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The Metrics Behind Facebook, Inc.'s Monster Second Quarter

By Daniel Sparks - Updated Jul 27, 2017 at 1:41PM

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Want to know what a business looks like when it grows quarterly net income 71% year over year to $3.9 billion?

With Facebook (META 1.70%) stock rising about 42% year to date, and about 13% in the past three months, expectations were undoubtedly high ahead of the social network's second-quarter earnings release on Wednesday. But its results didn't disappoint. Driven by its rapidly rising advertising revenue, total revenue and profit both surged during the quarter.

Here's a close look at Facebook's monster second quarter, including an update on user growth, management's outlook, and more.

Facebook CEO Mark Zuckerberg reveals the social network's new mission statement

Facebook CEO Mark Zuckerberg. Image source: Facebook.

Second-quarter results

Metric

Q2 2017

Q2 2016

Year-Over-Year Change

Revenue

$9.3 billion

$6.4 billion

45%

Operating margin

47%

42%

500 basis points

Net income

$3.9 billion

$2.3 billion

71%

EPS

$1.32

$0.78

69%

Data source: Facebook's second-quarter earnings release. Table source: author.

Revenue increased 45% year over year. Though the growth rate was down from the 49% revenue growth Facebook posted in Q2, the social network's total revenue of $9.3 billion exceeded analysts' consensus estimate for revenue of $9.2 billion. 

Revenue growth during the quarter was entirely driven by growth in advertising revenue. Accounting for 98% of the quarter's revenue, advertising revenue was up 47% year over year. Facebook's "payments and other fees" revenue, which accounts for the remaining revenue, fell 20% year over year.

Since Facebook's revenue rose faster than expenses during the quarter, the company's operating margin expanded from 42% in the year-ago quarter to 47% in Q2. Facebook's sharp increase in revenue paired with its operating-margin expansion meant net income soared. Net income was up 71% year over year, helping Facebook's EPS rise an impressive 69%. Facebook's EPS of $1.32 handily surpassed a consensus analyst estimate for EPS of $1.12.

Second-quarter highlights

Prepare yourself. Here are some jaw-dropping facts from the quarter.

  • Instagram Stories and WhatsApp Stories each have over 250 million people using them daily. 
  • Facebook has over 70 million businesses on Facebook and over 15 million business profiles on Instagram.
  • With 2.01 billion monthly active users at the end of Q2, Facebook added 294 million monthly active users in the past 12 months.
  • Facebook's 1.33 billion daily active users increased by 197 million since the year-ago quarter.
  • The average price per ad during the quarter increased 24% year over year, while the number of ads increased 19%.
  • Total expenses increased 33% year over year.
  • Facebook generated over $3.9 billion in free cash flow and ended the quarter with over $34 billion in cash and investments.
Social network interaction icon notifications

Image source: Getty Images.

Outlook

Unsurprisingly, Facebook maintained its outlook for revenue growth to slow in the second half of the year. Facebook management has repeatedly warned investors that, during the second half of 2017, ad load growth would begin to play a less significant role in driving advertising growth, causing revenue growth rates to come down. Further, management said during the second-quarter conference call that slowing desktop ad revenue growth and Facebook's increasing emphasis on driving engagement with mobile video, an area where ad impressions are lower than Facebook's cash-cow news feed, will also play roles in bringing Facebook's revenue growth rates lower as the year progresses.

And to be sure to drive his point home, Facebook CFO David Wehner clarified during the earnings call that the social network doesn't expect the company's early efforts to monetize Messenger will offset its revenue growth headwinds.

On a positive note, Facebook's updated outlook for expenses and capital expenditures represent more moderate forecasts. Management narrowed its previous expectations for a full-year expense growth range of 40% to 50% to a range of 40% to 45%. And Facebook said it now expects its full-year capital expenditures to come in at the low end of its guidance range for $7 billion to $7.5 billion.

Daniel Sparks owns shares of Facebook. The Motley Fool owns shares of and recommends Facebook. The Motley Fool has a disclosure policy.

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