A Complete Guide to Facebook’s Q3 2015 Financial Results

By David Cohen Comment

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If you still need proof that Facebook has fully transitioned to a mobile company, consider this statistic: At the end of the third quarter of 2014, the social network had 1.35 billion total monthly active users. At the end of the third quarter of 2015, it had 1.385 billion mobile MAUs.

The company announced its third-quarter-2015 financial results after market close Wednesday, and its numbers were strong across the board.

Facebook now has 1.545 billion total MAUs, up from 1.49 billion at the end of the second quarter of 2015 and 1.35 billion at the same time last year. Other user figures included:

  • 1.385 billion mobile MAUs, up from 1.314 billion in the second quarter and 1.124 billion in the prior-year period.
  • 727 million mobile-only MAUs, up from 655 million last quarter and 456 million in the third quarter of 2014.
  • The social network cracked the 1 billion daily active user milestone, finishing the third quarter of 2015 with 1.007 billion, up from 968 million in the previous quarter and 864 million in the year-ago period.
  • Mobile DAUs at the end of the third quarter were 894 million, versus 844 million in the second quarter and 703 million at this time in 2014.

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The company posted third-quarter-2015 revenue of $4.501 billion, up nearly 41 percent from $3.203 billion in the year-ago period. GAAP (generally accepted accounting principles) net income of $896 million, or $0.31 per share, was up 11.2 percent from the third-quarter-2014 figure of $806 million ($0.30).

Facebook said mobile now makes up 78 percent of its ad revenue, with total ad revenue up 45 percent year-over-year and mobile ad revenue of $3.4 billion up 73 percent.

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The social network also offered the following advertising highlights from the third quarter of 2015:

As for non-advertising-related stats from Facebook:

  • More than 925 million users are using groups every month.
  • There are more than 8 billion video views per day on Facebook, with more than 500 million users viewing videos on a daily basis.
  • Instagram topped the 400 million MAU mark, with more than 80 million photos shared per day.
  • WhatsApp is rapidly approaching the 1 billion MAU milestone, having topped 900 million during the third quarter.
  • Facebook’s Messenger apps now boast more than 700 million MAUs, with more than 9.5 billion photos sent via Messenger every month.
  • The Internet.org initiative to connect everyone in the world to the Web is now offering free basic Internet services in 29 countries, and it has resulted in more than 15 million new online users, including some 1 million in India.
  • On the virtual-reality side, the Oculus Rift headset is set to ship in early 2016, and Gear VR, the mobile product being developed with Samsung, will be ready for the holiday shopping season.

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Facebook co-founder and CEO Mark Zuckerberg offered the following overview as part of his opening remarks during the company’s third-quarter earnings call Wednesday:

Now, let’s talk about how we’re working to develop our next generation of apps and services. For Instagram, this was a busy quarter. The community celebrated its five-year anniversary and reached a new milestone of 400 million monthly actives. More than 80 million photos are now shared on Instagram every day, and the pace of adoption among public figures, organizations and people around the world continues to grow really well. When President Barack Obama visited Alaska in September, he used Instagram to document his trip, and this is a great example of how Instagram is changing the way that people see the world.

With our efforts in messaging, we’re also making progress at building WhatsApp and Messenger both into great platforms of global scale. Last quarter, WhatsApp reached 900 million monthly actives and continues to be on a path to reach 1 billion people and beyond. Messenger has over 700 million monthly actives, and we continue to focus on improving the core messaging experience. A good sign of our progress is the more than 9.5 billion photos now sent monthly on Messenger.

We’re also building many different tools that can offer useful experiences to people beyond just traditional messaging. One example is M, a digital assistant we introduced this quarter that over time will use artificial intelligence to help people complete tasks.

Naturally, Facebook’s ad products were a major part of the opening remarks by chief operating officer Sheryl Sandberg:

Our third priority is making our ads more relevant and effective. We know relevant ads are more engaging for people and, therefore, drive better results for businesses. Products like carousel ads and dynamic product ads help improve effectiveness for marketers. Carousel ads show multiple images and now videos, and they drive 30 percent to 50 percent lower cost per conversion than single image link ads. Dynamic product ads, which allow marketers to upload their product catalog, are driving ROI comparable to search.

For example, Marriott uses DPA to re-target travelers based on their travel search habits, and it is now scaling globally across its portfolio of brands. Latin American e-commerce company MercadoLibre uses DPA to re-market over 38 million products in over 13 countries. Both are seeing high ROI and continuing to invest.

On the measurement side, conversion lift measurement is helping clients see the real business results from their campaigns. Boost Mobile, a Sprint brand, showed ads to people eligible for device upgrades. Using conversion lift, it was able to attribute a 4 percent lift in in-store sales to its Facebook campaign.

Finally, we’re continuing to invest in ad tech across Atlas, LiveRail and Facebook Audience Network. This quarter, we expanded the ad formats publishers in Audience Network can add to their mobile apps. On LiveRail, this quarter we began testing age and gender targeting. LiveRail can now deliver over 90 percent accuracy on age and gender segments across desktop, mobile Web and mobile apps versus a non-target rate of only 31 percent to 55 percent when not using LiveRail technology.

Other topics that were highlighted during the question-and-answer period of Wednesday’s earnings call follow:

Facebook’s multi-app strategy

Morgan Stanley analyst Brian Nowak asked:

Mark, can you talk a little about what factors and metrics you consider when you’re thinking about a multi-app strategy versus rolling out more products and offerings on Facebook? There’s a difference in Facebook Paper, Messenger, the video viewer on the platform. Just curious how you think about multi-app versus adding more functionality to the mothership.

Zuckerberg replied:

We view the social space as almost this matrix. You can think about it as a two-dimensional grid where one axis is the richness of the content that people want to share, and the other axis is the size of the audience, or intimacy of how people want to share. So on the first axis, you get everything ranging from text to links, to photos, to videos, to immersive 360 videos and virtual reality content and this progression.

And on the other axis, you get everything ranging from one-to-one messaging to small group communication, to communicating with all your friends at once, to big interest groups, to completely public. And what we believe is that you can intersect at any point on that. And there will be something interesting to build. So a small group product for sharing video, that’s going to be a thing. A one-on-one product for sharing text or calling, that’s clearly a thing. A public sharing and consumption product for video, that’s a thing.

And what we’ve tried to do is basically figure out the areas that we think are open and are not currently served by the set of products that the industry has built and figure out a way to offer those. So one of the big opportunities that I’m really excited about right now is I think that there’s a pretty big opening between very private messaging, the one-on-one messaging products like Messenger and WhatsApp, and products like Facebook where you share with all your friends at once or Instagram.

And in between there, what we’re seeing is this huge growth of private groups, and groups remains one of the, I think, least-talked-about products on Facebook. But I just said earlier that we have more than 900 million people are using that every month. It’s a huge thing and it’s a big area that we can develop going forward.

So we experiment with all of these things in terms of some of them make sense to naturally have inside the Facebook app because you’re using the same set of friends and network and connections. Some of them get clear value by being separate, like Messenger, for example, where we can make sure that everyone has their push notifications turned on, which is extremely important for a messaging app. But overall, there’s a lot of stuff in the space. And the amount that people want to share and communicate is boundless, and that’s I think partially why we’re seeing the growth that we are with so many of these products.

Content

Goldman Sachs analyst Heather Bellini asked Zuckerberg how he believed content would evolve on Facebook, and he responded:

And to your question about long-form content, the more natural starting point for us is shorter-form content, which can either be social content or premium short-form content. But the vast majority of the content that’s consumed on Facebook just talking about video right now is people browsing through News Feed. They discover something interesting that they weren’t necessarily looking for previously. That’s very powerful, because that’s a behavior that there isn’t really anywhere else to do at scale on the Internet today in a great way, and then people watch it there or they bookmark it to watch later.

But if you’re talking about watching inline and News Feed, that’s not the place where you’re necessarily going to see a TV show and then watch an hour-long clip right there. So what we’re actually seeing is that a lot of the best, or at least from my perspective, TV shows that we see folks like Jimmy Fallon breaking up their show into clips that they can now share to be consumed over social media and on the Internet in three-minute to five-minute or seven-minute segments, which are more of what people want when browsing through News Feed. So I do think over time we will get to more different types of content and we’ll build products that serve that. The current market of trying to help people share and experience all these shorter form clips is massive. We are nowhere near serving that as well as we want to.

So I actually think in a lot of ways, though, the more interesting question is not in the near term what we’re going to do to develop ways to consume long form content, but what traditional media and content producers that have traditionally produced short and long form content are going to do to chunk their stuff up better so that way it can be more easily consumed by this big community online.

Later, Nomura Securities International analyst Anthony DiClemente asked:

Mark, on the subject of media content on Facebook, it seems like the big opportunity is for Facebook to be the portal with which to access the short-form video content that you mentioned earlier, and maybe the idea is to keep the consumption of that content in line or inside the Facebook wall, the garden. So the follow-up question that I would have is how do you think you could best partner with the media providers and convince them the merits of bringing their valuable, in some cases expensive, content into the Facebook world, particularly at a time in media when they’re really trying hard to guard their own existing ecosystems?

He answered:

I can talk about video and the business model around that. So you’re definitely right that there’s a certain class of content that is only going to come on to Facebook if there’s a good way to compensate the content owners for that. And we’ve recently rolled out the business model for this, which is for premium content, we’ll give a revenue share on a portion of the views to the content owners. And we’ve got good feedback so far on that. We’re working with a small set of partners to start, and we’ll roll it out beyond that as that keeps on going.

But it’s important to keep in mind that there are a few different reasons why people share content on Facebook, and that’s just one of the use cases, right? There are a lot of people who are just sharing content socially, right, because they want to get a message out. That may not be business-motivated. There are a lot of folks who are business-motivated but who primarily post content in order to promote something or gain distribution for something. And that you can gain value without some kind of rev share, and that’s why the video ecosystem has grown so quickly even before we rolled out a revenue share.

And now the third class of content, which I think is going to be important and increasingly important over time, is the one that you basically want to essentially trade the content for money, and that is one where you need the rev share to unlock that. But we’re getting good feedback on that upfront. So we’re looking forward to seeing how that trends.

Search

RBC Capital Markets analyst Mark Mahaney asked:

Mark, I think this was touched on a couple of times, but can you talk about whether you’re seeing greater attempts to do search, the search functionality on the site, and how that could change over the next three years to five years, and also comment on news and to the extent to which you’re seeing a rising utilization by regular users of Facebook as a way to get news, and what you can do to make that even easier for people if that’s something a behavior you want to facilitate?

Zuckerberg responded:

On Search, we already have one very big use case, which is people basically using our search engine to seek out pages and people who are on Facebook, and that by itself is already one of the biggest search engines in the world. The next big use case that we’ve really been working on for a couple of years now, which is starting to roll out and is growing quickly, is people finding content on Facebook. So that’s trending. It’s people finding posts that their friends or others had posted in News Feed that they saw but then might want to go check out later.

And I think this is going to be a very important part of the video experience, as well, because one-half is pushed, right, going to News Feed and not asking for content but just coming across and discovering it. And then the other half is pull, right, and going to some experience where you’re asking for some type of content, and getting to a point where we can do that very well is just going to add a whole new dimension to the service. So that’s something I remain very excited about. In some ways, it’s taken a little bit longer than I’d expected to get to a point where it’s growing quickly. The people and page lookup part is doing very well, the post part has taken a bit longer but I’m very excited about that going forward.

Virtual reality and Oculus

In response to a question by UBS Securities analyst Eric Sheridan about how he sees virtual reality playing out in 2016 and beyond, Zuckerberg said:

The first thing that I want to stress here is that these kinds of new platforms take a long time to develop. So we’ve said often that we think that virtual reality and augmented reality could be the next big computing platform. But just to put that in perspective and compare it to the development of previous computing platforms like phones and computers, I think the first smartphones came out in 2003, and in the first year, I think BlackBerry and Palm Treo were the initial smartphones that came out. And I think they each sold in the hundreds of thousands of units. So just to kind of give a sense of the timeframe that we’re thinking about this and how we expect this to develop, that’s how we’re thinking about that.

In terms of the actual content, first, we think gaming is going to be the most obvious market. There are around, I think, more than 200 million, almost 250 million people who have either an Xbox, a PlayStation or a Wii, and we think that that audience is going to the type of people who are going to be very excited about the type of experiences initially that you can have with virtual reality.

And the advantage of that is also that some of those can be single-player experiences. They don’t require a big network effect or a lot of people having the technology or a large installed base. Once we start getting a bit further along with that, then the next thing that we think is going to be huge is video and immersive experiences, both things that people can create, like the social content that they share on Facebook today, and more professional and premium content both short-form and longer-form.

But we’ll start to see some experimentation with that. There already is some very good content. But until there are millions of units out in the market, I don’t expect that to be a big industry for folks to be investing a huge amount in 2016. Then when they’re starting to get to be more units, just like every other major computing platform before that, what we expect is that a large portion of what people do in it will be communication and social behavior, and that’s where Facebook really has the DNA and experience to, I think, build the best experiences. And we’re investing in trying to figure out what that’s going to look like, and that’s ultimately a lot of what we’re extremely excited about for a number of years down the road.

Censorship

Barclays Capital analyst Paul Vogel asked:

Mark, there’s a lot of debate around what content is appropriate for Facebook to block and not block. I’m just wondering if you could talk a little bit about how you decide what to censor and not censor in terms of on the content side.

Zuckerberg answered:

The guiding principle for us on this is that we want to give the most voice to the most people. And the idea is that there are all of these different barriers that any given person has to being able to share and express everything that they want, from technical barriers, it’s really hard to communicate with someone if you’re not on the Internet and they’re far away, to product barriers, it’s hard to share videos if we don’t have a good product for sharing videos, to legal barriers, it’s hard to share content that your government says is illegal for you to share.

And at the end of the day, there’s also policy, and you’re in a community, and we have community standards for how we think people should communicate in order to be safe because even if you have all of the Internet connectivity and the products and the legal framework that you need, if you don’t feel safe saying what you want to express, then you’re probably not going to share it. And we see a lot of that online, and that’s a pretty big issue from everything from bullying to terrorism, there are lots of reasons why people might otherwise have the tools to share what they would want but feel silenced. And that isn’t giving the most voice to the most people.

So we feel a responsibility to have policies for our community that limit hate speech and limit things that are going to create just an overwhelmingly uncomfortable environment for people that is going to silence other people’s speech in order to make sure that over the long-term we are enabling the most people to be able to express as much as possible as they can. And that’s the philosophy that we have.

Industry reaction to Facebook’s third-quarter-2015 financial results was generally positive, with WordStream founder and chief technology officer Larry Kim saying in an email to SocialTimes:

Facebook has been on a roll with its advertising revenue, and its next big opportunity is with small businesses. Here’s why: Just a few years back, Facebook ads offered questionable ROI, but today, thanks to its compelling mobile ad formats and powerful ad-targeting options like custom audiences, which drive awareness and sales, Facebook has today become an essential component of small business marketing, even with very small budgets. In fact, at this point, I think it’s crazy for small businesses to not be advertising on Facebook.

Rapid Ratings CEO James Gellert said in an email to SocialTimes:

Facebook is the strongest and most consistent company in the social space. Once again, we’ve seen a good earnings report, which, along with leverage and liquidity efficiency, has persistently been Facebook’s strength. We’ve continued to see the benefits of its effective acquisitions and growth in mobile.

Facebook is doing a good job across the board: continued user growth, increase in advertising, increase in mobile and efficient use of the cash. This position makes Facebook not just a leader in the social space, it makes it one of the more efficient companies in the U.S.

Readers: What was your reaction to Facebook’s third-quarter-2015 financial results?

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