One year after the hype of its IPO, Facebook is starting to show clear signs that it is performing in a very similar manner to other public companies that exist within the intersection of technology and media.
Facebook’s latest quarterly results demonstrate solid revenue growth, increasing revenue per user, an increase in inventory and a substantial chunk of income being derived from mobile. The only real downside is a slight decrease in margins, increased costs and a year-on-year profit decrease.
In reality, the downsides shouldn’t be alarming. GAAP costs and expenses for the period increased 60 per cent to $1.08 billion, driven mostly by infrastructure expenses and increased overheads as a result of an increase in employee headcount. Understandably, this impacted margins, which dropped from 36 per cent to 26 per cent – still within a very healthy range and significantly higher than competitors such as Yahoo (16 per cent) and AOL (13 per cent), and in line with Google (25 per cent).
Revenue continues to grow at rapid rates, up 38 per cent year on year and delivering $1.46 billion for the three months ending March 31. Advertising revenue for the period was up a staggering 42.7 per cent, contributing $1.25 billion of Facebook’s total revenue. Payments and other revenue increased 14 per cent.
All regions are growing at strong rates. The US and Europe are seeing 29 per cent revenue growth year on year, whilst Asia and ‘rest of world’ are seeing annual growth in excess of 70 per cent, representing 24 per cent of total revenue and showing signs of being a valuable growth area for Facebook. The potential here is significant if Facebook can continue to do what it currently is managing to – grow users, grow inventory and increase yield.
These three areas have been consistently strong for Facebook since it went public and are the lifeblood of any digital media operation. For the latest earnings period, Facebook has managed to increase inventory 39 per cent year on year while increasing yield by 3 per cent. The staggering part of all this is Facebook has added 39 per cent more inventory to its already significant pool, and at the same time increased the price it can charge for this inventory by 3 per cent. This clearly demonstrates the strong appetite for Facebook from advertisers, an appetite that continues to become larger and larger as the products add more features and becomes an even more central part of the businesses advertising and marketing mix.
The key driver of increased inventory and yield is mobile – which was up 30 per cent year on year in terms of revenue contribution. The earnings call identified that desktop revenue was essentially flat year on year. Chief operating officer Sheryl Sandberg believes desktop yield can improve with stronger targeting technologies. Is mobile growing at the expense of browser based desktop advertising? Maybe – but it really doesn’t matter; revenues across the board are up and Facebook for many users is much more about the mobile experience than the desktop.
Facebook’s acquisition of the Atlas advertising suite was barely discussed on the call, which is surprising as it could provide the foundation for a key area of Facebook’s future growth – an ad network powered by the large amounts of data Facebook has on its users. Facebook knows a lot about its users – from the devices they are accessing the site on, when they are active, where they live, age, gender, interests, friendship group, music tastes, site visitation, even life stage. It is the only company aside from Google that has access to such a deep, real-time ‘database of intents’. Facebook, using the back-end technology acquired as part of Atlas, could build an advertising network to operate on external sites that taps into this database of intents – basically allowing Facebook to monetise its audience even when they are not on Facebook.
How big is this opportunity? Huge. Google’s ad network has delivered $12.8 billion in revenue over the past 12 months and is growing at a rate of over 20 per cent year on year. Facebook’s current total share of the US digital advertising revenue pie is around 6 per cent; a large scale ad network combined with steady increases across onsite revenue could easily power Facebook to a 15-20 per cent share of the market within two to three years.