Facebook Q2 Revenue Slightly Beats Expectations But With A Net Loss

Facebook’s Q2 revenues are out. In the run up to the earnings announcement there was critical speculation about the company’s prospects. In terms of top-line revenues, Facebook beat analyst consensus estimates. Quarterly revenues were $1.184 billion vs. $895 million last year. However the company also reported a net loss of $157 million.

Immediately after the release there was a mixed reaction in the financial community, with some arguing analyst expectations were managed to be artificially low. There was general disappointment among many with these results; however some are taking a “wait and see” position.

In Facebook’s comments on the earnings call the company stressed this was a time of investment and that it would not manage to a specific operating margin. It emphasized its unique position in the market and the long-term positive outlook for its ad products.

Facebook also reported 955 million monthly active users and 552 daily active users. These are 29 percent and 32 percent increases, respectively, over a year ago. Mobile active users were 543 million, which represents a 67 percent increase year over year.

Other noteworthy bits from the earnings release:

• Revenue from advertising was $992 million, or 84% of total revenue
• Payments and other fees revenue were $192 million
• Capital expenditures were $413 million, a 213% year-over-year increase
• Cash and marketable securities were $10.2 billion, including the $6.8 billion from the company’s IPO

Facebook also made the somewhat curious and perhaps even defensive comment in its earnings release that third party research has validated a strong ROI from Facebook ads:

Facebook now has independent ROI data from more than 60 advertising campaigns using a variety of third-party methodologies like panels and marketing mix models. The results show that 70% of campaigns resulted in a return on ad spend of 3x or better, and 49% of campaigns showed a return on ad spend of 5x or better. 

Notes from the earnings call:

On the call are CEO Mark Zuckerberg, COO Sheryl Sandberg and CFO David Ebersman.

Zuckerberg is reading prepared remarks, though he sounds polished. He’s addressing mobile right away, discussing Facebook mobile adoption and growth rates. “People who use our mobile services are more active than people who only use our desktop services.” He adds that he wants to build “the most deeply integrated [mobile] experiences possible.”

About mobile ads Zuckerberg says, ” Sponsored Stories have grown quickly and demonstrated early success.”

Now he’s talking about Facebook the platform and how it will be the “social layer” across apps and experiences. He says that most people don’t realize how big Facebook’s platform vision is.

Advertising on Facebook today is delivering a “compelling ROI” even though most ads “aren’t social.”

Social Ads in the newsfeed “give us a clear path” to monetizing mobile. Zuckerberg says that social ads/sponsored stories have a run rate of “$1MM per day with half of the revenue coming from mobile.”

Sheryl Sandberg is now discussing the advertising opportunity for Facebook. She says that Facebook can address each part of the funnel.

Sponsored stories and newsfeed are “the cornerstone of our mobile monetization strategy.” This “avoids the dilemma of where to put ads on the smaller screen.”

She repeats, “We’re already seeing $1MM per day, with half of that coming from mobile.”

About the Facebook ad exchange: “It’s early but advertiser interest is strong.”

Now Sandberg is citing third party research for the proposition that ads on Facebook are more effective than other types of online ads (presumably display). She’s providing brand case studies with strong ROI and conversions.

Facebook is “uniquely accessible” to small businesses. She says that there are 11 million SMB pages, 7 million of which are actively used on a monthly basis. There are “hundreds of thousands” of small business advertisers on Facebook.

Now CFO David Ebersman is doing the technical accounting stuff. He’s talking about expenses and citing the differences in markets. Says payments revenue is flat because gaming is moving to mobile where FB payments has little or no usage.

Headcount is roughly 4,000. “Investment is a top priority, as opposing to managing toward an operating margin” in the near term.

Analyst Q&A:

In the context of discussing the Yahoo IP deal, Sandberg congratulates Marissa Mayer on her new job at Yahoo.

Zuckerberg says that building their own phone “wouldn’t make much sense” in response to a question about mobile.

Re social ads penetration: Sandberg says, “Fewer than half our ads today are social.”

One theme in Facebook’s executives’ responses is caution. Facebook is conscious that if it shows too many ads in the mobile newsfeed it might alienate users. They’re worried about doing that and are closely monitoring engagement and user reaction to sponsored stories in mobile.

Sandberg discusses local: “Local is the holy grail of the internet” but most SMBs aren’t tech savvy. She says however their personal experiences with Facebook will enable them to adopt Pages as a marketing platform. She cites again the 7MM SMBs that update their pages on a monthly basis. She adds that “thousands of them are are upsold” into Facebook ads.

Sandberg on how Facebook ads compare with other media: We’re still in a learning curve with a lot of our clients. We’ll be able to educate the market over time.