For Facebook (FB 8.55%), this may be the year that started out with a bang and ended with a whimper. After a series of data scandals, privacy hacks, record fines, and congressional hearings, it seemed as if the social media giant could brush off anything.
The reckoning finally came last quarter when the company missed expectations for the first time in over three years, causing the stock to plummet 19% in the wake of its disappointing earnings report. The recent stock market declines and tech rout exacerbated those losses, with Facebook losing a third of its value.
Investors were hoping for some good news when the company released its third-quarter financial report, and while challenges remain, the results weren't as bad as some had feared, giving shareholders some much needed optimism.
Image source: Facebook.
Decelerating revenue growth...
|
Metric |
Q3 2018 |
Q3 2017 |
Change (YOY) |
|---|---|---|---|
|
Revenue |
$13.7 billion |
$10.3 billion |
33% |
|
Operating margin |
42% |
50% |
(800 basis points) |
|
Net Income |
$5.1 billion |
$4.7 billion |
9% |
|
Diluted earnings per share |
$1.76 |
$1.59 |
11% |
Data source: Facebook third-quarter financial release. YOY = year over year.
For the third quarter, Facebook's growth continued the deceleration that began last quarter, with revenue up 33% year over year, but down from the 42% growth rate it generated in the second quarter and the 50% it produced in the first quarter. Earnings per share increased 11% year over year to $1.76. While revenue missed analysts' consensus estimates of $13.78 billion, EPS came in significantly higher than the $1.47 expected by analysts.
Mobile advertising revenue of $12.46 billion grew 40% year over year, and now accounts for 92% of total advertising revenue, up from 88% in the year-ago quarter. The average price per ad grew 7% year over year driven primarily by feed ads on Instagram and Facebook. Impressions per ad grew 25% versus the prior-year quarter, while impression growth came from sources that monetize at a lower rate (like Instagram Stories). The average revenue per user globally grew to $6.09, up 20% year over year.
...and slowing user growth
Facebook's monthly active users (MAUs) climbed to 2.27 billion, while daily active users (DAUs) grew to 1.49 billion, up 9.6% and 9.3%, respectively, compared with the prior-year quarter. Users contracted in Europe for the second successive quarter, contributing to the slowing growth. The company updated the way it estimates existing users, resulting in the removal of a small number of accounts that impacted MAUs by 9 million and DAUs by 15 million.
Continuing with a metric that debuted last quarter, Facebook revealed how many people accessed at least one of the company's platforms during the quarter. More than 2.6 billion people used Facebook, WhatsApp, Instagram, or Messenger each month, up from around 2.5 billion last quarter, and more than 2 billion users accessed one of these platforms on a daily basis.
It's important to note that spending continued to scale faster than revenue, as Facebook made good on its promise to hire additional employees to review content and ramp up its digital security in the face of recent hacks involving user data. Total costs and expenses climbed 53% year over year, much higher than the rate of revenue growth -- and that isn't expected to change anytime soon.
"Our community and business continue to grow quickly, and now more than 2 billion people use at least one of our services every day," said CEO Mark Zuckerberg. "We're building the best services for private messaging and stories, and there are huge opportunities ahead in video and commerce as well."
Image source: Facebook.
What the future holds
For the upcoming fourth quarter, Facebook is expecting revenue growth to decelerate by a high single-digit percentage, or down 5% to 9% versus the 33% growth achieved in the current quarter. The company is also expecting spending to continue to ramp up, with full-year expenses growing between 50% and 55% compared with 2017.
To put that into perspective, analysts' consensus estimates are calling for revenue of $16.34 billion, up 26% year over year, near the midpoint of management's guidance, and for EPS of $2.18, an increase of 51% over the prior-year quarter.
Facebook stock rose in the wake of its earnings release, as investors breathed a sigh of relief that things weren't worse. The company had been warning of slowing growth for some time, and management's prediction has finally come true. The combination of slowing growth and increasing costs will likely keep the stock from making big moves anytime soon. Challenges remain, but with continued monetization of Instagram, and as-yet-unexploited areas like video and e-commerce providing opportunities for growth, Facebook might still find additional sources of growth over the longer term -- but it will take time.
