Facebook: Building Knowledge Economy & Thoughts about Second Half of 2013

Building the Knowledge Economy:

Let’s talk about building the knowledge economy and what that means for Facebook’s core business. A lot of new businesses have signed up to advertise with Facebook, so they now have more than a million active advertisers. Their newsfeed ads products are working well for advertisers. One of the things, Facebook likes to watch most closely is the quality of their ads and people sentiment around them.

Right now, ads on average make up about 5% or 120 stories in newsfeed, they haven't measured a meaningful drop in satisfaction when they ask people about their experience with Facebook. Mark says, ‘We are comparing that to the result we get when asked the same question to people using a version of Facebook with no feed ads at all’.

Now that said in recent studies people have been telling that they notice ads more, so Facebook is going to invest more in improving the quality. Their top priority is to expand the number of marketers and overall demand in their system rather than just increasing the number of ads that they show.

See Also: Facebook: Progress Report

Thoughts about the Second Half of 2013:

Facebook expects newsfeed ads to remain the main driver of revenue growth in the second half of the year and believes to have a great opportunity to continue to drive long-term growth by improving the quality and relevance of ads. However, remember that newsfeed ads really began to contribute to Facebook’s revenue in the third and fourth quarters last year which will make more difficult year-over-year comparisons in Q3 and Q4 relative to Q2.

Looking at expenses, consistent with what was said previously, Facebook plans to invest in their business and continue to expect that total non-GAAP expenses including cost of revenue but excluding stock comp will likely grow in the neighborhood of 50% for the full year 2013 compared to 2012. And they also continue to expect that this full year-over-full year expense growth rate will be faster than their year-over-year revenue growth rate for the full year 2013 compared to 2012.

In terms of Facebook’s tax rate, they expect that Q3 and full year non-GAAP tax rate will be a few percentage points higher than their Q2 rate. And finally, they expect 2013 CapEx to be in the neighborhood of $1.6 billion. This is down from Facebook’s prior estimate of $1.8 billion due to a combination of the efficiency gains and changes in timing of purchases.

See Also: Facebook: Operations and Financials as of Today

Facebook: Operations & Financials as of Today.

Operations:

Facebook’s advertising business gained significant momentum past quarter, growing 61% year-over-year to $1.6 billion. Mobile ad revenue grew significantly as well and is now approximately 41% of total ad revenue up from about 30% in Q1. Overall ad impressions were up 43% and the average price per ad was up 13% compared to last year.

This is because Facebook’s ad products are delivering impressive ROI for each of these types of marketers. Direct response marketers including e-commerce companies increased spend significantly; year-over-year ad revenue from e-commerce companies doubled in the second quarter. Direct response marketers are taking advantage of a high click rates and competitive CPCs to grow their businesses. These marketers are typically very measurement focused and may quickly increase budgets as Facebook delivers compelling ROI.

Local businesses also grew spend significantly, Facebook surpassed 1 million active advertisers this quarter more than double the number they had only a year ago. The time people are spending on mobile devices is increasing dramatically that yet mobile represents just 2% of ad spend globally and 3% in U.S.

On an average day in June, 699 million people used Facebook, up 27% from last year. This represents 61% of the 1.15 billion people who accessed Facebook at any point during the month of June.

Additionally, time spent per person on Facebook continues to increase. In aggregate across everyone in their network, time spent on Facebook exceeded 20 billion minutes each day in June. Separately Instagram continues to grow rapidly with impressive engagement and Facebook announced last month, they had over 130 million actives using the service.

See Also: Facebook’s Progress Report

Financials:

Total revenue was 1.81 billion up 53% or 54% when adjusted for constant exchange rates. Ad revenue was $1.6 billion up 61% in the quarter or 63% when adjusted for constant exchange rates. This was Facebook’s strongest quarter in terms of advertising revenue growth since the third quarter of 2011. The performance was strong throughout the world with ad revenue in each of their geographic regions strong by greater than 50%.

Total payments and other fees revenue was $214 million in Q2, an increase of 11% versus last year. Payments revenue from gains specifically was up 7% but we believe 11% represents the best apples-to-apples comparison.

Overall ARPU increased 25% compared to last year to $1.60 per user for the quarter, including a 35% increase in the United States and Canada as well as 30 plus percent gain in all their other regions.

In Q2, GAAP total expenses were $1.25 billion, excluding stock compensation. Non-GAAP total expenses increased 52% to $1.02 billion primarily driven by headcount and infrastructure. Facebook ended the quarter just shy of 5,300 employees up 33% from last year and continue with their success in attracting talents. Q2 GAAP operating income was $562 million representing a 31% operating margin.

Excluding stock comp, non-GAAP operating income was $794 million, 44% non-GAAP operating margin. GAAP tax rate for Q2 was 39% and non-GAAP tax rate was 37%. GAAP net income was $333 million or $0.13 per share and non-GAAP net income was $488 million or $0.19 per share.

Facebook spent $268 million on CapEx in Q2 as they continue to invest in datacenters and facilities. Of note free cash flow in Q2 was over $1 billion, this is much higher than we expect in coming quarters as Q2 free cash flow benefited from $419 million tax refund and light quarterly spend on CapEx but still a $1 billion in free cash flow is a nice milestone for Facebook against an important financial metric.

Facebook has repurchased approximately $153 million worth of shares in the Q2 and ended Q2 with $10.3 billion in cash and investments.

See Also: Facebook:Building Knowledge Economy & Thoughts about Second Half of 2013

Facebook: Progress Report

What are the big changes Facebook wants to make in the world over the next five or 10 years?

Facebook made some really good progress this Q2 with the growth and engagement of their community, the release of new products like Instagram Video and advertising growth especially on mobile.

Facebook now has more daily actives on mobiles and on desktops, nearly half a billion people use Facebook on their phones every day and soon Facebook will have more revenue on mobiles and on desktop as well.

Now that Facebook has connected a billion people, what are the next big ambitions?

There are three main goals Facebook would like to achieve: connect everyone, understand the world and help build the knowledge economy. Connecting everyone is about growing their community to reach the next five billion people.

Facebook’s mission is to give all people the power to share and make the world more open and connected and that means everyone, not just people in developed countries. Most people in the world don't yet have smartphones or data access but Facebook knows they want to be connected. So Facebook is focused on making this possible, while also strengthening engagement within their existing community.

Understanding the world is that helping people share not just day-to-day updates like text messages and photos but also building up long-term knowledge about the world about what people are interested in; which restaurants are good, which hotels your friends have stayed at and so on. Facebook should be able to build intelligent services that help user network to answer lots of questions for people that no other service can.

And Facebook wants to lead the community to create a graph of all that understanding to power this intelligence. Building the knowledge economy is about helping people create companies and jobs using information.

 

The way Mark Zuckerberg sees advertising products, Facebook isn’t just building a strong monetization engine for itself, but also creating tools to enable new growth, jobs and businesses, door platform and to support a larger economic shift in the world based on knowledge and information.

‘I am proud of the work we are doing here to help developers to create apps to help local businesses find customers, to help great brands tell their stories and this is a core part of our mission’ says Mark.

Now let's talk about the progress Facebook has made in each of these areas, starting with connecting everyone.

The Facebook community has grown steadily this quarter adding 45 million new monthly actives and the number of monthly actives is steadier, increasing across demographics in the countries. Now 61% of monthly actives are daily actives and now the ratio has just continued to increase.

In Facebook’s most penetrated markets like the U.S. more than 70% of monthly actives use their services daily and now more than 700 million people worldwide use daily as of today.

See Also: Facebook: Operations & Financials as of Today.

     

As more social services get created, one question is How that Affects the Sharing and Time that People Spend on Facebook?

You could naively assume that more new services mean people spend less time on Facebook but that isn't happening, in fact people on average are spending more time on Facebook than ever before. It's possible that because the market is expanding due to mobile even the time spent per person increases on Facebook maybe their market share could decrease, but that doesn't seem to be happening either.

According to third-party metrics by comScore and Nielsen, Facebook’s share of time spent in the U.S. is either steady or increasing and we believe it's either steady or increasing everywhere else as well.

Some product like video fit into the flow of what people are doing and they take off quickly. Others like graph searching home are completely new kinds of product and they are just going to take a longer to develop. I think it's the right strategy to have a balance of long-term foundational new products ones that fit immediate demand. Facebook is committed to building all of those in to market leading products.

See Also: Facebook:Building Knowledge Economy & Thoughts about Second Half of 2013

Instagram:

Instagram is growing quickly as well, so if you combine the two services together we believe the engagement and share time spent are likely growing quickly throughout the world.

The newest product that Facebook is most excited about from their last quarter is Instagram Video, adding video fits really naturally with the Instagram mission of capturing and sharing the world's moments. It's off to a great start. People are already uploading hours of video to Instagram every minute.

Instagram has always been about helping people capture moments in the way they're proud of, filters were necessary for photos and when Instagram started most phone cameras weren't good enough to take high quality photos. Separately Instagram continues to grow rapidly with impressive engagement and Facebook announced last month, they had over 130 million actives using the service.

Twitter tweets about Confidential IPO

Twitter in its most recent tweet mentioned that ‘We’ve confidentially submitted an S-1 to the SEC for a planned IPO. This Tweet does not constitute an offer of any securities for sale’.

Twitter, which has a user base of over 200 million, is undoubtedly the most awaited consumer Internet IPO. The hype around Twitter IPO will be in full swing since Facebook went public. While Twitter has many lessons to learn from Facebook’s IPO, as $FB stock price fell soon after its public debut, however Facebook stock has crossed its IPO price recently.

What does this Confidential IPO indicate?

According to JOBS Act which was passed last year, under established SEC rules states that companies that are termed as ‘emerging growth companies’ can be allowed to file their S-1’s confidentially provided that their annual revenue is less than $1 billion.

Yes, Twitter’s revenue is quite less than a billion dollars.

Twitter does not intend to disclose its details as the provision also states that Companies do not have to make their documents public until 21 days before the company goes on the ‘road show’ to pitch the company to big investors on Wall Street for the IPO. As per estimates, under present situation Twitter can have a valuation of between $11 billion to $15 billion, which is subject to change.

PrivCo which gathers information on private companies, its Chief Executive, Sam Hamadeh, has predicted, ‘Unlike Facebook, which waited too long to IPO, Twitter will IPO at just the right inflection point, while revenue grows in triple digits’.