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Facebook's earnings: Old hat, tailored for a bigger head

By Kevin Kelleher , written on July 28, 2016

From The Earnings Desk

In the mixed up world of 2016, it's a little reassuring, if not terribly exciting, to have earnings as usual.

Which is what we've seen so far this month in tech. Twitter faces another setback. Intel's stock slumps on so-so numbers. Microsoft notches up as it erodes skepticism about its cloud business. Yahoo makes one last, forgettable financial report before it was officially swallowed by Verizon. And now, Facebook is Facebook, which means another quarter that leaves its investors giddy with glee.

Facebook didn't just deliver strong earnings in its second quarter, it showed numbers that were even more scarily strong than those in recent memory. Revenue grew by 59 percent to $6.4 billion, with advertising revenue alone growing by 62 percent. Facebook now gets 84 percent of its revenue from mobile ads. And despite increased spending on capital expenditures, the company is becoming almost obscenely profitable: operating income more than doubled, while net income nearly tripled. Analysts had made optimistic forecasts for Facebook’s numbers, but even these proved to be not starry-eyed enough.

This kind of growth is more common among well-run startups and nearly unheard-of among companies of Facebook's size. Facebook had a market value of $352 billion before its earnings report yesterday (a number that surpassed $370 billion after the stock rallied 5 percent on the earnings). Tech giants with 12-digit valuations feel lucky to have double-digit growth. But Facebook is growing at the same rate it was a few years ago, after it miraculously metamorphosed into a mobile butterfly. Back then, everyone expected the growth rates to come back to earth, including Facebook.

These latest numbers tell a pretty impressive story. But as any experienced storyteller will tell you, the more interesting tale lies in the reasons why. And here Facebook grows mysteriously and somewhat frustratingly opaque. The surge in growth is clearly the result of carefully monitored plans laid out years ago, yet every piece of insight into its dynamic yields more questions. Why is revenue growing? Because the user base is growing (with daily active users up 70 percent to 1.13 billion) and engagement deepening.

Okay, but why isn't user growth plateauing as expected, and where exactly is this growth coming from? These are some of the questions analysts kept asking in a conference call discussing earnings, questions that Facebook would only respond to by saying user growth is strong in all regions, and that certain initiatives to bring on the billions of users not yet registered are bearing fruit. In other words, it's all good!

Except, to hear Facebook tell it, it may not remain so good for long. Lest investors grow complacent in their faith that Facebook will endlessly chart new highs, CFO David Wehner threw a bucket of ice water early on in his comments.

“We will face tougher comparables as the year progresses, given accelerating growth rates we experienced in the second half of 2015. Consequently, we anticipate lower advertising revenue growth rates in each successive quarter in 2016. We anticipate ad load on Facebook will continue to grow modestly over the next 12 months and then will be a less significant factor driving revenue growth after mid-2017. Since ad load has been one of the important factors in our recent strong period of revenue growth, we expect the rate at which we are able to grow revenue will be impacted. Accordingly.” 

In plain language, Facebook realizes it can't possibly stuff more ads into your newsfeed without diminishing returns (your Instagram feeds are another matter). The warnings about unfavorable comparables echo some that Wehner has made before, only to have a gust of wind eventually come along and buffet Facebook’s stock to even greater heights.

The ad-load warning was more of a surprise, prompting several questions from analysts. Seeking answers to those questions, however, was like shaking a Magic 8-Ball of prepared answers: “Strong growth across the globe,” “We’re pleased with overall growth in usage and engagement,” “Ad load is a mix of art and science.” All answers point to “hmmm” and then the magical die sinks into a well of inky obscurity.

It was the same with multiple, and reasonable, questions about when Instagram, Messenger and WhatApp would contribute meaningfully to profits. Or were they already doing so? Facebook responded with old shtick, namely, The Three Phases of Monetization. One: grow user base and engagement. Two: build interactions between businesses and consumers. Three: expand commercial opportunities. The strategy is clearly successful, but it's so familiar it's already hoary – and starts to feel cynical when it's rolled out more than once an hour.

Even those useful case studies that Sheryl Sandberg trots out are starting to feel less and less informative and more and more formulaic as she pulls them out of nowhere: X company relied on Y technology from Facebook, working with ad companies A and B, to derive a Z times increase return on ad sales. This must be what it's like to date a magician. The delightful tricks over time stop being so enamoring and start to feel like calculated distractions from whatever the point at hand is. No room for spontaneity, that fire which fuels most human conversation.

This is the persona Facebook has crafted for itself in its peak moment of success. Gone is the arrogance of its childhood. Gone also is the ardent earnestness of the painful adolescence of proving itself. In early adulthood, Facebook has opted for a silent complacency. It doesn't need you to understand it. It doesn't even want you to try. Just know that it is succeeding and keep on logging on. Seeking explanations from such a corporate being is like approaching the oracle of an agricultural god to inquire about the odds of a harvest of plenty, only to be handed a copy of last year’s Farmer’s Almanac.

We get it. Facebook’s strategy is a long-term vision. The iterations of that strategy are charted along a long-term, even boring plot line, which Facebook is not about to redraw in order to satisfy demands for quarter-by-quarter drama. Maybe this modesty cum secrecy is even a kind of fuck-you revenge to investors who doubted Facebook in its dark days, a kabuki of erect middle fingers for the naysayers of yore.

The result is very good news that, as journalism, does not make for very good news. It's old hat, tailored for a bigger head. Nobody can credibly complain about this, outside of short sellers. Facebook knows that as long as it can perform the way it is right now, it can say whatever it wants, do whatever it wants. If its own cautions about a coming slowdown prove true, Zuckerberg & Co. might as well enjoy this moment while they can.