Facebook Q3 Earnings: Video First

November 4, 2016

Digital Marketing Link Walls By Link Walls

Around the time of Facebook’s IPO, Mark Zuckerberg famously announced that the company was adopting a “mobile first” approach in everything it did.  This was important because they had admitted that the rapid growth in mobile caught them off guard.  This approach clearly has paid dividends with 84% of Facebook’s revenue now coming from mobile.  In yesterday’s earnings call, Zuckerberg talked about a new era for Facebook — a “video first” world.  Facebook is betting on the fact that video will increasingly be the medium that users interact with (sharing and consuming) and one that advertisers will embrace.

On Wednesday Facebook reported their Q3 2016 results.  In this blog post, we analyze the results with a focus on the implications for retailers and brands.  This quarter continued very strong growth — growing overall revenue 56%.  What’s pretty impressive is that given their size, they’re still able to post this level of growth. In fact, Facebook’s growth rate is at least double any other company of equal size, not including companies that are growing through acquisitions.  Wall St. liked the results but got spooked by talk of slowing growth in what is called Ad Load (more on that later).

Some of the highlights from the quarter were:

  • Revenue increased 56%, advertising revenue grew at 59%.  Revenue exceeded $7 billion for the first time.  
  • Mobile advertising revenue represented 84% of the total, up from 78% a year ago.
  • Active user counts grew 16% with Facebook now counting close to 1.8 billion people as monthly active users.  Another pretty astounding stat here is that Facebook now has more than 1 billion monthly active users that are mobile only.
  • Despite growing headcount 31% and investing $1.1 billion in capital expenditures in the quarter, Facebook generated free cash flow of $2.5 billion for the quarter.

Facebook had a busy quarter on the innovation side, testing and rolling out a number of new products and features.  From a retail advertiser perspective these were some of the most important ones:

  • Instagram Shopping – Facebook announced this week a new test where a shopping tag will be added to products.
  • Instagram Stories – now has more than 100 million daily active users
  • Facebook Live – again, all about video.  
  • Marketplace – primarily about connecting consumers to consumers, does lay the groundwork for integrating more transaction-based commerce to the platform.

They also briefly touched on a new program called Dynamic Ads for Retail, which is all about connecting consumers with local retailers (think Google Local Inventory Ads but on Facebook).  Facebook is one of the few companies (Amazon and Google being the others) that have the infrastructure, data and advertising base to do this, making it be an interesting area to watch.  The ability to attribute offline sales to online advertising is the holy grail for omnichannel retailers and Facebook is on that quest.  

Much of the reaction to this quarter from Wall Street was around Facebook’s indication that ad load (and by extension, ad revenue) growth would slow in 2017  What is Ad Load you ask?  Put simply ad load is a metric that represents the % of ads compared to organic content.  For example, if you scroll through your news feed you see a mix of organic content (“Look at the crazy things my cat did” from your aunt) and ads.  Facebook has to strike a balance here – too many ads and users stop spending time on the platform.  On the call they indicated that growth in ad load would slow in the coming quarters.  

What is missing in this conversation is what happens to ad rates – to the extent that Facebook is limiting supply to protect the user experience but demand from advertisers remains strong then the growth may in fact come from rising advertising rates.  Facebook now has more than 4 million active advertisers and 500,000 on Instagram.  Clearly, if they continue to grow users and time spent on site, these numbers will increase as advertisers find it very hard to reach such a large audience on other channels.