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Founder Securities: Exploring Facebook (FBUS) Q3 Revenue Beyond Expectations Beyond E-commerce

Time: 2019-11-03 08:50 Source: Internet Author: admin Hits: 1321 times
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After paying $ 5 billion in fines and the FTC settlement, Facebook still faces antitrust investigations and investigations of privacy issues by other institutions. In July, Facebook disclosed the FTC's antitrust investigation. In September, the EU launched an antitrust investigation into Libra. In October, prosecutors from 47 US states joined forces to launch an antitrust investigation into Facebook. In the same month, the European Union announced the completion of an investigation into Facebook's leaks, and Facebook may again face more than $ 2 billion in fines. In June, Facebook launched its digital currency Libra program, hoping to build a blockchain-based digital currency that is protected by asset reserves. Subsequently, financial regulators in many countries expressed concern that Libra was urgently stopped by US regulators. After holding multiple hearings, FB has not yet won the letter from members of Congress. Several companies withdrew from the Libra Association.

Facebook's global MAU reached 2.45 billion (YoY + 7.8%, QoQ + 1.4%), a quarter-on-quarter decrease of 0.2 pct from the previous quarter, and the growth rate of users in Asia-Pacific and other regions slowed slightly, but still maintained the main contribution to Facebook's user growth The total platform DAU exceeds 2.2 billion. The main reason for the increase in DAU in North America is still the increase in user participation in core information flows, while outside the United States, it is mainly due to the increase in video participation.

The update of the 19Q3 advertising product strengthened the supervision of political advertising and provided a history clearing tool to protect user privacy. Advertisement templates are launched in Stories, and advertisers can easily publish them. The Instagram update feature deepens the connection between brands and personal content and reduces friction between planting and purchasing.

4. [Commercial realization] 19Q3 company revenue was US $ 17.65 billion, an increase of 29% year-on-year, and advertising exposure increased by 37% year-on-year, which is still the core driver of growth; management guides Q4 revenue to decelerate, and data privacy is still a constraint on the rapid increase in advertising revenue

19Q3 advertising revenue was 17,383 million US dollars (YoY + 28.4%, QoQ + 4.6%), accounting for 98.5% of revenue; mobile terminal accounted for 94%. At present, Stories' monetization efficiency is not as good as information flow. In the short term, Stories revenue will still be driven by advertising exposure, which will drive down the platform's advertising prices; the average advertising unit price will decrease by 6% year-on-year, and advertising exposure will remain the core driver, increasing by 37% year-on-year. The policy supervision and the platform and product's enhanced privacy management may lead to a decline in advertising accuracy. The company's revenue growth rate will face slowing pressure in 19Q4 and 2020.

The total expenses for 19Q3 were US $ 10,467 million (YoY + 32%, QoQ-15%), and the total expenses for the year 19 are expected to be US $ 46-48 billion. In 20 years, it will expand employee recruitment, and build privacy and security for major service platforms; net profit margin is 35% (YoY-3pct, QoQ + 19pct), and net profit rose sharply from the previous quarter, mainly due to the $ 2 billion fined in the previous quarter. Capital expenditures were USD 3,676 million (YoY + 10%, QoQ-3%), and capital expenditures for the full year of 19 are expected to be around USD 16 billion. The main expenditure is still data center construction and continuous investment in servers. Free cash flow was USD 5,631 million (YoY + 36%, QoQ + 16%).

Risk reminders: the risk of slowing down the growth of active users, the risk of regulatory changes, the risk of slump in the advertising industry, the risk of high-quality content production, the risk of income being less than expected, the risk of Internet industry valuation adjustment, the risk of rising content costs, market competition risks, and exchange rate risks Wait.

Following the FTC's $ 5 billion fine on Facebook, the EU ’s investigation of Facebook ’s privacy issues has also been completed. According to the European Data Privacy Act, Facebook may be fined more than $ 2 billion. At the same time, Facebook ’s antitrust investigations were conducted by the FCT and the European Commission ’s Competition Commission in June and September, respectively.

After Facebook announced the launch of blockchain-based digital currency Libra on June 18, due to Facebook's exposed privacy and monopoly issues, the US Congress expressed distrust of Facebook, and financial regulators in many countries also expressed their concerns about Libra. Worries in financial sovereignty, privacy, and financial crime. After multiple rounds of hearings, Facebook has repeatedly emphasized that Libra is only a payment tool, has no intention of challenging sovereign currencies, will not evade supervision, and will not advance without approval. But several rounds of hearings still did not dispel external concerns, after September, many European countries announced the ban on Libra. On September 16, Libra project representatives accepted questions from 26 central bank officials. After October, several companies announced their withdrawal from the Libra Association, and the future prospects of the Libra project are unknown.

In 19Q3, Facebook ’s global DAU reached 1.623 billion (YoY + 8.6%, QoQ + 2.3%), a quarter-on-quarter increase of 0.7pct from the previous quarter. DAU in North America increased by 2 million people to 189 million compared with 19Q2; DAU in European market 19Q3 increased by 2 million compared to 19Q2 to 288 million; DAU in the Asia-Pacific and other regions continued to grow, but the growth rate in the Asia-Pacific region slowed down, compared with the previous quarter The growth rate decreased by 0.5pct from the previous quarter; user growth in India, Indonesia, and the Philippines remained the main driver of DAU growth. North America experienced relatively strong DAU growth this quarter. The main reason is that user participation in core information flows has increased. Management expects that user growth in the region will face fluctuations in the future. Outside the United States, it is mainly due to increased video participation.

19Q3 Facebook user activity (DAU / MAU) as a whole increased slightly by 0.5pct compared to the previous quarter to 66.3%. In North America, user activity increased slightly by 0.1pct year-on-year, and decreased slightly by 0.1pct month-on-month. In Europe, user activity increased by 0.3pct year-on-year, and increased by 0.1pct year-on-year. In Asia-Pacific, user activity was 0.7pct and 0.6pct, respectively User activity in the rest of the region was 64.7%, a year-on-year and month-on-month increase of 0.9pct. In addition, according to the statistical indicators published by Facebook, the number of users of any of Facebook's apps (Facebook, Instagram, Messenger, or WhatsApp) increased slightly compared with the previous quarter, and the number of people using it every day rose to 2.2 billion.

In 19Q3, Facebook updated the advertising of many of its products, improving the accuracy of advertising for businesses, enhancing the transparency of advertising management, and providing users with a faster and more convenient experience.

In August, affected by the Cambridge incident, Facebook strengthened user privacy protection, enhanced its own transparency, and strengthened the management of political advertising. On August 20, Facebook updated the history removal tool, which allows users to manage Facebook's acquisition of user usage history, and updated the terms related to privacy activities in the software to make the meaning clearer. As the US elections near 2020, Facebook further increases the transparency of political advertising, it strengthens the cleanup of fake accounts, and requires political ads to be authorized before they can run.

Although these changes may have an impact on the company's performance, Facebook believes that this is beneficial to the long-term healthy development of the company's business. With the launch of Stories, Facebook's advertising approach has gradually changed. In terms of Stories, Facebook, Instagram, and Messenger have successively launched advertising templates. Enterprises can more easily change the template font format and layout, and publish attractive ads more easily.

In terms of search advertising, in August, Facebook conducted a small-scale test on search advertising merchants. On October 17, Facebook further increased the business scope of search advertising, and merchants can set up further screening in the search crowd. In terms of advertising algorithms, Facebook also updated its algorithm for ad coverage. The same customer contacting the same ad twice within a certain period of time is only counted as one contact. Facebook has extended that period of time, and the ad coverage will decrease slightly.

In terms of Messenger advertising, on August 29, Messenger launched a new advertising tool. The advertising tool has three core features: 1) allows companies to set up a dialogue mode similar to chatbots to quickly and automatically lock potential customers; 2) calendars, appointments Integrated with Facebook, when potential customers send appointment messages, companies can accept reservations through Messenger; 3) Improved event reporting.

In terms of Instagram advertising, Instagram provides collaboration and monetization functions for the Stories platform, which includes: 1) Allows multiple other pre-selected accounts to share their photos on the Stories platform of the enterprise, allowing more people to participate in the brand awareness Construction; 2) Allow companies to forward photos or videos of others to their Stories platform when asking others for their consent; 3) Allow companies to mark part of their content as promotional products so that they can be sold directly through a native ordering process. In terms of product display, Instagram is working with merchants to test the augmented reality (AR) function, which will further enhance the realism of product pictures and help users' consumption decisions. At the same time, Instagram introduced a product release reminder function, allowing merchants to check the information of unreleased products in advance and push product release reminders to users at the earliest one hour before the product release, which helps to promote product launches and maximize user interest. To encourage user spending.

4 [Commercial realization] 19Q3 company revenue was US $ 17.65 billion, an increase of 29% year-on-year, and advertising exposure increased by 37% year-on-year, which is still the core driver of growth; management guides Q4 revenue to slow down, and data privacy is still a constraint on the rapid increase in advertising revenue

2019Q3 company achieved operating income of 17,652 million US dollars (YoY + 29%, QoQ + 5%) 19Q3 advertising income of 17,383 million US dollars (YoY + 28%, QoQ + 5%), accounting for 98.5% of revenue; advertising revenue year-on-year The growth rate was slightly faster than the previous quarter. Mobile advertising revenue was US $ 16.3 billion, accounting for approximately 94% of 2019Q3 advertising revenue. Mobile advertising revenue accounted for the same percentage of total advertising revenue as in the previous quarter. Based on the 8% year-on-year increase in MAU, the platform achieved 31% revenue growth (based on constant exchange rates).

The company's revenue growth is still driven by information flow and Stories advertising, but the company still keeps exploring the form of advertising to improve the customer's advertising experience in the future and broaden the monetization channels in the advertising field:

i) Of the company ’s 7 million advertisers, 3 million publish ads through Stories, and the demand for Stories ads is still expanding. This quarter, the company began using customizable vertical screen templates to help more advertisers save time and resources, It entered the field of Stories. Currently, Stories' monetization efficiency is not as good as information flow. In the short term, Stories revenue will still be driven by advertising exposure, not price.

ii) Explore search advertising profit models. Currently the company is starting to add ads under the search function of Marketplace. However, users in the Facebook product line use the vast majority of people who search for people, so the advertising profit model is still in the early stages of development;

iii) Enhance the effectiveness of advertising. This quarter launched an interactive ad based on AR effects via Instagram Stories and completed a small beta test. During the test, advertisers ’product sales conversion rate has significantly improved.

In addition, Oculus Quest, a VR all-in-one, contributed to the growth of other revenues this quarter ($ 269 million, YoY + 43%), and the unit price was $ 400. In the future, Facebook will work to introduce more VR platform content and improve products to help users get a better experience.

In terms of regional breakdown, the North American advertising market is still the main source of advertising revenue. 19Q3 North American market advertising revenue reached US $ 8,317 million (YoY + 27%, QoQ + 5%), a year-on-year growth rate of 3pct lower than the previous quarter, accounting for 47.8% of total advertising revenue, unchanged from the previous quarter; advertising revenue in Europe was 4,057 million 10 million US dollars (YoY + 24%, QoQ + 0.3%), year-on-year growth rate is unchanged from the previous quarter; advertising revenue in the Asia-Pacific region was 3,243 million US dollars (YoY + 35%, QoQ + 9%), year-on-year growth rate increased by 5pct; others Regional advertising revenue was US $ 1,766 million (YoY + 34%, QoQ + 7%), a year-on-year growth rate of 13pct. Among them, the increase in advertising revenue growth in the Asia-Pacific and other regions was affected by product optimization and favorable macroeconomic trends (especially the Brazilian market, with a low base of 18Q3).

The growth of advertising revenue in Q3 2019 was mainly driven by the increase in advertising exposure. In Q3 2019, the average advertising unit price decreased by 6% year-on-year, but the ad exposure increased by 37% year-on-year. Similar to Q2, the increase in ad exposure was mainly driven by the increase in exposure of Instagram Stories and in-stream ads, as well as Facebook in-stream ads; The main reasons for the year-on-year decline in the average unit price of advertising are: 1) the company's advertising model is gradually shifting to a hybrid form mainly based on Stories ads, and the unit price of Stories ads is lower than information flow ads; 2) regions where the unit price of ads continues to be less monetized Driven, causing average prices to fall.

The company's management expects that the year-on-year growth rate of operating income in 19Q4 will be lower than that in Q3 by a single-digit percentage. Due to: 1) the high base brought by the successful optimization of 18Q4 products (optimization of advertising bidding, and increase of IG information flow and Stories ad inventory); 2) adverse effects related to the accuracy of advertising positioning. The company expects that the revenue deceleration in 2020 will not be as significant as in 19Q4, but it will still be affected by adverse factors: 1) regulatory control from GDPR and other levels, and under regulations, users can choose not to allow the company to use their relevant data for precision advertising; 2) The mobile platform's emphasis on privacy management makes advertising accuracy more difficult; 3) Facebook recently launched OSA, and users have higher control over the activity information stored on the platform.

The total cost of 19Q3 (operating costs, R & D expenses, selling expenses and management expenses) was 10,467 million US dollars (YoY + 32%, QoQ-15%). 2019Q3 operating costs of US $ 3,155 million (YoY + 30%, QoQ-5%), sales expenses of US $ 2,416 million (YoY + 25%, QoQ + 0.1%), and management costs of US $ 1,348 million (YoY + 43%) , QoQ-58%), research and development expenses of 3,548 million US dollars (YoY + 34%, QoQ + 7%), the total year-on-year growth rate decreased by 34pct compared to the previous quarter, to 32%. In terms of the proportion of three-fee revenue, the research and development expenses and sales expenses in 19Q3 were the same as the previous quarter, which were 20% and 14%, respectively. The sales expenses were the same as the same period last year, and the research and development expenses were the same as last year. The impact of fines decreased by 11 pct QoQ and increased by 1 pct YoY. The company's management estimates that the total cost for 2019 will be US $ 46-48 billion (including an accrued US $ 5 billion fine).

During the quarter, the number of employees increased by 3,379 to 43,030 (YoY + 28%, QoQ + 9%). The number of employees increased by 3pct from the previous quarter, and unit revenue was US $ 410,000, a decrease of 4% from the previous quarter.

The company expects total expenses in the range of USD 54-59 billion in 2020, and will re-expand recruitment of employees, especially on the company's important priorities, including recruiting talents on privacy security and investment. At the same time other expenses, such as marketing promotion. Companies will still rely on humans to label and classify content, and AI machine learning cannot replace humans in the short term.

The company's 19Q3 gross profit margin rose 2pct month-on-month. Operating profit was US $ 7,185 million (YoY + 24%, QoQ + 55%), operating profit margin was 41%, an increase of 14pct month on month, and a decrease of 1pct year-on-year, mainly due to the provision of penalties in the previous quarter and the decrease in management expenses during the quarter; sales and marketing Expenses as a percentage of revenue, research and development expenses as a percentage of revenue remained the same as the previous quarter; management expenses accounted for 8%, a decrease of 11pct month on month, and an increase of 1pct year on year.

The company's capital expenditures in Q3 2019 (including repayment of the principal of financing leases) were US $ 3,676 million (YoY + 10%, QoQ-3%), and this growth was mainly driven by the increase in investment in data centers, servers, office facilities and network infrastructure. The company once again lowered its annual capital expenditure budget to about 16 billion U.S. dollars, which was close to the previously expected lower limit of 16-18 billion U.S. dollars.

The company expects to continue to invest in new areas around product innovations such as Facebook and Instagram, platform privacy and security, and ARVR. The company's 20-year capital expenditure guidance is between $ 17 billion and $ 19 billion.

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