Facebook earnings - Q2 2014

posted by Alex Cho | published by Amigobulls on
  • Facebook topped analyst consensus Non-GAAP EPS estimates of 0.32, by reporting Non-GAAP EPS of 0.42.
  • Facebook beat estimates by 10 cents, as a result of aggressive cost control, paired with revenue growth at the upper end of the guidance range.
  • The eventual deceleration on an annualized basis will occur in FY 2015, as a result of a much larger base.

Facebook Q2 2014 earnings

Pretty much every analyst that attempted to make a guess on what Facebook (NASDAQ:FB) would report today, were embarrassed by how wrong they were, including me. Facebook offered better guidance, as more qualitative and quantitative factors pertaining to revenue growth were disclosed in the most recent earnings conference call.

Going forward, Facebook communicates that it will continue to invest aggressively into headcount, infrastructure, and product development. The company believes that it can sustain fairly high growth rates, however investors should lower expectations modestly as deceleration in growth is likely to be seen in the next fiscal year.

Facebook Q2 2014 Estimates versus Actual performance

I anticipated revenue in the $3.6 billion range on the basis of better monetization per user. However, despite the beat on sales that was well ahead of consensus estimates, the company didn’t quite reach 100% revenue growth.

And this was primarily driven by the fact that the transition to mobile ads comes with fewer impressions, even as the engagement rate, paired with pricing was higher. Dave Wehner, CFO of Facebook reports, “In Q2, the average affective price per ad increased 123% compared to last year, while total ad impressions declined 25%.”

So even though sales channel data was most likely accurate on higher pricing, paired with higher engagement per user, the revenue growth didn’t follow on account of lower impressions. The decline in impressions most likely came as a result of changing the algorithm to display fewer statuses in the newsfeed, which reduced the impression rate. Also, the mix from slowing desktop engagement, paired with payments and fees, slowed the growth rates on a consolidated basis.

Dave Wehner, CFO of Facebook stated in the conference call:

As we saw in Q2, our year-over-year growth rate declined from 72% in Q1 to 61% in Q2 or 59% on a constant currency basis. This is consistent with our comments on the Q1 call when we indicated that over the course of 2014, the year-over-year growth rates in revenue would decline meaningfully as the comps became more difficult.

The company outperformed consensus analyst estimates by allowing revenues to grow at a significantly higher run rate, than costs. This trend is likely to continue, as guidance from management offers much more insight than the vague commentary that was provided in previous quarters. This gives me much more confidence when projecting the next quarter.

However, my estimates were significantly closer than what the street consensus estimated. In fact I estimated within a cent of earnings. I anticipated that Non-GAAP EPS was going to be $0.41 for Q2’ 2014. Facebook reported Q2’ 2014 Non-GAAP EPS of $0.42. I was a little more conservative on how Facebook would manage its cost structure even as I was aggressive on my revenue estimate. Thankfully I balanced optimism with some skepticism; otherwise I would have been off by a significant margin when it came to bottom line performance.

Q3 2014 guidance and EPS estimate

  • Non-GAAP tax rate of 36%
  • 2.9 billion shares outstanding by end of FY’ 2014. Share dilution increases at a 75 million rate per quarter.
  • Revenue growth based on ARPU trends, paired with MAU trends.
  • Year-over-year cost of revenue and operating costs will increase by 30% - 35%.

I quickly summarized the guidance, as management was extremely wordy, and elaborated in extensive detail. But with these basic figures I can come up with next quarter earnings estimates, which I will break down.

Facebook Earnings: Q3 2014 breakdown

In Millions USD (unless otherwise noted)
Revenue 3,273
Non-GAAP Cost of revenue/ Opex 1,389
Operating income 1,884
Taxes 659
Net income 1,225
Non-GAAP EPS estimate for FY Q3 2014 (in $) 0.46
Shares outstanding 2635

Source: AlexLeAnders

I estimate that Non-GAAP EPS will come in at around $.46 for the next quarter. I expect Q3 revenue to come in at the higher end of the range of analyst estimates like it did in Q2. It’s a modest increase in revenue on a quarter-over-quarter basis (12.4% growth rate). Or in other words YoY growth of 62.35%, compared to 61% growth in Q2.

I don’t think outright deceleration will occur so as long as modest user growth, paired with a modest improvement in monetization per user occur. I think monetization from non-core web properties may come into play in this upcoming quarter. I think YoY revenue growth will moderate in the low 60% range. I expect QoQ deceleration to happen towards the beginning of fiscal year 2015, which is two quarters in the future.

Usually Facebook beats on revenue expectations, so I’m a little aggressive on that aspect. However to off-set the optimism on revenue, I’m extremely conservative on costs. I think Facebook will report cost increases at the upper end of the range, which will lower profitability by a modest amount.

Even so, my $.46 Non-GAAP EPS estimate is above the analyst consensus EPS estimate of $.39 for Q3. I have pretty high conviction that Facebook will deliver beats even in the third quarter of 2014.

Facebook accelerated growth to continue through 2014

I remain optimistic on Facebook. The stock moved up by 5.62% in after-hours trading. Analyst consensus earnings estimates are likely to increase, and upgrades from sell-side firms are likely to happen on the basis of extended growth for the duration of the year, paired with costs that are likely to grow at a slower rate than revenue growth.

Facebook is nowhere near market saturation, and I think that if Facebook is able to sustain annual sales growth rates for the duration of the year, the stock will beat earnings again. Furthermore, Facebook can drive revenue growth by selling more ads on its other web properties, and by delivering continued cost per click growth, paired with higher click through rates.

I expect significant deceleration in the next fiscal year, as a larger base will make it significantly difficult for Facebook to accelerate growth on an annualized basis.

Amigobulls currently has a hold rating on Facebook stock. View Facebook stock rating.

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About the author

Alex Cho
Alex Cho is a guest contributor at Amigobulls. He specializes in equity analysis, and writes opinion for some of the worlds most prestigious financial websites. Alex Cho started of as a contributor for Seeking Alpha, and went onto write for the Motley Fool for a brief period of time. By the end of 2013, Alex Cho's analysis of current events, and equities attracted a fairly massive following, and has earned him a reputation for firing straight from the hip. At times, Alex Cho can be extremely opinionated and controversial, but he always comes prepared with a solid stack of research. Currently, Alex Cho is the Senior Analyst and founder of AlexLeAnders.
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