Facebook Reports Strong Second Quarter; Sales Growth Beats Estimates

Facebook Reports Strong Second Quarter; Sales Growth Beats Estimates

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Facebook reported a strong second quarter earnings on Wednesday, with revenue and earnings that beat analysts’ estimates.

reported a solid quarter on Wednesday, with sales growth that beat analysts’ estimates, thanks to growing demand for the social network’s mobile ads and the company’s ability to attract new users across its suite of apps.

Revenue in the second quarter, ending June 30, rose 45% to $9.32 billion, from $6.43 billion in the same period a year earlier, topping the $9.2 billion and 43% year-over-year growth expected on average among analysts polled by Yahoo Finance. The gains represent Facebook’s ninth straight quarterly revenue beat, buoyed by mobile video ads sales, including those on Instagram. Mobile ad revenue represented about 87% of total ad sales in the latest quarter, up from the prior quarter (85%) and up from 84% in the same period a year earlier. Facebook’s global ad revenue is expected to total $36.29 billion this year, up 35% from 2016, according to forecasting firm eMarketer, making Facebook the largest ad seller after Google.

The company posted a profit of $3.89 billion, up 71% from a year-earlier profit of $2.28 billion, with earnings per share of $1.32, up 69% from 78 cents in the same period a year earlier and beating analysts’ estimates of $1.13 per share. (In May, Facebook said it is no longer reporting non-GAAP income and earning-per-share, which excluded stock-based compensation and other expenses, following in the footsteps of Alphabet.) Facebook reported that second-quarter expenses grew 33% from the same period a year earlier to $4.92 billion.

Last year, the company warned that “ad load,” the volume of ads the company can show users, will become a less significant revenue growth factor this year. Facebook also said at that time that expenses in 2017 will increase “meaningfully” to support building new data centers, buying original content and recruiting engineers and content moderators. Investors will be eager to get more insight into how higher costs and slowing ad growth will affect profit. Facebook shares rose nearly 1% in after-hours trading. Facebook shares reached a record high of $166 on Monday.

User growth in the latest quarter was solid. Total monthly active users grew 17% year-over-year to 2.01 billion people, from the same period a year earlier. Year-over-year, daily active users in the latest quarter increased by 17% to 1.32 billion people. User activity on Facebook’s suite of apps continues to grow. Facebook -owned messaging apps WhatsApp and Messenger both have more than 1.2 billion monthly active users, with WhatsApp reaching 1 billion daily users. Instagram has more than 700 million monthly active users.

More than 70 million businesses have Facebook pages, a key gateway to converting small and medium sized businesses into advertisers on the social network. There are more than 5 million active monthly advertisers on Facebook, up from 2.5 million at the end of 2015. More than 1 million of these advertisers are in emerging markets.

 “We had a good second quarter and first half of the year,” Facebook CEO Mark Zuckerberg said in a press release on Wednesday. “Our community is now two billion people and we’re focusing on bringing the world closer together.”

Facebook and Instagram compete with platforms like Snapchat, and for budgets bleeding out of the $70-billion TV advertising industry. Instagram is already generating substantial revenue, thanks in large part to the app’s popularity among millennials. In 2017, Instagram is expected to generate $3.92 billion in revenue worldwide, eMarketer says.

Investors and analysts are mulling over where Facebook will find its next spurt of revenue growth. Facebook’s long-term investments in messaging and virtual reality (its $2-billion acquisition of Oculus VR) should become meaningful revenue streams for Facebook down the road. RBC Capital Markets analyst Mark Mahaney recently estimated that Messenger and WhatsApp will become multiple-billion dollar annual revenue generators in the next three to five years. Facebook has also been experimenting with offering ads in new places. This month, Facebook began its global roll out of ads in Messenger and started testing ads in Marketplace, a buy-and-sell section in its flagship app that is similar to Craigslist. The company has also been offering “mid-roll” ads that run part-way through Facebook videos.

Zuckerberg continues to emphasize video and the smartphone camera as key to Facebook’s product road map. Facebook has made features for quick, ephemeral video sharing prominent across nearly all of its apps, mimicking Snapchat’s “Stories” feature. In April, Zuckerberg highlighted augmented reality as an increasingly important consumer tool. Facebook said it has started making its camera an augmented reality (AR) platform open to some developers, and it continues to add filters, lenses and special effects to its apps to promote frequent, playful sharing. Its efforts are working. More than 250 million people use Instagram “Stories” every day, and the same number of people use WhatsApp’s version of that feature (called “Status”) every day.

Facebook rose less than 1% to $165.61 during regular trading on Wednesday. The stock is up about 44% this year as of Wednesday’s close

Follow me on Twitter @kchaykowski and e-mail me at kchaykowski@forbes.com.

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