5 key things I learned from Facebook’s Q4 2018 earnings call

Last August, I wrote an article when the Cambridge Analytical scandal hit Facebook causing the share price of the company to plunge by 18.96% in one day – wiping off $120 billion in market value.

Could it get any worse?

During Facebook’s Q2 2018 earnings call, CFO David Wehner told investors to expect revenue growth to decelerate further by high-single digits for the next two quarters. Operating margins decreased by three percentage points from the previous quarter to 44%. The margin compression was largely due to Facebook’s investment to beef up security on their social media platforms and build a team to combat fake news.

But that’s not the end of it!

A month later, in September 2018, Facebook reported an attack on its computer network that exposed the personal information of nearly 50 million users. Coupled with the negative sentiment in the market, the share price of Facebook hit a 52-week low of $123.02, before recovering slightly to trade between $130-150 in January.

However, Facebook’s share price jumped 10.8% yesterday to close at $166.69 after announcing its Q4 2018 earnings:

Chart: Google

What caused the stock to jump? I listened in to Facebook’s latest earnings call to find out more and whether the social media platform is still the place to advertise for businesses everywhere.

Here are five key things I learned from Facebook’s Q4 2018 earnings call:

1. FY2018 revenue grew 37% year-on-year to US$56 billion. Most of the revenue growth was attributed to growth in advertising. In Q4, the average price per ad actually decreased by 2%, but the number of ad impressions served increased by 34%. Impression growth was primarily driven by ads on Instagram and Facebook mobile News Feed. It’s well-known that Facebook is running out of ad space on its News Feed, but there is more runway for advertising growth especially on Instagram.

2. Average revenue per user (ARPU) increased by $8.10 in U.S. and Canada, and $2.12 in Europe. In comparison, ARPU grew 42 cents in Asia-Pacific. Facebook continues to show pricing power in the West, with Google as its only serious competitor right now.

3. Full year capital expenditure for 2018 was $13.9 billion, driven by investments in data centers, servers, network infrastructure and office buildings. Net of capital expenditures, Facebook generated $15 billion in free cash flow. The company has a total of $41 billion in cash and investments, and no debt.

4. Total expenses increased by 62% year-on-year to US$9.1 billion in 2018. This was primarily due to investment in infrastructure, safety and security and innovation. Facebook ended 2018 with more than 30,000 people working on safety and security, up from 10,000 people a couple years ago. The company seems to be serious on its data security as it probably cannot afford another scandal to pull down its already badly-hit reputation yet again.

5. Daily active users on Facebook reached 1.52 billion, up 9% compared to 2017, mainly led by growth in India, Indonesia and the Philippines. Monthly active users on Facebook also grew by 9% to 2.32 billion. In total, Facebook has 2.7 billion people worldwide using Facebook, Instagram, Messenger, and WhatsApp, and a total of 2.0 billion daily active users across all platforms. Instagram is going rapidly, passing 500 million daily actives on Stories, and Mark Zuckerberg intends to introduce commerce and shopping on the platform. Instagram is clearly Facebook’s next major growth driver — it has over 1 billion users and growing, and is still relatively ad free.

The fifth perspective

As for now, Facebook looks to have stabilized. The scandals that the social media company went through did not make a dent in their revenue, which is still growing at a rapid rate of 30%. Moving forward, expect users to grow much faster in Asia compared to matured markets in the U.S. and Europe. Revenue growth will slowly tilt towards increasing advertising cost and the monetization of existing platforms such as Instagram.

In 2019, CFO David Wehner expects Facebook’s revenue growth rate to continue to decelerate by mid-single digits. Total expenses are expected to grow between 40-50% from $9.1 billion this year, while capital expenditure to remain between $18-20 billion driven by continued investment in data centers.

Kenny Quek is a research analyst at The Fifth Person. He graduated from Drexel University in Philadelphia, PA with a major in finance and previously managed a fund in the U.S. before returning to Singapore.

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