It has been about a month since the last earnings report for Facebook (FB). Shares have added about 25.2% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Facebook due for a pullback? Before we dive into how investors and analysts have reacted as of late, let’s take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
Facebook’s Q2 Earnings Beat Estimates, Revenues Up Y/Y
Facebook’s second-quarter 2020 earnings of $1.80 per share beat the Zacks Consensus Estimate by 25% and soared 97.8% year over year.
Revenues of $18.69 billion comfortably surpassed the Zacks Consensus Estimate by 8.1% and also rose 10.7% year over year. At constant currency (cc), the top line improved 12%.
Geographically, the United States & Canada was the strongest region as revenues grew 14.5% year over year followed by the Asia-Pacific’s 10.9% and Europe’s 9.6%. However, Rest of World (RoW) revenues declined 5.9% year over year.
Average Revenue per User (ARPU) growth was highest in the United States & Canada, increasing 9.7% year over year followed by Europe’s 3.1%. However, ARPU in the Asia-Pacific and RoW fell 1.6% and 5.3%, respectively. Worldwide ARPU stayed at $7.05.
Facebook’s second-quarter advertising revenues were better than anticipated, and grew handsomely when compared to its closest peers– Alphabet’s Google and Twitter. Facebook’s ad revenues increased 10.2% year over year (12% at cc) to $18.32 billion.
Notably, Google, Facebook’s primary competitor for ad dollars, announced second-quarter ad revenues of $29.87 billion, down 8% year over year. Further, Twitter’s second-quarter advertising revenues declined 23% to $561.9 million.
Facebook didn’t provide any specific revenue guidance for the third quarter of 2020 due to macro-economic uncertainties related to coronavirus.
User Base Expands in Q2
Monthly active users (MAUs) were 2.701 billion, up 11.9% year over year. Daily Active Users (DAUs) were 1.785 billion, which increased 12.5% year over year and represented 66% of MAUs.
Family Daily Active People (DAP) defined as a registered and logged-in user who visited at least one of the Family products (Facebook, Instagram, Messenger and/or WhatsApp) on a given day, were 2.47 billion, up 15.4% year over year.
Family Monthly Active People (MAP) increased 13.8% year over year to 3.14 billion.
The above community metrics reflected increased engagement with Facebook products during the reported quarter as more and more people were compelled to stay at home due to the coronavirus outbreak.
Asia-Pacific DAUs were up 13.7% year over year to 699 million. DAUs in the RoW, Europe and the United States & Canada grew 16.8%, 6.6% and 5.9% each to 583 million, 305 million and 198 million, respectively.
MAUs in Asia-Pacific, RoW, Europe and the United States & Canada grew 13.9%, 14.1%, 6.5% and 4.9% each to 1.14 billion, 892 million, 410 million and 256 million, respectively.
Advertising Revenue Details
Asia-Pacific and the United States & Canada were the strongest regions, increasing 11% and 13.9%, respectively. Advertising revenues in Europe grew 9.1% year over year. However, RoW advertising revenues decreased 6.4%.
Ad impressions served rose 40%, driven by Facebook Mobile News Feed. However, average price per ad decreased 21% from the year-ago quarter.
Other revenues surged 39.7% year over year to $366 million. This growth is primarily attributable to higher sales of Oculus and Portal products.
Operating Details
In the second quarter, total costs and expenses climbed 3.8% year over year to $12.72 billion. However, as percentage of revenues, total costs and expenses were 68.1%,down 450 basis points (bps) year over year.
As percentage of revenues, research & development, and marketing & sales expenses increased 420 bps and 90 bps, on a year-over-year basis, respectively.
However, as percentage of revenues, general & administrative expenses decreased to 8.5% from 19.1% reported in the year-ago quarter.
Notably, Facebook’s employee base was 52,534 at the end of the second quarter, up 32% year over year.
Operating income of $5.96 billion jumped 28.9% year over year. Operating margin expanded 450 bps year over year to 31.9%.
Balance Sheet & Cash Flow
As of Jun 30, 2020, cash & cash equivalents and marketable securities were $58.24 billion compared with $60.29 billion as of Mar 31, 2020.
Capital expenditures declined 10.9% year over year to $3.36 billion. Free cash flow plunged 89.4% year over year to $514 million in the reported quarter.
Facebook bought back shares worth almost $1.4 billion in the reported quarter.
Guidance
Facebook expects DAUs and MAUs to be flat or slightly down in most of its regions in the third quarter of 2020, sequentially.
The company expects ad-revenue growth on a year-over-year basis to be roughly 10%. Facebook assumes some of the recent surge in community engagement to normalize as regions reopens.
Further, a number of companies including Starbucks, Coca Cola and Verizon among others have announced plans to freeze ad spending on the social media platform. This is expected to hurt ad-sales growth.
Moreover, changes made by Apple and Google in their mobile operating systems and browser platforms have limited Facebook’s ability to track user-activity trend.
Additionally, it expects total expenses for the current year between $52 billion and $55 billion, narrowed down from the prior range of $52-$56 billion.
Moreover, in the ongoing year, Facebook expects capital expenditures to be $16 billion.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted 13.45% due to these changes.
VGM Scores
At this time, Facebook has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren’t focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Facebook has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.
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