Facebook (NASDAQ:FB) kept up its winning ways this quarter, showing strong growth in revenue, earnings and the all-important active user metrics. 

Even against the company's more targeted internal scorecard, they seem on track. On this Industry Focus episode, Fool analysts Dylan Lewis and Sean O'Reilly discuss Facebook's quarterly report, how the company is defining success and check in on Facebook's other big Internet properties.

A full transcript follows the video.


Sean O'Reilly: Why aren't Dylan Lewis and I Facebook friends? On this technology edition of Industry Focus.

Greetings, Fools! I am Sean O'Reilly joining you here from Fool headquarters in Alexandria, Virginia. It is Friday, Nov. 6, 2015, and joining me to talk about why Facebook has been awarded a higher valuation than GE and Wells Fargo is Dylan Lewis. How's it going, man?

Dylan Lewis: I'm good. You know, I hadn't thought about it but, yeah, we're not friends on Facebook.

O'Reilly: It's so sad.

Lewis: Are you friends with a lot of people at the office on Facebook?

O'Reilly: I would say 10 to 12.

Lewis: I'm at  two.

O'Reilly: That might be why.

Lewis: Yeah. Michael Douglass and Kristine Harjes, both in editorial, and they friended me.

O'Reilly: You need to branch out.

Lewis: I need to branch out, but to be fair, I did have the opportunity to make a couple new friends at the Fool, at Foolapalooza.

O'Reilly: Boom. Did you have a good time?

Lewis: I had a great time.

O'Reilly: Actually, for all our listeners, Dylan, what is Foolapalooza?

Lewis: Foolapalooza is our annual -- every year-and-a-half thing -- a company retreat. Basically, we have some business meetings, have some fun, and have happy hour.

O'Reilly: Play games.

Lewis: Have us a little dinner, maybe do some golfing if that's your speed, or some paintball. I happened to get a massage. What did you do for your activity?

O'Reilly: Free time. I also enjoyed a little bit of a wine tasting.

Lewis: Why not?

O'Reilly: In southern Maryland, on the shores of the Chesapeake, why not drink some wine?

Lewis: Great way to get to know some other Fools, got some nice business takeaways out of all our meetings. I'm looking forward to seeing what comes out of the new quarters.

O'Reilly: I'm excited.

Lewis: I came back super relaxed. I'm very excited to see what happened with earnings this week, and here we are.

O'Reilly: Yeah. Actually, I'm pretty excited -- having gone to Foolapalooza -- probably not as excited as Facebook is following these earnings.

Lewis: Absolutely incredible.

O'Reilly: How did the earnings look, first and foremost?

Lewis: Fantastic. Actual earnings were $0.57 per share EPS against a consensus of $0.52 per share. Revenue was $4.5 billion against a projected $4.37 by analysts.

O'Reilly: Of course, the stock made a new, all-time high.

Lewis: Right. I think immediately after earnings had been announced it popped 5%. It settled around 3.5% or 4% for the week, but the market was obviously very happy with the results. There's a lot of encouraging stuff in here.

O'Reilly: Do you remember years ago -- and when I say "years," I mean two or three -- when everybody was like, "They've got to figure out how to monetize."

Lewis: It was the mobile quandary, right?

O'Reilly: It's just funny. Everything is 20/20 in hindsight.

Lewis: We will get into how they've totally taken over mobile later on in the show.

O'Reilly: An interesting thing you were telling me before we went on air came out of the release and the conference call. That's their three goals, their scorecard: What is Facebook using to score itself internally? They broadcasted it publicly. What are these things? How are these things looking right now?

Lewis: I think one of the great things that came out of the conference call and why I always urge investors to read the conference call and check in on the companies that they hold, and the companies that they're interested in... you get a lot more insight than just the top-line numbers that you'll get from a standard earnings report.

One of the things that Sheryl Sandberg, the COO of Facebook, said in a conference call was: "Our results show that we continue to make progress on our three priorities. Capitalizing the shift to mobile, growing the number of marketers using ad products, and making our ads more relevant and effective." Those are your big three right there.

O'Reilly: I wanted our listeners to hear about this because before we went on air we were talking about it and I am way more likely to click on an ad if it's on my PC. I don't click on any there, either. Is it that we're not talking marketers; this is actually people using their phones and iPads as their computer and that's what we're talking about?

Lewis: That might be the case. I'm in the same struggle with Facebook's mobile success as you are, and trying to really grasp what's going on. I am the same way. If I click on an ad on mobile, it's by accident.

O'Reilly: Facebook has over 1 billion users. The U.S. population is 350 million, so two-thirds of their customer base is outside the United States. People outside the United States use their smartphones. That's why they're making the smartphones so much bigger.

People, particularly in China, use their phones as their computers a lot. It's very odd to me. Talk to me about the shift to mobile. Facebook and Instagram together continue to account for over one-fifth minutes of mobile in the U.S. What does that mean?

Lewis: That's one of the things they hit on the call. Twenty percent of minutes on mobile in the U.S. by browsers is accounted for by Facebook and Instagram. That's incredible.

O'Reilly: Hold on. I'm reflecting on my day yesterday.

Lewis: Sound about right?

O'Reilly: That sounds right. Yeah. Don't tell anyone. I swear! I was looking up on Foolapalooza.

Lewis: I always see you at your desk on your phone. Now I know what you're doing.

O'Reilly: Yeah.

Lewis: That's amazing and it's something they talked about on the conference call. They have two of the most powerful mobile platforms at their disposal and they are absolutely crushing it. Something that really highlights that -- the research firm, the statistic visualization firm Statista always sends out these daily emails and I subscribe to them because I send out a lot of the ideas to writers like, "Hey, this is something that would be really cool to incorporate into an article."

I got something the day after Facebook reported earnings and it was before I had really gotten a chance to dig into the data...

O'Reilly: Is this the cool infographic?

Lewis: This is the cool infographic I saw. The title is "Facebook's Growth is Entirely Fueled by Mobile Ads." It breaks out Facebook's revenue by three major segments: desktop advertising, mobile advertising, and payments. You look at the numbers in a table and you see the growth, but to see it visualized is pretty staggering.

O'Reilly: That's a pretty lineup.

Lewis: Desktop has been more or less flat since early 2012 and almost all the growth the company's made on the top line has been via mobile revenue.

O'Reilly: Taking a step back real quick, because we just did a show on Google (NASDAQ:GOOG) (NASDAQ:GOOGL), and their revenue per ad on mobile is going down, but they're making it up on volume so it's fine. Did Facebook mention any of that at all? Does it matter to them?

Lewis: Yeah. That's a great point. I think it plays into the relevant and effective mandate that Facebook has set for themselves when it comes to guidance. They got into their ad price volume metrics on the conference call and they said, "Average price per ad increased 61%, while total impressions declined 10% on a year over year basis." If you're looking at year over year, how they're making their money, that's very encouraging.

O'Reilly: It just goes to show, because we mentioned this again before, Facebook has way more info on me than Google does. Google has a lot of info so that's probably helping their ads.

Lewis: Yeah. I think it's a pretty level playing field in terms of the data collection. All in all, I think you have to be very encouraged by what we're seeing on the price-per-ad side. They pointed to two main drivers for this, one of them being the shift to mobile and how effective those ads have been and one of the other main ones being page designs impacting inventory. That comes into play. You'll notice on the right column...

O'Reilly: OK. I was about to say, "My Facebook looks kind of the same."

Lewis: I think there used to be more ads populating over there and they've been a little more selective with that. One of the things they talked about was, moving forward we should not really expect the same dramatic year over year swings. They've hit a full year of comps after the redesign.

So we won't be seeing these swings moving forward, but if you were to look at things sequentially I think you're still very encouraged by the results. Cost and volume both look great. Volume increased by 7% and average price is up 5%. Great numbers to see and like we talked about with Google...

O'Reilly: So this compares really well with Alphabet's Google.

Lewis: Yeah. This is something we've talked about on the show before. I'm guessing due to lower engagement and lower ROI on mobile, they've had to cut back their CPCs. It could also be something where it's simply a supply and demand thing. The inventory is larger and it's quite less competitive. I think it has to do more with ROI than anything else.

O'Reilly: Because of all this, most likely, it seems to me that more and more advertisers are jumping on the Facebook bandwagon. They're getting more and more people throwing money at them.

Lewis: Yeah. The other growth driver they're looking at is the number of marketers. Obviously, the more people that are interested in advertising on their platform, the better long term for top line and bottom line. I just want to run through the active number of advertisers that they have on the platform over time. Just to give you a sense of the growth that they have and where they're looking to move things.

July 2014, they had 1.5 million active advertisers. As of February 2015, they're up to 2 million. That's 33% growth. In their most recent report, they noted 2.5 million monthly active advertisers.

O'Reilly: These are basically companies, right?

Lewis: Yeah. If you read the conference call you saw that they made a lot of references to small businesses -- SMBs. I think this is such a valuable market for them because it's really easy for them to find a mutually beneficial solution.

One of the things they talked about quite a bit is that it's a struggle to get a very good web presence as a small company, right? It's costly to setup a website, especially if you want to venture into the mobile app type thing. I believe Sheryl Sandberg said that 35% of small businesses have no web presence whatsoever. That's insane.

O'Reilly: This is 2015, right? We haven't gone back in time?

Lewis: Right. It's kind of crazy. You would expect that number to be much smaller. The metrics they pointed to is, there are 45 million SMB pages on Facebook.

O'Reilly: That's where you go if you've got a little shop around the corner.

Lewis: Right. It's a free way to get setup and have a web presence without really investing all that much up front and you can start to build up a following, maybe you have some nice engagement with customers and you start to see the value proposition there. I think two number we'll continue to see them highlight in future earnings calls is this number of active advertisers and the number of small businesses that have pages.

One of the main reasons for that is, they said that 80% of the 2.5 million advertisers started with SMB pages, which are free. Then they saw the value, worked their way into some of the simplified ad products, and are now more robustly involved in that.

O'Reilly: So it's a partnership?

Lewis: Yeah. It's something that I think scales incredibly well because the intro level is free. You can start to see the value that's being added and it's a huge addressable market when you think of the number of small businesses that are out there.

O'Reilly: Before we move on, I wanted to point our listeners to a newly redesigned focus.fool.com. There you'll discover a special offer to join The Motley Fool's Stock Advisor newsletter for all Industry Focus listeners. All loyal IF listeners have access to a special discount on Stock Advisor that works out to $129 for a full two-year subscription. Just go to focus.fool.com to take advantage of this offer. Once again, that's focus.fool.com.

Dylan, I know you dug into the port and pulled some cool stats for us. How many people are on Facebook? Are they still stalking me and trying to sell me T-shirts? What else can you tell me?

Lewis: They will never stop stalking you and try to sell you T-shirts. The constant will be stalking you and trying to sell you T-shirts.

O'Reilly: Until I buy one.

Lewis: Yes. One of the other headline numbers that people like to look at in terms of growth and things like that is monthly active users and daily active users. Facebook reported 1.55 billion monthly active users, which is up 14% year over year.

O'Reilly: What's the population of mankind? Is it just over 8?

Lewis: I think we're around 7, but I could be wrong. That's one of those stats that I haven't had to know in a while.

O'Reilly: I don't know. That's a big chunk of our species either way.

Lewis: That's 14% year over year, 3.6% sequentially, and 1 billion daily active users, up 16.5% year over year, and 4% sequentially.

O'Reilly: You were right: July 2015, 7.3 billion; 1.55 divided by 7.3.

Lewis: I'll meet you in the middle.

O'Reilly: Twenty-one percent of the human population is on Facebook.

Lewis: That's pretty incredible. You think about the number of people that actually have access to the Internet, I think it's somewhere closer to 3 billion.

O'Reilly: Half of Internet users.

Lewis: Both of those numbers are great to see. You think about how growth rates work and the denominator getting larger and larger and they're still posting pretty impressive growth. Especially when you compare them to some of the other social media outlets like Twitter, which is posting relatively similar growth despite being a much smaller denominator. Another nice thing that they highlighted was 8 billion daily video views on Facebook.

O'Reilly: Whoa. I went to YouTube for the Star Wars trailer the other day.

Lewis: One of the things that we'll continue to see with them is hosted content and moving away from having embedded YouTube links. The analysts asked a little bit about their content aims and I think it was much more oriented on what we're seeing in terms of length, but a lot of the execs noted that they're seeing a lot of folks like late night talk show hosts segmenting their shows into these very nice, digestible one- to three-minute clips.

It's something similar to what we do with our partners here, rather than posting full shows. That's what you see a bit more with YouTube. Again, just something to watch out for. Videos play incredibly well on the platform I expect that number to only go up in the coming quarters.

O'Reilly: The biggest growth number I'm seeing here is the number of employees. What's up with that?

Lewis: Yeah, it's pretty awesome. They're up to almost 12,000 employees, which is up 44% year over year. Continuing to invest in talent.

O'Reilly: I wonder what all these people are doing.

Lewis: I think at a certain point it's got to be sales staff, but that is just speculation.

O'Reilly: For all the ads and everything.

Lewis: On my part. One of the most impressive things was that Facebook has four properties with more monthly active users than Twitter.

O'Reilly: Staggering. They could just buy Twitter. Who are we kidding? I have to ask: We've given a glowing review so far. Were there any bad parts?

Lewis: Yeah. You can't have a perfect earnings report, right? Something's got to not do well. If you were going to nitpick here, total payments and other fee revenue -- which is a tiny, tiny part of their business...

O'Reilly: Yeah. That was the little sliver on that pretty chart you had earlier.

Lewis: Yeah. It was $202 million, which is down 18% year over year. This was not unexpected. It was anticipated and had to do with PC gaming activity.

O'Reilly: Wait. Gamers are paying each other with -- OK.

Lewis: I think it has to do with the in-game purchases.

O'Reilly: Oh, I see.

Lewis: The ones that you have on some of the games on the platform. Obviously, you hate to see a dip, but it's such a tiny part of their business. It's really...

O'Reilly: This revenue pays for Facebook's headquarters cafeteria, which I hear is lovely.

Lewis: Exactly. I wouldn't worry much about it.

O'Reilly: What's up with the other properties? You were talking about it. What do they own? Can we make fun of WhatsApp some more? What else do they own, and how are those doing?

Lewis: Just to check in on some user counts for the other properties that I'd mentioned earlier: Instagram is up to 400 million monthly active users; Messenger up at 700 million monthly active users; and WhatsApp at 900 million monthly active users.

O'Reilly: You keep talking about the services that are free from what I can tell. What attracted the most attention? Did they give them a hard time for WhatsApp still? Are they waiting and seeing? Because need I remind our listeners, they spent $21 billion on this.

Lewis: After settling? Yeah. I think the sticker number on that...

O'Reilly: It's actually looking good -- it's actually looking bad now because the stock is at an all-time high.

Lewis: One of the coolest things about that transaction was that sticker cost was $19 billion and because so much of the deal was weighted toward stock grants, it wound up ballooning to $21.

O'Reilly: I had to think it's more now. What was the stock then?

Lewis: Solely because of stock price appreciations.

O'Reilly: Appreciations. Good for the WhatsApp guys.

Lewis: Yeah, great for them. They focused quite a bit on Instagram in the conference call, not surprisingly because I think the one that has the clearest path to monetization, right? It's the most similar to what has worked already with Facebook and a lot of the messaging from them was along those lines.

O'Reilly: We used Instagram at Foolapalooza, a lot of people I know still use it.

Lewis: It's very popular. Last I checked, I think it was 9 months ago, and they had 300 million monthly active users.

O'Reilly: Awesome growth, yeah.

Lewis: So you're seeing really solid growth, which is great. I think that is the next big segment for them. They started introducing ads this quarter.

O'Reilly: So it is going to be ad-based?

Lewis: Yes, but they're going to be -- and this is something they've communicated several times -- they're going to be very slow and very deliberate about what that ad rollout looks like. They've been very selective when it comes to what is good enough to be on the platform. They know it's a valuable space and they don't want to mess with user experience because of that.

They talked a little about a common ad infrastructure between Facebook and Instagram and I think that's one of the most encouraging things. Like I said, so much of their learnings from their namesake platform are transferrable to Instagram as they try to monetize it. You have to love that as an investor.

O'Reilly: Awesome. Before we go, we talked about this a couple months ago; what's up with Internet.org? The free Internet in sub-Saharan Africa.

Lewis: The possibly benevolent plan that might also lead to Facebook world domination. We had that debate when we were talking about open Internet a couple months ago.

O'Reilly: Real quick, for our listeners that may not know what it is, what was the initiative in three sentences?

Lewis: We actually floated this earlier. I think 3.5 billion people in the world have access to the Internet. Internet.org is an initiative to bring Internet access to that remaining half the world that doesn't have Internet. So far, they have rolled out free, basic Internet to people in 29 countries, which brings the total to roughly 15 million people online that were not previously online. It's a drop in the bucket considering how addressable that market is.

O'Reilly: The criticism of Internet.org is that it's not the Internet that you and I know. It's actually like 20 services and it's a news app and it's Facebook and 18 other things, right?

Lewis: Yeah. It's everything you would need, but it's not with any variety within that. It's got messaging services, job posting type things, but it's not a free and open Internet. That's why I think it's controversial for some people.

I think ultimately you have to be happy that more people are getting Internet and the world is becoming more connected. I think two very cool things to watch down the pike that they talked about a little bit was Aquila, which is an aircraft designed to beam Internet down to communities from the sky. That sounds terrifying.

O'Reilly: This sounds like the next James Bond movie.

Lewis: Right? That's going to be coming down sometime in the near future. Something they also discussed was, to address the sub-Saharan Africa using a satellite based Internet access, which is pretty cool.

O'Reilly: Sweet. Dylan, thanks for your thoughts.

Lewis: Always a pleasure, Sean.

O'Reilly: We'll do it again in three months. 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!

Dylan Lewis has no position in any stocks mentioned. Sean O'Reilly owns shares of Facebook. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.