Tim Bradshaw Closed As it happened: Facebook’s Q3 earnings

Facebook thoroughly beat expectations on the back of a rise in mobile user numbers as mobile advertising now contributes almost half of ad revenue. But the social network still failed to impress investors when it told them usage was declining among younger teens and warned the switch from adverts on the right rail to the newsfeed would slow in coming months. Facebook reported earnings of $0.25, far exceeding forecasts of around $0.19.

Here is how it happened: from the share price soaring in after hours trading to a new all-time high when traders saw the initial figures, to it falling back down rapidly during the earnings call. Tim Bradshaw and Hannah Kuchler brought you the live reaction and the all details from the call.

Some impressive headline numbers from Facebook’s press release:
- Total revenues: $2.02bn up 60% from last year, ahead of analyst consensus of $1.91bn
- Mobile revenue represented 49 per cent of advertising revenue for Q3, approx. $881m (up from 14 per cent in Q3 2012)
- Mobile monthly active users grew 45 per cent year-over-year to 874m
- Total MAUs were 1.19bn as of September 30, 2013, up 18 per cent year-over-year
- 150m new users signed up to Instagram in the last six months
- Earnings per share: $0.25, beat consensus of $0.19

Brian Fenske, a tech sector trader at ITG, said: “This Facebook number is very positive for sentiment around Twitter’s roadshow. It is certainly convenient that your largest publicly traded peer puts out strong numbers like these.”

Brian Wieser, an analyst at Pivotal Research, said such strong earnings from Facebook should help Twitter’s initial public offering which is expected next week.

“These numbers should enhance confidence about the strength of social media advertising,” he said.

Facebook’s conference call is just starting. Listen in here: http://investor.fb…cfm?eventid=135246

Facebook’s strong earnings couldn’t come at a better time for Twitter, whose executives are currently on their investor roadshow. TWTR could start trading as soon as next week and Facebook’s handy beat to earnings forecasts, along with investors’ strong reaction to them, sets the stage very nicely for Twitter’s IPO. However, there’s a risk now that things might swing too far the other way. Twitter has been trying as hard as it can to avoid the inflated expectations that caused Facebook’s stock to slump for so long. That might be somewhat harder now…

Shares at the start of the call are up 10 per cent after hours.

Mark Zuckerberg is getting going on the earnings call. “We continue to see strong overall engagement and are making strong progress on our strategy,” he says. “We’ve also reached new milestones on mobile,” 48% of people are only using Facebook on their phones now, he says – a “pretty incredible sign in how Facebook has evolved over the last year”. This time last year, doubt over Facebook’s ability to make money on mobile was the biggest concern hanging over the stock.

Zuck is going through his first mission of “connecting the world”. The internet’s growth is slower than you might expect – just 9 per cent a year. Facebook’s popularity means it can help to accelerate, he says.

“We’re already trying to make access to Facebook cheaper,” he said, and the same tools can be applied to other internet services. Internet.org is Facebook’s effort to bring the industry together on this but it’s still early days.

Now onto Zuck’s second mission: understanding the world.

“The model of the world that people are building into our systems are things that people only want to share with a few people.” This is powerful but Facebook is barely touching it, he says. Newsfeed is the most popular app but it’s “just the start of what’s possible”, he says, suggesting that people can ask questions to Facebook’s community.

Graph search is still in beta, only English and not on mobile but Zuck is “very excited” about it.

Facebook has several mobile apps, Zuck reminds us, including Messenger and Instagram. Messenger got an update yesterday. “In the future we expect to build more of these services,” he says.

Zuck’s next big goals are Facebook’s artificial intelligence, which he says can be used to make services easier to use, and the growth of the knowledge economy, which will make ads more relevant.

Facebook’s strong growth shows that it is improving the usefulness and engagement of its ads, Zuck says.

The average daily user is engaging with one ad every week, he says – more than we might expect. There’s still a lot of scope to improve ads, he says, so Facebook is still investing in this area.

Now Zuck’s handing over to Sheryl Sandberg, COO.

Q3 total ad revenue grew 66 per cent and half of that is from mobiles – after launching ads on mobile just last year.

Our overall user engagement metrics remain strong, she says. “We think this validates the careful approach we’ve taken to building our ads business.”

Sandberg is talking about Facebook’s growth drivers. One in eight minutes on the desktop and one in five minutes on mobile are spent on Facebook, she says – more than most of its largest competitors, including Yahoo, Twitter, Pinterest and Snapchat combined.

A growing portion of marketers are spending to advertise on Facebook, she says. In Q3, the number of Facebook’s advertisers in Europe, Middle East and Africa, almost equalled that in North America – a sign of global growth.

Next growth driver is improving its ad tech. Ad targeting is being improved. Ad format changes now make them more common across Facebook, its ad buying tools have been simplified and advertisers now have fewer formats to choose from.

Mobile app install ads are going well, and now Facebook advertisers can buy ads to promote engagement – or making sure that they keep using the app once they’ve downloaded. it.

A negative note among the good news: there are signs that younger users aren’t using Facebook as much.

Facebook use and engagement in the US shows that usage of Facebook among US teens in Facebook overall was stable from Q2 to Q3 but it DID see a decrease among young teens. Facebook’s CFO David Ebersman warns that there is a lack of reliable data about this but says that they are revealing this because they’re asked about it a lot. “We remain close to fully penetrated among teens in the US,” he says.

Facebook’s average revenue per user was up 33 per cent overall.

Expenses – total GAAP expenses were $1.28bn. Headcount and infrastructure spending are up. Facebook now has 5,800 employees.

Facebook ended the quarter $9.3bn in cash and investments. It repaid its earlier loan and now has a $6bn line of credit that remains undrawn.
Another warning sign for investors but something users might be relieved about: ads as a percentage of newsfeed stories will not increase much further than where they are now – this has been a big driver of revenue growth so far this year.

Now we’re going into Q&A.

A question about location data. Ms Sandberg says that there is significant opportunity for upside from ads by better targeting based on location and other signals.

Asked about brand marketers, she dodges the question, saying Facebook doesn’t break out a figure. “We have every one of the AdAge 100 have advertised with us.” The focus is on measurement. “We have to show brand marketers that our ads drive in-store sales.”

Facebook’s stock has pared back almost all of those huge early gains after the comments on the call about slowdown among younger teen users and that ad frequency in newsfeed won’t be increased any further. Now up about 3 per cent.

Zuck is talking about the product experience and how it will change over time. He says that small businesses will use Facebook to learn about who their customers are and developers to use better analytics to find new customers. Those are a lot of the inspiration from the ad side.

On the people side, “right now I do think the Facebook experience is very push-based. We are suggesting content to you over newsfeed. Over time, we should be able to create more value through the knowledge shared all the time that isn’t surfaced a lot at the moment.” Graph search is the start of that but in five years’ time he hopes to have made a lot of progress in that direction.

A question about whether Facebook’s focus is moving from brand advertisers to smaller businesses?

Ms Sandberg says “top of the funnel” ie brand ads are still very important. Facebook is a powerful place for discovery. “The key for us is measurement,” she says. It’s harder to measure brand ads’ impact on purchase behaviour than clicking through and buying something through a direct response ad. Facebook is doing a lot of work in that area, giving an example from Mondelez.

A question about the volume of ads. Overall ad revenue growth in Q3 compared with Q2 was driven by three factors: growth in users, growth in demand among advertisers, which affects pricing, and a growth in the number of ads that users see. That last one, “ad load”, is the third most important, Mr Ebersman says.

Mobile ad load increased “quite modestly” in the third quarter, but on the web the percentage of ads in the newsfeed went up more significantly compared with the prior quarter, he says.

Zuck is answering a question about video on Instagram. It’s very popular, he says, and shows that autoplay can be a good experience in-line in the feed – something a lot of people were worried about early on. “We are heartened by that,” he says. “This is an important launch for Facebook overall.” The addition of video to the stream could make the newsfeed “much more engaging” but there’s a risk it could harm engagement if it’s done badly, so Facebook is taking it carefully for the moment.

Ms Sandberg adds on video ads: anyone can embed a video in page posts already, she says, and the area remains “pretty exciting”. But no more information on Facebook’s on/off plans to launch a more fully formed video ad products.

Mark Mahaney from RBC asks about why the reduction in operating expenditure growth for the year and Zuck’s five-year vision of going from push to pull – what does Facebook need to do to get there?

On opex, Facebook continues to invest “aggressively” on technical hiring and infrastructure. R&D is on track or ahead of where it expected to be in hiring and spend, the most important area for growth. Cost of revenue, G&A, marketing and sales are being ramped up less than anticipated, thanks to efficiency improvements, some slower-than-expected ramp in “hiring and new projects” and not as much spent on “unplanned areas” such as a big acquisition.

Zuck answers on the five-year plan. The first thing to do was index all Facebook’s data – more than a trillion connections, friendships and likes. With 10 years of behaviour and trillions of pieces of content and information, now Facebook wants to make that more useful, rather than just what has been shared in the last day or so. New kinds of services leveraging that will be a big focus in the coming years, he says.

A question about draft regulation on local data storage requirements for internet companies.

It’s “very hard to assess” the implications for Facebook but it is paying “close attention” to it.

Another analyst question about the comment in the changes to the number of ads shown to each user. Since the mobile newsfeed ads began a year ago, how much cost per click and click through rate improvement has Facebook seen?

Facebook’s CFO says that as it has ramped up from a small number of ads in newsfeed to a lot, pricing and click through rates have held up. “Validating our confidence that newsfeed ads were going to be a very important product… We remain really encouraged.” We will try to continue to grow the userbase…

Another question about return on investment for ad products – the need to create tools for measurement attribution internally and how far advertisers should be using their own tools to benchmark Facebook against other sites?
It takes both, says Ms Sandberg. Multiclick versus last click attribution is improving, she says. This is the idea that it isn’t just Google that gets too much credit for the last link or ad that people click before they buy something online, a longstanding concern for its rivals.
She also reiterates how excited they are about app developers and mobile app install and mobile engagement ads. Developers are a “really interesting place for us”.

A question about hashtags, which Facebook introduced a few months ago.

All we really did was take hashtags that people were already putting into the product and make them links, says Zuck. Facebook is putting more emphasis on both public and private content sharing, he adds – a lot of communication is one-on-one. (The competitive threat here is from chat apps like Whatsapp, Line, WeChat and Snapchat.)

Interesting that Facebook is getting almost no questions from analysts about the drop in teen usage and several about Facebook putting a limit on the increase to the number of ads that it shows in each newsfeed.
The two negatives have now wiped out all of Facebook’s after-hours gains – the stock is now flat.

Instagram just started testing ads – 10 advertisers are showing ads in the feeds, there’s a lot of interest, Ms Sandberg says.
Making ads exciting and engaging relies on the ads fitting the format of the product, says Ms Sandberg – both on Instagram photos and Facebook’s own newsfeed ads. “They are meant to be as exciting, as engaging as the content.” Some of them are, a lot of them aren’t, she says.

Another question about the mix of small to large advertisers and what impact that has on margins (given small businesses often require a larger sales force and so are more expensive to reach).
All parts of the advertising business are growing, says Ms Sandberg. There is an opportunity in the shift from TV to mobile, from brand advertisers, and from small to medium sized businesses. Simplifying the ad product makes it easier for SMBs to use it and cheaper for Facebook. Facebook is trying to figure out how to meet marketers’ objectives, she says, rather than making them decide for themselves which kinds of ads they should buy – and that makes working with them more efficient.

That’s it for an earnings call that saw a huge swing in sentiment. Facebook has gone from hero to zero stock-price growth in the space of an hour.

Brian Wieser at Pivotal Research thinks the disappointment at the numbers of teens on Facebook is a “significant over-reaction” .

For a look at some of the changes Facebook has been making to keep its userbase engaged, see this FT story on what it is borrowing from Twitter: http://www.ft.com/…l?siteedition=intl

Earlier this month, Facebook tried to court teens by allowing them to post publicly – as they can on rivals like Twitter – but faced the predictable outcry as it removed the protection of privacy.


Its wasn’t just the lack of teen spirit that pushed the stock down, but also a warning from the chief financial officer that the pace at which adverts were shifting from the right rail, where fewer users engaged with them, into the newsfeed would slow.

Zuckerberg said the average user clicks on an advert once a week now when they are right in front of them in the newsfeed. But if that shift ends in the coming quarters, it could put a dampener on the rapid growth.

Will more teens get turned off by Facebook now the financial press reports it isn’t cool for kids?


Who stands to benefit if Facebook loses its teenage fanbase? A report by financial research firm Piper Jaffray last week said Twitter was influencing teen spending decisions more than Facebook .


Teens have cited “friends” as the strongest influence over their purchase decisions for the duration of our survey history, but “Internet” is quickly rising in profile. More than half of teens indicate that social media impacts their purchases with Twitter being the most important, eclipsing Facebook, followed closely by Instagram. But the popularity of Facebook is waning among teens with 23% citing it as the most important, down from 33% six months ago and 42% a year ago.

Clark Fredericksen from research firm e-Marketer said the decline in users in their early teens on Facebook showed just what a “shrewd move” it was to buy Instagram. He said Facebook made the purchase before any even questioned teen engagement on the site.

This may matter to investors but I’m not so sure it matters to Facebook’s business at the moment because they acquired Instagram. That is the destination for teens which is growing. So ultimately, we see the slight declines in engagement may be happening on Facebook as a wash as so many of them are just using Facebook less and Instagram more.

Instagram announced it was trialing ads earlier this month: http://www.ft.com/…-00144feab7de.html

If the switch from right rail ads to newsfeed ads slows, what could drive Facebook’s ad growth?

1. Video: Sheryl Sandberg said on the call that advertisers can already embed video. But it does not yet play automatically. If Facebook can find a way of introducing video ads which play without annoying users too much, it could lure more advertisers.
2. “Multi-touch attribution”: Facebook is focusing on measuring the impact of its ads to prove their worth. At the moment, online ads are often only counted if the user clicks through and makes a purchase – “last touch attribution” – but as ways of measuring whether users who see ads make a purchase later down the line on improve, Facebook could benefit.
3. More marketers including small businesses: Sandberg stressed that the simplification of the advertising platform during the quarter helped attract less tech-savvy marketers, including small businesses. Advertisers now have to tell Facebook what their objective is – e.g. improving app installs, selling more on an e-commerce site, raising brand awareness – and Facebook leads them to the most effective product.

One more thing worth noting from the call is the increase in Facebook’s borrowing. The company swapped a $1.5bn loan for a $6.5bn loan, saying it would give them “flexibility for new opportunities in growing the business”. Or, in other words, cash for acquisitions.

What else could they buy to lure in the teens? Rumour has it the company wanted to acquire Snapchat, the blink and you’ll miss it messaging app popular with young people. http://mashable.co…facebook-snapchat/

It has been a tumultuous ride, not least for the Facebook share price now trading up just 0.2 per cent, but we’re going to wrap up the live blog. Thanks for following and keep an eye on FT.com for further analysis on the future of Facebook.