If you were previously unconvinced that the digital advertising world is effectively a battle between two powerhouses, then Facebook’s third-quarter results should squash any doubts that we are in a world where Facebook and Google are enjoying unprecedented market dominance.
Simply put, Facebook delivered another stunning set of numbers that more than vindicate the market’s increased bullish stance around the stock over the past six months.
These numbers demonstrate that digital advertising is starting to look remarkably similar to other media channels - television, outdoor, magazines and newspapers - in that it is being dominated by a handful of big players.
Looking at the performance of Google and Facebook compared to the rest of the market, you could draw the conclusion that the entire growth of the digital advertising category is most likely being driven by the remarkable growth of these two companies alone.
For the three months ended September 30, Facebook generated revenues of $US2.01 billion, a 60 per cent increase on the same period the year prior. This resulted in an after tax net profit for the quarter of $US422 million. EPS came in at 17 cents a share, Facebook’s best result since becoming a public company. GAAP income was $736 million.
The balance sheet is in excellent shape as well. The company has $9.3 billion in cash/cash equivalents and marketable securities, within an asset pool of $US14.9 billion. Its liabilities are minimal: $US1.88 billion with $US984 million effectively supplier and trade payables. In the third quarter, the company also wiped $US1.5 billion of long-term debt off the balance sheet. Facebook is as well positioned as anyone for big-ticket acquisitions, should the need arise.
So what is driving this outstanding performance?
Despite Facebook’s large userbase, it is continuing to find ways to increase daily users. For the third quarter, Facebook reported daily average users of 728 million, a 24 per cent increase on the same period for the year prior. On top of this, the company has continued to improve average revenue per user through significant developments and advancements in its advertising suite. Worldwide, the average revenue per user for third quarter was $US1.72, a 33 per cent increase on the third quarter in 2012. Facebook is seeing increases in this vital metric across all key markets: US, Europe and Asia.
Asian revenue – which includes Australia – is on a tear and, at $US278 million for the three months ending September 30, up 81 per cent on the year prior. Europe also bounced 57 per cent year-on-year, a huge turnaround after only seeing 17 per cent year-on-year growth for the third quarter of 2012 due to an extremely sluggish advertising climate within the region.
The other key driver is improved operating efficiencies. Expenses as a percentage of revenue are down in research and development, marketing and sales and general and administrative. These drops are small, but result in significant savings considering the scale of the business.
What’s more, GAAP operating margin continues to improve. For the third quarter of 2013, it was 37 per cent; for the same period last year it was 30 per cent. As the company gets larger it is not only generating more revenue, but it is managing to keep costs as a percentage of revenue down. This may seem like simple good business – which it is – but it is also an achievement many dot-com businesses struggle to achieve.
No guidance was given for fourth quarter performance, but analyst consensus is for Facebook to deliver revenues in the vicinity of $US2.2 billion. If the company can maintain its current margins it would be on track to deliver GAAP income around $US800 million, which would see annual income nudge very close to $2.5 billion. There’s nothing visible that appears able to stop Facebook on this tear.