Facebook's Q3 Earnings Scorecard

| About: Facebook (FB)

In Q3, Facebook (NASDAQ:FB) found its footing, giving investors some well-deserved good news in the form of better than hoped revenue and earnings. Given 16% of the shares available for trading were held short heading into the earnings release, the bullish news surprised many.

Mobile is the present and the future.

You don't have to look much further than Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN) and Google (NASDAQ:GOOG) to recognize the future of consumer engagement is mobile connected devices. Each has invested heavily in hardware designed to capture the mobile ecosystem, and in turn control spending on mobile content.

At Facebook, the company may not have its own hardware (yet), but it seems to have decoded the secret of making money with mobile.

As I wrote previously, "the biggest asset Facebook has is its members. Their engagement drives page views and advertising revenue. Increasing that engagement remains job one for ensuring Facebook's long term survival."

Facebook has a lot riding on its mobile initiative. Users continue to migrate from wired desktops to wireless devices and luckily for Facebook their migration comes with more frequent visits.

During the quarter, 600 million Facebook-ers visited from mobile devices, up from 376 million a year ago. 70% of these mobile users visit Facebook every day - far better engagement than the 40% rate for their connected brethren.

The trend isn't lost on CEO Mark Zuckerberg, an ardent product enthusiast, who reiterated his focus on building the most engaging mobile ecosystem possible. More importantly for investors, Mr. Zuckerberg surprised with a new found emphasis on monetizing mobile.

Facebook's push into mobile began in earnest 6 months ago.

A few quarters ago, mobile ad revenue was a rounding error. Today, it accounts for 14% of total revenue, generating sales at an annualized run rate of $300 million and climbing.

The new version of Facebook's iOS app has bumped up news feed loads by 80% and users are liking and commenting 20% more frequently than they did in the prior version. This has been big for Facebook's news feed advertising program, because it means more impressions and opportunities to connect. The company reported in-feed ad engagement 8x higher than ads in the right hand column.

Those in-feed ads are now generating some $4 million a day, driven predominately by mobile. Ad impressions have grown 27% in the past year. And, advertisers seem to agree with Facebook on their effectiveness, buying 9% more ads than last quarter and 36% more than a year ago - despite a 7% increase in prices.

The combination produced a 36% improvement in ad revenue year-over-year during the quarter, driving 32% growth in overall revenue. If you ex-out currency adjustments, ad revenue increased by 43%.

Zynga is increasingly irrelevant to Facebook's success.

Facebook's success or failure is increasingly untied to its long time gaming partner Zynga (NASDAQ:ZNGA). In Q3, Zynga represented just 7% of the company's total revenue, down 10% in Q2 and 12% in Q3 2011. This is an important shift away from an industry marked by hit-and-miss launches.

Far more important to Facebook's future than Zynga is Instagram, which the company acquired for $1 billion this past summer. At the time, Instagram had 27 million users. Today, they have 100 million and climbing. According to Comscore, users are spending more time on Instagram than Twitter.

Such success more than offset the shrinking impact of gaming payments. Facebook's global average revenue per user ("ARPU") climbed 4% from a year ago, led by North America and the rest-of-world segment, which increased 20%. Europe, which remains in recession, and Asia, weighed down ARPU.

Overseas opportunities are big.

North America accounts for 50% of the company's revenue yet represents only 18% of the company's 1 billion users.

In terms of users, the U.S. and Canada is the company's slowest growing region, climbing 7.4% to 189 million in the past year. Meanwhile, users in Asia have climbed 41% to 277 million, Europe has grown 14.5% to 253 million and the rest of world category has expanded 39% to 288 million.

Facebook is an increasingly global play, which gives it a significant opportunity to take lessons learned in monetizing America to other markets.

A year ago, the U.S. and Canada accounted for 27% of total daily active users. Today, they account for 22.6%. Similarly, Europe has fallen to 27.4% from 29.5%. Instead some 50% of all daily active users are in Asia and the rest of the world.

Daily Active Users (millions)

# Q3 '11

% of all

# Q3 '12

% of all

Rest of World




















As user growth advances outside of the U.S. and Canada, other markets are becoming increasingly important to revenue. While U.S. and Canada's contribution to sales remained about flat year-over-year, sales driven by Asian users climbed to 12.2% from 10.9% of total revenue while the rest of world segment climbed to 10.3% from 8.18%.

Sales by Geography(millions)

# Q3 '11

% of all

# Q3 '12

% of all

Rest of World




















The social media experiment continues to evolve and spread worldwide alongside the proliferation of mobile devices such as smartphones. As global GDP lifts per capita income in emerging markets, the trend toward mobile content will expand exponentially.

Such a shift makes Facebook's focus on monetizing mobile platforms vital for investors. Given Facebook's Q3 results, it seems they're on their way to leveraging that growth.

Disclosure: I am long FB, AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.