Facebook (FB) continues to set fresh highs in after-hours trading as the company reported a solid set of fourth quarter results. Very strong ARPU, mobile performance and engagement numbers please investors who continue to see the fruit of a focus on advertisement quality and mobile investments.
At this pace an annual run rate of $20 billion in revenues by 2015 is not unimaginable. Combined with very high operating margins and Facebook has turned itself into a money machine.
Fourth Quarter Highlights
Facebook again surprised the market with blow-out results. Revenues rose by exactly $1 billion to $2.59 billion for the fourth quarter, up 63.1% on the year before. Revenues came in miles ahead of consensus estimates at $2.33 billion.
The company did a great job turning these actual revenue increases into real earnings. GAAP earnings rose from merely $64 million last year to $523 million. As such, GAAP earnings rose from $0.03 per share to $0.20 per share. Non-GAAP earnings advanced to $0.31 per share, four cents ahead of consensus estimates.
Acceleration In The Final Quarter
Facebook's growth actually accelerated in the final quarter, showing 63% revenue growth year-on-year, which compared to full year growth of 55%. Growth is driven by Facebook's global ARPU which rose to $2.14 on a quarterly basis, up nearly 25% on a quarterly basis and up by 39% on an annual basis.
What is interesting to note is that the strong advertising performance is driven by quality and higher rates, with advertising prices nearly doubling over the past year. Facebook admitted the number of ad impressions fell by 8% on the year before in an effort to avoid annoying users. The newly created newsfeed ads are ideal for smaller screens, such as mobile devices.
While top line growth was impressive, operating leverage was very impressive as well. Operating income rose by a cool 10.8 percent point to 43.8% of total revenues.
Note that Facebook pays high tax rates of 53.7%, paying roughly $607 million in taxes on $1.13 billion in operating earnings. If not for these excessive rates, reported GAAP earnings would have come in much higher.
For 2013, Facebook generated revenues of $7.9 billion. Yet at the current rate, revenues run at a rate of more than $10 billion per annum. One consideration to make is that the fourth quarter results are seasonally very strong. Reported earnings came in at $1.5 billion for the past year, and will undoubtedly rise sharply again in 2014.
Factoring in gains of 12% in after-hours trading, with shares trading at $60 per share, the market values the social network at $150 billion which is a new record. Subtracting $11.4 billion in cash and equivalents, operating assets are valued at $138.5 billion. This still values the company at 17 times annual revenues for 2013 and 92 times earnings.
Growth, Driven By ARPU
At the moment, Facebook has 1.23 billion users which is up by 39 million over the past quarter and up by 172 million over the past year. Growth was seen across all geographic regions with 77% of all these users accessing the social network through a mobile device. In fact 296 million users, or nearly a quarter of total user only access the network on their mobile phone.
Of interest is the strong continued growth in the US and Canada were ARPU reached $6.03 per user, up 24% on a quarterly basis and up nearly 48% on the year before.
Europe saw very strong gains as well with ARPU being up by 53% on an annual basis. Growth in Asia and the rest of the world was solid as well, but note that ARPU remains below $1 per user. ARPU came in at $0.95 and $0.84 per user, respectively. As an illustration, if Facebook's current global user base would achieve similar ARPU as they do in North America by now, the company's annual run rate would imply revenues of $30 billion.
While the user base remains important, especially to validate the "value" of the network it slowed down to 16% over the past year, while ARPU rose by 39%. Revenues for advertising are increasing on the back of the fact that the company managed to successfully advertise on mobile devices, with revenues from those devices now making up 53% of total revenues.
Engagement is rising as well with 61.5% of monthly users now accessing the site on a daily basis, up more than 3% compared to the final quarter of 2012. Comments about lower daily user rates among teens, which spooked the market in October, have not been reiterated thereby alleviating some investors concerns.
Takeaway For Investors
Back in November of last year, I checked out Facebook's prospects. I concluded that growth came less from user growth, but more from increased ARPU driven by the mobile success.
At the time I foresaw 1.5 billion monthly users at the end of 2015, something which is still within reach. Yet I foresaw ARPU of $2.50-$3.00 per quarter, while Facebook already posted ARPU of $2.14 this quarter. As a result I up my ARPU prediction to $3.00-$3.50 for the end of 2015.
This creates an annual run rate of annual revenues of nearly $20 billion by the end of 2015. Given that operating earnings of 40-50% might be sustainable, earnings could come in at $9 billion before tax or close to $6 billion after tax, when using normalized tax rates.
This would still value the business at 23 times earnings for 2015 at today's valuation, certainly not cheap. The continued effective advertising, success in mobile and growth driven by Instagram bode well for the near term futures. Long term concerns about the "boredom" of the user base with the network, and competition from other services might still exist.
In my eyes shares are more "fairly" valued, although the fair value range for Facebook remains quite wide given the reliance upon growth.