There were a few words missing from Facebook's (NASDAQ:FB) most recent quarterly filing with the SEC. Don't worry, everything's still above board! But Facebook just changed how it defines active users.
In Facebook's third-quarter 10-Q filing, the company explains, "We define a monthly active user as a registered Facebook user who logged in and visited Facebook through our website or a mobile device, or used our Messenger app (and is also a registered Facebook user), in the last 30 days as of the date of measurement."
Previously, that definition included the words "or took an action to share content or activity with his or her Facebook friends or connections via a third-party website or application that is integrated with Facebook."
Dropping third-party integrations like sharing high scores or sharing songs from Spotify doesn't seem to have much impact on Facebook's user growth, and the new measurement method provides a more accurate picture of Facebook's engagement.
Facebook's true audience
With the updated definition of active user, Facebook's monthly active users came in at 1.545 billion last quarter. That's up from 1.490 billion during the second quarter, when Facebook was still counting users from third-party apps and websites. On an absolute basis, Facebook's sequential growth of 55 million active users was its best since the first quarter of 2012. So, it seems the redefinition had minimal impact on Facebook's growth numbers.
This is important to investors because Facebook can't monetize users that log in through a third party and don't actually visit its site or app. When a user uses Facebook for authentication in another app, it provides Facebook with some valuable data, but that data is only unlocked when a user actually visits Facebook.
Twitter (NYSE:TWTR), meanwhile, has been touting its reach, recently saying that more than 1 billion Internet users encounter tweets on a monthly basis. Tweets are syndicated on other websites and apps and hundreds of millions of people check out Twitter's homepage, search results, and individual profiles without ever logging in. While Twitter is capable of monetizing these users to varying degrees, its early efforts have yet to show a major impact on the company's ad revenue.
Facebook, too, has this syndicated audience of sorts where users never actually visit Facebook. Since its capabilities of monetizing those users are even less than that of Twitter's, it's only appropriate that it no longer counts those users as part of its active user base.
But a problem remains with counting users
Facebook's user count still isn't perfect, though. In Facebook's risk factors section of its SEC filing, the company mentions that some logins are caused "by applications on certain mobile devices that automatically contact our servers for regular updates with no user action involved." These users likely don't even know they're logging into Facebook, and it's impossible for Facebook to monetize those users.
Twitter experiences the same risk, and, in fact, saw a negative impact from it during the fourth quarter of last year. A popular smartphone maker changed a setting in its mobile browser that caused Twitter to lose 4 million "active" users. That was a big hit, considering Twitter had just 288 million active users at the time, and it caused the company to miss analysts estimates for user growth.
The good news for Facebook investors is that the company believes that "any such inaccuracies or adjustments are immaterial." What's more, Facebook has shown that it's capable of continued growth even as it restricts its definition of active users. As such, there's little reason to believe any major changes to mobile device software will have a significant impact on Facebook's continued user growth like we saw with Twitter.
Investors should be pleased with Facebook's efforts to more clearly define its active user base. It provides a much better look at how Facebook is growing and the level of engagement it's seeing from users. Average revenue per user may go up slightly with the new definition, but since the impact on user growth was minimal, the average revenue bump is likely imperceptible considering the continued growth in average ad prices at Facebook.
At least Twitter's management will have one less thing to complain about when people compare it to Facebook.
Adam Levy has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Facebook and Twitter. 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.
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