Facebook (NASDAQ: FB) reported earnings last week, and the call was so positive that the market sent the behemoth company up a whole 5% on the news.
In this Industry Focus: Tech segment, host Dylan Lewis is joined by two summer interns to go over the biggest numbers from the call -- revenue, bottom- and top-line growth, net income and more -- and explain what got the market so excited about Facebook's future. Also, the hosts talk about some of the biggest risks and potential downturns that Facebook is facing for the next few years and quarters.
A full transcript follows the video.
This video was recorded on July 28, 2017.
Dylan Lewis: If Alphabet posted good numbers and got a pretty meek response from the market, I think Facebook had pretty much the opposite. Great numbers and, wow, up 5% immediately after posting the next morning. Great results here. Do you guys want to walk through some of the numbers a little?
Aneesh Susarla: Yeah. Facebook continues to be a wonderful story when it comes to social media growing and taking over the whole space. The company reported revenue of $9.3 billion, which was good for 45% growth and beat expectations pretty handily. On the bottom line, net income clocked in at $3.9 billion, which is up 70% year over year. You don't see that for a company that has a market cap greater than $500 billion, so that's super impressive. Operating margin was up 500 basis points to 47%, thanks to revenue growth outpacing spending. That's a pretty huge swing, so that will definitely be an indicator to look for in the future. Particularly, mobile ad sales hit $8 billion, which was a 53% increase.
Lewis: Looking at that number for a second, you see that $8 billion comes in at a massive part of the overall $9.3 billion revenue they're posting for the quarter. They, too, are seeing that mobile pivot, and doing it very successfully.
Susarla: Yeah. Mobile ad revenue now accounts for 87% of their total ad revenue. In the past, we heard so many concerns about whether or not Facebook would be able to transition to mobile and continue to generate revenue from there, so that's super impressive. Another good indicator is that the price of an individual ad rose 24%, and the total number of ads rose by 19%. Even though the company signaled that the ad space in the News Feed is reaching upper limits, they're still continuing to grow, so that's pretty positive. Additionally, the company still makes most of its ad revenue from those in the United States and Canada, just because they're more developed markets. But it's looking to continue monetizing more of its international markets. Currently, the average revenue per user worldwide is $4.73, which was a 50% jump from the first quarter of 2017.
Lewis: I want to circle back on what you talked about, with looking forward in growth, in a little bit. But before we get over to that stuff, if we're talking Facebook, we also have to talk user counts. I think that's one of the easiest ways to see the trajectory of a social-media business. You look at the response with Twitter today, after reporting earnings and showing absolutely zilch for user growth --
Connor Lott: Yikes.
Lewis: -- you can show how much the market fixates on that. So, what are we seeing with users, Connor?
Lott: Right now, the platform has two billion monthly active users, with 1.3 billion daily active users, which obviously makes it the preeminent social network in the world. Then, looking at the different properties in terms of advertisers on those properties, Facebook now has five million advertisers. Instagram -- which is owned by Facebook -- has one million by themselves. They've grown incredibly over the past five to 10 years since the formation of the company, in terms of driving at growth and in terms of MAUs and DAUs. It's a really encouraging sign that they can now really see those profits take over from that base growth.
Lewis: Yeah. I think that advertiser at a glance is good, because you don't get a good breakout of what's going on, what's coming from Facebook and what's coming from Instagram. Getting a sense of how many advertisers they have participating on each at least gives you kind of a baseline feel for, maybe, what those revenue contributions might be. We talked about the growth deceleration. Facebook's management has talked about the growth deceleration. They've tried to signpost this as much as possible. I think part of it is, it's really tough to keep putting up these ridiculous numbers. You look back to what they've done, Q3 of 2016, which they'll be going up against, they posted 55% revenue growth, and that's really tough to do. Part of the equation, though, looking at the way the business works, is they're hitting us some saturation with their ad load.
Susarla: Right. There's only so many ads you can include in the News Feed, simply because as users scroll on videos, they'll spend a certain amount of time there, and you don't really want to compromise the user experience by including a ton of ads. So, the company does have to strike a fine balance in terms of monetizing its audience, but also providing that incredible user experience. I think management has done an amazing job when it's come to that. I still have confidence that they will be able to do this in the future when it comes to monetizing WhatsApp and Messenger, which they gave a little bit of color on, and how their monetization for Messenger was a little bit slower than they expected it to be.
Lewis: There are other things that play into that revenue number. Ad load is one of the main factors. But the gains are also driven by active-user growth and advertiser demand. So, what we're seeing in other parts of the business is, MAUs and DAUs keep climbing. We saw that the ad rates that people are willing to pay for keep going up, too. So, even as ad load decreases, we may not see the same gaudy growth, but that's not to say that we're not going to see growth on the Facebook platform itself.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Aneesh Susarla has no position in any stocks mentioned. Dylan Lewis owns shares of Alphabet (A shares) and Facebook. TMFcurrahee has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Facebook, and Twitter. The Motley Fool has a disclosure policy.