Analysis: FB

Facebook (FB) reported strong first-quarter results Wednesday after the closing bell. On the top line, total revenue hit $26.171 billion (+48% YoY or 44% on a constant currency basis -- an acceleration from the fourth quarter and the best growth rate in years). That exceeded the estimate of $23.729 billion. Earnings per share of $3.30 (+93% YoY) crushed estimates of $2.35 per share. 

Digging into the top-line number, advertising revenueof $25.439 billion (+46% YoY or 42% ex FX) topped expectations of $23.297 billion. Management attributed the terrific growth rate to continued strength in product verticals such as online commerce. In addition, it said the advertising growth was broad-based, across all advertiser sizes.

Small- and medium-sized advertisers were a particular bright spot. Pricing trends looked strong in the quarter, as the average price per ad increased 30% YoY, and the number of ad impressions was up 12%. Impression growth was driven by both Facebook and Instagram. Meanwhile, the average price per ad benefited from easy comps off last year's depressed pricing levels, as well as strong advertiser demand.

On a user regional basis, ad revenue growth was strongest in Europe (+53.3% YoY), followed by the rest of world (+47.2% YoY); Asia Pacific (+46% YoY) was new, and last was the U.S. and Canada (+42% YoY).

Other revenue came in at $732 million (+146% YoY) and soared past expectations of $435 million, thanks to continued strong sales of the Quest 2 virtual reality headset. 

CEO Mark Zuckerberg said he believes there has been a "very real inflection in terms of adoption and engagement" with the Quest 2, prompting the company to "double down" on its virtual reality investment.

On the expense front, capital expenditures, including principal payments on finance

leases, were $4.42 billion and well below the consensus of about $4.887 billion, while headcount grew by 26% YoY to 60,654.

Engagement was strong with Facebook Daily Active Users (DAUs) averaging 1.88 billion (+8% YoY), a tick short vs. expectations of 1.891 billion. Facebook Monthly Active Users (MAUs) were 2.85 billion (+10% YoY), largely in line with expectations for 2.855 billion. The closely tracked DAUs and MAUs held steady at 66%. 

Growth in DAUs on a sequential, absolute basis, was led by Asia Pacific (+16 million QoQ, +82 million YoY) followed by rest of world (+15 million QoQ, +57 million YoY), then Europe (+1 million QoQ, +4 million YoY), and U.S. and Canada (flat QoQ and YoY).

Facebook Watch and Reels were two areas that management was pleased with the engagement in international markets. Facebook said Watch currently has about 1.25 billion users visiting each month, while Reels is starting to gain traction.

From an e-commerce perspective, COO Sheryl Sandberg said on the call that Facebook is currently driving hundreds of billions of dollars of off-site e-commerce GMV (gross merchandise volume) through its add business. On Instagram Shops, she added that the feature has more than 1 million active shops and more than 250 million people interactive with merchandise per month.

Looking at the company's "Family" metrics, which include Facebook, Instagram, Messenger, and Whatsapp, the "Family Daily Active People" - or DAP - grew 15.25% year-over-year to 2.72 billion. Family Monthly Active People (MAP) increased 15.4% year-over-year to 3.45 billion. This means DAP/MAP held steady at 79%. And the Family Average Revenue per Person (ARPP) increased roughly 28.5% YoY to $7.75. 

As for how Facebook monetized its products, worldwide Average Revenue per User (ARPU) came in at $9.27 (+33.4% YoY), topping expectations of $8.40. By geography, U.S. and Canada ARPU was $48.03 (+40.5% YoY); Europe came in at $15.49 (+45.6% YoY); Asia-Pacific was $3.94 (+28.8% YoY); and the rest of the world was $2.64 (+32.7% YoY). 

On the capital allocation front, Facebook repurchased $4.1 billion of stock in the quarter. Facebook also generated a whopping $7.8 billion of free cash flow, beating estimates of $7.4billion. The company ended the quarter with $64.22 billion in cash and cash equivalents and marketable securities. 

Outlook 

In the earnings release, CFO David Wehner updated the company's outlook for the rest of the year. Wehner said the company expects second-quarter year-over-year revenue growth will remain stable or modestly accelerate relative to the (+48%) growth rate in the first quarter. This looks like a guide up to us, as estimates were looking for a 36% YoY growth rate in the second quarter. If Facebook increases second-quarter revenues by 48% YoY again, sales in the quarter would be closer to $27.6 billion, well above estimates of $25.4 billion.

However, revenue growth in the second half of the year is expected to significantly decelerate on a sequential basis, as the company laps periods of increasingly strong growth. This guidance is consistent with prior commentary and is already built into estimates to some degree. Factored into this outlook are ad targeting headwinds related to regulatory and platform changes, most notable from Apple's new iOS update, which will begin to have an impact in the second quarter. The application of targeted ads is a bit of a controversial topic, but Facebook remains a staunch proponent of its benefits.

"It's also on us to keep making the case that personalized advertising is good for people and businesses and to better explain how it works so that people realize that personalized ads are privacy protected," Sandberg explained on the call. "Small businesses don't have to understand the alphabet soup of acronyms they'll need to comply with, but they do need to have confidence that they can still use our tools to reach the people who want to buy what they're selling in a privacy-safe way. We're confident they can and that they can continue to get great results as digital advertising evolves."

Management is also monitoring uncertainty related to the viability of transatlantic data transfers, which comes in light of recent regulatory developments in Europe.

On the expense side, management narrowed its expectation of total expenses to the range of $70 billion to $73 billion from $68 billion to $73 billion, representing a negative in the context of accelerating expense growth. But what this really is about is Facebook investing into strength. Capital expenditure guidance was lowered to the range of $19 billion to $21 billion from $21 billion to $23 billion. 

Bottom Line 

Overall, it was another great quarter from Facebook, and you will not find us complaining about the accelerating growth rate or the second quarter revenue guide that was well above expectations.

The social media giant continues to benefit from digital transformation and the ongoing shift to online commerce. Success here should continue, because the company has become one of the best enablers of success for small- and medium-sized businesses. Although the Apple iOS update could challenge the company's ability to create personalized ads, Facebook is still one of, if not the best-positioned platform to navigate the changes. In fact, we have said before in our Alert here that Facebook could pick up market share as a result of the changes. 

Shares are trading more than 6% higher in after hours trading to what would be a new all-time high of about $326. Price targets will be increased Thursday.

Action AlertsPLUS, which Cramer co-manages as a charitable trust, is long FB.