Everything You Need to Know About Facebook’s Q1 2016 Earnings Call

Facebook reported its first-quarter-2016 financial results Wednesday and announced a proposal to create a new class of stock in the company.

Facebook reported its first-quarter-2016 financial results Wednesday and announced a proposal to create a new class of stock in the company.

Following are highlights from the social network’s financial results, details about the stock class proposal and highlights from the company’s earnings call, which was held Wednesday after market close.

Financial results

Facebook’s revenue reached $5.382 billion in the first quarter of 2016, up 52 percent from $3.543 billion in the year-ago period. Ad revenue climbed 57 percent year-over-year, to $5.201 billion, and mobile ad revenue—which accounted for 82 percent of total ad revenue—was up 75 percent compared with the first quarter of 2015, to $4.2 billion.

Facebook’s generally accepted accounting principles net income nearly tripled year-over-year, reaching $1.51 billion ($0.52 per share), up from $512 million ($0.18) in the previous-year quarter.

The social network reported 1.65 billion monthly active users as of March 31, up 15 percent year-over-year; 1.51 billion mobile MAUs, up 21 percent; 1.09 billion daily active users, up 16 percent; and 989 million mobile DAUs, up 24 percent.

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Class-C capital stock

Facebook announced that its board of directors approved a proposal to create a new class of non-voting capital stock, class-C capital stock. The company said that if its proposal is approved, it will issue two class-C shares as a one-time dividend for each outstanding class-A and class-B share of common stock.

The proposal will be voted on at Facebook’s 2016 annual meeting, scheduled for June 20.

Facebook co-founder and CEO Mark Zuckerberg said in note shared via Newsroom:

Everything we do at Facebook is focused on our mission to make the world more open and connected.

To maintain our focus on this mission, we have always been a founder-led company. This structure has helped us resist the short-term pressures that often hurt companies. It has helped us grow our community, build our business and create shareholder value. It has given us the freedom to prioritize your product experience and invest in new apps like Instagram—decisions that don’t always pay off right away, but that we believe help us serve our community and our shareholders.

When I look out at the future, I see more bold moves ahead of us than behind us. We’re focused not on what Facebook is today, but on what it can be and what it needs to be for our community. That means investing in areas like spreading connectivity, building artificial intelligence and developing virtual and augmented reality. I am committed to our mission and to leading Facebook there over the long term.

While helping to connect the world will always be the most important thing I do, there are more global challenges that I feel a responsibility to help solve—like helping to cure all diseases by the end of this century, upgrading our education system so that it’s personalized for each student and protecting our environment from climate change. That’s why Priscilla and I created the Chan Zuckerberg Initiative and committed to give 99 percent of our Facebook shares during our lives to advance human potential and promote equality.

Today, Facebook’s board of directors is announcing a proposal to create a new class of stock that will allow us to achieve both goals. I’ll be able to keep founder control of Facebook so we can continue to build for the long term, and Priscilla and I will be able to give our money to fund important work sooner. Right now, there are amazing scientists, educators and doctors around the world doing incredible work. We want to help them make a bigger difference today, not 30 or 40 years down the road.

If this proposal goes into effect, we’ll get to keep improving your Facebook experience the way we do today. And over the long term, I think you’ll have better services and be part of a stronger community as a result. I believe in our community and the good we can do in the world, and I’m looking forward to continuing this journey with you.

And general counsel Colin Stretch said in a note of his own:

The board believes that a large part of Facebook’s success has stemmed from the leadership, creative vision and management of Mark Zuckerberg, and that the company’s future success will depend on Mark’s continued leadership. Specifically, the board believes this structure will benefit Facebook and its stockholders by:

  • Allowing the company to maintain focus on Mark’s long-term vision for Facebook.
  • Encouraging Mark to remain involved with Facebook in a leadership role.
  • Mitigating succession risk.
  • Better mitigating potential future voting dilution.

This is not a traditional governance model, but Facebook was not built to be a traditional company. The board believes that a founder-led approach has been and continues to be in the best interests of Facebook, its stockholders and the community.

Stretch also included a frequently asked questions section in his note:

What is happening? How are the new class-C shares different than the existing class-A shares? Today, Facebook filed a preliminary proxy statement that includes a proposal to create a new class of publicly listed, nonvoting class-C capital stock and, if approved, to issue a one-time dividend of two shares of that new class of capital stock for each outstanding class-A and class-B share held by stockholders (referred to in the rest of this FAQ as the “reclassification”). The class-C shares will have the same economic rights as the existing class-A and class-B shares. The primary difference is that the class-C shares are nonvoting. This proposal will be subject to stockholder approval at the annual stockholder meeting on June 20.

How will these shares be traded? The class-A shares will continue to trade under the “FB” ticker symbol, while the class-C shares will trade under a different ticker symbol following the payment of the dividend. Stockholders will be able to trade the new class-C shares, just as they can with class-A shares today.

What is the timeline for the change? The board of directors hasn’t yet set a record date for the payment of the stock dividend. The actual record date will be communicated at a later date.

Will this change my percentage ownership in the company? No. Following the reclassification, each stockholder will hold three times as many shares as they did before the reclassification and, similarly, the total number of outstanding shares will be three times greater than it was before the reclassification. Shareholders’ percentage ownership interest in the company will not change.

How did the board arrive at this proposal? In August 2015, the board of directors established a special committee, comprised of independent, non-management directors (Susan Desmond-Hellmann, Marc Andreessen and Erskine Bowles) to evaluate a potential reclassification of our capital structure. The committee considered and received advice from its own independent advisors on the likely effects of a reclassification on our share price, capital structure, governance, management, operations and investor relations. Following these discussions, the special committee unanimously recommended, and the board of directors unanimously approved (with Mark and the other management directors not participating), the reclassification proposal.

Milestones and statistics

  • More than 1.5 billion people accessed Facebook via mobile devices in March, up 21 percent from March 2015, and the social network said it has consistently seen more than 1 billion mobile users each day in recent weeks.
  • People spend more than 50 minutes per day using Facebook, Instagram and Messenger.
  • Messenger has 900 million MAUs, and WhatsApp has more than 1 billion. The two apps account for some 60 billion messages every day, or more than three times as many as SMS (short messaging services, or text messages) at its peak.
  • Internet.org Free Basics currently features more than 600 services and has brought more than 25 million people online.
  • On the virtual reality front, Gear VR users have watched more than 2 million hours of video on the devices, and more than 50 games have been developed for Oculus Rift.
  • Users are creating nearly three times more video on Facebook than one year ago.
  • As of February, time spent watching videos on Instagram was up 40 percent compared with the prior six months.
  • Captioned videos saw a 12 percent bump-up in view time.
  • Facebook boasts more than 3 million active advertisers, while that total tops 200,000 on Instagram.

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Messenger and bots

During the question-and-answer portion of Facebook’s earnings call Wednesday, JPMorgan Securities analyst Douglas Anmuth asked:

Mark, I was hoping you could talk to us about how you expect to shift user behavior within Messenger to get users to focus more on businesses versus more personal communications and how you’ll make users aware of the capabilities within the platform.

And then just secondly, as more bots come on board here and businesses are engaging with Messenger, how do you envision bots and humans working together in terms of providing more customer service?

Zuckerberg replied:

Part of our playbook for building out these ecosystems at scale is that we start with the person-to-person user base, whether that’s in messaging, people messaging their friends or groups and News Feed. Before that, it was people posting updates and seeing what was going on with their friends and the people that they care about.

And then the next step is to create organic activity around public entities–whether that’s businesses, public figures like athletes and celebrities and types of folks that people want to interact with on these different platforms–and we did that on Facebook in News Feed group pages, and we’re working on a number of different ways to do that in Messenger. One of those is bots. And one of the good things about bots that we’ve seen is that it can decrease the amount of time that you have to wait before you get a reply back from interacting with a message.

So what we’ve seen–we’ve done some research on this. A lot of people every day in Facebook today are already messaging pages and businesses directly, and the businesses respond. But what we’ve actually also found is that through some of our AI research, we can look at the responses that businesses give to common questions and can confidently provide the right reply a lot of the time. And when we can do that, then that decreases the latency. And predictably, people want to do more of that activity.

So that’s one way that I think you’re going to see bots work, between people who are actually driving the businesses directly will need to in some way train or answer questions for people, but we can build artificial intelligence that can learn from people how to automate a lot of that and make that experience a lot faster for people who want to interact with businesses and public figures. And of course then, after you start building out that segment of businesses and then public figures on the platform, then on top of that you have just a good amount of intent on these platforms to build a good business on top of that. That’s stage three.

Later in the call, Deutsche Bank Securities analyst Ross Sandler asked:

At F8, you showcased a bunch of new features for Messenger, including ads to promote your business inside of Messenger. So how should we think about the timing of those ad units coming on in Messenger? And can you use the same ad stack in the Facebook Power Editor that’s used on core Facebook and Instagram to get ads up on Messenger? Can you walk us through that?

And then the second question on messaging, so with WhatsApp crossing 1 billion users recently, how do you view the product roadmap today on WhatsApp versus what you showcased recently with Messenger? Is it a year behind, or is it further back than that? Any color there would be helpful. Thanks.

Chief operating officer Sheryl Sandberg replied:

For Messenger and WhatsApp, our focus right now continues to be on growth and engagement. We are not rolling out any monetization products on WhatsApp right now, but we did start that process at F8 on Messenger. And what we’re doing is following the organic activity that’s happening on the Messenger platform. Businesses and consumers are using Messenger to connect to each other in a more personal, more immediate way. And we rolled out a platform beta, which gives new opportunities to build compelling experiences. Bots are very early but giving the opportunity for more personal interactions between businesses and mobile. The send-receive API allows businesses to send immediate responses to common questions, including engaging images and calls to action, as well as texts.

In terms of the timing, this is really early. We have a lot of opportunity to invest in advertising across our different platforms. And so we want to make sure we get this right as we focus on continued engagement. You’re right that over time, when we make these investments, we are going to be able to rely on some of the core aspects of the ads infrastructure. Certainly, our long base of advertisers, some of the things we understand about how ads perform and the functionality will be an important part of the product offerings in the future, but those are not immediate by any stretch of the imagination.

Facebook Live

During his opening remarks, Zuckerberg discussed the social network’s Facebook Live live-video-streaming feature:

Earlier this month, we opened up Live to everyone. Live is just one part of our overall video effort, but we think it has a lot of potential. Friends go Live because it’s unfiltered and personal. Actors and news anchors go Live because they can reach bigger audiences in some cases than they can on even their own shows. And if we do a good job, we think it’s something that people will associate with Facebook, with interacting with people and not just watching content. But it’s also a very new and small part of all of the videos that we see on Facebook today.

Engagement

Bank of America Merrill Lynch analyst Justin Post asked:

There have been some concerns about traffic to publishers and sharing levels on Facebook. I just wanted you to talk about core Facebook engagement. What’s really working? Are you concerned at all about that? And then when you think about the ad loads, are you comfortable with where they’re at, or is there still a lot of room to go?

Zuckerberg replied:

All right, let’s talk about engagement first. So overall sharing is up across Facebook, and people are spending more time on Facebook and the whole family of apps. And that is not just the case for the aggregate of the growing community, but it’s actually also the case on a per-person basis, as well in terms of people sharing more and spending more time individually.

Now one of the things that we see is that the way that we are sharing is always changing, and some of this is because of underlying technical transition. So on desktop, for example, it’s easier to type, so we saw more text posts. On mobile, it’s easier to take videos, so we see more videos. On desktop, people would have more commonly uploaded an album of photos that they took from their digital camera and downloaded onto their computer; whereas on mobile, the more common behavior is to take a single photo or a couple and just post those. So there are all these transitions. And that’s our job, is to make it so that we build great tools that people–everyone around the world can share anything that they want with everyone.

Now the other thing that’s also true is that people want to share with lots of different kinds of audiences. So Facebook gives you the ability to share with all of your friends and publicly if you want and with groups. But we’re also investing in things like Messenger and WhatsApp because a lot of people want to share increasingly messages privately one-on-one or with very small groups. So in addition to Messenger, which is at 900 million people a month, and WhatsApp, which is at more than 1 billion people a month, Facebook groups is also at more than 1 billion people a month, which I think represents the increasing diversity of the different types of audiences that people want to share with.

But ultimately, I think that humans have such a deep desire to express themselves and want to connect with the people around them that I think that all of these audiences and all of these different types of media should grow over time. And it’s our job to basically make sure that we build good products and get rid of all the bugs and make it so the performance is fast and all the basic stuff works, so that way we get there. But in general, right now all the high-level trends look pretty positive on that.

Machine learning

In response to a question from Robert W. Baird analyst Benjamin Gaither about machine learning, Zuckerberg said:

So the biggest thing that we’re focused on with artificial intelligence is building computer services that have better perception then people, so the basic human senses like seeing, hearing, language, core things that we do. I think it’s possible to get to the point in the next five to 10 years where we have computer systems that are better than people at each of those things. That doesn’t mean that the computers will be thinking or be generally better, but that is useful for a number of things.

So for example, I talked about earlier, we are building this Moments app, so that way you can take photos on your phone. And if you use this app, our facial recognition can look at the photos that you take and suggest that you might want to share photos that you took with a friend in them with that person. So that way, all the photos that might be of you and your friends’ camera rolls, they can share with you.

Another example is just spam filtering and just making sure that we can actually read the content and understand what’s interesting to you or not and not show that.

One obvious thing I think over time is if you just look at the way that we rank News Feed, today we use some basic signals like who you’re friends with and what pages you like as some of the most important things for figuring out what–out of all of the millions and millions of pieces of content that are on Facebook–what we’re going to show and what are going to be the most interesting things to you. That’s because today our systems can’t actually understand what the content means. We don’t actually look at the photo and deeply understand what’s in it or look at the videos and understand what’s in it or read the links that people share and understand what’s in them, but in the future, we’ll be able to, I think in a five- or 10-year period.

So all of these millions and millions of pieces content that are out there, whether or not you’ve added someone as a friend or have liked a page, we’ll be able to know a lot better what types of things are going to be interesting to you to produce a much better feed of content. So that’s just a basic example of where having human-level perception broadly is going to yield better experiences in a lot of the things that people care about today.

Readers: What were your thoughts on Facebook’s first-quarter-2016 financial results and earnings call?

First-quarter results image courtesy of Shutterstock.