Facebook Reports 2018 Q2 Earnings

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Shares are down about 20% in AH trading. User growth is certainly slowing, so is revenue and earnings growth. But I still think its more than impressively valued. Right now that’s probably just me, but I’m not too concerned about the long-term here. Here’s what TechCrunch is saying:

Facebook has hit a wall. The social network succumbed to the public backlash over its handling of fake news, privacy, and digital wellbeing to miss some of Wall Street’s estimates, showing mixed results in its Q2 2018 earnings. GDPR, Mark Zuckerberg’s testimony before congress, and more scandals appear to have contributed to Facebook’s weak user growth.

Facebook reached 2.23 billion monthly users, up just 1.54 percent, much slower than Q1’s 3.14 percent around where its growth rate has hovered for years. Facebook earned $13.23 billion in revenue, missing Thomson Reuters consensus estimates of $13.36 billion, but beat with $1.74 EPS compared to an estimated $1.72 EPS.

From https://techcrunch.com/2018/07/25/facebook-q2-2018-earnings/…

Here’s a look at the “horrible” numbers that are causing the drop in AH trading:


Revenue (billions)	Q1		Q2		Q3		Q4
2013			1.458		1.813		2.016		2.585
2014			2.502		2.910		3.203		3.851
2015			3.543		4.042		4.501		5.841
2016			5.382		6.436		7.011		8.809
2017			8.032		9.321		10.328		12.78
2018			11.97		13.23

EPS (Diluted)		Q1		Q2		Q3		Q4
2014							0.30		0.25
2015			0.18		0.25		0.31		0.54
2016			0.60		0.78		0.90		1.21
2017			1.04		1.32		1.59		2.21*
2018			1.69		1.74

2018 Q2 Earnings (Current):

Revenue Growth (billions)
2017 Q2 TTM Revenue = 33.173
2018 Q2 TTM Revenue = 48.309
YOY TTM Revenue Growth =45.6%, previous quarter 46.6%

EPS Growth (Diluted)
2017 Q2 TTM Earnings = 4.47
2018 Q2 TTM Earnings = 7.23
YOY TTM EPS Growth = 61.7%, previous quarter 73.3%

P/E (Check Current Price) = 217.50/7.23 = 30.08

Trailing 1Y PEG = 30.08/61.7 = 0.49

Here are some of the other quarter’s highlights:

DAUs (daily active users): 1.47B, +11% YOY
MAUs (monthly active users): 2.23B, +11% YOY
Cash and cash equivalents: $42.31B, previous quarter $43.96B
Cap Ex: $3.46B, previous quarter $2.81B, up 23.1% sequentially
Mobile advertising revenue: Made up 91% of all revenue, up from 87% in prior year’s quarter
Head count: 30,275 47% increase YOY

Matt
Long FB
MasterCard (MA), PayPal (PYPL), Skechers (SKX) and Square (SQ) Ticker Guide
See all my holdings at http://my.fool.com/profile/TMFCochrane/info.aspx

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Hi Matt,

I don’t own FB, but I own NVDA and PSTG so I am interested in how much FB spends on AI, GPUs, storage, etc. CapEx spending increased by 23% sequentially. Do you listen to the earnings call? Did they say where the spending increased?

Chris

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I may sell a little Google and Amazon and pick up a few more shares of Facebook.

Cheers
Qazulight

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Looks like having an after hours drag on the whole sector based in guidance being revenue growth being reduced.

Hard to know if this is due to FB cleanup of how ads are placed or market saturation or some combo.

If I recall from FB previous drops before, SHOP will likely be on sale in the coming days.

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Chris, same here. Especially after Microsoft’s increase in capex.

So from the call:

Over the next several years, we would anticipate that our operating margins will trend towards the mid-30s on a percentage basis. We expect full-year 2018 capital expenditures will be approximately $15 billion, driven by investments in data centers, servers, network infrastructure, and office facilities. We plan to continue to grow capital expenditures beyond 2018 to support global growth and our ongoing product needs.

------

More broadly, our strategy is to use Facebook’s computing infrastructure, business platforms and security systems to serve people across all of our apps. For example, we made the decision a decade ago to build our own data centers, and we opened our first custom-built data center in 2011. Today, we have six data centers around the world, and we’re working on building eight more. We’re using AI systems in our global community operations team to fight spam, harassment, hate speech, and terrorism across all of our apps to keep people safe. And this is incredibly useful for apps like WhatsApp and Instagram as it helps us manage the challenges our hyper-growth there more effectively.

----

And finally, Sheryl responding to a question from an analyst basically asking why, with all the data centers that FB have/are investing in, why don’t the improve ROI by doing what Azure and AWS does.

Her response:
Mark Elliot Zuckerberg - Facebook, Inc.

And I can quickly answer the second part around data centers. And the quick answer is that we’re not planning on going in to the cloud services. We’re not planning on doing that. We have to build out all this capacity to serve our community. It’s a very computationally and resource-intensive set of services that we provide and we need to build that out.

We are very optimistic. I’m very optimistic about AI overall and being able to use more computing resources to be able to crunch more data to be able to rank News Feed and ads and search and friend suggestions, and all the important things that we use our AI systems to do in addition to the integrity and security work. Part of the advance in AI technology now allows us to use more compute to use all the data that’s in the system to provide better results, so we certainly plan on doing that.

Basically saying we’re too busy as it is supporting our own resource intensive operations to worry about supporting 3rd party servers. FB is no where near finished with the build-out of their data centers.

Good news for our companies supplying the bones for data centers!

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Yep very good news for Micron, Pure Storage, Arista, Nvidia et al on the continued build out front.
My take is that Facebook is controlling and managing down the growth rate due to privacy policy and compliance efforts as opposed to market demand.

Whilst I detest FB as a product (with the exception of Whatsapp), and can’t stand the Zuck (I find him an untrustworthy slippery cagey and pretty uninspiring character), I actually think if the 20% drop materialises in trading hours it is of exceptional value given the core business profitability and growth prospects. I might consider taking a position although if the rest of the ecommerce and tech sector gets knocked for 6 at the same time there might be opportunities all over the place.

Having said that, FB isn’t doing anything near what Tencent and WeChat is doing and offering. Tencent’s WeChat is far superior and with the exception of advertising is far more commercialised than Whatsapp representing a payment platform, wallet, Venmo like P2P app, eCommerce transaction platform with an in-app ecosystem of its own. Then add in Gaming, eSports, Data centers, messaging, email etc and it’s monumental. Add to that of late the SoftBank vision fund type investment holdings operations and effectively Tencent is taking over the digital world. It has or is launching IPO/fund raising for about 8-10 of its holdings all in the 10s of billions of USD from ride hailing to food delivery to groupon like operations to streaming to eSports etc. I hold Tencent in HK and think I might top up today given where it stands.

Ant

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Good news for our companies supplying the bones for data centers!

FB recently deployed a very large intel farm, for the express purpose of data mining/ AI. Why or what makes you believe facebook, AI is using NVDA chips?

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FB recently deployed a very large intel farm, for the express purpose of data mining/ AI. Why or what makes you believe facebook, AI is using NVDA chips?

Perhaps because NVDA is by far the market leader and best GPU for general purpose AI systems needed for the scale of FB.

Or because any competitors are at this point clearly inferior and less efficient and potential viable competitors are at this point vaporware. (http://discussion.fool.com/nvidia-competition-update-33005138.as… and http://discussion.fool.com/implications-for-nvda-of-intel-ceo-ax…)

Or maybe because FB has said it used NVDA in its recent iteration of machine learning server, Big Basin (https://research.fb.com/wp-content/uploads/2017/12/hpca-2018…).

Perhaps even if FB is not specifically using NVDA chips in new data centers (either using Intel chips or ASIC or FPGA or developing in house), it indicates continued robust growth in the total data center market, also described in the GOOG earnings call. (http://www.datacenterdynamics.com/content-tracks/colo-cloud/…)

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Microsoft doubling their capex? Google and FB also massively increasing build-out with no signs of stopping or slowing? This is great news for us and makes me optimistic that the bull-run is continuing (cue a crash).

You’re right, I don’t know that they’re using NVIDIA chips. Same as I don’t know they’re using arista switches or Micron RAM (although at least micron has another shot on goal with potentially being in whatever GPU they buy). But I like the odds. The Nervana chips from intel have been shown to be a disappointment vs NVIDIA’s offerings. I expect FB is on show partnering with them, buying and using a lot of their chips, whilst also using NVIDIA’s higher margin ones. Why do this? I’m not sure. Maybe there are lower priority tasks where a cheaper, lower-margin chip would do, or maybe they just want to partner with alternative suppliers so as never to be reliant on one customer. A bargaining chip. But yes, that is an assumption only.

On the flip-side, Google cloud appears to have publicly partnered with NVIDIA, using their chips for AI-inferencing. There is absolutely zero reason for Google to do this unless they actually are using NVDA.

3-weeks to go until we have a better idea. Earnings season is always very exciting isn’t it?

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What an odd move pre market, - 20%…

ad revenue up 42% mobile ad revenue up 50%, mobile ad revenue is 91% of ad revenue.

Probobly next year will not be +32% stock price but I think this kind of dump is unwarranted.

I think price will stabilise quite quickly, especially since this slowdown was expected from q1. I think it is just panic at this point.

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I own Facebook and keep written notes of every quarter, as well as a personal valuation going. I think the selloff is overdone but the much reduced growth rates and operating margins for the next couple of years do impact valuation. Since the stock is selling off 20%, this much of a slowdown wasn’t factored into most people’s thoughts. It wasn’t factored into mine. When I did factor in the slower growth and margins it dropped my valuation estimate by about 10.5%, around half of the stock price drop.

Here’s my notes:

Facebook’s Q2 results missed analyst estimates on revenue, beat on earnings per share, and really missed on guidance going forward. Revenue was up 42% from a year ago, driven by an 11% increase in monthly active users and a 26.2% increase in average revenue per user. Average price paid per ad was up 17%. Mobile ad revenue was up 50%, and now 91% of Facebook’s advertising revenue is through mobile devices, up from 87% a year ago. Earnings per share were up 32%, the smaller increase relative to revenue coming from a lower operating margin (44% vs. 47% a year ago) due to higher expenses. Near term profitability will get heavily impacted by increased spending on better security measures, and capex in the quarter was up 139% compared to a year ago. On the conference call management outlined just how much profitability will get impacted, which surprised enough people to drop the stock 20% on the news.

Facebook had dropped about 7% on the earnings report revenue miss but then plummeted during the conference call, where management stated that revenue growth would drop by high single digit percentages sequentially in the next two quarters of 2018 and its operating margin would be in the mid 30% range for the next few years as Facebook spends on security infrastructure. Taking the current 42% growth rate and subtracting 9% twice gets you an end exit growth of around 24% at the end of 2018. Reasons for the revenue slowdown include currency headwinds, a focus on some areas such as Facebook Stories that will likely produce less revenue growth than other historical areas, and giving users more security options around data privacy that might lead to less revenue growth.

Going through the user stats for the quarter, monthly active users now amount to over 2.23 billion people with 1.47 billion of those users visiting the site daily. Both monthly active users (MAU) and daily active users (DAU) increased by 11%, keeping the DAU/MAU ratio at 66%, same as last quarter, which can be used as a rough sign of user engagement. As in recent quarters, most of the growth in MAU’s and DAU’s were in Asia-Pacific and Rest of World while the U.S. and Europe had low single digit user growth compared to a year ago. Europe actually registered a slight MAU and DAU decline looking at Q2 compared to Q1, likely due to the GDPR regulation going into place. Instagram hit 1 billion active users for the first time.

I’m reducing my personal valuation (not TMF’s) from $228 to $204. The higher trailing twelve month revenue this quarter is getting more than offset by reduced revenue growth estimates going forward and by lower operating margin assumptions for the next few years. I’m now assuming 20% revenue growth (down from 26%) over the next five years, and 10% for years 6-10. Revenue growth will likely be more than 20% next year and less than 20% five years from now, so I’m estimating a midpoint. I get about the same valuation estimate if I start revenue growth at 28% and explicitly ramp it down every year to 12% at year 5. For 2018 I was expanding capex and reducing margins down to 35% in year 1 to take into account the outsize spend on security measures, but I’ve now changed this so that operating margins stay at 35% for the next few years, and then grow back to 43% after that. I’m currently using a 10% discount rate.

Mike

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I own Facebook and keep written notes of every quarter, as well as a personal valuation going. I think the selloff is overdone but the much reduced growth rates and operating margins for the next couple of years do impact valuation. Since the stock is selling off 20%, this much of a slowdown wasn’t factored into most people’s thoughts.

People tend to focus on from where the price moved most recently. It was $217 and dropped after earnings. But what happened in the past weeks. The price rose quite a bit. Prior to that the price fell when Zuck testified before Congress. It might be better to focus more on what the valuation should be rather on the relative recent price changes. Will FB’s business continue to post strong gains in earnings growth, does the multiple compared to the future earnings growth make the stock a bargain or overpriced?

Chris

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I’m reducing my personal valuation (not TMF’s) from $228 to $204. The higher trailing twelve month revenue this quarter is getting more than offset by reduced revenue growth estimates going forward and by lower operating margin assumptions for the next few years. I’m now assuming 20% revenue growth (down from 26%) over the next five years, and 10% for years 6-10. Revenue growth will likely be more than 20% next year and less than 20% five years from now, so I’m estimating a midpoint. I get about the same valuation estimate if I start revenue growth at 28% and explicitly ramp it down every year to 12% at year 5. For 2018 I was expanding capex and reducing margins down to 35% in year 1 to take into account the outsize spend on security measures, but I’ve now changed this so that operating margins stay at 35% for the next few years, and then grow back to 43% after that. I’m currently using a 10% discount rate.

This is a thoughtful analysis. I think FB will move to video and then to VR eventually. Will the ads cost more then?

Chris

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I think FB will move to video and then to VR eventually. Will the ads cost more then?

The ads apparently don’t make more money for Facebook currently. One of the key factors affecting Facebook’s revenue growth rates going forward is a focus on growing Facebook Stories (i.e. video), which they haven’t monetized as effectively as other things such as Instgram and Newsfeed in Facebook.

MIke

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A 50% YoY increase in headcount is astounding. And it comes with a cost. I was ready to redeem my loathing of FB as “too expensive at $96” and dip feet in on the 20% drop, but I’m having a hard time understanding how or why a company like this needs, or could effectively sustain, bringing on 50% more staff in such a short period of time. At the very least, that means half their existing workforce is probably spending some amount of time training a new-hire or three and may not be fully adding to profitability.

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I’m having a hard time understanding how or why a company like this needs, or could effectively sustain, bringing on 50% more staff in such a short period of time.

This has been going on for quite a while. They are content moderators/monitors. For instance, this is from more than a year ago and it’s Zuck talking about bringing on content moderators: https://www.facebook.com/zuck/posts/10103695315624661?pnref=…

After the whole Cambridge thing Zuck talked more about bringing new employees on to monitor the platform.

But it has been ongoing for quite some time.

Matt
Long FB

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Google cloud appears to have publicly partnered with NVIDIA

Every cloud platform is going to offer that choice, and they talk about it too. But no one is talking about offering Intel choices because it is so pervasive… :slight_smile:

There is absolutely zero reason for Google to do this unless they actually are using NVDA.

These kind of simplistic extrapolations are not going to help you.

If anything, the takeaway for me is, I would assume the market for MU product is healthy and MU will continue its growth and it is cheap from valuation point of view.

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Hey Matt!

Thanks for preparing the numbers for us, that’s very helpful. What really popped out for me in your numbers was the trailing 1Y PEG of 0.49. That sounds like such an extreme bargain, that I had to look more into it:


		        Growth	*100	PE		
Price	        177.9					
EPS 16'	        3.703			48.04		
EPS 17'	        6.162	66.41%	66.41	28.87	**0.43	PEG trailing (17')**
EPS 18' exp	7.64	23.99%	23.99	23.29	**0.97	PEG forw (18')**
EPS 19' exp	9.13	19.50%	19.50	19.49	**1.00	PEG 1Y forw (19')**

So even with the falling growth rates the forward PEG of 1 still looks great to me. Not as exciting as the super bargain of 0.5, but if you can buy a dominant business like FB on such a discount, I think you should consider doing it.

Best wishes
Niki

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Looks like tech is getting wiped out, correction on overpriced or extreme pricing?

Did FB miss blow a hole in the entire tech sector?

Taking a serious hit today again.

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Looks like tech is getting wiped out, correction on overpriced or extreme pricing?

Did FB miss blow a hole in the entire tech sector?

Taking a serious hit today again.

Yes, it looks like indiscriminate selling of many leading stocks. I think this is the worst down day for my portfolio this year.

But I’m not seeing any screaming bargains in the stocks I own or on my watch list. I think it’s a normal pullback exacerbated by FB’s weakness - but FB is not a tech bellwether dealing with normal issues for a maturing large cap. Even FB is up compared to March.

dave