Facebook’s Earnings Get a Boost from Accounting Change

Revenue jumped 51% Y-o-Y to $8.8 billion, advertising revenue grew 53% Y-o-Y to $8.62 billion

Social media giant Facebook Inc. (NASDAQ: FB) announced its Q4 FY16 and full year FY16 financial results on February 01st, 2017.

The Menlo Park, California-based company builds products that enable people to connect and share through mobile devices and personal computers. The Company enables people to share their opinions, ideas, photos and videos, and other activities.

The Company’s products include Facebook, Instagram, Messenger, WhatsApp, and Oculus. Facebook’s subsidiaries include Andale Inc., Edge Network Services Limited, Facebook Ireland Holdings Limited, Facebook Ireland Limited, Facebook Operations LLC, Instagram LLC, Oculus VR LLC, Parse LLC, Pinnacle Sweden AB, Siculus LLC, Vitesse LLC, and WhatsApp Inc. Read more about Facebook’s financial results below.

Q4 FY16 and FY16 financial highlights

During Q4 FY16, Facebook’s total revenue jumped 51% Y-o-Y to $8.8 billion, of which advertising revenue grew 53% Y-o-Y to $8.62 billion, while payments and other fees declined 12% to $180 million. Growth in Q4 FY16 was driven entirely by the company’s advertising business, which now accounts for 98% of total revenue. Advertising revenue surged 53% thanks to strong mobile advertising revenue growth. Mobile advertising revenue accounted for 84% of Facebook’s total advertising revenue and increased 80% Y-o-Y during the reporting quarter. Facebook is the second largest ad publisher globally, behind technology major Alphabet Inc.’s (NASDAQ: GOOGL) (NASDAQ: GOOG) Google, as per eMarketer.

Despite a 29% rise in costs and expenses to $4.24 billion, income from operations jumped 78% to $4.56 billion, while operating margins jumped to 55% from 44% in the year ago same period. As a result, net income soared 128% to $3.56 billion, or $1.21 per share, from $1.56 billion, or $0.54 per share, in Q4 FY15.

For the full-year FY16, revenue jumped 54% Y-o-Y to $27.63 billion, of which advertising revenue grew 57% Y-o-Y to $26.88 billion, while payments and other fees declined 11% to $753 million. Net income soared 177% to $10.21 billion, or $3.49 per share, from $3.68 billion, or $1.29 per share, in the year ago same period. Facebook’s 2016 earnings got a boost of more than $934 million with a massive reduction in its income-tax provision, including $214 million in Q4 FY16, from a new rule affecting the accounting for stock payments to employees.

The change has benefited Facebook and other companies like Microsoft Corp. (NASDAQ: MSFT) and Alphabet, which are heavy users of employee stock compensation. Companies like Amazon.com Inc. (NASDAQ: AMZN) and Apple Inc. (NASDAQ: AAPL) and others are required to adopt the change this year.

Facebook’s investment and focus on video showed strong returns, with viewership increases, and allowing Facebook to weave high-priced video ads into the feeds. This in turn drove Facebook’s average revenue per user (ARPU) in the US and Canada during Q4 FY16.

Daily active users (DAUs) grew 18% Y-o-Y to 1.23 billion on average for December 2016. Mobile DAUs jumped 23% Y-o-Y to 1.15 billion on average for December 2016.

Monthly active users (MAUs) grew 17% Y-o-Y to 1.86 billion, while mobile MAUs jumped 21% Y-o-Y to 1.74 billion as of December 31st, 2016.

Facebook also reached a new milestone when it revealed that two-thirds of Facebook users, or 66%, get news on the site, according to the Pew Research Center, up from 47% in 2013. Capital expenditures for FY16 were $4.49 billion. The Company had cash and cash equivalents of $29.45 billion at the end of Q4 FY16.

Segmental highlights

Facebook notched major milestones, reaching 1 billion monthly users on messaging apps WhatsApp and Messenger, and 500 million monthly Instagram users. Messenger also reported 33,000 live bots. During FY16, Facebook launched Messenger Lite, which is designed to make messaging fast and easy with a wide variety of Android phones, and for people who are on slower networks as well. Facebook also launched Workplace to help make organizations more connected and productive. Workplace is a communications platform that uses features like News Feed, Groups and Messages to help people collaborate and share at work.

Other highlights

Facebook to develop app for TV set-top boxes: Facebook is creating an app for television set-top boxes, including Apple’s Apple TV, according to the Wall Street Journal on January 31st, 2017. Facebook has been marketing its live-streaming capabilities, testing a new video ad product and integrating more videos into Instagram, its photo-sharing app, to enable it to compete for television ad dollars. Facebook is also in discussions with media companies to license long-form, TV-quality programming. The recent move is aimed at bringing Facebook closer to live video and video advertisements, and getting advertisers to buy more video ads since such ads fetch higher rates from advertisers than text or photo-based ads.

Tapping more of the $70 billion US TV advertising market could help offset its growth plateau. Video ads command a premium over text- and image-based ads within the news feed. Though video ads already contribute to Facebook’s growth, deep-pocketed advertisers still spend the bulk of their marketing budgets on television ads. However, Facebook is expected to run into competition from other tech companies like Alphabet’s YouTube and Snap Inc.’s Snapchat. Google said that ads it sells on YouTube generally cost less than its search-engine ads. Snapchat is pushing more toward a content-licensing model.

The app would be a home for video content, including the original, premium content that Facebook currently is trying to attract from major studios. Facebook eventually would sell ads against that content, giving it another way to generate growth to offset the expected decline in ad growth in its core news feed. In April 2016, Facebook expanded its live video product, Facebook Live – a potential threat to broadcast television, giving it prominent placement on its app and rolling out features to make it easier for users to search and comment in real time.

Innovation: Facebook’s innovation roadmap includes three areas: connectivity, artificial intelligence, and virtual and augmented reality. Through its efforts with Internet.org, Facebook connected 40 million people, up from 15 million a year ago. Facebook’s Express Wi-Fi program empowers entrepreneurs to build a business by providing their community with access to the internet. On artificial intelligence, Facebook has over 40 teams, and about 25% of its engineers, using AI to power the products and services they build. At Oculus Connect, Facebook announced that Touch controllers for Rift will ship in early December 2016 with 35 games and experiences exclusively built for Touch.

Outlook for FY17

CFO David Wehner had earlier reiterated that Facebook is approaching maximum ad load, and hence will not be able to increase the number of ads it shows any more. As a result, Facebook expects a drop in ad revenue growth rates in the coming months. Furthermore, management said that it expects to invest a lot of funds in 2017 to hire engineering talent. Specifically, Facebook said it expects full-year GAAP expenses to rise 40% to 50% and non-GAAP expenses to increase 47% to 57% during the year. Facebook also said it expects to spend $7 billion to $7.5 billion of capital expenditures during the year, primarily for data center expansion and office facilities to support the company’s fast-growing business.

Stock Performance

Facebook’s stock finished the day at $130.98, gaining 0.11%, at the close on Friday, February 03rd, 2017, having vacillated between an intraday high of $132.85 and a low of $130.76 during the session. The stock’s trading volume was at 24,774,146 for the day. The Company’s market cap was at $377.51 billion as of Friday’s close.

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