Facebook Slides After Revenue, Daily Users Miss As Operating Costs Soar; Zuck Warns Of “Stories” Troubles

Update: after Facebook shares manged to turn modestly green after the close, the have since slumped again, down over 3% after Zuckerberg said that in order to shift user activity to video and stories, it will have to take activity away from other kinds of social interactions which monetize a lot better. Why stories?

Because Zuckerberg wants Stories to be the thing that brings people back to the Facebook core app even though he admit the launch hadn’t gone quite as well as expected, and as a result the company was prioritizing that kind of activity over the traditional Facebook feed of videos, posts and news. This is a significant change as “we don’t make as much money from them yet as we do from feed ads.” 

And the red flag: he said 2019 will be another “investment year” as they figure out how to make the stories transition.

Some more details from Bloomberg;

  • Advertisers say it increases pressure on them to do unique things frequently. You will forgive an advertiser for seeing the same ad in your news feed over and over, but if you see it multiple times in your stories, taking up the entire screen, you will be annoyed. It’s supposed to be ephemeral.
  • Advertisers aren’t used to the vertical format for “stories” ads, which is not like the ads they make for TV.
  • They don’t like that they can’t as easily get interaction from people. If you promote a post on Facebook, for example, you can see what people are saying in comments, and they might share it themselves, giving it a so-called “organic” lift. That can’t happen in Instagram.

The update has pushed FB down nearly 4% after hours…

… and has pressured the entire FANG sector lower.

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Exactly three months ago, with its stock trading at $218, or 50% higher than where it is now, Facebook shocked Wall Street with a second-quarter revenue miss and a warning that growth would slow while profits shrank as spending rose which sent its stock crashing more than 20%, wiping out $132 billion in market cap – the biggest single-day shareholder value loss in history. Fast forward to today, when with the company’s Q3 earnings due, investors will be watching user growth and engagement numbers, expenses and of course, profits closely. The top wish: no more surprises.

They did not quite get that when moments ago Facebook reported a revenue miss, an earnings beat (thanks to a 13% tax rate), while both daily and monthly average users missed, and rather badly at that. Here are the Q3 details:

  • Revenues of $13.73BN, below the estimate of $13.80BN
  • EPS $1.76, Above the estimate of $1.47 but as Facebook admits, this was because “its effective tax rate was 13%, which was lower than expected primarily due to the withdrawal in August of an appellate court ruling in the case of Altera Corp. v. Commissioner.”
  • Daily Active Users 1.49B, up 9% Y/Y but below the estimate of 1.557B
  • Monthly Active Users 2.27B, up 10% but also below the estimate 2.352B

While FB tried to spin the user miss, saying that it estimates that “more than 2.6 billion people now use Facebook, WhatsApp, Instagram, or Messenger each month, and more than 2 billion people use at least one of our Family of services every day on average”, the miss in DAUs and MAUs was problematic, even more so since the growth in monthly users to 2.27BN was just 11%, the lowest since well before the company’s 2012 IPO.

Some more details from the latest report:

  • Advertising rev. $13.54 billion
  • Mobile ad revenue as percentage of ad revenue 92%, up from 88% Y/Y
  • Facebook headcount was 33,606 as of September 30, 2018, up 45% Y/Y

But the biggest problem may be that Facebook’s costs, as feared, indeed soared, jumping from $5.2BN a year ago to $7.9BN, up 52%. As a result, Q3 operating margin tumbled from 50% to 42% Y/Y.

Commenting on the results, FB CEo Jeff Zuckerberg said that “Our community and business continue to grow quickly, and now more than 2 billion people use at least one of our services every day,” He added that “we’re building the best services for private messaging and stories, and there are huge opportunities ahead in video and commerce as well.”

Digging into the details, US and Canada DAUs were flat for the second quarter in a row at 185MM, while Europe posted a second consecutive decline.

Monthly Active Users hit 2.271 billion, and while US/Canada MAUs rose to 242MM from 241MM in Q2, Europe posted a second consecutive drop here too. Still, the data was spun as having a “slight uptick” in North American users, which pushes back on the big concern around the company, that growth has plateaued in its high-value markets. There was no way to spin the drop in European users.

There were no surprises in revenue broken down by geography, where the US led with $6.7 billion, half of the company’s total $13.7 billion.

There were some more surprises at the expenses line, which rose across the board, to the highest level since Q1 2017.

But the biggest surprise is that Operating Margin slumped from 44% in Q2 and 50% a year ago to just 42%, the lowest since Q1 2017.

The result: net income has been flat for three quarters despite continued top line growth.

Meanwhile, Capital spending is soaring as the company warned last quarter, up almost double from $1.755BN in Q3 2017 to $3.343BN this quarter.

And with flatlining revenue growth, declining margins, and soaring capital spending, it will not come as a surprise that Facebook’s Free Cash Flow actually declined from last year, down to $4.2billion from $4.4billion.

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In kneejerk reaction, the stock was first down, then modestly higher after hours, a far cry from the 20% plunge a quarter ago.

Developing.

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