Facebook's promising results

Business Spectator

Facebook fourth-quarter earnings were released last night with solid results in line with expectations.

All key metrics were up – total revenue, active users, revenue from mobile and revenue per user – as Facebook reported revenue of $1.585 billion for the quarter and $5.089 billion for the 12 months to December 30.

With these results, Facebook is now a larger business than Yahoo in terms of revenue.

The market of late has been resoundingly positive about Facebook – on November 9 the stock was sitting around $19 and has since bounced over 50 per cent since to be $31 – so these results won't surprise anyone.

Still, Facebook is at a price-to-earnings ratio of 291 – more than 10 times that of Google (23.2), Yahoo (6.1), Oracle (16.9) and Apple (10.3). Whilst a 291 price-to-earnings is perhaps a little excessive, there is plenty to be excited about around Facebook's latest results.

1) Revenue growth is significant and has plenty of room to grow via new ad formats and Facebook Ad Exchange

Revenue was up 40 per cent year-on-year, almost three times the wider digital advertising market, with Facebook seeing $1.585 billion of fourth-quarter revenues in a very competitive advertising market worldwide.

While its payments revenue is effectively flat, Facebook is stealing large chunks of advertising share from its competitors. Another positive is this revenue growth is relatively uniform in all key territories – the US was up 37 per cent, Europe 22 per cent, Asia 72 per cent and rest of world 92 per cent. When you consider Facebook has barely begun to scratch the surface on ad formats, the sheer volume of the user base means there is solid growth to be expected here over the next few years.

Add the potential of the FBX ad exchange and Facebook's user data and there's a strong case that Facebook has the tools and data to compete with Google's third-party ad network.

2) Average revenue per user is up in all markets, Europe sluggish

A key challenge for Facebook is monetising audience in developing regions – specifically Asia and ‘rest of world'.

Revenue per user was up 15 per cent in Asia to $2.35 and 'rest of world' increased 22 per cent to $1.84. North America is still the highest yielding market for Facebook – revenue per user is $13.58 and growing steadily.

Europe is growing in the low single digits – something Facebook puts down to expansion into poorer regions. Europe accounts for just over 20 per cent of Facebook revenue so this is something to keep an eye on.

3) Mobile revenue is promising – now representing 22 per cent of all revenue

Mobile represented 22 per cent of fourth quarter ad revenue, up from zero in the fourth quarter of 2011. Facebook has been much more aggressive with ad placement within the mobile news feed and this seems to be resonating with advertisers.

Facebook will continue to evolve its mobile ad offering to better balance the needs of users and advertisers – this is especially important as in the fourth quarter Facebook had more daily users on mobile than it did on desktop/browser.

4) Usage is still increasing

Monthly users were up 25 per cent to 1.05 billion, with daily users up 28 per cent to 618 million.

The staggering part of this is 59 per cent of Facebook users use the site daily – an engagement metric that has remained stable across the last two years. If a service is losing traction with users, frequency of visitation is the best indicator.

Based on this, Facebook is holding engagement levels while growing audience volume.

5) The rise of real-time bidding and automated trading will continue to provide solid earnings

Last year was when programmatic trading went from being a new piece of ad-tech kit into a core part of the digital marketing mix. Real time bidding and programmatic trading relies heavily on large pools of accurate user data to improve ad placement and yield – which places those companies with the strongest data at a significant advantage.

Facebook and Google have more user data – and far better user data – than any other company, which gives them a huge competitive advantage to increase yield in the programmatic volume game.

6) GAAP net income is down $1 billion year-on-year

Facebook is investing big in all key areas – which have turned its GAAP net income from a $1 billion positive to a $75 million negative.

This isn't surprising as Facebook has openly stated it will continue to invest heavily in sales and marketing, development, data centres and technology infrastructure as it sets itself up to be a future-proof company.

Google did the same thing during its early stages – but managed to make these sorts of large-scale long-term investments before it was public. Zuckerberg stated on the fourth quarter call that costs would continue to increase at a level higher than revenue. At current levels that is perfectly acceptable – the company has a bucketload of cash and the fourth quarter's $64 million of net income, while modest, isn't eating into it.

7) First quarter predictions: down quarter-on-quarter but up year-on-year

The first-quarter advertising market is always sluggish in comparison to the fourth, which is given a solid kick by Christmas and end of year ad investment. Revenue should continue its year-on-year increase, so expect first quarter revenues around the $1.43 billion mark with increases in mobile-based ad revenue.

First-quarter revenue per user will be down on the fourth quarter, but up year-on-year.

Ben Shepherd is a media and technology consultant. He blogs at Talking Digital.