By Adam Fraser
Blogging about Facebook’s quarterly results since they became a listed company had become somewhat monotonous, such was the consistent strength and predictability. Growing users, growing profits, impressive free cash-flow generation. Quarter after quarter. Copy/paste previous quarters blog and change the headline. Rinse and repeat.
The recent Q2 2018 results, however, seemed to mark a potential watershed, and the share price was smashed 24% as the results were released.
Don’t get me wrong, the headline numbers were still strong, but the market was spooked about the road ahead, rather than the rearview mirror. No doubt the recent Cambridge Analytica crisis, Mark Zuckerberg’s recent testimony to Congress and a range of other governance and privacy-related headwinds created a level of tension which did not help the market’s willingness to be forgiving. Sell now, ask questions later.
To the numbers. If you want to dive into the details, you can find the financials, investor presentation and management conference call. For those without the time to review all of the details, here are 10 key points from the results:
- Monthly active users reached 2.23bn from 2.20bn last quarter (1.7% growth) and 2.01bn a year earlier (11.4% growth).
- Daily active users hit 1.47bn from 1.45bn last quarter (1.5% growth) and 1.32bn a year earlier (11.0% growth).
- An interesting quote from Mark Zuckerberg on security: “Looking ahead, we will continue to invest heavily in security and privacy because we have a responsibility to keep people safe. But as I’ve said on past calls, we’re investing so much in security that it will significantly impact our profitability.”
- During the quarter, Facebook launched two ad transparency tools; one to let anyone see the ads any page is running – even if the ads are not targeted at the person – and the other, an archive of ads with political or issue content starting in the US, ready for the midterm elections.
- For the first time, Facebook released how many people use at least one of their apps – Facebook, WhatsApp, Instagram, or Messenger – which was 2.5 billion people each month.
- Total revenue was $13.2bn versus $12.0bn in the prior quarter (a 10.6% increase) and $9.3bn a year earlier (a massive 40.9% growth), generating a net profit of $5.1bn, in a single quarter!
- Facebook has a reasonably balanced global spread with just under 50% of revenue coming from the USA and Canada, a ratio that has remained reasonably consistent over the past 4 quarters.
- Average revenue per user was $5.97 vs $5.53 last quarter and $4.73 a year ago. Note, revenue per user is significantly higher in the USA/Canada ($25.91), compared to Europe ($8.76) and the Rest of World ($1.91).
- Facebook ended the quarter with a cool $42bn in cash, enough to buy both Twitter and Snapchat!
- Some interesting other soundbites: over 200 million people are now members of meaningful groups on Facebook, Instagram active users now exceed 1 billion and mobile ad revenue was $11.9 billion (a 50% increase year-over-year) making up approximately 91% of total ad revenue. Also, over the next five years, Facebook is focused on building out its business ecosystem around messaging on WhatsApp and Messenger.
Nothing too much wrong with the actual historical results, but management flagged slowing growth rates going forward as well as further risks from GDPR regulation which led to the savage share price reaction.
As Twitter has learned, news around share price declines can create a brand reputation challenge which can then loop back into actual consumer attitudes and behaviour towards the platform.
With the privacy genie finally out of the bottle, a sense of declining consumer trust and regulatory headwinds, the waters seem far choppier from here than they have done for some time. The network effect (“I have to be on there because everyone else is there”) is a wonderful thing on the upside but delivers a savage, brutal impact on a business when it goes into reverse.
For the first time in a long time, people are openly saying Facebook may have hit a tipping point and could be in serious decline. For a business still valued at $US500bn+, that’s a big (and early) call but the headwinds are real and the risk is tangible. Interesting times.