It was a brutal earnings season for social media companies. Despite impressive headline numbers, Facebook (NASDAQ:FB) , Twitter (NYSE:TWTR) and LinkedIn (NYSE:LNKD.DL) all took a tumble after they reported earnings last week.
Each company had their own issues that spooked the Street -- Facebook's investment in the future is raising cost concerns, while Twitter's user growth continues to disappoint investors, and LinkedIn's increased mobile traffic is causing display ad revenue to decline -- but should these short-term hiccups have investors worried?
A full transcript follows the video.
Sean O'Reilly: We have no choice but to talk about social-media earnings, on this tech edition of Industry Focus.
Greetings, Fools! I am Sean O'Reilly, joining you here from hot, hot, hot Alexandria, Va., at Fool headquarters. To my left is the incomparable Dylan Lewis. How are you, Dylan?
Dylan Lewis: Doing all right, Sean. Not as great as some of these social-media companies.
O'Reilly: We talk about them a lot, but we have no choice because they all reported in the last week. First up is Facebook; everyone's favorite -- giant social-media company with 1.5 billion ...
O'Reilly: 1.49 billion active users. How'd they do?
Lewis: The numbers looked great: $4.04 billion in revenue against expected revenue of roughly $4 billion. EPS was about $0.50 per share adjusted, and analysts were expecting about $0.47 per share. This revenue jump was about 40% year over year. It was at $2.19 billion a year ago.
O'Reilly: Not bad.
Lewis: Pretty great. Yet the stock took a hit.
O'Reilly: It wasn't a huge hit. It was 4%. It wasn't a huge deal.
Lewis: It was 4% immediately after earnings, and then I think as of the end of this week they're trading about 1% down from pre-earnings.
O'Reilly: Full disclosure: I am a shareholder, and I was watching it and it literally went up to $100 a share. I gave it a high five and came back to bed. That's literally what's been happening.
Lewis: "Hey, there. Nice to see you."
Lewis: I think one of the big things the Street was a little disappointed in and wary of was the fact that total costs shot up this quarter. They were up 82% from the same quarter a year ago. This caused profits to decline 9% over the same quarter a year ago.
O'Reilly: But Dylan, they're investing in the future.
Lewis: Yeah. To a certain extent people are expecting this. They've guided for this, and they'd said, "We're going to make some long-term investments in virtual reality, some of our solar-powered drone projects," which is crazy that they do.
O'Reilly: Why is Facebook doing that?
Lewis: They also added some staffing.
O'Reilly: Does Mark Zuckerberg think he's Iron Man?
Lewis: He might. He's got some Tony Stark in him.
O'Reilly: Elon Musk has got that. Anyway, sorry to interrupt.
Lewis: The company added 873 people in the second quarter, which brings their employee base to just under 11,000. That is a 52% hike from where they were last year this time.
O'Reilly: A lot of these cost increases are humans, then.
Lewis: Yeah. It's both capital investment and human capital.
O'Reilly: Got it.
Lewis: Like I said, no surprise here. This is something they told people to look out for.
O'Reilly: You might be able to add some color to this, but the big headline I saw right when it came out -- I got the push notification from The Wall Street Journal -- it said how large corporations are essentially spending more of the big ad dollars on Facebook. That's the avenue they're choosing. I think that was up by 67% or something.
Lewis: Their mobile ad revenue was up 67%.
O'Reilly: Is Don Draper sitting around thinking they're going to advertise on TV, or Facebook? Is that where we are?
Lewis: I think it's getting close to that. I misspoke there; it accounted for 67% of ad revenue. It wasn't up 67%. I think along with Google they're the go-to place to spend ad dollars online. Other stuff to look at with them: MAUs grew from $1.49 billion to $1.44 billion sequentially from last quarter.
I think one of the most interesting things was, despite some of the bearishness that we're seeing in the market, and the fact that they're still down 1% from when they posted earnings; 22 analysts raised their price target on Facebook after earnings.
O'Reilly: People might be a bit disappointed right now because it's going to take some time, but it's like Tom Cruise said: "Show me the money!" They're showing you the money. They're not doing that badly. Really, when you think about it, they earned $0.50 a share this past quarter. Annualize that, and that's $2,.They're at 90; that's 25 times earnings.
Lewis: Yeah, it's pretty reasonable. No insight into Messenger or WhatsApp at the moment.
O'Reilly: I'm sorry, 40 times earnings. I'm losing my mind.
Lewis: They're still largely unmonetized. Zuck asked for some patience with those. He said, "Just let us do what we did with our timeline; slowly roll it out, and we'll monetize it over time." We've just got to trust him with that.
O'Reilly: I'm willing to give him the benefit of the doubt. Good stuff.
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Now we're talking about Twitter earnings. I actually joined Twitter because I was working at The Motley Fool. Everybody's here, they put their articles up there, I follow all my favorite companies, I follow Amazon.com and all that stuff on Twitter. How were their earnings?
Lewis: Earnings, quick snapshot, looked great: $502 million in revenue against expectations of $481 million.
O'Reilly: I actually sent you the push notification of their results. I was like, "Oh, man! This is awesome."
Lewis: Yeah. Immediately they shot up. EPS was $0.07 per share against expectations of $0.04 per share. You think Twitter finally had a really great quarter; they need this.
O'Reilly: I'm not sure, because we were kind of negative the last time we talked about Twitter. I was like, "Aw, Dylan. We're going to have to get our hats."
Lewis: They were that down-and-out friend that really needed a break. Then the conference call happened, and I think we got a bit more insight into the business. I think people were disappointed. CFO Anthony Noto in the conference call said there would not be sustained or meaningful user growth for a considerable amount of time.
O'Reilly: For one, how do they know that? And two, they only have 330?
Lewis: They are at 313. Something like that.
O'Reilly: Right. Just over 300 million users. Facebook is up there with the 1.5 billion number. What do they have to do to get more people on there? It's weird.
Lewis: I think that's one of the frustrations people have with the platform. They look at what's going off Facebook, and they have 1.49 billion people on the platform right now. Facebook's sequential user growth outpaced Twitter's, despite the fact that their denominator was 1.44 billion.
O'Reilly: It's weird. How many are in the United States again? Is it 40%?
Lewis: I think it's more than that. I think it's closer to 60%.
O'Reilly: I was about to make a joke. They basically have the population of the United States, but obviously that's not the case because they've got a bunch of people in Europe. I don't know what they've got to do to get up to 350, 400, even 500. It's weird.
Lewis: This is more anecdotal, but I was reading some of the analysts' takes on the conference call and the platform in general, and this one guy said, "It's not as easy to conceptualize for people." It's far more nuanced being on Twitter. My mother can understand what it means to like something on Facebook. My mother doesn't understand what a hashtag is.
I think one of the problems with Twitter, and something they need to remedy and people are waiting for, is to make their platform more accessible to the average person.
O'Reilly: I just had a brilliant insight that's going to get me the CEO job.
Lewis: What's that?
O'Reilly: They need to pull up PayPal and pay people to use it.
Lewis: That might work.
O'Reilly: That's what PayPal did in the beginning. They paid people on eBay to use it in 1999 and put everybody else out of business. Take the short-term hit; pay people to use Twitter.
Lewis: Speaking of some of the stuff going on with the CEO; can you speak to leadership a little bit?
O'Reilly: This is the thing that I was interested in, because in my mind, until they figure out a CEO thing, the user growth, the numbers, and the money all take a back seat. They still have yet to find a replacement. Unfortunately, Twitter shareholders have lost $13 billion in market capitalization since Dick Costolo stepped down. Then we got more news that more people are stepping down. They're cleaning house.
According to VentureBeat.com, a few minutes into Twitter's quarterly earnings report we've seen two major departures. Todd Jackson, formerly Twitter's director of product management, has left the company for Dropbox; and Twitter's former head of growth, Christian Oestline, is leaving for YouTube.
O'Reilly: It actually might be good. The writer of this article, as well as myself, basically said the same thing. Everybody at Twitter has either been in the CEO job or doesn't want it. They've been in management there and they've all had their shot, and they're not doing anything with this.
I hate to keep comparing Twitter to Facebook, but it's actually amazing to me how, if you had told me back when The Social Network came out, or three years ago when people were giving Facebook a lot of flak for not figuring out mobile and ads and all that, I didn't think that Mark Zuckerberg -- who's my age -- do you think you and I could have run Facebook and done as well as he has? There's no way!
What were the odds that the guy that made it also wound up being a perfect leader to make money off this?
Lewis: There's usually not a blend of that innovative thinking and business savvy.
O'Reilly: Even Bill Gates stepped down, and the other founder, Steve Ballmer, came in, and he couldn't do it. Then they got this guy who was not a founder at all -- Nadella -- and he's crushing it at Microsoft. They need to bring in some fresh blood. They really do.
Lewis: I think that's something we're just going to have to watch. I think for a while the market has been super patient with Twitter just because they see what the potential for these platforms is. If they get to half the user base of Facebook, then I think it's pretty reasonable to assume their valuations are going to be great. I don't know if that's going to be the case. I think they have a lot to figure out with their platform.
O'Reilly: We're just going to have to wait and see. The current CEO, Jack Dorsey, is the interim CEO, and he's one of the co-founders. He also happens to be one of the founders of Square. There's talk of him stepping in, but he's a founder, he's biased; there are issues there. I don't know what they're going to do, but they need to shake things up.
Lewis: Yeah. I will say there are a couple reasons to be happy about what came out on the earnings results.
O'Reilly: Including ad revenues, right?
Lewis: Yeah. They raised their full-year guidance slightly, up to $2.27 billion from $2.2 billion. If you're looking for some other reasons to like the company, Q2 bucked the trend of declining year-over-year ad engagements, and I think it's pretty reasonable to expect that to continue. They also maintained the trend of positive year-over-year ad engagement costs. Those are two really nice things that you want to see if you're trying to monetize a platform.
O'Reilly: Yeah. When I saw the actual results -- the money results from Twitter -- I thought for sure the stock would go crazy. Then they had a conference call.
Moving on, we've got LinkedIn (NYSE:LNKD.DL), the only social network that arguably has a social utility to civilization. How'd they do?
Lewis: They did pretty well, too. I think the recurring theme we're seeing with Facebook, Twitter, and LinkedIn is that you look at the top-line numbers and you're like, "All right. Yeah." Then you look at the bottom-line numbers and you're like, "All right. Yeah. Sweet. What went wrong?"
With LinkedIn, revenue was $712 million against expectations of $680 million. Non-gap EPS was $0.55 per share against expectations of $0.33 per share. It looks great.
O'Reilly: It sounds like a win all around.
O'Reilly: Then they had a conference call.
O'Reilly: Am I right?
Lewis: Yeah. Once you start getting into the details, that's where people start poking holes in some of these numbers that we're seeing.
O'Reilly: The devil is in the details.
Lewis: Yeah. One of the things that really stuck out was the Lynda.com acquisition provided $18 million in revenue, which was well above single-digit expectations.
O'Reilly: For our listeners that don't know; what is Lynda.com?
Lewis: It's an online learning portal. LinkedIn picked it up earlier this year for about $1.5 billion.
O'Reilly: Feel free to go check it out, folks.
Lewis: The idea there is, they're trying to augment their professional networking with skill-building online programs and stuff like that.
O'Reilly: It's a value offering.
Lewis: Right. They're just trying to enhance their platform. They also released that it should add about $90 million in revenue for 2015, which is up from earlier estimates of around $43 million. That's largely attributed to ...
O'Reilly: That's 125%.
Lewis: Yeah. That sounds great, right?
Lewis: The problem is that it means some of the core businesses for LinkedIn struggled.
O'Reilly: Because that's the dollar amount that they beat revenue by, more than that.
Lewis: This segment is doing great, but once you start parsing out the numbers, you're like, "Wait a minute. That means that some of the other options..."
O'Reilly: That means your actual company ...
Lewis: It's growth through acquisition to a certain extent. I think that's only applicable to one or two of their segments right now. We can get into that. Basically, one of the big, lagging segments is their display-ad business. The declines there accelerated over the previous quarter; it fell 30%. The big reason for that is LinkedIn is seeing a huge shift over to mobile. I think over half of their traffic is coming through mobile at this point.
O'Reilly: As we know, mobile ads aren't as profitable.
Lewis: Yeah. Display ads are generally clunky. They don't work as well with the interface, and people tend to flip right by them. They just don't work out as well. Personally, I'm not nearly as bearish as the market is on this. I think this is a huge overreaction.
O'Reilly: If you're looking for a job, or you're just a professional on planet Earth, the odds are pretty good you're on LinkedIn.
Lewis: It's the de facto place to go. They upped their full-year guidance from $2.9 billion to $2.94 billion. That's not a huge jump. Again, one of the issues there is some of that was already realized in Q2. There's not a huge upside there, because a lot of that is already in the coffers. I wouldn't be too worried about the display-ad business, though.
You look at their revenue breakout, and 62% of their revenue comes from Talent Solutions. That's helping HR departments find the right candidates, prospecting; that kind of stuff. Eighteen percent comes from premium profile subscriptions. That's people paying to use the service. Then 20% comes from marketing solutions.
O'Reilly: I'm sure our listeners are curious how LinkedIn is doing with the people that pay. I don't know about you; I'm on LinkedIn, but I don't give them money. How are they doing there?
Lewis: Pretty solid. Like I said, there's no real reason to worry there. I think the big issue in terms of their business segments is the marketing solutions and concerns over declining display-ad revenue. One of the things that the company is doing to look to buck that a bit is de-emphasizing it as an offering within their marketing solutions suite.
They're trying to move more toward something like sponsored updates, which they've seen as pretty successful. I think time will tell whether that transition proves fruitful or not.
O'Reilly: Got it. Very good. Thanks for your thoughts, Dylan.
Lewis: Always a pleasure, Sean.
O'Reilly: We'll see you later.
O'Reilly: If you are a loyal listener and have questions or comments, we would love to hear from you. Just email us at industryfocus@Fool.com. Again, that's industryfocus@Fool.com. As always, people on this program may have interests in the stocks that they talk about, and The Motley Fool may have formal recommendations for or against those stocks. So don't buy or sell anything based solely on what you hear on this program. For Dylan Lewis, I'm Sean O'Reilly. Thanks for listening, and Fool on!