Facebook – Q2 FY14: Squeezing out the returns, but DAU growth slowing

Facebook: Unparalleled qualitative information on consumers and unmatched reach makes Facebook a must have for both advertisers and NSA alike. For the moment, the group is managing the migration to lower yield mobile and overseas users while sustaining overall yield growth of +41% YoY and +14% QoQ and somewhat surprisingly, an average yield increase on non-mobile DAU that is actually greater than that for mobile! Having convinced the advertisers to spend, Facebook’s low direct cost component is enabling the marginal revenues to drop down substantially through to margins and even more impressively to cash/marketable securities. Indeed, the ability in H1 to increase revenues by almost $1.1bn with accounts receivable expanding by just $81m is truly impressive. Social media users however are fickle and today’s cool site may not be so appealing should the owners appear to sell-out to commercial and government interests. Yes, reach is still growing, but at +3% QoQ, not by that much and any reversal could quite quickly see remedial costs thrown at the hole and reverse some of today’s spectacular performances.

Trading Q2 FY14: Revenues +61%/+$1.097bn to $2.91bn (vs Q1 +72%/+$1.044bn), costs +22%/+$269m to $1.52bn (vs Q1 +32%/+$342m to $1.43bn), EBIT +147%/+$828m to $1.39bn (vs Q1 +188%/+$702m to $1.075bn) and margins +17pts to 48% (vs Q1 +17pts to 43%). Within revenues, advertising (91% of revenues) advanced+67% to $2.68bn (vs Q1 +82% to $2.27bn), including mobile (62% of advertising vs 59% in Q1). Daily active users (DAUs) meanwhile, increased by +19% YoY to 829m (vs Q1 +21% YoY to 802m), including mobile at +39% to 654m (vs Q1 +43% to 609m). After -$469m of CapExp (16.1% of revenues (vs Q1 -$363m/14.5%), Q1 FCF was $872m (vs Q1 $922m) while cash and marketable securities ended the period up +$1.32bn to $13.954bn (vs end Q1 of $12.63bn), albeit not reflected in the P&L with a net interest EXPENSE reported of -$4m (vs Q1 of -$20m)!