Earnings season is in full swing, and earlier this month, two of the biggest tech companies, Apple (NASDAQ:AAPL) and Facebook (NASDAQ:FB) reported their quarterly results.

In this episode of Industry Focus: Tech, Motley Fool analyst Dylan Lewis and senior tech specialist Evan Niu, CFA, dive into the highlights from the reports. Listen in to find out which segments are growing Apple's top line the most and which segments are flagging; what it means that Facebook is planning to report on a GAAP-only basis in the future; how both companies are executing on their long-term growth strategies; and more.

A full transcript follows the video.

This video was recorded on May 5, 2017.

Dylan Lewis: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. It's Friday, May 5, and we're talking big tech earnings and wrapping up Puzzle Week. I'm your host, Dylan Lewis, and I'm joined on Skype by fool.com senior tech specialist Evan Niu. Evan, what's going on?

Evan Niu: We thought last week was busy. This week was really busy with the earnings.

Lewis: Yeah, back-to-back earnings episodes for us. And this is your favorite episode of the quarter. We're talking Apple earnings. I guess we'll work our way into Facebook, too, but I know this is one you always look forward to.

Niu: Of course.

Lewis: For listeners who have been following us all week on the episodes, we have the final clues for Industry Focus Puzzle Week at the end of the show, so make sure you stay tuned after we wrap up all of our earnings talk. Safe to say it's a jam-packed show here today. Evan, why don't we get right into the Apple discussion? Apple reported what looks like a pretty decent quarter. Revenue for the second fiscal quarter totaled $52.9 billion. EPS came in at $2.10 a share. The company sold 50.8 million iPhones. You look at what estimates were and what people were expecting, just under expectations with revenue, they actually beat on EPS and missed a little bit on iPhone unit sales. What did you make of this quarter?

Niu: I think, as far as those headline numbers, it was pretty much in line with expectations. Plus or minus a little bit on some of the metrics, but no big surprises one way or the other. In terms of iPhone sales, I don't think investors were too shocked one way or the other. Of course, anytime you hear iPhone sales less than expected, the stock sells off automatically because people always freak out about the iPhone. But, Apple is so big at this point that it's really hard to put up a big earnings beat anymore these days.

Lewis: We touched on units there. Thankfully the iPhone ASPs were up -- average selling price. They hit $655, which is up from $642 a year ago. It seemed like that was really thanks to a stronger mix, people buying at the higher price points for the different form factors they offer. You have that going on, which helps them make up the revenue for that segment. Do you have anything on why they might have missed on the unit side, anything related to future products releases or something like that?

Niu: [CEO] Tim Cook talk to little bit of that, there does seem to be an impact on all the rumors. Of course, iPhone rumors are always there every day. But, I think this year's cycle, the expectations are so high and there's so many rumors that it's a particularly intense cycle, the speculation that's going on -- people are waiting. Plus, if you think about it, this is the first time they've ever used the same iPhone design for the third year in a row, so the design is getting a little long in the tooth. This original design was unveiled in 2014. Of course, people like new things. I think those two factors are probably hurting unit sales a little bit, because people are waiting. Even for me personally, I didn't buy the iPhone 7 because I didn't think it was that great, which is the first time I hadn't upgraded in eight years. If even me, who's one of the biggest Apple fans out there, doesn't buy it, you have to wonder who else isn't buying it. So, people are really waiting for the next one. Of course, I'm very excited to get the next one, whatever it is. But yeah, I think there are a couple things that are holding back. Like you mentioned, ASPs were up, which was nice. The 7 Plus was finally in supply demand balance. Last quarter, they misgauged how much to produce and where demand would be focused. It turns out it's really heavily skewed toward the 7 Plus, and they didn't really plan very well, and they admitted that. It was up year over year, but down a little bit sequential. Last quarter, ASPs for iPhone was $695, almost $700, so a little bit of a sequential down tick there, but nothing too concerning, because the point being, people are still loving that big 7 Plus, and that thing is super expensive, so that's helping drive their selling prices overall.

Lewis: And also to get into the mind of consumers here a little bit, you talked about how the form factor didn't really change all that much year to year. They made one major overhaul, which was the change to the headphone jack. So, you're asking people to make a major change in how they consume content, or maybe switch over and do use the adapter there, and a lot of people might have said, "The updates to the phone itself aren't compelling enough for me to make that change."

Niu: Right. I didn't think there were any big headline features last year. Even the prior year, with the success, the big feature was 3D Touch, which, I think over time was underwhelming. In the past few years I've actually used it, it's not a feature you use every day. It's kind of nice, but it's not a game-changing interface thing, and I think it's kind of underwhelming. So, last year, there wasn't any big feature that was like, "I have to have this phone." I think the dual-camera system was probably the biggest selling point, but that's only on the 7 Plus. For people like, for example, myself, I don't like gigantic phones, and the 5.5 inch screen I think it's just too big. I would like to have that dual camera system, but I'm not willing to go up to the bigger phone that also costs more just to get that camera. As far as the regular 7 goes, there wasn't any huge upgrade that made people go out and say, "I need to get this phone right now," whereas hopefully the next one -- of course, there's a million rumors right now -- it sounds like the next one will be a pretty big upgrade. It'll be the 10th-generation phone, it'll be a pretty big milestone and you can bet that Apple will make a pretty big deal about it, both in terms of marketing and also all the features they're going to try to stuff in there.

Lewis: Switching over to a segment that seems to be on fire in recent quarters, services revenue jumped 18% to $7 billion, and it has been Apple's second-largest revenue stream just behind the iPhone. That's pretty awesome, and I think it's been underappreciated for quite some time. I think the market is starting to wise up to this pretty significant and very high-margin part of Apple's business.

Niu: Right, I definitely think that's what's happening, in particularly if you think about the historical context of the services business. If you go back maybe five years, Apple's whole approach to content, services, and things like that was to basically break even, and offer these things as a way to build its ecosystem and solidify retention period -- it was more of a strategic piece than a profit piece. They used to operate all their storefronts -- they don't really break it out as far as exposures, but they used to very publicly say, "We're really just trying to break even on this stuff. It helps people use the phones and buy the phones, but we're not trying to make a whole bunch of money on it." I think now, that's very much swapped around, because now they are very much making quite a bit of money on these services, and it is becoming a big profit driver. I remember last quarter when we talked about earnings, we mentioned how their guidance had called for a small uptick sequentially in gross margin.

We talked about [how] that's really hard when you're coming off of a holiday quarter, when your revenue comes down from a seasonal factors, you lose a lot of operating leverage, all these things, and it's like, how are they going to actually put up an increasing gross margin? Now we know why, the answer is services, because services are so profitable. CFO Luca Maestri very much said, the mix shifting toward services is really helping profitability. They did put up a sequential increase in gross margin, some 40-odd basis points. I think that's really impressive. That's really the services profitability shining right there. So, four out of the past six quarters, it's been the second-largest business. But, greater than the Mac or the iPad, the iPhone is the only thing that's bigger. So, this is really becoming a very big, large, meaningful business, both in terms of revenue as well as profitability. This is now a $26 billion business on a trailing-12-month basis, and it's also much more profitable than the hardware operations. I think investors aren't fully appreciating it, and I don't think you'll be able to ignore it for very much longer, because like they said last quarter, they're going to try to double this business over the next four years. It's only going to keep growing from here.

Lewis: And it's something that really only continues to grow and get stronger the larger their installed base gets. As they continue to penetrate new markets, services is going to be another tailwind that follows all those iPhone unit sales. It's kind of an add-on in some ways, but also, because it's so profitable for them, certainly something to continue to watch. I think a lot of people are curious as to what's going on with wearables in Apple. We hear so much about the Apple Watch and you see tons of people wearing them. Any updates on that product segment?

Niu: They dropped a few clues. Of course, they obfuscate Apple Watch sales within the "other products" segment. They did say that Apple sales were up roughly double, but without having any context, who knows what that means.

Lewis: It's a meaningless number.

Niu: Yeah, two times? OK, thanks, Tim [Cook]? But, what they did say is, wearables -- it's kind of weird, I'm not sure why they do this, but Apple considers AirPods and wireless Beats headphones as wearable products. I know that technically, wireless headphones are wearables, because you wear them. I'm wearing wireless headphones right now. But, I don't think headphones are what people think of, when you hear the term "wearable technology," you don't jump to headphones. You think about smartwatches and fitness trackers and things like that. He did say that the wearables business is now the size of a Fortune 500 company, which means it's at least $5.1 billion over the past year. With AirPods only recently launching, and it's not clear how much they're bringing in from Beats wireless headphones, but I think it's safe to say that the majority of that revenue is from Apple Watch. So, that's kind of a hint. But, again, they're not really giving away too much, as usual, which is really frustrating. But, maybe eventually, one day, they'll start breaking that out. It's weird, because they've always said, "We don't want to give it away for competitive reasons," but competition in smartwatches is actually declining. People are getting out of the smartwatch market. And there haven't been a whole lot of really strong product introductions. So, competition is actually getting easier. So they should just share the numbers. [laughs] 

Lewis: Yeah, it's still tough to parse out what's going on there. I think one place that the company has been super clear, though, is its capital return program. They obviously made some new announcements related to that. Do you want to touch on that, Evan?

Niu: Every March or April, basically this fiscal second-quarter earnings, this is now, every year, this has become the traditional schedule, that's when they provide updates to the capital return program. This year, the update was pretty in line with previous years. It's a total increase of about $50 billion, and they're allocating most of that to share repurchases. About $35 billion is going toward share repurchases, the other $15 billion going toward dividends. Their shares repurchase authorization is going from $175 billion to $210 billion. To date, they've purchased right about $151 billion. They have about $60 billion of authorization that will last them until next year. And the overall size of the increase this year is pretty much in line with historical standards, yet, at the same time, their cash continues to grow to ridiculous, unheard-of levels. On a gross basis, they're now sitting on over a quarter-trillion dollars in cash. Of course, the vast majority of that is overseas, and that's before you factor in the net debt they've been raising. They actually just raised more debt this week. But, they have so much cash, and even though they're very aggressive at giving it back, they generate it so fast that they still add to their pile of money every quarter. Of course, the big challenge with trying to do more with that is the whole repatriation thing. Maybe the Trump administration will actually have some type of holiday. There's been a lot of talk about that. But at this point, it's still pretty uncertain, if that will happen sometime. If there is a one-time repatriation deal, either deemed repatriation or a one-time thing, I do think Apple would take that opportunity to bring quite a bit of cash back. But, at the same time, I think we have to acknowledge that the majority of their capital needs are actually outside of the U.S.

Lewis: Because that's where a lot of the manufacturing and all the tooling is, right?

Niu: Right, that's a big piece of it. The majority of their capital expenditures is for product and tooling equipment. This equipment is installed at contract manufacturers in Asia. It's their equipment, but they are putting it in their partners' facilities, which are all located international. Plus, on top of that, in terms of retail store expansion, the U.S. retail network for Apple stores is already pretty mature. Over the past few years, they've been really focusing on growing the footprint internationally. Those stores are pretty expensive, especially when you think about how nice Apple makes the stores. They use really high-quality materials. They put a lot of money into their stores because that's the way they want to make the experience. So, between increasing retail footprint internationally and the fact that the majority of the capital expenditures are concentrated in Asia, they do need to keep quite a bit of money out internationally. But, obviously, they don't need anywhere near $230 billion internationally, that's just ridiculous. So, I do think there's an opportunity to bring some back if you get a repatriation holiday. Maybe, as far as what they would do with it, pay down some of the debt to restrengthen the balance sheet, maybe a special, one-time dividend. I'm not a fan of the whole "make a huge blockbuster acquisition" idea, which some people like to talk about. I think that would be kind of irresponsible. But, we'll see what happens. It really hinges on this idea of a tax repatriation, because that would allow them to really bring back more and either give it back or do something more productive with it.

Lewis: Yeah, I think that will probably be one of the biggest stories to watch in 2017 for Apple and the Trump administration. You touched on the dividend a little bit. It's worth noting here, they did boost their quarterly dividend payment 10.5%, it is now $0.63 per share. Now, Apple is the world's largest dividend payer, it just passed ExxonMobil, which is just another fun tidbit about the scale of their business and how quickly they are printing cash.

Niu: Yeah, I think they're estimating it at $13 billion a year, which is the size of medium-sized companies, just in dividends.

Lewis: Yeah. Evan, anything else before we switch things over to Facebook, on Apple? It seems to me like this kind of a humming-along, boring quarter for this company. A lot of the intrigue for Apple in 2017 would come with a tax repatriation holiday, or when they actually show what the next model of the iPhone looks like. So, it's kind of a wait-and-see quarter for investors.

Niu: Yeah, this quarter seasonally isn't really too exciting. Obviously, the fourth quarter, the holiday quarter, that's where the more exciting stuff comes in. So, yeah, I agree, it's kind of more of the same, executing very well. I think the services piece is probably the most important thing that we talked about. Other than that, overall, a pretty solid quarter.

Lewis: All right, switching gears over to Facebook. Facebook's top line came in at $8 billion, up 49% year over year. EPS came in at $1.04 versus expectations of $0.87 a share, so a handy beat right there. Of that total top line, advertising revenue was $7.9 billion, 85% of which came from mobile. This is and always has been an ad-driven business. I think if you want to highlight just how well Facebook has transitioned to mobile, think about that number and then think about the fact that in Q1, average price per ad was up 14%, and the total number of impressions was up 32%. Last week, we talked about the ad dynamics with Twitter, and they were both not going in that direction. The idea of average price per ads going up would be something that Twitter would love right now.

Niu: Yeah, they're crushing it on the mobile side. If you look on a trailing-12-month basis in dollar terms, mobile ads are now a $25 [billion]-$26 billion for Facebook. That is just incredibly impressive, considering the fact that five years ago, they had basically nothing. They've really worked hard to grow that business. They always disclose percentage, but I like to crunch the numbers and look at them in dollar terms: $25 [billion]-$26 billion. It's funny, because that's what Apple's services business is now, and that's a side thing for Apple, but it's Facebook's core business right now. But it's growing so fast. It continues to really drive higher, like you mentioned, ad prices are going up. I think demand for Facebook ads is outstripping supply, particularly for what they're trying to do with the ad load, and improve the user experience. Ad prices are going up, and they're putting up really strong numbers, it's really hard to not love what they're doing.

Lewis: That's really backed up by all of the ad industry research that I read about digital ad spend. It's Google and Facebook that continue to eat up market share, and it comes at the expense of a lot of the smaller platforms. They just seem to get stronger and stronger. And some of that is definitely fueled by what's going on on the user side for them. Monthly actives now total 1.9 billion on Facebook, which is good for 17% year-over-year growth, and roughly 1.3 billion, or about two-thirds of those, are coming to the platform every day. It's baffling that they can put up that type of double-digit percentage growth on a denominator that is already in the billions.

Niu: Yeah, it's incredible how much their user growth keeps...I think, on a sequential basis, monthly actives were up 78 million. That's a third the size of Twitter, and they just added that in a single quarter. I think the ratio of dailies to monthlies is pretty much always held constant right around that two-thirds level you mentioned. So, yeah, no big changes in terms of the engagement front there, which is interesting because, like we talked about last week, Twitter's engagement is going up. If you look at, directionally, dailies versus monthlies, whereas Facebook is holding flat. That's not necessarily a bad thing, because Facebook is a much bigger platform. I think there's a different use case for it. And, obviously, they're putting up much better financial numbers than Twitter. They have so many platforms now, too, that each platform individually continues to crush it, and Facebook has four or five of them. I think investors would be happy about any one of these platforms doing well, but they're killing it on literally all fronts.

Lewis: Yeah, it's funny to think about a platform that put up double-digit year-over-year growth, and have that be the mature platform in their portfolio. But, you look over at Instagram -- Instagram has 700 million monthly actives as of this quarter. A year ago, that number was 400 million monthly actives. That is insane growth that it's posting. You look at the Instagram Stories feature, which is kind of a Snapchat mimic type thing they rolled out recently, that already has over 200 million daily active users. It already has the daily active user base of Snapchat, despite being an add-on feature to a platform that already has 700 million monthly actives, which is just baffling.

Niu: Right. They also have the WhatsApp Status, which is basically the same thing, it's ephemeral photos, videos, gif images that disappear. On WhatsApp Status, they have 175 million daily actives there, too, which is also bigger than Snapchat. Again, they have all these platforms that are just growing. That 2 billion monthly active number they're approaching on the core platform is only for the core platform. I think I would like to see Facebook starting to report more detail on these other platforms because they're becoming so big and important. They give these infrequent updates through blog posts and stuff like that. But as far as a quarterly basis, I think that would be very useful for investors, to start breaking it out. I know they acknowledge that they haven't yet because they're still selling Instagram ads through the same core interface as Facebook. But, I think, from an investing perspective, that would be really useful, to better gauge the progress of each of these platforms, particularly the smaller ones. Even if they haven't turned on the monetization bit yet, I think having operating metrics would be really helpful. 

Another interesting thing to touch on while we're talking about reporting is that they've now announced that they're going to move away from non-GAAP reporting, and only report on a GAAP basis. I think that's a pretty strong move. I think it shows a lot of confidence. A lot of the reason that companies report non-GAAP is to make themselves look better. If you don't need that, then there's no real reason to report it like that in that way. Of course, the SEC prefers if you just report on a GAAP basis. So, I think it's a pretty big move. If you look at it, the biggest piece that they exclude when they do non-GAAP is stock-based compensation. Stock-based compensation is almost 20% of total operating costs. That's a pretty big piece to either include or exclude, depending on which way you want to report it. But, on a GAAP basis, even if you include your stock-based compensation, your operating margins are in excess of 40%. So, they're doing really well. That's what I'm saying, I think they can afford to take the hit on reporting, in terms of what they tell investors to focus on. At the same time, it shows confidence, like, "We're going to start including these costs because they are real costs, and we're not going to exclude them like other companies like to do, and we're still going to put up these incredibly strong numbers." I do think it's a big sign of confidence.

Lewis: It's certainly more shareholder-friendly. I think one of the biggest things that's been on my mind as a Facebook shareholder is: What exactly is the plan with the Messenger properties? You touched on some of the more ephemeral features that they've added to WhatsApp and the adoption there. But you look at the gross numbers of monthly active users, WhatsApp has over a billion monthly actives. Messenger has 1.2 billion monthly actives. Those are massive and relatively untapped opportunities for Facebook to monetize. In the past, Mark Zuckerberg has outlined this philosophy of phase 1, get a really great consumer experience and get it at scale. Those are clearly both there already. Phase 2 is have people interacting with businesses freely, and I think that's where both these platforms are. Phase 3 is, help the businesses reach people. That's where you start to see monetization, that's where you see ads or sponsored content, something like that. With Messenger properties both in phase 2, I'm wondering what that's going to look like. I don't mind as much that Instagram isn't broken out as a product segment, because the monetization strategy there is very similar to what they're doing on the main Facebook platform. A lot of the learnings there are going to port directly to it, because it's a visual medium, it' not a messaging app, it's a very news feed-oriented platform. But, when you look at WhatsApp and Messenger, the experience for users is a little bit different.

Niu: Yeah. I think the challenge on the messaging side, in terms of building a business, which, Zuckerberg touched on in the conference call, is that they need to, I think he said, "build the behavior" of people actually getting used to interacting with businesses through Messenger. I think that's probably the biggest challenge and also the biggest opportunity, because if you think about it, people aren't used to thinking of it like that. Lots of companies have, when you go to their website, they have this pop-up thing for a live chat, like, "Do you have any questions? Can I help you?" And that's one thing people are used to. But it's more like, that comes to you, that's in your face when you go to the website. I think that's what most people think of when they think about this idea of having a chat with the company. To completely change that model into, "Here's this one messaging platform where you can message your friends, but you can also message any company that you do business with and want to interact with, and they can do customer service or whatever it is that they want to interact with you about." But, I think behaviorally, it is a pretty big change. There's never been a platform like that before. To get people that actually warm up to that idea, in meaningful numbers -- with over a billion people on these platforms, you need to have a lot of them actually doing that type of behavior before you can really start turning on the monetization. I think that's going to be pretty tough because it's really unfamiliar to people. Not to say they can't do it. I believe in Facebook's ability to execute. But, I think that's going to be a pretty key piece of building this business, and it will be a big challenge. But, I think they will be able to pull it off eventually if they can get people to shift. There's a paradigm shift in thinking about how you interact with companies. People like to interact with companies on Twitter all the time, but it's a little bit different.

Lewis: Yeah, it's kind of changing how users expect to interact there. Two different ways management offered as possibilities and things they're investigating for monetizing these platforms, one of them was ads that display in News Feed, which is kind of interesting. It wouldn't be that they're appearing in Messenger or WhatsApp, but they would be ads to take people to those platforms and create communications with companies and brands. And then, the second one is paid content in Messenger. This is probably something that's a little bit easier to visualize, and it's something that's in the inbox or in other places on the platform, more standard ad placements. That's all we got from management in terms of commentary on that, so it continues to be a wait-and-see type thing. Thankfully, with Instagram and Facebook firing on all cylinders and being incredibly profitable, showing great growth, it's not something that we really have to worry about right now, but that will be the next phase of growth for this business, looking at the available user base there.

Niu: Yeah. I'll be interested to see what the mix looks like. Once they really start churning out monetization, what's driving the revenue? Is it going to be this business-interaction stuff or is it going to be paid content -- sponsored ads in some carousel? The problem with ads in messaging is it's a crappy experience. No one wants to look at ads while you're trying to communicate. Which they've acknowledged before. So, I'll be interested to see how that plays out, in terms of the shift. Or, if they have some other new ideas. A lot of the messaging companies in Asia have e-commerce, games. With games, I think, there may be some potential there, and they might be experimenting a little bit. But, yeah, it's still very much early days.

Lewis: Yeah. It's interesting you bring up games. For Facebook's main platform, payments and other fees is really the only segment that's declining, or not really showing impressive growth. There's not a huge surprise there, it's all revenue that's tied to games and in-app purchases on the platform. It's a tiny, tiny part of Facebook's top line. I wonder if that would be something that would resonate more on the messaging side. I could also see them doing something along the lines of how ads appear in Gmail right now, where it's part of the experience, it's there, but it's not super intrusive. I'm sure they have a lot of market research that would lead them to either steer toward that or away from it, though.

Niu: Yeah, kind of like the sidebar display ads on the desktop platform for Facebook?

Lewis: Yeah, exactly. Looking forward with Facebook, and looking at their guidance, unfortunately the company is pretty numbers-light when it comes to what might be coming in future quarters. The biggest thing that we have to go off here is a quote from David Wehner, who is the CFO. He said, "We continue to expect that we'll see deceleration in ad revenue growth, and that's going to be particularly pronounced as we get to the second half of 2017 because ad load will be a less significant factor driving growth starting in the second half." I think the message from management is, curb your enthusiasm a little bit. They posted basically 50% year-over-year growth here. I don't think that's going to continue. We don't really have a whole heck of a lot else to go on, though, unfortunately.

Niu: They did give a little bit of guidance in terms of the expense side, even if they didn't clarify on the revenue side. They did say GAAP expenses should go up 40%-50%. With revenue last quarter being up 50%, if that's decelerating, that does imply a little bit of margin contraction if expenses are going to keep rising at that same rate while ad revenue gross was down a little bit. Again, as we mentioned earlier, they have pretty healthy margins to begin with, so it's not a huge issue if that contracts a little bit. But to put that percentage growth into context, that would put 2017 total costs and expenses to about $21 [billion]-$22 billion. Last year, it was about $15 billion. That's a pretty big jump up in terms of expenses. A big piece of that is the capex. 2017 capital expenditures are expected $7 [billion]-$7.5 billion, which they said, they're really ramping up infrastructure investments, which makes sense, because Facebook is so big that it made sense a long time ago for them to really take control of their infrastructure. During the quarter, they did break ground on their their ninth data center in Nebraska. They definitely are investing very heavily on the infrastructure side to really support future growth. Another quote from the call that's forward-looking that I think is important is, Zuckerberg said something about how, in the next 10 years, they're going to keep building these consumer use cases around technologies they think will be a big part of their business eventually, maybe not for a little while. So, generally, I do like that long-term thinking. 10 years is a pretty long timeline to be putting together these strategies. To invest now certainly makes sense, given how good they are at the data center side. Their infrastructure is really impressive in terms of how much they've built it out over the past few years. Again, they're now on their ninth data center. That is wholly owned. It's only theirs, it's not shared with anyone. They control their infrastructure, and that's probably one of the biggest advantages that they have, is being able to invest in it and have control over how it operates. But, yeah, I think we're going to continue to see them investing heavily in this infrastructure piece. Just need them to put up the growth to help cover those costs, even if there's a little bit of margin contraction.

Lewis: Yeah. I think if we're looking for takeaways for investors with Facebook, I'm a shareholder, I was pretty happy with the results all in all. I know there was a little sell off immediately after they posted. If you want to get a sense of what's going on with properties like Instagram, you have to watch monthly active users and gauge things from there, unfortunately. I think there's still a lot of excitement about what they're going to do with the messaging apps. Over the last year, they've been a little bit clearer in actually talking about what they might be doing in terms of monetization. I don't think we're near that any time soon, but it's clearly something they're thinking about and testing quite a bit. So, that's a big growth runway for them. I still see a lot of stuff that I really like with this business. I don't know about you, Evan?

Niu: I'm also a shareholder, and I'm a big fan of everything they do. I think they're executing very well. To play devil's advocate for a second, I will say, one thing I've mentioned repeatedly over the past few years is, it's been years since they bought WhatsApp, and I'm still skeptical about what they paid for it. They paid some $20 billion for a messaging app that had no revenue. I know their plan is to build this business with it. But it's just so much money. When you pay so much for an acquisition like that, you create so much risk for yourself. If you look at the balance sheet, they have something like $18 billion or so in goodwill intangibles, the vast majority of that is because of this WhatsApp acquisition. If you compare that to Instagram, Instagram is $1 billion. And at the time, everyone thought that was crazy. But now, in hindsight, that's been one of the best acquisitions they ever made because of how much it's growing. But, $1 billion compared to $20 billion, it's a pretty different bar in terms of how well you need to execute to justify that later on. Very specifically, if you can compare WhatsApp to Messenger, these two platforms are very similar in terms of user size, how they're going to monetize it. But Messenger, they developed in house for way less than $20 billion.

Lewis: Yeah, that's true.

Niu: WhatsApp they bought for $20 billion, and now you have these two businesses that are both doing really well operationally, still early days monetization. But one, you paid a whole ton of money for, and the other you paid almost nothing for, because you made it yourself. There's just so much risk. If WhatsApp doesn't work out later on in terms of monetization, they will have to end up taking a humongous impairment on that goodwill that's sitting on the balance sheet right now. I'm not saying that's going to happen, but it's a huge risk factor that's just sitting there on the balance sheet, it has been sitting there for years, and eventually, if they can't make it work out, it's going to be a big hit for shareholders. Hopefully, they will. But it's a huge risk factor that I haven't been able to ignore, and it's still very prominent, and I still don't understand why they paid so much.

Lewis: Rant over. You have a great article, I believe it's from a year or two ago, right around when the acquisition was settled, detailing that. Listeners, if you want more of a nuts-and-bolts look at the company's goodwill and the accounting for that, email into the show, industryfocus@fool.com, and we'll be sure to send it along. I'm getting a note from Dan Boyd in the studio that we need to wrap up, I guess there's some other stuff going on, I guess we're getting a little carried away with earnings. Anything else before we wrap things up, Evan?

Niu: No, I think we covered pretty much all of it.

Lewis: Before I get into my standard disclosure, I have to do the wrap-up for Puzzle Week. Listeners, this is the end of Puzzle Week for Industry Focus. If you've been following along, you know that we love games at Fool HQ, puzzles and challenges are a huge part of how we team build and spark collaboration at the Fool. We even have our own chief collaboration officer and puzzle master, Todd Etter. We wanted to give you guys, the listeners, a little taste of the fun that we have here at office, so we had Todd devise a challenge for you guys, a little puzzle for you guys to try to figure out. As you may have heard on previous episodes, every day this week, each host wrapped up each show with a clue. The answer to that clue is a company name, and the company names from Monday to Friday will all fit into a final puzzle that I'm going to reveal in just a minute. So, if you want to solve the whole thing, I need you to listen to every episode this week. For doing that and submitting it, the first 10 listeners to shoot us an email after today's show airs with the five company names and the final answer will get Fool swag. 

Here's today's Tech clue: if you insert three letters after the second letter in the name of this seven-letter e-commerce company, you'll get the name of a mustard. What is the name of the company?

Now, for the final clue that puts all five company names together: using the following order -- Tech, Consumer Goods, Healthcare, Energy, and Financials, take the first letters of the five companies of your answers to spell the name of a globally famous consumer goods brand. 

After this show airs Friday afternoon, if you solved every clue, write in to industryfocus@fool.com with the email subject line "Puzzle" with the five company names and the answer to the final clue. Also, make sure to tell us your T-shirt size, that's part of the swag. If you're stumped and want the reveal, on May 12, we'll post them to The Motley Fool podcasts Facebook group and the Industry Focus Twitter account, so you can find the answers there. I have to read a little legalese here. To enter this contest, there's no purchase necessary, and the contest is open to all legal residents of the U.S. and Canada, excepting residents of the province of Quebec, over the age of 18. Employees, affiliates, and contractors and their families at The Motley Fool LLC or any of their affiliates are not eligible. Void where prohibited by law. If you want a complete list of the contest rules, visit puzzle.fool.com. 

That was a mouthful. Listeners, that does it for this episode of Industry Focus. Thanks to Dan Boyd for subbing in for Austin Morgan behind the glass today. If you have any questions, or just want to reach out and say "Hey," you can shoot us an email at industryfocus@fool.com. You can always tweet us @MFIndustryFocus as well. If you like the show and you're looking for more of our stuff, subscribe on iTunes, or check out the Fool's family of shows at fool.com/podcasts. As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell anything based solely on what you hear. For Evan Niu, I'm Dylan Lewis, thanks for listening and Fool on!

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Dylan Lewis owns shares of Alphabet (A shares), Apple, ExxonMobil, and Facebook. Evan Niu, CFA owns shares of Apple and Facebook. Evan Niu, CFA has the following options: long January 2019 $20 puts on Snap Inc. and long January 2018 $120 calls on Facebook. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Apple, Facebook, and Twitter. The Motley Fool owns shares of ExxonMobil. The Motley Fool has a disclosure policy.