Facebook Earnings: The Social Network Enters A New Era Of Slow Growth

Two seemingly contradictory things are happening at Facebook right now, we learned from the social network's Q1 earnings call.

The company is growing really fast — revenues were up 72%, and ad revenue was up 82%.

But growth in key areas is slowing, or about to slow, dramatically. The desktop side of Facebook looks like it may have entered a terminal decline (forgive the pun). And the rate of ad revenue growth is about to decline precipitiously, CFO David Ebersman warned, due to tough comparable numbers from the year before. (Business Insider has been warning about this for a while.)

The new "slow growth" era of Facebook will be compounded by the fact that both CEO Mark Zuckerberg and COO Sheryl Sandberg said that autoplay video ads and ads on Instagram — both sales products that analysts had presumed would add hundreds of millions in new revenue — won't be happening any time soon. Both those products will be slow to monetize as Facebook is moving very slowly on them, Sandberg said.

The fact that both video ads and Instagram won't add meaningful revenue any time soon was a surprise. Observers have been expecting ads in those products for more than a year now.

So the takeaway seems to be, that revenue until now has grown really fast. But in the future? Not so much.

Here are the highlights:

• Revenues: up 72% to $2.5 billion (analysts expected $2.36 billion) that's a nice beat.
• Earnings per share: $0.34 (analysts expected $0.24) that's a huge beat.
• Revenue from advertising was $2.27 billion, up 82% vs Q1 2013.
• Mobile advertising revenue was 59% of ad revenue, up from 30% in 2013.
• Payments revenue was $237 million.
• MAUs: 1.28 billion
• CFO David Ebersman stepping down later this year; will be succeeded by David Wehner formerly of Zynga.
• Cash was $3 billion - looks like those recent acquisitions of WhatsApp and Oculus have yet to hurt the balance sheet.

The stock went up more than 5% on the news after hours.

Now for some charts!

Note that Facebook's desktop business is essentially stagnant, maybe even in decline.

All its growth is coming from mobile. This chart from analyst Ian Maude shows that:

Ian Maude

Maude attributes that mobile revenue growth to mobile app install ads — and we'd agree. These are the poorly understood ads that drive app downloads. Most people just see the non-app ads for brands and local businesses — but app ads, because they monetize instantly, are more valuable.

This chart from Maude backs up the case that on desktop, Facebook is essentially over:

Ian Maude

These users are U.S. only. But the U.S. trends ahead of everyone else when it comes to Facebook because the company was born here and its highest percentage of user penetration is here.

This chart, also from Maude, shows that revenue per user is also down on desktop:

Ian Maude

Revenue:

Facebook

Here's the ad revenue split over a longer timeframe (from BI Intelligence):

Business Insider Intelligence

Here are the monthly active users:

Facebook

The mobile monthly active users:

Facebook

And the mobile-only people:

Facebook

And here's how those users split, from Business Insider Intelligence:

Business Insider Intelligence

Here's Zuckerberg's formal statement on the numbers:

"Facebook's business is strong and growing, and this quarter was a great start to 2014," said Mark Zuckerberg, Facebook founder and CEO. "We've made some long term bets on the future while staying focused on executing and improving our core products and business. We're in great position to continue making progress towards our mission."

Now some highlights from the Q&A with Wall Street analysts.

(Facebook chose some rather stuffy classical music for those of us on hold for the conference call.)

The call begins ...

Zuckerberg: Starts with the user numbers. Then the acquisition of WhatsApp, Oculus and the Internet.org effort.

"These are important efforts that will help us achieve our mission over the long term."

"Our core FB app has an audience of over 1 billion people."

Next set of apps such as Messenger, Instagram and WhatsApp: IG reached 200m MAUs this quarter. "Monetization isn't our near term priority here."

Wants 100 million users on each new app before revenues are attached. Paper is an example.

Internet.org: Basic update on progress.

Next, "Understanding the world." Says FB has unique data that others don't. More to come at F8 developers conference.

"Our mobile app install ads have been one of our best performing products to date. Launched in January of last year."

"Advertising and the ability to reach people more broadly is one of the most important" things FB does.

He thanks CFO David Ebersman who is stepping down after five years. "I've learned a lot from Dave both personally and professionally and I'm grateful for everything he's done."

Sandberg: Also thanks Ebersman. "Great people build great teams and that's what David has done."

Ad revenue growth 82%, strongest ad rev growth rate in 3 years.

Saw growth from existing advertisers as well. Particular strength with SMB and DR. And packaged goods.

Sandberg touts Canadian advertiser Sport Chek that pulled all its paper coupons in favor of Facebook ads — and saw positive ROI.

Ad targeting will improve. 10 times more advertisers are using custom audiences than last year. Ben & Jerry's is an example.

Simplifying ad tools: Self-serve ad tools are now available to SMB's. Buy now and install now buttons improve responses.

Ad network test is positive - but won't have meaningful results this year.

Ebersman: Made a personal decision to get back into healthcare where he worked before Facebook.

Now we're into the nitty-gritty numbers. Desktop rev up 8%.

Decrease in ad impressions due to cont'd shift in mobile use. Price per ad went up as fewer ads are seen in mobile.

Shift to desktop is a significant headwind to payments because payments in games business are mostly desktop.

Neither WhatsApp nor Oculus deals are yet closed, and haven't his FB's numbers yet.

Bad news! "Our y-o-y comparables will get more challenging from here. Over the rest of 2014 our y-o-y ad revenue growth rates will decline ... and be meaningfully lower y-o-y."

Questions!

Expenses:

Ebersman says Q1 is lighter on expenses that usual quarters. Benefits from one time events.

Browser tech and native apps, HTML5:

Zuck: "Timing matters a lot. "There's nothing wrong with the standard of hmtl5 technically. ... both Apple and Google have made it easier to build hi quality experiences in their proprietary formats than in open web formats ... our bias would have been to push on html5 ... we haven't walked away but a large no. of people have accessed FB on the open web but ... we see the best path .... in the native app experience."

Messaging:

Zuck: People want experiences to be defined to one medium or app. "You'll see us do more things in private content. ... growing." "The Facebook app by itself is the furthest along. The core of our business." Messenger, IG, and WA: M and IG are both greater than 200 million MAUs. WA: The immediate priority will be getting them to 1 billion people.

Facebook Creative Lab apps are just getting started. Those are further along than IG was. IG "is a few years away from being an important business for us."

Re-engaging lapsed users and user overlap:

Zuck: decline to answer ... no sign of user fatigue on FB. 63% of MAUs use it every day.

Where will growth in app install ads come from?

Zuck: We saw more diversity in clients now. Not just games. Anyone who needs an app, we're the no.1 delivery vehicle for that.

Sheryl: Mobile app install ads prices are up. No specifics.

Where the heck are the premium video ads?!

Sheryl: Really big opportunity ... also a lot more video from consumers in news feed ... we have a current product in the mkt it's a click to play video ad ... going really well ... we're in early conversations for a cpm autoplay video ad ... we want to see autoplay videos be pretty common in the news feed before we push hard in the ad biz ... we won't see a material contribution from it this year.

Another Q about app ads:

Sheryl: Our mobile ad rev is v. broad based. DR, brands, SMB, developers ... we're pretty distributed there.

When will IG be monetized?

Sheryl: Passing 200m, it's also a great ad product, tons of demand because pictures themselves are so visually appealing ... we've seen some great results .... Levi's running beautiful pics targeting 18-34 in U.S., reached over 7m people. drove 24% lift in ad recall, which was 3X control group. "We're v focused on consumer growth and we're moving v slowly on monetization ... we really want to grow it slowly and deliberately."

Sheryl: Nearby Friends is being rolled out slowly.

Did an analyst just suggest that WhatsApp was based in Russia? It's based in Mountain View, Calif.! So no, turmoil in Russia won't affect that app. [Analyst may be confused that Russian Facebook clone VK was recently taken over by Putin allies.]

Payments, whats happening?

Sheryl: We've had a payments biz for a while ... nothing new to announce there.

How low will this y-o-y decline in ad rev growth be?

Ebersman: 82% growth caused by ramp in news feed ads ... meaningfully different ... newsfeed ads really ramped in Q2 ... but there are lots of things that will drive growth: users, more mktr demand.

And we are out!

The context:

It was a huge quarter for Facebook. In the last three (fiscal) months the company has bought messaging app WhatsApp for $19 billion and virtual reality headset maker Oculus VR for $2 billion. It has opened the door for video advertisers, and begun carving out its messaging business into a separate app, Messenger. Lastly, the company has begun rolling out an off-Facebook advertising network.

At the same time, Zuckerberg has begun to outline his vision for the future of Facebook, "unbundling the big blue app.

Read more: http://www.businessinsider.com/facebook-q1-earnings-2014-4#ixzz2zpj2IE7Q