Facebook (NASDAQ:FB) stock was falling by 2.7% on Tuesday after the close, as the social network announced earnings for the first quarter of 2015. While earnings were better than expected, sales came in short of expectations, and this seems to be the main reason for concern among investors in Facebook stock. Let's look at the latest announcement from Facebook and the implications for investors going forward.
Making new friends
As of March, Facebook had 1.44 billion average monthly users, a 13% year-over-year increase. On a sequential basis, the company gained roughly 50 million monthly users versus the 1.39 billion monthly users it had in December.
Daily active users are growing at a faster rate than monthly ones, and this is a positive sign when it comes to measuring engagement and overall user activity. Facebook ended the quarter with 936 million average daily users, a healthy 17% increase versus the same period in the prior year.
The company is also doing quite well in the important mobile segment. Facebook announced 1.25 billion mobile monthly users, a 24% annual increase. Growth rates in mobile daily users were even stronger, as the company reported a 31% year-over-year increase, ending the period with with 798 million mobile daily active users.
Facebook is still growing at a remarkable speed, considering the size of the platform, and engagement trends are also showing healthy signs. Strong growth in both users and activity is a major positive when it comes to evaluating Facebook and its ability to continue delivering strong sales and earnings expansion in the future.
Sales came in below expectations
Revenue for the first quarter of 2015 came in at $3.54 billion, a 42% increase versus $2.5 billion in the first quarter of 2014. The negative impact from currency fluctuations was a big drag during the quarter. Excluding the impact of changes in foreign exchange rates, revenue would have increased by a much stronger 49%.
Wall Street analysts were on average forecasting $3.56 billion in total revenues, so sales were moderately below expectations. This was the main negative in the report. However, it's important to keep in mind that currency headwinds were a major issue in the quarter. Besides, Facebook is still delivering growth rates that most companies of its size can only envy.
Revenue from advertising was $3.32 billion, a 46% increase from the first quarter in 2014. Excluding the impact of foreign exchange rate volatility, revenue from advertising grew by 55%. Mobile advertising revenue represented approximately 73% of ad revenue in the first quarter of 2015, a major increase over the 59% of advertising revenue that came from mobile in the first quarter of 2014.
This shows that Facebook is not only generating a lot of traction when it comes to users and activity in mobile, but it's also producing rapidly growing sales in this crucial segment.
The payments and other fees segment, on the other hand, is clearly on a decline, falling by 5% to a small $226 million during the last quarter.
Monetization metrics are also increasing. Average revenue per user was $2.50 in the last quarter, growing 25% versus $2 per user in the first quarter of 2014.
The company is investing tons of money for growth, and it's taking its toll on profitability. Costs and expenses increased 83% year over year on a GAAP basis and 57% on an adjusted basis. This increase pushed profit margins downward: GAAP operating margin fell to 26% of revenues versus 43% in the first quarter of 2014, while adjusted operating margin was 52%, compared with 57% for the same quarter last year.
However, management had already announced that the company is actively investing in areas such as employees, technology, and product development, so analysts has anticipated the decline in margins. So Facebook still delivered better-than-expected earnings in spite of rising costs. Adjusted earnings per share were $0.42, up 20% year over year, and above the $0.40 per share analysts forecasted on average.
All that being said, Facebook is performing strongly in key areas such as users, engagement, mobile, and monetization. Sales are also expanding rapidly, so the fact that revenues came in below Wall Street forecasts should be no reason to panic, as the business fundamentals are still moving in the right direction.