Key Takeaways From Facebook's Q1: High User Growth, Decelerating Business

Facebook released an updated S-1 yesterday with their Q1 numbers, and they basically tell the same story as the previous S-1: Facebook has amazing user growth, and it has an excellent business, with only one problem: it’s decelerating.

Facebook Quarterly Revenue Growth

Photo: Facebook S-1

Some key takeaways from the filing:

  • Q1 revenue was $1.06 billion, up 45% y/y. Revenue was down q/q but this is due to the seasonality in advertising spend.
  • Net income was $205 million, down 12% y/y, largely because of capex and hiring. This is a trend to watch: after it went public, Google’s hiring and capex exploded, and Facebook is understaffed and will need to spend a lot on infrastructure.
  • Payments revenue was $188 million, flat/down from $186 million in Q4. (It is up sharply y/y but this can be misleading because Facebook started taking its 30% cut on social games virtual goods last year.)
  • Facebook now has 900 million monthly active users and 526 million daily active users.
  • Facebook now has 500 million monthly active users on mobile. This does not even include Instagram’s 35 million registered users, as Facebook’s Instagram acquisition hasn’t closed yet. Also worth noting that Facebook hasn’t even begun monetizing mobile users, though it will.
Facebook MAU and DAU

Photo: Facebook S1

So the key things to watch for Facebook are:

  • Ad revenue growth. Interesting point here from Capstone Investments’ Rory Maher in a note this morning: “Our checks indicate aggregators like Buddy Media and Spruce Media are having increasing success winning brand ad campaigns on Facebook for distribution on Facebook’s self-serve ad units. We believe national brand advertisers from entertainment companies to CPG brands are increasingly using these companies for Facebook advertising instead of premium units like sponsored stories, which can earn rates as high as 10X the self-serve ads. In our opinion, this is likely a key contributor to Facebook’s decelerating Y/Y revenue growth.”
  • Credits revenue growth. This is linked to the health of the social gaming sector as a whole, particularly Zynga, and so far it’s not encouraging. We’re still bullish longer-term.
  • Costs. Facebook says it expects to spend $1.6-$1.8 billion in capex this year, and it is severely understaffed. Given that Mark Zuckerberg controls the company, he won’t be afraid to increase costs at the expense of shorter profits—this may be the right course of action over the long term, but it’s still something to watch.

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