Friends with benefits: Facebook's booming revenue

Facebook stock has surged past the US$30 mark for the first time in seven months off the release of record earnings for the three months ending June 30 that have outperformed all expectations.

Metrics across the board were impressive - total users up, daily users up, total revenue up, revenue per user up, yield up, EPS up, and mobile revenue up. In many instances these increases were dramatic.

When comparing these results with competitor Yahoo, Facebook generated 55 per cent more revenue than the internet veteran, pulling in US$1.81 billion for the quarter compared to Yahoo’s US$1.13 billion. The revenue gap is significant, especially considering 12 months ago Facebook lagged Yahoo when it came to revenue.

Now Facebook sits as a clear number two when it comes to digital advertising revenue, behind only Google. The two companies for the three months ending June 30 combined accounted for over US$15 billion of advertising spend. And while Google is responsible for 85 per cent of this amount, Facebook is growing rapidly.

CEO Mark Zuckerberg, COO Sheryl Sandberg and CFO David Ebersman appeared relaxed on this morning’s call and with good reason, the news they had to share was resoundingly positive.

Revenue is booming. Facebook reported strong revenue growth the three months ending June 30, up 53 per cent from the same period in 2012. Both advertising revenue and payment revenue increased, with advertising revenue the dominant contributor. The US remains the strongest revenue contributor, followed by Europe, with Asia and Rest of World segments achieving close to 100 per cent year on year growth. In the call the company reported it now has over 1 million active advertisers.
Importantly, yield is demonstrating very encouraging growth with still plenty of upside to be gained. Revenue per user (ARPU) was up 25 per cent to $1.60 from $1.28. The US hat the highest ARPU at $4.32 per user and the strongest territory by far.

This growth in revenue and yield, combined with well managed expenditure resulted in a US$333 million in net profit for the three months ending June 30.

The numbers are solid and it’s understandable that the stock is up close to 20 per cent in after-hours trading, especially when you consider how competitive the digital advertising space is; particularly given how much slower advertising growth is compared to three years ago. At its reported 50 per cent growth rate Facebook is enjoying double the growth of Google and most likely 4-5 times the rest of the digital advertising category. And it’s achieving this growth in advertising revenue without compromising user numbers or engagement. In fact, both are growing. There was strong reported growth in user engagement with daily users up 26 per cent to 699 million a day. Of these, 469 million daily users are accessing the site across mobile devices.

A big contributor to the revenue growth is the success of the company’s ‘news feed’ ad product - where sponsored messages are inserted into user news feeds alongside updates from friends and companies they follow. Introduced in calendar Q3 of 2012, this ad product has become one of the company’s most effective revenue drivers and a strong performer for advertisers. News feed ads are also frequently used in conjunction with other external data - such as cookies - which increases their effectiveness.

The news feed format is the key driver of ad revenue on mobile devices. A little over a year ago some elements of the predominantly US tech and advertising media were claiming that Facebook had a significant mobile problem driven by poor monetisation of its hundreds of millions of mobile users and no real strategy to arrest the issue of “no meaningful revenue.” So much for that ‘problem’. In today’s earnings call Zuckerberg outlined that mobile now accounts for 41 per cent of the companies rapidly growing revenue.

In the back half of the calendar year the key area to keep a close eye on is revenue per user. Facebook has only really begun to scratch the surface of how it can monetise its vast data stores on user behaviour - both on its own site and across the wider internet. There is heavy speculation that the company is closely investigating new ad products around video and also an external advertising network fuelled by user information - both large scale products that could fuel Facebook’s continued growth trajectory.