On May 3rd, Facebook Inc. (FB) reported revenue of $8.032 billion and net income of 3.064 billion, resulting in EPS of $1.04. Analysts had been looking for revenue of $7.829 billion and EPS of $0.86, with the company easily beating on the top and bottom line. Revenue for the quarter grew by 49% y/y, and EPS increased by 73% y/y, indeed monstrous y/y comparisons. Despite strong results, shares of the stock were declining in after-hours trading by nearly 2.5% to around $148.
When we start digging into the numbers, we start noticing a few interesting developments that are perhaps concerning investors. In the prepared remarks of the conference call, the CFO David Wehner spoke of growth rates coming down meaningfully throughout the balance of 2017. Additionally, the CFO pointed to 2017 GAAP expenses growing by 40 – 50% when compared to full-year 2016. Additionally, the company is looking for capital expenditures to increase by over 50% when compared to last year to $7 – $7.5 billion in 2017. (For more, see also: Facebook Says It Didn't Help Advertisers Target Emotional Teens.)
(Data Complied from YCharts, Revenue in Billions)
When we turn to Average Revenue Per User, we see that ARPU fell on a sequential basis. Below is a slide from the Facebook presentation. In it, we can see that ARPU in the U.S. & Canada fell in the first quarter from $19.81 to $17.07, and in every region FB operates, likely due to seasonality.
The next section is important because average daily users in the U.S. and Canada growth only grew to 182 million from 180 million. It is likely FB is getting close to topping out in this region of the world.
The problem that faces Facebook today is still the same problem that Facebook was facing when we wrote The Contrarian piece. They need to figure out how to grow their revenue numbers fast enough to satisfy investors' demands. Facebook is growing at an incredible pace, the question is can it continue to grow at its current pace? (For more, see: The Contrarian: BTIG Goes All In on Facebook.)
There are only two ways for Facebook to grow revenue, with an ad-based model, increase the number of eyeballs, or increase the revenue per eyeballs. FB either needs to drive ARPU meaningfully higher in the U.S. or needs to drive users significantly higher in the US, Canada and Europe.
Analysts are looking for FB to grow revenue in 2017 to $37.92 billion, up from $27.64 billion, a growth rate of 37%. This means that in the next three quarters FB needs to generate revenue of approximately $29.9 billion or roughly $10 billion per remaining quarter, which implies big growth rates y/y for the balance of the year. However, Facebook just told us in the prepared remarks that revenue growth rates were going to come down meaningfully for the rest of the year. What is meaningful? Analysts are expecting revenue for 2Q of $9.016, 3Q of $9.505, and 4Q of $11.60.
Or it could be something completely different. It depends on the definition of meaningful slow down.
Keeping this in its most basic of forms, Facebook said the two magic phrases on its conference call: slowing growth and rising expenses. Two phrases that don't mix well for investors. Facebook will likely grow well into the future, it's just moving into a new phase of life—one of a company that is maturing.
Earnings Estimates Complied from YCharts, Data Complied from a Combination of Facebook and YCharts.