TechCrunch 

The company's user engagement steadily grew and reached nearly 63% in the first quarter of 2014. If the engagement keeps rising, a higher number of users will become active on a daily basis, which could improve Facebook's revenue. The revenue from ads per MAU slipped by 7% sequentially, but spiked by 57% from the same quarter last year. One of the factors behind the modest decline (quarter-over-quarter) in revenue per user is the rise in Asia's part from total revenue.  

Roaring Asia
Despite these positive results, investors should notice the potential slowdown in the growth of users in the U.S and Canada, a geographical segment that accounts for roughly 47% of total revenue. 

From the chart below, the company's average revenue per user, or ARPU, in U.S and Canada grew by 67% year-over-year. But, this metric declined by 3% quarter-over-quarter. At the same time, Facebook's DAUs in the U.S and Canada dropped from nearly 21% in the first quarter of 2013 to 18.7% in the recent quarter. The main reason for this fall was the rise in users in Asia. This region's DAU share grew by nearly 2 percentage points to 27% in the past quarter. Despite this rise, Asia still accounts for a small portion of Facebook's total revenue at 14.1%. Asia's ARPU is very low at only $0.93, so if the region keeps expanding, this could eventually reduce Facebook's profitability. 

Arpu Fb

Source: TechCrunch 

Bottom line
Facebook has outdone itself and managed to increase revenue and improve profit margins by expanding its user base and turning customers into daily users. But, as Facebook further extends its reach into Asia, the company's profit margin could start to come down.  

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Lior Cohen has no position in any stocks mentioned. The Motley Fool owns shares of Facebook and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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