Facebook (FB) Conference Call Highlights & Analysis

Yesterday, the much awaited Facebook (FB) earnings report hit the street resulting in a wild ride in after hours trading and at the open today.  It’s safe to say traders weren’t impressed with the report with the stock gapping down big at the open (although it has recovered some).  Here are some highlights of the conference call followed by own thoughts.

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– Importance of Mobile
Zuckerberg estimates that it in about 5 years there will be twice as many mobile users as current desktop users and early indications point to greater engagement from mobile users (20% more).  Over the past year, the number of active mobile users has increased 67% so clearly the company is focused on how to monetize it (under the guise of “how to better connect people”).

“So mobile not only gives us the potential to connect more people with our services, but it also gives us the ability to provide more value and a more deeply engaging experience,” says Zuckerberg.

– Social Selling (selling without.. selling)
The biggest challenge for Facebook in terms of advertising is how to sell without selling.  How to incorporate advertising without being intrusive and taking away from what people are on Facebook to do.. interact with friends and family.  Zuckerberg discussed Social Ads on the call highlighting the fact that the best form of advertising is a from a friend.  True, there is nothing more powerful than an endorsement from a trusted friend or family member and Facebook of course has the viral platform to make this successful.  However, they have to do so carefully.

COO Cheryl Sandberg discussed the rollout of their more social form of advertising called Sponsored Stories: “Sponsored Stories are regular stories that people see in the News Feeds already, updates, likes, comments posted to Facebook every day that a marketer pays to highlight. For example, if I post a positive review of a product I purchased at Walmart, about 20% of my friends have seen the post, depending on things like when they check their News Feed. Using Sponsored Stories, Walmart can pay to boost distribution of this post so a larger percentage of my friends see it.”

“By the end of June, Sponsored Stories in News Feed was at a run rate of over $1 million per day in revenue and about 1/2 of that is coming from mobile. This is an encouraging start in our effort to generate revenue from the mobile use of Facebook. We know that social ads perform much better than nonsocial ads, so our job over the next few years is to increase the percentage of ads that are social and engaging,” said Zuck.  Sandberg mentioned that Sponsored Stories perform multiple times better than the standard ads on the right hand side of the page when measured by click through rate.  Considering this is probably the only way they’ll be able to advertise on mobile devices, that’s a good sign.  It should be noted however that they don’t have a ton of data on this yet and are rolling it out slowly.

One potential significant ad revenue driver for Facebook that most analysts aren’t really factoring in is the Facebook Ad Exchange which is still in testing.  It’s basically a retargeting model where users are shown ads of websites they visit.  For example if you visit a site about fly fishing, your computer would be cookied by that website so that their ad would then show on Facebook once you went to Facebook.  This used to be considered a bit creepy, but it’s so common now that many are used to seeing ads of sites they visit all over .. essentially the ad follows them around.  That’s the age we live in when it comes to online services.  Everything is free, paid for by advertising.  If you don’t like it, there are ad blocker plugins for FireFox and Chrome and certainly (albeit hard to find) ways to opt out.

Getting Facebook users to click through and engage in ads is one thing, but companies need to see an ROI.  Not many small business can afford to pump money into brand awareness and social proof.  They need to see a verifiable return.  Sandberg indicated that an independent review of 60 campaigns revealed that 70% of them delivered a return of 3x or better and half delivered a return 5x or better.  I have to say I’m skeptical of these numbers based on what I’ve read in forums and what I’ve seen from my own efforts as marketing director for an e-commerce company.  It wasn’t long ago that General Motors made headlines ahead of the Facebook IPO when it announced it was pulling its Facebook paid ads due to poor results.  I think there are two angles at play here.. (1) it greatly depends on the type of business advertising and (2) valuing Facebook advertising is very difficult.  If you’re just tracking how many people come directly from Facebook then buy, my own results aren’t great.  However, you have to believe consumers see an ad for a Facebook page then research that product in Google or somewhere else before clicking through.  There is value in Facebook for businesses in both brand awareness and social proof as well.  These points probably illustrate why most companies are spending some money on Facebook advertising, but not a big chunk of it.  It’s still relatively early days for reaching customers on Facebook and companies are proceeding as cautiously optimistic.

Key Metrics

– Total revenue up 32% from year ago, ad rev up 28%
– Ad revenue driven by 18% increase in number of ads shown and 9% increase in price of ads (mostly US)
–  strong international growth, particularly Asia
– Payment revenue of $192 million which has been flat for 3 quarters due to more gaming moving to mobile
– 955 million users at end of June (increase of 29% in past year)
– 552 million active users (accessing FB every day) (up 32% over past year)
– Amount of engagement remains steady (likes, comments, posts)
– Excluding IPO related expenses, expenses increase 60% to 669 million
– Number of employees has increased 50% in past year
– Company expects to continue to spend aggressively, not worried about a target margin yet
– Operating margin of 43%

You can read the transcript of the full conference call over at Seeking Alpha

I’ll follow up this post on Monday with some highlights of analyst commentary.  Have a great weekend.

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