A Complete Guide to Facebook’s Q3 2016 Financial Results, Earnings Call

Beat the Street, indeed: Facebook’s third-quarter-2016 financial results exceeded Wall Street’s projections across the board, and the social network now boasts 1.79 billion monthly active users as of Sept. 30.

Beat the Street, indeed: Facebook’s third-quarter-2016 financial results exceeded Wall Street’s projections across the board, and the social network now boasts 1.79 billion monthly active users as of Sept. 30.

The company posted revenue of $7.01 billion in the third quarter of 2016, up 56 percent from $4.5 billion in the year-ago period and topping analysts’ consensus of $6.92 billion.

GAAP (generally accepted account principles) net income was $2.38 billion, up 166 percent from the third-quarter-2015 total of $896 million, and earnings per share soared to $1.09 from $0.57 in the same quarter last year, again besting analysts’ consensus of $0.97.

Ad revenue of $6.82 billion topped analysts’ consensus of $6.73 billion and was up 59 percent from $4.3 billion in the prior-year quarter, and Facebook said ad revenue grew by more than 50 percent in all regions of the globe.

Mobile ad revenue soared 70 percent year-over-year to $5.73 billion, and mobile represented 84 percent of total ad revenue in the third quarter of 2016, up from 78 percent in the year-earlier period.

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Statistics and milestones

  • Facebook reported 1.79 billion MAUs as of Sept. 30, up 16 percent year-over-year.
  • Mobile MAUs were up 20 percent versus the third quarter of 2015, to 1.66 billion.
  • Mobile-only MAUs topped the 1 billion mark for the first time, at 1.055 billion.
  • The third quarter marked a record quarter for adding daily active users year-over-year, as Facebook averaged 1.18 billion DAUs in September, up 17 percent.
  • The social network’s September average of 1.09 billion mobile DAUs was up 22 percent year-over-year.
  • 66 percent of Facebook’s MAUs visit the social network every day.
  • More than 60 million small and midsized businesses are using pages each month.
  • More than 80 percent of pages are active via mobile.
  • The number of users livestreaming via Facebook Live grew fourfold since May, with videos coming from all seven continents and outer space.
  • More than 3 million SMBs have posted videos to Facebook over the past month—organic video posts and ads.
  • Approximately 33,000 bots are live on Facebook Messenger.
  • Instagram has 500 million MAUs and 300 million DAUs.
  • Instagram Stories now has more than 100 million DAUs, as does the photo- and video-sharing network’s Explore tab.
  • More than 1.5 million businesses are using business profiles on Instagram.
  • The 2016 presidential election spurred more than 5.3 billion likes, posts, comments and shares on Facebook over the first nine months of the year, from about 109 million users.
  • The voter-registration link Facebook added to its flagship mobile applications in September helped an estimated 2 million people complete the process, many for the first time.
  • More than 270 million Facebook users generated some 1.5 billion interactions during the 2016 Summer Olympic Games from Rio de Janeiro.
  • More than 40 teams at Facebook, and more than 25 percent of the company’s engineers, are using artificial intelligence to power the products and services they are building.
  • The social network’s Internet.org initiative has connected an estimated 40 million people to the Internet.

We just announced our quarterly results and gave an update on our community's progress in making the world more open and connected.

Our community now has 1.8 billion people. We hit the milestone of 1.2 billion people using our apps every day.

Our biggest focus has been putting video first across our apps. People are creating and sharing more video than ever, so we're building new tools to make it easier to express yourself in creative ways.

The number of people going Live on Facebook at any moment has grown by 4x since May. We launched Instagram Stories less than 3 months ago, and already more than 100 million people are using it every day. We're also building a brand new camera across our apps and we'll be adding even more visual messaging tools over the next few months.

Our community has a lot to be proud of this quarter. Thanks for being a part of this journey to connect the world.

Posted by Mark Zuckerberg on Wednesday, November 2, 2016

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Advertising

As always, a healthy portion of Facebook’s conference call to discuss its third-quarter-2016 financial results revolved around advertising.

In her opening remarks, chief operating officer Sheryl Sandberg said:

We continue to focus on our three priorities: capitalizing on the shift to mobile; growing the number of marketers using our ad products; and making our ads more relevant and effective.

First, capitalizing on the shift to mobile, people have shifted to mobile, and we remain focused on helping businesses catch up. We know that marketing shifts take time. The first TV ads showed people standing in front of microphones reading their radio ads. Similarly, many of the first mobile video ads were TV ads dropped into mobile. Ads optimized for each platform often perform better, so marketers are increasingly tailoring their creative for mobile.

We’re excited to see the world’s largest advertisers realize that the small screen is big. In September, Procter & Gamble chief brand officer Marc Pritchard, General Motors CEO Mary Barra and I addressed the Advertising Week audience together.

Marc described how P&G is creating mobile video ads designed to grab attention in the first few seconds. He shared the example of Tide. In a typical TV ad, it starts with a clean dress or shirt, shows it getting stained and then cleans it with Tide. On mobile, it needs to communicate the product’s value more quickly, so it starts by showing Tide cleaning a stained garment.

Mary shared GM’s success with Facebook mobile video ads. In the third quarter, GM subsidiary Holden used carousel ads with video to maximize its sponsorship of Australia’s premier rugby tournament. Holden created a video series about its support of the youth rugby. The ads generated an eight-point lift in brand favorability for the overall audience and a 15-point lift amongst its target audience of women over 35.

Our third priority is making our ads more relevant and effective. Our goal is to be the No. 1 driver of growth for our clients. In the third quarter, we introduced tools to help businesses find people around the world who look like their current customers and target the ones most likely to convert. For example, SA, an outdoor gear and apparel business started by a young man out of his parents’ home, used international lookalike targeting to reach customers in 32 countries and increase sales by 37 percent.

We’re focused on driving purchases online and in stores. In the second quarter, we launched estimated store visits, which show advertisers how many people came to their store after seeing an ad. And this quarter, we made it possible for advertisers to optimize campaigns for in-store visits.

We also expanded dynamic ads, a proven way to drive online sales for in-store retail objectives. Businesses can use dynamic ads for retail to show people the products available at their closest location in real-time and reach people likely to visit their stores.

To prove the value we’re driving for our partners, we continue to invest in measurement. This quarter we announced new third-party partnerships with Nielsen DataLogix, Visual IQ and MarketShare to help our clients measure how Facebook ads drive business results.

Sandberg also addressed why SMBs are turning to Facebook in response to a question from UBS Securities analyst Eric Sheridan:

The reason we think people are so active is that it’s just really expensive and hard to have your own mobile site or your own even webpage. 35 percent of small businesses in the U.S.–which is the most developed market in many cases–don’t even have a webpage of any kind. And it’s cheaper and easier to build a webpage than it is to build a mobile app and get distribution or downloads.

So what’s happening is that people are really using Facebook business pages and increasingly Instagram business profiles as their mobile presences, and we think that’s what’s working. And then we’re working hard to build products that work, in-store visits and then to use simplified ad products that convert them over to advertising.

Facebook’s ad load was a frequent topic of conversation during the question-and-answer portion of the earnings call, with Sheridan asking:

As we try to digest some of the comments you made about ad load and revenue as we exit 2016 and go to 2017, how should we also be thinking about the mix of ad units as you continue to see more e-commerce and video in the platform? And how should we be thinking about the pricing of ad units as that mix changes over time?

Chief financial officer David Wehner responded:

Just really reiterating what I said last quarter about our expectations on ad load going into mid-2017, it’s been one of the key factors in terms of driving growth along with time spent–user growth and time spent growth and advertiser demand. So we continue to see good opportunities to grow time spent, continue to see good opportunities to grow users and we continue to see good opportunities to grow advertiser demand.

On that latter point, really, the mix of ad units is part of what we’re doing I think really well. We’re developing a number of new ad products, as well as enhancing the ad products that we have out in the market today. So we’re taking what is a great mobile ad product on Facebook and Instagram and making it even better. And I think the investments that we’re doing there will continue to enable us to drive advertiser demand. So those key factors will continue, we believe, to drive growth next year. So what I’m specifically talking about is ad load and our anticipation that it’s going to be a less significant factor as we get into mid-2017.

Citigroup Global Markets analyst Mark May asked:

As the rate of growth in ad loads slows and also as you continue to enhance targeting and as more video advertisers come onto Facebook, would you expect that eCPMs (effective cost per thousand impressions) will rise and offset part, if not all, of this impact of the ad loads slowing?

Wehner answered:

On ad load growth slowing and the impact on eCPMs, I think when you look at our business, demand has been one of the key factors driving growth. So we’ve built up a large base of advertiser demand. We’ve got 4 million advertisers on Facebook and 500,000 advertisers on Instagram. We continue to innovate on the products to make them more effective and make this a great gateway for businesses to come onto Facebook and come into mobile and spend. And we expect we’ve got a lot of great opportunities to continue to innovate on that front. But we’ve also been innovating over the past several years. So demand has been a big factor in what’s been driving our growth to date. On top of that, we’ve grown users and time spent, and then we’ve also grown ad load.

So I do think as we look into 2017, we do expect that as you get to mid-2017, ad load will be a less significant factor contributing. We’ll continue to get benefits of being able to grow our revenue with advertiser demand and continuing to innovate there. But I do think that as we slow ad load growth, we’re going to have a slowing in revenue, as well. So that’s our expectation, but obviously we’re going to continue to work hard to innovate in the ad product space.

On the topic of video ads, JPMorgan Securities analyst Douglas Anmuth asked:

Sheryl, can you just talk about with video, how you see marketers using Facebook more to complement TV and what it would take to shift dollars over in a bigger way going forward?

Sandberg responded:

When we think about video ads and what platform they run on, we really believe that over time, the dollars will shift with eyeballs, and our goal is to be the best dollar and the best minute people spend measured across channels.

It’s definitely true that most of our advertisers are advertising on TV and advertising with us on mobile, and they should be. And we’ve done studies that show with Nielsen that our ads can be a really big complement to TV, particularly enabling you to reach people who really aren’t on TV and you can’t reach.

I think the power of what we’re able to do really goes to the targeting. Big brands are really recognizing that they can do big-brand buys on our platform like they would do on TV, but make them much more targeted.

For example, Nestlé Purina PetCare did an ad campaign in Germany with ZenithOptimedia, and they defined five distinct cat-owner personality types and created different creatives for each group. So that’s a big brand thing. The cat-food category is big, and they want brand awareness. But rather than just run one ad, they were able to run five based on the interest base and personality targeting that really only we can do. And the results were amazing. They got an 89 percent increase in brand awareness and a 20 percent lift in sales. And so we think what we offer is the power of the broad reach of TV, but an ability to target much more efficiently.

The next five and 10 years

During his opening remarks, Facebook co-founder and CEO Mark Zuckerberg addressed the company’s plans for the next five years and 10 years, saying:

Over the next five years, we’re going to keep building ecosystems around products that a lot of people already use every day. Instagram, Messenger and WhatsApp each have large communities, but we have a lot more work to do on all of them.

I think about our progress here in three phases. The first phase is building a great consumer experience and getting it to scale. The second phase is about enabling people to organically interact with businesses. And then the third phase is to give businesses tools to reach more people, and that’s where we build our business.

Right now, Instagram has moved into that third phase. Instagram has more than 500 million monthly actives and more than 300 million daily actives. We’re making good progress helping businesses and marketers use Instagram in new ways, and Sheryl will talk more about that in a few minutes.

Messenger is early in the second phase. We’re helping businesses and consumers increasingly interact in richer ways. Today there are 33,000 bots live on Messenger. We also launched Messenger Lite, which is designed to make messaging fast and easy with a wide variety of Android phones and for people who are on slower networks, as well.

A lot of businesses use WhatsApp already, but we’re going to really start working on the second phase in the next year. Right now, we’re testing new camera features, and we’re continuing to keep features fast and reliable on multiple devices and every network condition.

Finally, we’re starting to build communities around completely new applications. This quarter, we launched Workplace to help make organizations more connected and productive. Workplace is a communications platform that uses features that people know–like News Feed, groups and messages–to help them collaborate and share at work the same way that they do everywhere else. Already, more than 1,000 organizations are using Workplace, including Starbucks, Royal Bank of Scotland and Danone, and we’re adding more all the time.

We’re also getting new services to scale in the core app. In October, we also launched the Marketplace tab to help people discover, buy and sell things with people in their community. While we just launched Marketplace, many millions of people have been buying and selling things in Facebook for-sale groups for a while, and we think this is going to be an important tool going forward.

Over the next 10 years, we’re going to continue to invest in the platforms and technologies that will connect more people and more places and allow everyone in the world to have a voice. We focused our long-term innovation roadmap around three areas: connectivity initiatives that bring more people online; artificial intelligence; and virtual and augmented reality.

On connectivity, through our efforts with Internet.org, we’ve connected 40 million people, based on our best estimate. And we’re making good progress with our Express Wi-Fi program, which empowers entrepreneurs to build a business by providing their community with access to the Internet.

On artificial intelligence, we’re starting to see the impact that AI can have on enhancing people’s experiences on Facebook and showing them more of what they care about. More than 40 teams at Facebook and more than 25 percent of our engineers are already using AI to power the products and services they build. We’ve made changes and improvements to our AI in order to filter out misleading clickbait stories from News Feed. And we’re using AI to help find terrorist propaganda on Facebook. It’s still early, but we think that AI will help improve the quality of what people see and can share on our platform.

We also took some important steps forward on virtual reality to help people experience the world in richer and more immersive ways. At Oculus Connect, we announced that Touch controllers for Rift will ship in early December with 35 games and experiences exclusively built for touch. And since we believe the next phase of VR is great software experiences, we’re investing another $250 million in virtual reality content on top of the money that we’ve already invested.

Video

Facebook’s emphasis on video was reflected in conversation during its third-quarter-2016 earnings call. Zuckerberg said during his opening remarks:

In addition to making it easy to share video, we also want to make it easier to capture video. In most social apps today, a text box is still the default way we share. Soon, we believe a camera will be the main way that we share. We’re already testing this in our main Facebook app with a version that has a camera, directly just one swipe away from News Feed, with creative effects for your photos and videos. And in Messenger, we’re testing new camera and video features. We’ll be experimenting with even more visual messaging tools over the next few months, as well.

During the Q&A portion of the call, Nomura Securities International analyst Anthony DiClemente asked:

In terms of video and your broader media content strategy, just trying to think about your investment in Facebook Live and then trying to frame that against investments in I guess non-live forms of video, such as maybe short-form, prerecorded, professional content. So how do you weigh investing in live versus let’s call it on-demand content?

Fox Sports and Sports Illustrated are co-producing some original content for Facebook Live. I think they’re doing a pregame show ahead of the big game tonight. So that seems like, in some ways, it’s an entree into sports perhaps for Facebook. Could you give us an update on whether or not you see any advantage or any benefit in licensing sports content over time versus having one of the publishers do it on the Facebook platform?

Zuckerberg answered:

The VOD content is the vast majority of video that is both shared and consumed on Facebook, not live video, but live is growing very quickly. And part of the reason why we’re investing in it is we see that video as a medium is not only in the future going to be about people producing content that looks like traditional content and then consuming it in a static rectangle video screen.

So live video we think represents an example of something new, which is video which is a medium for doing something that’s really interacting with other people. Whether you’re a public figure that is using it to hold a town hall or interact with a lot of people at the same time, or you’re hanging out with your friends by going live and you have 10 people who are just there with you chatting with you while you’re doing something, going about throughout your day, it’s not the kind of traditional video experience; it’s actually a more social experience.

I think 360 videos in another way are another example of this kind of interactive video experience, and my guess will be that we will see more different kinds of video media as time goes on. I think Stories is another example of this. We’re seeing it with Instagram Stories and with Messenger and the initial test that we have with Messenger Day, where that is another interesting format for how you can put videos together. And I think that’s going to be more and more.

But to put that all in context, the majority of consumption today is VOD. We are very interested in making sure that the business model that we have works for folks who produce content as their business to make sure they can make money from it, so that their best content comes on Facebook. So it’s going to be a lot of growth in all of these things across all our family of apps.

May asked:

When you went mobile-only or started this concept, you had to tweak the app because it wasn’t necessarily optimized for mobile. As now you begin to move to more of a video-first approach, what needs to happen to the Facebook app both from a consumer-facing and from an ad-tools perspective to make sure that you’re optimized for video? What needs to change?

Zuckerberg responded:

There are two broad sets of improvements that I think we need to make. One is to the capture and sharing tools that we offer. So the example of that is the new camera that we’re working on and all the creative tools around that. And then on the other hand, we also need to improve the infrastructure to deliver the best videos to people and do that quickly.

So if you think about what is enabling video to become huge right now, it’s that fundamentally, the mobile networks are getting to a point where a large enough number of people around the world can have a good experience watching a video. If you go back a few years and you tried to load a video in News Feed, it might have to buffer for 30 seconds before you watched it, which wasn’t a good enough experience for that to be the primary way that people shared. But now it loads instantly. You can take a video and upload it without having to take five minutes to do that, so it’s a good experience.

So we’re very focused on creative tools. You can see that a little bit in the announcement and launch of Instagram Stories and what we’re doing with Messenger and some of the additional tests on Facebook and the camera work that we’re doing in WhatsApp. So this is across the whole family of apps. This is a big part of the product experience that we want to deliver.

And then on the actual delivery of video side, it’s just much more intensive technically. So there aren’t that many companies that can do this at the scale that we’re talking about, and this has been a big advantage for us. In rolling out things like Live, we’ve had this infrastructure that we’ve been building out for a decade all around the world, and that allowed us to build a product like Live where someone has to stream something live from their phone to potentially hundreds of thousands of people around the world. From a phone, that’s a difficult scaling problem. So we’ve been able to build that up not just because of the ongoing investment in technology and infrastructure here, but because we’re building on this strong base.

That goes not only for just being able to deliver the content, but being able to understand what it is so we can rank it in News Feed better and show people the right content. But all of these things are going to be part of a cohesive experience to get behind our community. And when people are ready and want video to be the primary way that they’re sharing and consuming content, we’re going to be ready.

RBC Capital Markets analyst Mark Mahaney continued with the video theme, asking:

You’re talking about some of these features and making the camera more of a central way of communicating on Facebook. How long do you think the iterations or the testing is going to go until, as an average user, I would notice that in my News Feed? I do see much more prevalence of live video, and it doesn’t seem to me yet a perfect experience. But just in terms of other features and putting the camera at centerpiece, do you think this is something that’s going to be obvious to people in the next year, couple of months? Just what’s the timing of the innovations?

Zuckerberg said:

We already rolled out the first test of the new camera in Ireland. And we’re a company that believes in testing things and getting feedback from our community before we roll it out broadly. We think we have a lot to learn. And the methodology of how we develop is we try to build things quickly. And rather than just relying on our own intuition, although we do rely on that a lot, we will try to put it out in the market and get feedback and then roll it out from there. So we rolled out what we believe is a good experience in Ireland. They were the first part of the community to get access to these new features. And then from there, we’ll start to roll it out broadly across the world, hopefully sooner rather than later.

Same thing on the Messenger side, as I mentioned, these products around Messenger Day, it’s a similar video medium to Instagram Stories and a similar camera to what we’re building in the Facebook app as well. And that we rolled out in a few countries as well. And similarly, based on the feedback that we’re getting, I would expect that we’ll be rolling that out pretty widely across the world soon as well.

Anmuth asked whether Facebook would separate video into a stand-alone app, and Zuckerberg said it would not, adding:

So in the main Facebook app, we’re doing a number of different things. One is that video is naturally becoming a larger share of the content in News Feed because both people and pages are sharing more videos as a mix and people want to consume that content. So there’s not really a question of whether that should be a separate app. This is what people want News Feed to be increasingly, so this is what it will become.

There is a second experience called Video Home, which we started talking about earlier in the year and we’ve rolled out again in a few markets, and those tests have gone well. So we’re also hoping to roll that out pretty soon widely. And that’s the new experience: If you come to Facebook and you specifically want to watch some different kinds of videos, or you want to see what videos a recent page that you follow has posted, or the presidential debate is on and you want to find a good place to go online to get that, you can go to Video Home and see that.

That is a new experience that we’re building, and building that as part of Facebook is a great way for people to see it and get exposure to it, and we’ll see where that goes over time. I think it’s a good experience inside Facebook, but we also have had examples over time, like Messenger for example, where we started it in Facebook and decided that in order to fulfill their potential, it needed to be its own experience over time. So we’ll look at all those options, but for now I really think that Video Home is going to be a great experience, and I’m excited to roll that out.

News Feed

Jefferies analyst Brian Fitzgerald asked:

You’ve been tweaking the News Feed algorithm to prioritize friends and family and original content. We’re curious what kind of impact you’re seeing there. And is it driving more engagement and more sharing of originals?

Zuckerberg replied:

News Feed is an ongoing work that we’re always improving. What we basically are trying to do is work on over time adding more and more signals to the News Feed model to help us fully value what people in the community value about the different content that we show them. So what we realized was that the model that we had previously didn’t fully capture the nuance in how people preferred certain content from friends and family. So we ran a bunch of qualitative studies and talked to a bunch of people and incorporated those signals into the model, and that has had the result that the people in our community who gave us that feedback and who we worked with on this, what we had expected in terms of both increasing the quality of the content that people see, and therefore also enabling people to share more with their friends and the people that they want.

But one thing that I would clarify is that I think sometimes people–in your framing of your question, you asked if we had tweaked News Feed to do this or that. This is an ongoing iterative process. We’re constantly learning about what our community wants, and we will constantly be trying to incorporate new information and signals into the models to help value all of the content in the system as accurately as possible. The biggest job that we have is to show people in the community what’s going to be meaningful and important to them, and that is our goal in all of these changes.

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