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Facebook - advertising revenue down but stabilising

Sophie Lund-Yates, Equity Analyst | 30 April 2020 | A A A
Facebook - advertising revenue down but stabilising

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Facebook Inc Com USD0.000006

Sell: 277.73 | Buy: 277.89 | Change 2.22 (0.81%)
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First quarter revenues of $17.7bn were up 18% compared to last year, and slightly better than the market expected. Within that advertising revenue increased 17% to $17.4bn, which was broadly in line with consensus.

Total costs and expenses were up 1% to $11.8bn. The stronger revenue uplift resulted in operating income of $5.9bn - slightly lower than analysts had hoped for.

The group experienced a significant reduction in advertising demand, and pricing also weakened, in the last three weeks of the quarter. Performance has stabilised in April, with advertising revenue flat compared to last year.

The uncertainty means no revenue guidance can be given for the remainder of the year.

The shares rose 9.4% in pre-market trading.

View the latest Facebook share price and how to deal

Our view

Advertising revenue is Facebook's bread and butter, with marketing teams paying handsomely for the data footprints users leave behind. There had been concerns that lower advertising spending in the wake of coronavirus would upset the apple cart.

Luckily, while subdued, trends don't look as bad as feared. Revenue is still likely to be lacklustre compared to recent years, but there are some brighter spots.

The current disruption means increased screen time as millions of us are stuck and bored at home. The read across for Facebook and its stable of social media platforms is increased engagement with the likes of the flagship Facebook site, as well as Messenger, Instagram and WhatsApp.

An uplift in usage won't move the dial on revenues at the moment, but it's still crucial that a growing user base likes, and uses, these apps. Without that pillar, plans to monetise the newer networks would fall over. We continue to think Facebook has substantial untapped growth opportunities, including growing services like WhatsApp Pay.

Although investing in these new innovations, as well as improving lingering security and privacy issues means margins and profits have been under pressure. You have to spend to stay ahead in tech, which is reflected in a whopping 40% increase in research and development spending. And where we once thought margin progress was expected in the near term, the outbreak means they're shouldering a burden once again. We can't deny that cost control is looking better, but we wonder if this simply means cost growth will spring back quickly from next year too.

We should make it clear that we don't have qualms about Facebook's ability to survive the current storm. With over $60bn of cash on hand, this isn't really a concern.

Instead the priority is the rate at which revenues and profits can progress from here. That will depend on the timeframe for monetising its multiple social platforms, how quickly advertising revenue completely recovers, and how costs are controlled in the years ahead. Overall Facebook still looks well placed to us, and will continue to be an invaluable resource for advertisers.

The shares currently trend on a price to earnings ratio of 23.7, someway below the average.

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First quarter trading details

Facebook is seeing increased engagement across its platforms as a result of lockdowns, although this is expected to decrease once restrictions are lifted. The number of daily active users were 1.73bn on average for March 2020, an increase of 11%, while monthly active users were 2.6bn, reflecting an increase of 10%.

Average revenue per user (ARPU) rose 8.3% to $6.95.

The higher costs included a 28% increase in headcount to 48,268 and a 40.4% increase in research and development spending. The group also paid the $5bn FTC fine in the quarter.

Facebook expects weaker operating margins for the year, despite total expenses being lowered to $52-56bn, from $54bn -59bn.

Free cash flow stands at $7.3bn, and the group has a net cash position of $60.3bn (including cash equivalents like marketable securities).

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