Facebook - Advertising And Mobile Continues To Drive Results

| About: Facebook (FB)
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Shares of Facebook (NASDAQ:FB) trade with healthy gains on Thursday following the release of its third quarter results on Wednesday after the close.

The social networking company reported very strong results which initially resulted in a lot of enthusiasm. Shares did give up a lot of their gains following the earnings report after CFO Ebersman issued cautious comments about declining use among young teens.

Despite this cautious comment, I continue to be long-term optimistic about Facebook's future prospects.

Third Quarter Results

Facebook generated third quarter revenues of $2.02 billion, up 59.8% on the year before. Revenues came in far ahead of consensus estimates of $1.91 billion.

The company reported non-GAAP earnings of $621 million, nearly double the amount reported last year. Facebook reported net earnings of $425 million, compared to a loss of $59 million last year.

Facebook reported GAAP earnings of $0.17 per share, while non-GAAP earnings came in at $0.25 per share. Note that consensus estimates for non-GAAP earnings stood at $0.19 per share.

CEO Mark Zuckerberg commented on the third quarter performance, "For nearly ten years, Facebook has been on a mission to connect the world. The strong results we achieved this quarter show that we're prepared for the next phase of our company, as we work to bring the next five billion people online and into the knowledge economy."

Looking Into The Results

Revenues were driven by advertising, which makes up 90% of total revenues, as revenues were up by 66%. Note that mobile advertising already makes up 49% of total advertising revenues, expected to surpass traditional advertising revenues already in the coming quarter.

The number of daily active users was 728 million, up 25% on the year before. Note that the monthly active user base rose by 18% to 1.19 billion users. The faster growth on a daily basis indicates that users are becoming more active again.

Note that a total of 874 million users access the website on their mobile devices on a monthly basis, indicating that 73% of monthly users access the social networking website through their mobile device.

Total costs rose by 45% to $1.28 billion, as expense growth was far lower than revenue growth, resulting in strong margin growth. GAAP operating margins improved from 30% last year to 37% over the past quarter.


Facebook ended its third quarter with $9.33 billion in cash, equivalents and marketable securities. The company operates without the assumption of debt, although it does hold $575 million in capital lease obligations.

Revenues for the first nine months of the year came in at $5.29 billion, up 50.9% on the year before. Net earnings came in at $977 million, approaching the billion mark, which compares to a small loss of $11 million last year.

At this pace annual revenues of $7.5 billion should be attainable, while earnings could come in around $1.5 billion.

Factoring in gains of 2% in after-hours trading, with shares trading at $50 per share, the market values Facebook at $122 billion. This values operating assets of the firm around $113 billion. As such, operating assets are valued at 15 times annual revenues and 75 times annual earnings.

Facebook does not pay a dividend.

Some Historical Perspective

It was only August of last year, when shares of Facebook fell to lows of just around $18 per share, after a disastrous public offering.

Shares have seen a very nice bounce back, and at current levels around $50 per share, investors who participated in the offering have seen solid gains of little over 30%.

Between 2009 and 2012, Facebook nearly seven-folded its annual revenues to little over $5 billion. Earnings took a beating last year on the back of increased investments, but Facebook should be able to report record-earnings this year.

Investment Thesis

Facebook's success continues to depend on user engagement, average revenues per user and a success of its mobile advertising campaign. On all of these metric, Facebook is performing really well.

Both the monthly and the daily user base show healthy growth, as Facebook aims to achieve 5 billion users in the long run. Note that the total user base rose from 1.15 billion to 1.19 billion over the quarter, but the growth in the subscriber base is slowing down. This forces Facebook to focus on other areas to drive growth.

One of these other areas is the average revenues from each of those users. Global ARPU came in at $1.72 for the quarter, up $0.12 on the quarter before, and up $0.43 compared to a year earlier. North American and Canadian ARPU rose to $4.85 up from just $3.40 in the third quarter of last year. European ARPU came in at $1.96. Note that the largest markets in terms of user bases are Asia and the rest of the world. These generated ARPU of $0.81 and $0.67 per quarter, respectively.

And once again, the big surprise came from mobile advertising revenues, which made up 49% of total advertising revenues. Note that Facebook only started with mobile advertising at the start of 2012. The fact that Facebook generates half of its revenues from mobile indicates the company has clearly turned this into a success.

Mobile revenues in terms of total advertising revenues stood at merely 41% in the second quarter, and just 30% in the first quarter of this year. Also noteworthy, the mobile daily active user base increased by 38 million to 507 million users, while total daily active user base rose by merely 29 million to 728 million. In fact, some 254 million users only access their favorite website through a mobile device by now.

The strong performance on all metrics, only confirms my long-term thesis. I can easily foresee 1.5 billion monthly users in 2015, as ARPU could come in between $2.50 and $3.00 per quarter. This could translate into annual revenues of $15 billion, and earnings of $4-$5 billion. At the current valuation, a price-earning ratio of 25 for 2015 seems justifiable.

Note that strong momentum was driven by Newsfeed and an increase in ads over the quarter, something which is not going to continue given that the company aims to balance the fine line between user engagement and increased advertisements. To offset slower ads growth, Instagram will now offer advertisements as well. For now Facebook has cracked the code for mobile advertisements, something which once was a big fear for investors.

Back in October, when Raymond James was getting cautious on Facebook's prospects, I last took a look at the company's prospects. I concluded that the broker was rightfully cautious after shares have doubled in just three months time. The success in mobile advertisements and expense control, is now convincing.

As Facebook continues to perform even better than I thought, I remain upbeat for the very long-term prospects.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.