Updated from 10:28 a.m. to include comments from Topeka Capital Markets analyst in the twelfth paragraph.
NEW YORK (TheStreet) –– The biggest takeaway from Facebook's (FB) earnings is that its mobile advertising efforts are much stronger than anticipated, allowing it to generate margins other companies could only hope to dream about.
Facebook's margins on earnings before interest taxes, depreciation and amortization, or EBITDA, were 67.7%, significantly higher than what Wall Street was expecting, as the company's mobile ads are simply more effective than anything else out there right now. On the earnings call, COO Sheryl Sandberg said it's not just mobile app install ads that are driving the results; it's everything.
"Our mobile ads revenue is pretty, it's broad based," Sandberg said on the earnings call. She noted that the company has not only large brand advertisers, but small businesses, direct response advertisers, as well as developers using mobile ads. Sandberg did note that mobile app install ads "remain a good part of our mobile ads revenue and we're excited about the opportunities there," but it's clear that the company is focusing on more than just installing apps, be it from developers or corporations.
The company's margin expansion continues to be the envy of all Internet advertisers, and was a standout point for Jefferies analyst Brian Pitz, who boosted his price target to $100. "FB posted solid top-line beat but it was the margin expansion that stood out," Pitz wrote in a note. "We note it is impressive FB is delivering this kind of growth without any meaningful contribution from promising go-forward growth levers like Instagram or video ads."
"Facebook has become a more popular destination for advertisers to utilize their paid advertising spends," said Ken Wisnefski, CEO of Internet Marketing company WebiMax via email. "A lot of our clients have shifted portions of their ad spend away from Google's paid search programs into Facebook's paid advertising units. This is based largely on two factors, the ability that Facebook has to drill down and target their core demographic because of the large amount of data that Facebook possesses about its users, and the fact that their ad units are still much lower priced than the costs driving Google's paid search units."
For the second-quarter, Facebook earned 42 cents a share on $2.91 billion in revenue, as revenue from advertising was $2.68 billion, a 67% increase year over year. Mobile advertising revenue rose rose 41% year over year, accounting for 62% of total advertising sales, coming in at $1.66 billion. Payments and other fees revenue was $234 million, a 9% increase from the same quarter last year.
Analysts surveyed by Thomson Reuters expect Facebook to earn 32 cents a share on $2.81 billion in revenue.
At the end of the quarter, Menlo Park, Calif.-based Facebook had 829 million daily active users (DAUs), an increase of 19% year-over-year, while mobile DAUs rose 39% year over year to 654 million. The company ended the quarter with 1.32 billion monthly active users (MAUs), including 1.07 billion mobile MAUs.
Not only are Facebook's EBITDA margins exceptionally strong, the company's operating margins are almost as strong, coming in at 59%.
The company is barely getting any contribution from other endeavors, such as Instagram and video ads. Additionally, current earnings don't reflect the potential to monetize things like Messenger, the apps from Facebook's Creative Labs (Paper being an example), Oculus Rift or the WhatsApp platform, which hasn't closed yet.
"FB remains a 2014 top pick for us, given its position as the largest/most-engaged Internet platform offering personalized marketing at scale, the on-going shift to mobile, and as yet untapped monetization potential for Instagram and WhatsApp, all at a relatively compelling valuation still," wrote Cantor Fitzgerald analyst Youssef Squali in a research note. Following the quarter, Squali boosted estimated, and raised his price target to $82 from $80.
Topeka Capital Markets analyst Victor Anthony noted that Facebook's upcoming advertising initiatives, such as its Audience Network (mobile ad exchange), the auto-play video ads, as well as a potential entry into China are "incremental opportunities" for the world's largest social network.
Margins may come down a bit in the future, as operating expenses rise, taking into account the investments in Oculus, which CEO Mark Zuckerberg said is far out in terms of being meaningful contributors to Facebook, noting that it's still "early on some of those businesses and we're not going to rush those," as well as WhatsApp (which is expected to close later this year). However, the company has growth drivers that will help mitigate the rise in expenses, something investors should be pleased about, according to UBS analyst Eric Sheridan.
"We applaud management for laying out constructive & balanced comments that stressed the importance of maintaining Facebook's user experience while acknowledging the potential (and growing) power of Facebook's products & platforms as engines for future growth," Sheridan said in a research note following the earnings. Sheridan rates Facebook "buy" with a $94 price target.
It's clear that with the plans Zuckerberg, Sandberg and the rest of the Facebook team have in store for mobile advertising, the company can barely contain its excitement. Zuckerberg's comments about continuing to invest "aggressively in areas that are important for our mission and long term strategy" made for good headlines, but it's the operational efficiency that should make shareholders quite pleased.
--Written by Chris Ciaccia in New York
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