Cover Image of Facebook

If you own Facebook stock (FB) or are thinking of investing, you will find these insights from Facebook’s Q1 2017 useful.

Facebook (FB) has a market cap of over $400 Bn. So the question for investors or anyone thinking of investing is:

How Facebook performed in Q1 2017 and management’s area of focus will tell us about Facebook’s performance going forward.

Key Highlights From Q1 2017

Facebook Q1 2017 Highlights

Social Metrics At A Glance

Facebook Community Metrics

So let’s dig deeper into the revenue numbers.

Revenue By Segment

First, let’s take a look at FB revenues by segment.

Facebook Revenue By Operating Segment

Facebook is primarily an advertising company. 98% of its revenue comes from advertising and merely 2% from “Payments” which is expected to decline over time.

Facebook earns “Payments” revenue from developers when users make payments to game developers on Facebook's platform.

Advertising Revenue By Placement

85% of Facebook’s Q1 2017 revenues came from mobile and the rest from desktop. The mobile advertising revenue grew 57% YoY while desktop revenue grew by 26%.

Facebook Revenue By Placement

On the earnings call, management said they expect the desktop revenue to decline over time due to the secular trend away from desktop towards mobile.

So just to recap: we know that 98% of Q1 2017 revenue came from advertising and 85% of that came from mobile.

Revenue By Geography

Now let’s look at Facebook’s revenue broken down by region:

Facebook Revenue By Geography

Year over Year (YoY) revenue for Asia Pacific and Rest of World grew more than 60% while the developed world (US & Canada and Europe) grew by approximately 46%.

As you can see from the table above, Facebook earned 49% of its revenue from US & Canada, and 24% from Europe, a combined 73% from the developed world.

And that’s because Facebook earns more when marketers advertise to users in the developed world who have higher ability to spend.

Check out the chart of average revenue per user (ARPU) by geography.

Facebook ARPU By Geography

As you can see, Facebook earned $17.07 ARPU in Q1 2017 for users in US & Canada vs a mere $0.91 ARPU for users from the Rest of the World -- a huge difference!

But here is the catch: Facebook is reaching saturation in the developed world where Facebook earned 73% of advertising revenue.

How do we know that?

Let’s look at current Facebook users by geography and the growth rates:

Facebook MAU By Geography

Monthly Active Users (MAU) grew by a mere 4.5% in US& Canada but check out user growth in Asia-Pacific and Rest of World where YoY growth in MAU was 27% and 19% respectively.

So Facebook added users at a faster clip in Asia-Pacific and Rest of World regions but that’s not where it gets the highest ARPU.

As shown earlier, ARPU from Asia-Pacific was only $1.98 and $1.27 for the Rest of World.

Facebook management also mentioned that going forward, management expects deceleration in revenues because ad load (number of ads users see without impairing their experience) will be less significant in driving revenue growth .

(By the way, if you want to learn the stock picking thought process of a famous hedge fund manager, check out how Leon Cooperman selects stocks...).

That’s why Facebook is focused on new ad formats and other product innovations to create new revenue streams.

New Product Initiatives Management Discussed During Earnings Call

Instagram

Management highlighted the broad adoption of instagram by the fact that it has 700M Monthly Active Users and 8M business profiles.

Zuckerberg highlighted the increasing role of virtual reality (VR) and Sheryl Sandberg mentioned how increased visualization via videos coupled with sophisticated targeting and measurement is a very powerful value proposition of instagram platform to businesses.

Facebook does not break down revenue specifically for Instagram but management is content with the engagement.

Messenger

Zuckerberg also addressed messenger monetization. He mentioned that currently the top priority for management is to build organic interactions between businesses and their customers via messenger.

As interactions between customers and businesses increase organically, management will have no problem generating revenue from Messenger.

Zuckerberg also listed two ways Facebook is currently generating revenues through Messenger:

  1. Showing paid content in messenger
  2. Offering businesses the ability to communicate with existing customers

Video Ad Formats

The Facebook team also addressed the future of video in creating new revenue streams.

Management discussed how “Ad Breaks” is a potential opportunity to revenue share with content creators and influencers. Ad Breaks is this idea of introducing ads in videos which are heavily watched.

Management said this initiative is in its early stages because for Ad Breaks to scale, content creators need to create content and users have to develop the habit of using Facebook to view content.

Facebook is also experimenting with pre-roll video ads (ads are shown before the video starts) and mid-roll ads for on-demand videos.

There you have it guys...key highlights from Facebook earnings call.

Stock Picks Of Superstar Hedge Fund Managers

Click here to access

Let me know what you think.