FB Stock: 3 Factors Which Are Driving Facebook Inc Earnings Higher

Facebook Inc (NASDAQ:FB) saw its EPS grow by 77% in Q3. Strong profit growth has provided support to Facebook Stock.

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The social media giant Facebook Inc (NASDAQ:FB) recently reported its third quarter earnings results. The company delivered on most fronts, reporting a beat on both, top and bottom line. On the top line, Facebook Inc reported $10.33B in revenue, representing a YoY growth of 47.4% and conveniently beating analysts estimates by $490 million. The bottom line performance was even impressive, with EPS coming in at $1.59, a massive 77% growth over last year same quarter earnings. This strong performance has provided support to Facebook stock which is facing resistance after the company announced that expenses could see a drastic increase next year. The 77% growth in the bottom line came much ahead of Wall Street expectations. So, what is driving this massive growth?

Facebook Inc continues to deliver strong revenue growth.

The top line growth contributed the maximum to the bottom line growth. Facebook revenues grew by 47.3% YoY in the current quarter. Facebook’s ad revenues, which makes up the bulk of Facebook’s revenues grew by 49% to $10.14 billion while “Payments and other Fees” declined by 5%. All the geographic segments continued to deliver strong revenue growth.

U.S revenues, which makes up over 48% of Facebook’s total revenues grew by 41% despite just 4% growth in daily users. In comparison, Asia-Pacific (APAC) revenue grew by 52%, despite almost 30% jump in daily users. Average Revenue Per User (ARPU) in U.S grew by 35% in United States & Canada while ARPU in APAC region grew by just 20%, despite being a fraction of US ARPU.  While the importance of international markets is rising, U.S continues to remain the main growth driver. Europe, Asia-Pacific and ROW delivered more than 50% YoY revenue growth.

This strong revenue growth was despite Facebook management’s warnings of an impending revenue growth slowdown in H2 revenues due to ad load saturation. While Facebook did see ad load saturation, it was mitigated by higher prices for ad impressions.  “Just the auction dynamic, which as supply growth has slowed, then there’s more competition, and you’re seeing prices increase as demand continues to grow. “ Facebook CFO David Wehner said during the earnings call.

Cost control led to profit margin expansion.

Moreover, Facebook managed to keep its costs in check. While gross margin remained similar to last year, Facebook was able to control its operating expenses. Facebook’s operating expenses grew by 29.2% YoY in the third quarter, much lower than revenue growth, leading to operating margin expansion. Operating profit grew by a massive 64%, from $3.11 billion to $5.12 billion driving operating margin to 50% from 44% in the comparable quarter last year. On the cost front, R&D expenses grew by 33% while SG&A expenses were up by just 25%.

Lower Taxes.

Another factor which helped in driving Facebook’s net profit/earnings higher was lower taxes. Facebook’s effective tax rate came in at just 10%, 6% lower than the effective tax rate of comparable quarter last year. The decline in effective tax rate allowed Facebook to save $300 million in profits and report its highest net profit margin ever. Net profit margin rose from 33.8% last year to 45.6% this year. Net Profit rose by over 79% on an absolute basis.

There were two main reasons for the lower effective tax rate. The company had more revenues in jurisdictions with lower tax rate and adoption of Accounting Standards Update No. 2016-09 which deals with recognition of tax related to share based compensation. In its 10Q filing, the company said that “Our 2017 effective tax rate differs from the U.S. statutory rate primarily due to a portion of our income before provision for income taxes being earned in jurisdictions with tax rates lower than the U.S. statutory rate where we plan to indefinitely reinvest a certain portion of those earnings, as well as the recognition of excess tax benefits from share-based compensation.”

Continued profit growth is a strong driver of FB stock

The strong revenue growth and along with controlled expenses continued to drive Facebook’s profit higher. Generally, when the times are good, both profit and revenue continue to show robust growth, companies tend to be more profligate. However, Facebook management has shown strong commitment to keep its costs in check. The company has lowered its guidance for this years opex growth from 40%-45% range to 35%-40% range.

Of course, Facebook has guided for strong growth in operating expenses and investments for next year. The company expects expenses to grow by 45 and 60 percent next year. The company is doubling its staff working on safety and security from 10,000 to 20,000 and it has warned that this could have a material impact on its profitability. “I’ve directed our teams to invest so much in security on top of the other investments we’re making that it will significantly impact our profitability going forward, … Protecting our community is more important than maximizing our profits.” Facebook CEO Mark Zuckerberg said during the earnings call.

However, we must keep a couple of things in mind. The increase in opex is mainly towards Videos and enhancing security, which are likely to drive future growth. The company has said that it is willing to spend over $1 billion in creating new content. Facebook is betting on videos to be a strong growth driver in the medium term. Secondly, Facebook tends to conservative with its expenditure guidance. Facebook spends much lesser than what it guides for.

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