Facebook Fourth Quarter Earnings: [ANALYSIS]

Facebook Fourth Quarter Earnings: [ANALYSIS]

Facebook Inc (NASDAQ:FB) reported earnings today, which beat analyst estimates’. However, investors were not satisfied and sent the stock down 10% in after hours trading. Facebook finished the session down 3.43% in the after hours session.

Analysts at Stifel Nicholas opine that ‘overall, a good 4Q result for FB, even if it isn’t one that forces us to update our status. Upside of $53mn in ad revenues, with mobile revs of $306mn (23% of advertising), double last quarter. EBITDA and EPS right in line with our estimates, and ahead of the consensus view.’

Victor Anthony, an analyst at Topeka Capital, issued a research report which noted that, both revenues and Adj. EPS beat the Topeka and Consensus expectations on better than expected advertising and payments revenue growth. Mobile advertising revenues jumped to 23% of total advertising from 14% in 3Q12 and grew 101% sequentially to $305.67mm, slightly better than Topeka’s $303.6mm estimate. On the call, the Company stated that expenses should grow 50% YoY in 2013 and it tempered expectations about the monetization of Gifts and Graph Search this year as they look to improve both products. He ended off by stating that this ‘was a solid print in our opinion, and investors should use the weakness to buy the stock.’

Analysts at Bank of America Merrill Lynch (BAML) were positive, albeit a bit more cautious noting, ‘Facebook reported a better-than-expected revenue quarter, but the mobile ramp was light of our expectations, so uncertainty on revenue trajectory will persist. We continue to expect mobile usage growth and improved targeting to drive strong growth in 1H. We are maintaining our Buy rating and our 12-month Price Objective of $35.’

So why the negative response?

First we break down some of the notable items from the earnings release and conference call:

4Q12 Results.

Reported revenues of $1.585B, up 40.1% YoY and 25.6% QoQ, were above Consensus revenue estimates of $1.512B. Adj. EPS of $0.17, was two cents above the Consensus of $0.15. Non-GAAP operating margin of 46% was better than our 43.6% estimate.

Ad Revs Reaccelerates:

Reported ad revenues came in at $1.329B, up 40.9% YoY, and accelerated from the 36.1% in 3Q12. Advertising growth was strong in the U.S. & Canada, where growth accelerated slightly to 36.6% YoY from 36.2% YoY in 3Q12. Europe ad growth accelerated to 22.2% YoY from 20.4% YoY in 3Q12. Asia ad growth accelerated strongly to 76.8% YoY from 51.1% YoY in 3Q12, and ROW ad growth accelerated to 97.5% YoY from 69.0% YoY in 3Q12. The strong growth in Asia and ROW was attributed to a lowering of the market reserve price for the ad auctions. Advertising ARPU accelerated across all regions. FBX delivered 1B impressions daily in the quarter.

Mobile Revenues Ramp, Driving Slight Upside. Mobile revenues grew to $306mn from ~$153mn last quarter, now accounting for 23% of total ad revenues.

MAUs were 1.060B, with 49mm users added. DAUs were 618mm, for an DAU/MAU ratio of 58.5%, up from 58.0% in 3Q12. Mobile MAUs grew to 680mm from 604mm in 3Q12 with mobile only MAUs jumping to 157mm from 126mm in 3Q12.

Mobile MAUs at 680mn (up 12% from 604mn last Q) were strong and highlight the ongoing shift to mobile devices. The ratio of DAUs to MAUs improved to 59%, and Facebook indicated that its engagement metrics remained strong across user cohorts.

Payment Revenue Slightly Lagged. Payment and Other revenue of $256mn up 36% y/y, decelerated from 3Q, but was $1mn above consensus estimates. This quarter had 4 months of payments revenue included, so it isn’t a direct comp with last quarter. There was a $5M contribution mostly from user promoted posts and to a lesser extend Gifts.

David Ebersman – Facebook Inc (NASDAQ:FB) – CFO  had some  insightful commentary on the quarter, we highlight his remarks below:

We ended the year with 1.06 billion people using Facebook, up 25% from a year ago. In December, 618 million people accessed Facebook each day on average, up 28% from last year, and we grew monthly and daily users across all geographic regions. Mobile continues to drive our growth. 680 million people accessed Facebook from Mobile Devices in December, up 57% versus last year, and the numbers I just mentioned do not include Instagram, which continues to grow at an impressive rate. We ended 2012 with strong engagement across our products, and this engagement remains a foundation for everything we’re trying to build.

Turning to revenue, in Q4, revenue was up 40% year-over-year, or 42% when adjusted for constant exchange rates. Q4 year-over-year growth would have been 34%, if adjusted to exclude the additional month of Payments transactions we recognized as planned. Ad revenue in Q4 was up 41% or 43%, when adjusted for constant exchange rates. Year-over-year advertising growth in Q4 was the strongest of any quarter in 2012, and we view this as a validation of our recent investments in mobile News Feed ads, growing our advertiser base, and launching new ad products.

In the fourth quarter, ad impressions were up 46%, and average price per ad was down 4% compared to last year. These trends were driven by significantly faster impression growth in developing markets such as Asia and Latin America, which have relatively lower pricing and thereby brought down our average price overall. The faster impression growth in developing markets in Q4 was significantly affected by product changes, primarily our decision to lower the market reserve price, or the floor price we accept in our auction, which increased the number of ads shown in these markets. We continue to see positive trends in price per ad in key developed markets, including an 18% increase in average price in the US and Canada in Q4.

Payments and other revenue was $256 million in Q4. As planned, in Q4, we recognized revenue from four months of payments transactions, for accounting reasons detailed in our last 10-Q. Adjusting for the extra month, Payments’ revenues from games was essentially flat with the fourth quarter of 2011. This past quarter, Payments and other revenue also included around $5 million from sources outside of games, primarily user-Promoted Posts, and to a lesser extent, from our new Gifts product.

Shifting now to expenses. In Q4, our total GAAP expenses were $1.06 billion. Excluding the impact of stock compensation, total expenses increased 67% to $849 million, driven primarily by headcount and infrastructure. We ended 2012 with just over 4,600 employees, a 44% increase from last year, driven by hiring in our technical groups. We were recently ranked the number one place to work by Glass Door, which we view as a testament to how strong our culture remains, through this period of significant headcount growth.

In Q4, our GAAP operating income was $523 million. Excluding stock comp, our non-GAAP operating income was $736 million, representing a 46% operating margin. Our GAAP tax rate for Q4 was 87%, and our non-GAAP tax rate was 41%. For 2013, we expect our non-GAAP tax rate to be a few percentage points higher than the