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If any tech company is living a charmed life in 2016, it's Facebook

By Kevin Kelleher , written on January 28, 2016

From The Venture Capital Desk

Investors who have been desperately seeking someplace immune from the sudden and abrupt slowdown in the global economy seem to have finally have found one: the financially profitable, if emotionally sterile, social universe tucked inside Facebook's business.

Facebook had been one of a handful of companies believed capable of shining some kind of bright spot into this turbulent earnings season. And the company did just that last night. Not only was it a bright spot, it was so bright it blinded investors grown weary from weeks of fumbling around in the dark.

Facebook said revenue in the fourth quarter rose 52 percent to $5.8 billion, well above the $5.4 billion Wall Street had been expecting. Its earnings rose to 79 cents a share, a healthy margin higher than the 68 cents a share forecast. Somehow, Facebook managed to not only trim spending ahead of the global turmoil, but to also accelerate its revenue and user engagement. If any tech company is living a charmed life in 2016, it's Facebook.

A handful of tech companies were held out by hopeful investors as ones that could buck the trend of slowing revenue and profits this quarter. Netflix was one – and thanks to its aggressive expansion into international markets in recent years, it met those hopes. Alphabet is another, although the proof of that remains to be seen when the company reports earnings on Monday.

Apple was yet another, but because of a sudden decline in the sales of iPhones around the world, the company was obliged to eat humble pie in front of investors and analysts during its earnings report Tuesday. Apple CEO Tim Cook placed the blame squarely on the global economic slowdown, arguing that whatever slump the company is enduring right now has more to do with things it has no control over: plunging oil prices, free-falling Chinese stock markets, weakness in emerging economies.

In hearty times, companies rarely credit the economy, but in lean times they frequently blame it. Facebook isn't having any of this. Asked in an earnings call whether the company was suffering from the ailing macroeconomy, CFO Dave Wehner replied that, beyond the strong dollar, “we didn’t see anything in Q4 that indicated broad-based macro weakness.”

Instead, Facebook is seeing not only growth in its user engagement, but accelerating growth. Last quarter, daily active users grew 17 percent year over year to 1.6 billion. A quarter earlier, the same metric rose 16 percent to 1 billion. Ad revenue is also growing at a faster pace: 57 percent last quarter versus 45 percent in the previous quarter.

Not only is user growth improving, so is Facebook's ability to extract and revenue from them. Average revenue per user increased 33 percent to $3.73 worldwide in the quarter. The vast bulk of this ad revenue has long come from Facebook users in North America. Slowly but significantly, more ad revenue is coming from emerging markets, the very areas where financial markets are tumbling the hardest.

Last quarter, $4.2 billion of Facebook's ad revenue came from North America and Europe, equal to 75 percent its total ad revenue. Asia and other regions made up the rest. Compare this to the previous quarter, when North America and Europe made up 73 percent of ad revenue and Asia and other markets made up 27 percent. And this was during a period when developed economies were doing better than developing economies.

In other words, Facebook's efforts to draw in more members beyond first-world economies are not only paying off in the size of its audience, it's already paying off in terms of the ads it's serving to them.
Of course, Facebook would never have been able to get to this point if not for its ability to monetize its mobile news feeds. It was only three years ago when Facebook was battling investor scepticism it would ever make money from its mobile app. Last quarter, mobile ad revenue made up 80 percent of total revenue, a significant rise from 69 percent a year earlier.

The surprises in Facebook's reports this week weren't restricted to the top line. Operating expenses fell across the board: research and development costs declined to 22 percent of revenue from 29 percent a year earlier. Sales and marketing costs fell to 13 percent from 16 percent, while administrative cost fell to 6 percent from 9 percent.

In short, this was a pretty bullish report in the middle of a very bearish month. But it doesn't mean that Facebook still doesn't have its challenges. The company still needs to reach China's 1.4 billion population to be truly global. Exclusion from China may be a kind of buffer to the country's troubles right now, but it will hobble Facebook's growth in the long term.

Facebook still faces other challenges: the ever present privacy concerns that may erupt into controversies inside highly regulated countries as it grows; the question of how it will monetize WhatsApp and Messenger as their communities grow; and whether it can juggle the dual demands of slinging more ads into Instagram feeds while preventing it from becoming a passing fad like Flickr or Tumblr.

For now, the surprisingly strong growth inside Facebook's numbers makes it, now more than ever, not only the anti-Yahoo but also the anti-Twitter. Both of those companies are struggling to revive user engagement as well as investor enthusiasm. In after-hours trading, Facebook's earnings, meanwhile, lifted its stock to around $105 a share, back to its levels in the halcyon days of late 2015.

Unlike Twitter or Yahoo, Facebook has been seeing its engagement and revenue grow seemingly without effort. And it has several engines of future growth if and when its core business slows down: 900 million WhatsApp users, 800 million Messenger users, 400 million Instagram users – most of them already conditioned to be casually monetized by the shiny ad-serving machinery the company built for its eponymous feeds.

Only all of this hasn't been without effort. The growth that Facebook saw last quarter is the result of seeds planted two or three or more years ago, as well their meticulous cultivation along the way. Like Netflix, Facebook is now reaping financial and stock gains that have been years in the works. Other tech companies watching their valuations sink like rocks this month may not only admire that foresight, they might wish they'd had it themselves.