Facebook Earnings Review: Q4 2014

  • Facebook earnings for Q4 2014 came in at 54 cents, 5 cents higher than analyst estimates.
  • Facebook revenue of $3.85 billion was 1.6% higher than analyst consensus estimates.
  • Mobile ad revenue registered 100% YoY growth and video views per day averaged 3 billion in December 2014.

Facebook (NASDAQ:FB) earnings for Q4 2014 were released after market hours yesterday (Jan 28). The company beat analyst estimates on both the topline as well as bottomline, which was along our expectations stated in our Facebook earnings preview. Mobile ad revenue registered 100% YoY growth and video views per day averaged 3 billion in December 2014, which were key highlights in another quarter of revenue beat and earnings surprise.

Analyst Estimates v/s Facebook Actual Performance

Analyst consensus Actual Revenue beat/Earnings surprise
Revenue 3790 3851 2%
Non-GAAP EPS 0.49 0.54 10%

Facebook reported an earnings surprise of 10% on a revenue beat of 2%. This was Facebook’s 7th consecutive quarter of earnings and revenue beat, a testimony of Facebook's improving fundamentals.

Facebook Earnings Summary Q4 2014

Facebook reported a solid growth in topline as well as bottomline. Facebook’s Q4 2014 results are summarized in the table below.

In millions of $, except per share numbers Q4 2013 Q4 2014 YoY change/growth
Revenue 2585 3851 49.0%
Operating Income
GAAP 1133 1133 0.0%
Non-GAAP 1498 2219 48.1%
Operating margin
GAAP 43.8% 29.4% -14.4%
Non-GAAP 57.9% 57.6% -0.3%
Net Income
GAAP 523.00 701.00 34.0%
Non-GAAP 814.00 1518.00 86.5%
Net Income margin
GAAP 20.2% 18.2% -2.0%
Non-GAAP 31.5% 39.4% 7.9%
EPS (earnings per share)
GAAP ($) 0.20 0.25 21.6%
Non-GAAP ($) 0.32 0.54 69.4%

Facebook reported yet another quarter of continued growth across all metrics. Facebook revenue grew at a rate of 49% YoY, lower than the continuing the declining growth trend from the first three quarters of 2014. However, this is along expected lines, which has been reflected in the management’s earnings commentary over the last few quarters. The revenue growth was driven by a 99% increase in mobile ad revenue. Mobile ad revenue for the quarter came in at $2.48 billion, contributing 69% to Facebook advertising revenue in the quarter.

Facebook Profit Margins Q4 2014

Facebook gross profit margins in Q4 2014 registered a 2 percentage point improvement over the year ago quarter. Facebook gross profit margin is amongst the highest in the S&P 500 companies.

Q4 2013 Q4 2014 YoY change
Gross profit margin 81.0% 83.0% 2.0%
Operating profit margin 43.8% 29.4% -14.4%
Non-GAAP operating profit margin 57.9% 57.6% -0.3%
Net profit margin 20.2% 18.2% -2.0%
Non-GAAP net profit margin 31.5% 39.4% 7.9%

The improvement in Facebook’s gross profit margins didn’t translate into operating margin gains, which was negatively impacted by a 228% YoY growth in stock-based compensation. Excluding the one-time expenses, Facebook maintained operating margins at Q4 2013 levels while registering an 8 percentage point improvement in the Net profit margins. The net profit margin gains were positively impacted by the tax credits in the last quarter.

The expansion in Net profit margin (Non-GAAP) and Gross profit margin helped leverage the impact of revenue growth on earnings. The Non-GAAP earnings per share (EPS) registered a 69% YoY growth in Q4 2014.

Facebook User Engagement Metrics

Facebook measures engagement using the DAU (daily Active users) to MAU (Monthly Active Users) ratio. The Q4 2014 DAU/MAU ratio came in at 64% which was a significant improvement from 61% in Q4 2013. However, the ratio came in flat on a QoQ basis after 6 quarters of constant improvement on a QoQ basis. It will be interesting to see if this trend holds in the coming quarters.

The stagnation in this ratio is an indicator for the management to look at monetization options in products like video ads and also on its other properties like Instagram and WhatsApp. Facebook reported average 3 billion video views in December 2014, a 200% increase form September 2014 levels.  In spite of the DAU/MAU ratio remaining flat from Q3 2014, Facebook reported a 99% growth in Mobile ad revenue, driven by a 58% growth in mobile ad revenue per user. The growth in ad revenue was driven by a 335% YoY growth in average ad prices while the number of impressions decreased 65%. The decrease in as impressions is directly linked to the increase in Facebook mobile usage.

In conclusion Facebook’s huge operating scale, increasing mobile monetization and monetization of video ads and its other web properties will be key value drivers over the long term. At a PE ratio of 69 and price to sales ratio of 16.9, Facebook stock continues to trade at levels outside the realms of value investing. However, the huge growth potential, large user base, extraordinarily high gross profit margins and brilliant cost controls merits a deeper look for a growth investor. Our Facebook stock analysis highlights the strong operational fundamentals of Facebook, while highlighting the valuation concerns surrounding the stock.

Facebook Q4 2014 Earnings Preview (published on Jan 20, 2015).

  • Facebook is expected to report its Q4 2014 results after market close on January 28.
  • Pew research recently reported a significant rise in Facebook engagement metrics.
  • Facebook revenue and earnings will continue to grow, driven by engagement metrics and average revenue per user growth.

Facebook is set to report its Q3 2014 earnings on January 28, 2015 after stock market close. The Facebook earnings report will be for the fiscal quarter ending December 2014, and the and Full Year 2014 Earnings report. The company has reported an earnings surprise for 6 successive quarters and is expected to deliver another earnings report ahead of analyst estimates. Facebook has delivered consistent growth in topline as well as bottomline, consistently beating analyst estimates.

Facebook Q4 Earnings Analyst Estimates

Analyst consensus is for Facebook to report Non-GAAP earnings per share (EPS) of 49 cents on revenue of $3.8 billion. The current consensus estimate implies a year on year (YoY) revenue growth of 46.4% and earnings growth of 58.1%.

Analyst Consensus Q4 2013 implied growth (YoY)
Revenue ($, in millions) 3791 2590 46.4%
Non-GAAP EPS ($) 0.49 0.31 58.1%

Source: Estimize

According to WSJ, the Facebook Non-GAAP EPS consensus estimate for Q4 2014 is $0.48, a cent lower than the consensus on Estimize. The reported Facebook EPS for the same quarter last year was $0.31 while the GAAP EPS was $0.20 (See Figure 1).

Facebook EPS
Source: Facebook stock chart by Amigobulls

Facebook registered revenue growth of 63% through the first 3 quarters of 2014, while Facebook earnings growth over the same period was 105%. However, the growth in earnings as well as revenues has slowed through each of the first three quarters as the comparable numbers from the year ago period have got tougher.

Facebook Revenue and Earnings Growth Chart

Facebok revenue and earnings growth

The revenue and earnings growth implied by the analyst estimates is in line with the current trends in Facebook’s topline and bottomline.

Facebook Earnings Q4 2014 Guidance

Facebook revenue for the fourth quarter is expected to grow between 40% to 47% YoY. The management also forecast a 30% to 35% YoY growth in non-GAAP expenses for FY 2014 with a Q4 Non-GAAP tax rate in line with Q3 2014 level. In addition, the company has projected an increase of 50% to 70% in costs and expenses in 2015. According to CFO David Wehner, the firm is looking to invest in talent and new areas like video. We at Amigobulls feel that this reinvestment could reduce the profit margins in the short term but will lead to increased growth in earnings and revenue in the long term.

Modeling the management’s guidance, we arrive at Facebook’s non-GAAP EPS estimate of 48 cents using the midpoint of the management guidance.

in millions of $ Management guidance
Revenue 3709.48
Non-GAAP operating expenses 1682.43
Non-GAAP Operating Income 2027.05
Non-GAAP operating margin 54.6%
Provision for income taxes 689.2
Non-GAAP Net Income 1337.85
Number of shares 2800
Non-GAAP EPS 0.48

Facebook Q4 2014 in Review

In a recent post on Facebook user trends, we had highlighted two trends from a Pew research report:

  • Facebook user growth through 2014 had not seen any meaningful growth, raising user growth concerns ahead of the upcoming Facebook earnings report.
  • However, the user engagement saw significant improvement, which will result in higher average revenue per user (ARPU). In light of slowing user growth, Facebook engagement and ARPU trends will be the key trends to watch out for.

Facebook Growth - ARPU Increase Will Be Key Value Driver For Facebook Stock

Facebook ARPU growth has accelerated over the last 4 quarters. With the pew research report hinting at an increase in the daily active users as a percentage of monthly active users (DAU/MAU), ARPU growth will be a key metric to watch out for in Q4 2014 Facebook earnings release.

Facebook average revenue per user growth

Facebook Earnings History

Facebook has delivered a strong earnings report in most of the recent quarters. The earnings history for the last 9 quarters is summarized in the table below

Earnings history
EPS estimate Actual EPS Revenue estimate Actual revenue Earnings surprise Revenue beat
Q3 2014 0.40 0.43 3115 3203 7.5% 2.8%
Q2 2014 0.33 0.42 2799 2910 27.3% 4.0%
Q1 2014 0.24 0.34 2360 2500 41.7% 5.9%
Q4 2013 0.27 0.31 2356 2590 14.8% 9.9%
Q3 2013 0.18 0.25 1895 2016 38.9% 6.4%
Q2 2013 0.14 0.19 1612 1813 35.7% 12.5%
Q1 2013 0.13 0.12 1449 1458 -7.7% 0.6%
Q4 2012 0.15 0.17 1526 1585 13.3% 3.9%
Q3 2012 0.11 0.12 1229 1262 9.1% 2.7%

Source: Estimize

Facebook has beaten analyst estimates in 8 out of the last 9 quarters with an average earnings surprise of 21%. Facebook revenue has come ahead of Analyst estimates in each of the last 9 quarters, with an average revenue beat of 5%. Facebook Q3 2014 earning results were great and the company beat analysts estimates both on top line as well as bottom line. However, the lower guidance and increased costs for Facebook was not something that made investors happy and the Facebook stock lost 8% in after hours trade.

In conclusion, Facebook is all set to report a strong quarter, as indicated by solid improvements in engagement metrics reported by Pew research. We estimate the company to report in-line with its recent earnings history, beating the street consensus on both the topline and bottomline. However, the GAAP profit margins could be suppressed over the short term, negatively affected by stock based compensation expenses from acquisitions as well as management’s focus on reinvestment. Our Facebook stock analysis highlights the valuation concerns surrounding the company. However, the company continues to be a compelling growth story given its huge topline growth and exponential earnings growth, which is currently underway.

What are your thoughts, expectations on Facebook’s upcoming earnings report? Do let us know in the comments section below.

Virendra Singh Chauhan Virendra Singh Chauhan   on Amigobulls :

Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice.

Buying and selling of securities carries the risk of monetary losses.Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions.

Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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