Analysis: FB

Facebook (FB) reported a top- and bottom-line beat with its second-quarter earnings report after Wednesday's closing bell. The company again delivered on very high expectations for the quarter despite management previously indicating that 2017 would be an investment year against very tough compares. You can read our analysis from the company's third-quarter 2016 conference call, when management first raised the topic of the 2017 outlook. 

Facebook's second-quarter revenues rose 45% year over year to $9.321 billion, exceeding the consensus of $9.2 billion. EPS came in at $1.32 (note: FB is now reporting GAAP figures), topping the consensus of $1.13. The stock has been rather volatile in after-hours trading, moving from about a 4% drop to a 4% gain. While we expect the trading to adjust and smooth out during management's conference call, we believe this strong quarter will send the stock higher. 

In addition, we remind members that the stock has been on a stellar rise this year, up about 44% year to date. Despite the cautious commentary from management in recent quarters that has tempered forward outlook, investors have remained bullish in the stock, and Facebook continues to surpass these lofty expectations. 

As we have noted in past Facebook earnings reports, any prolonged pullback in the stock has created long-term buying opportunities. The stock has been on a steady rise since 2013, and we expect any short-term weakness will be outlived. 

Referencing the cautious third-quarter 2016 report again, management instilled hesitation in its outlook that pressured shares following the report; however, we note that the stock has only improved and built its momentum since. With several monetizing growth opportunities in Instagram, WhatsApp and Messenger and virtual-reality capabilities supplementing the core platform, we expect this momentum to continue into the year as management's new mission is to bring the world "closer together." 

Digging into the quarter's results, advertising revenue grew 47% year over year to $9.164 billion, beating expectations of $9.02 billion. Ad revenue growth slowed again sequentially from the first quarter's result of 51%, but we note that the number is still quite impressive. In addition, mobile ads accounted for 87% of advertising revenue for the second quarter, up from 85% in the first quarter and 84% from the second quarter last year. 

During the call, COO Sheryl Sandberg said, "Our goal is to build meaningful connections between people and businesses by focusing on our three priorities: helping business leverage the power of mobile; developing innovative ad products; and making our ads more relevant and effective." 

Breaking this out further, Sandberg expects Facebook and Instagram to continue to reach people and drive strong marks in the mobile environment. She explained how Dynamic Ads and Instagram Stories have been innovative to the point where they have created big opportunities for marketers. Lastly, the company is looking to improve its targeted ads to increase the return on ad spend. Management's strong ability and commitment to deliver these results are why the company has been a real success. 

Helping to beat the bottom line, the company's operating margin improved to 47%, up from last year's 42%. Facebook achieved this result despite an increase in total costs and expenses of 33% year over year, but we note that the rising costs are simply a product of the company increasing in size. With that, capital expenditures rose for the quarter to $1.444 billion, making year-to-date capex $2.71 billion. The company originally set its capex budget for the year at around $7 billion to $7.5 billion (up over 50% compared to 2016), but during the call management noted that they expect the total number to fall in the lower range. Still, we note that we should expect heavy spending over the back half of the year. 

Digging deeper into user engagement metrics, daily active users (DAUs) were 1.32 billion, increasing 17% year over year and about 3% sequentially. Monthly active users (MAUs) were 2.01 billion, representing a 17% increase year over year and 3.6% sequentially. That being said, Facebook continues to develop ways to attract new users, ensuring that its users are accessing the platform regularly. 

Importantly, DAUs as a percentage of MAUs -- a metric that provides insight into consistent engagement -- were 66% for the sixth quarter in a row. Advertisers find this metric meaningful as high figures entice them to spend more money advertising with Facebook's platform. The steady figure for the quarter is no reason for concern; it is important in that Facebook can keep members engaged with respect to its increase in users. This flat rate means the absolute number of users remains engaged, despite the percentage remaining flat. 

Worldwide, the average revenue per use (ARPU) increased about 24% year over year to $4.73. This total also represents a 12% increase sequentially. This figure beat expectations of $4.66, and is a key measure of how well the company can make money off its users. 

This rise was consistent across all regions and the company continues to monetize its growing user base. This figure really exhibits part of the strength of the company, and is a key tipping point to how strong this quarter was. Facebook continues to make money, and at a growing pace, with its users. Lastly, as the number continues to grow, we expect the stock to grow, too. 

Overall, we view this as a great quarter for Facebook. The company continues to over-deliver on the lofty expectations set by investors, even with the company continuing to spend to grow in scale. After-hours trading is continuing to push the stock higher, and we expect the stock to reach new highs. This quarter's results will have us reviewing our price target again, as the company has again smashed expectations. Facebook clearly understands what its members want with their content, and its forward-looking outlook has us optimistic after another strong quarter again.