Facebook, Inc. Class A reported preliminary financial results for the quarter ended March 31, 2015 with GAAP diluted EPS of $0.18, down 28% compared to $0.25 in the first quarter of 2014.
Non-GAAP diluted EPS for the first quarter of 2015 was $0.42, up 20% compared to $0.35 in the first quarter of 2014. Non-GAAP income and EPS were adjusted for amortization of intangible assets and share based compensation.
- Daily active users (DAUs) were 936 million on average for March 2015, an increase of 17% year-over-year.
- Mobile DAUs were 798 million on average for March 2015, an increase of 31% year-over-year.
- Monthly active users (MAUs) were 1.44 billion as of March 31, 2015, an increase of 13% year-over-year.
- Mobile MAUs were 1.25 billion as of March 31, 2015, an increase of 24% year-over-year.
Even though revenue for the first quarter of 2015 totaled $3.54 billion, an increase of 42%, compared with $2.50 billion in the first quarter of 2014, GAAP costs and expenses for the first quarter of 2015 were $2.61 billion, an increase of 83% from the first quarter of 2014.
Their R&D and Marketing expenses which is compensated by stock has increased by 212% and 67% respectively indicating that the cost of sustaining the current user volume and increasing the user base is becoming more expensive for Facebook.
We analyze the earnings along side the following peers of Facebook, Inc. – Google Inc., Yahoo! Inc., Microsoft Corporation, IAC/InterActiveCorp. and Twitter, Inc. (GOOGL-US, YHOO-US, MSFT-US, IACI-US and TWTR-US) that have also reported for this period.
- Summary numbers: Revenues of USD 3.54 billion, Net Earnings of USD 509 million, and Earnings per Share (EPS) of USD 0.18.
- Gross margins widened from 81.53% to 81.54% compared to the same quarter last year, operating (EBITDA) margins now 39.23% from 53.52%.
- Year-on-year change in operating cash flow of 32.30% is about the same as the change in earnings, likely no significant movement in accruals or reserves.
- Narrowing of operating margins contributed to decline in earnings.
The table below shows the preliminary results and recent trends for key metrics such as revenues and net income growth:
|Relevant Numbers (Quarterly)|
|Revenue Growth (%YOY)||71.6||60.51||58.88||48.97||41.61|
|Earnings Growth (%YOY)||194.47||138.07||90.05||33.85||-20.34|
|Net Margin (%)||25.54||27.08||25.04||18.07||14.37|
|Return on Equity (%)||15.87||17.97||16.21||9.71||5.53|
|Return on Assets (%)||13.85||15.84||14.27||8.65||4.95|
Market Share Versus Profits
FB-US’s change in revenue this quarter compared to the same quarter last year of 41.61% is almost the same as its change in earnings, and is about average among the announced results thus far in its peer group, suggesting that FB-US is holding onto its market share. Also, for comparison purposes, revenues changed by -8.00% and earnings by -26.87% compared to the immediate last quarter.
Earnings Growth Analysis
The company’s earnings declined year-on-year largely because of the increases in operating costs. Its operating margins (EBITDA margins) went from 53.52% to 39.23%. This decline in earnings would have been worse except for the fact that the company showed improvement in gross margins, from 81.53% to 81.54%. For comparison, gross margins were 79.54% and EBITDA margins 40.66% in the immediate last quarter.
Gross Margin Trend
Companies sometimes sacrifice improvements in revenues and margins in order to extend friendlier terms to customers and vendors. Capital Cube probes for such activity by comparing the changes in gross margins with any changes in working capital. If the gross margins improved without a worsening of working capital, it is possible that the company’s performance is a result of truly delivering in the marketplace and not simply an accounting prop-up using the balance sheet.
FB-US’s improvement in gross margin has been accompanied by an improvement in its balance sheet as well. This suggests that gross margin improvements are likely from operating decisions and not accounting gimmicks. Its working capital days have declined to 327.53 days from 454.51 days for the same period last year.
Cash Versus Earnings – Sustainable Performance?
FB-US’s change in operating cash flow of 32.30% compared to the same period last year is about the same as its change in earnings this period. Additionally, this change in operating cash flow is about average among its peer group. This suggests that the company did not use accruals or reserves to manage earnings this period, and that, all else being equal, the earnings number is sustainable.
The company’s decline in earnings has been influenced by the following factors: (1) Decline in operating margins (EBIT margins) from 42.97% to 26.33% and (2) one-time items that contributed to a decrease in pretax margins from 42.97% to 26.31%
Facebook, Inc. is a social networking service and website. It aims to make the world more open and connected. People use Facebook to stay connected with their friends and family, to discover what is going on in the world around them, and to share and express what matters to them to the people they care about. The company offers advertisers a unique combination of reach, relevance, social context, and engagement to enhance the value of their ads. Its services include timeline, news feed, messages, lists, ticker and mobile apps. Facebook was founded by Mark Elliot Zuckerberg, Dustin Moskovitz, Chris R. Hughes and Eduardo Saverin on February 4, 2004 and is headquartered in Menlo Park, CA.
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