Facebook (FB) is 1% higher premarket after reporting another staggering quarter in terms of financial performance. Fourth quarter revenue was up 48% to $12.8 billion, well above estimates. Operating profit rose 61% to $7.35 billion as operating margins expanded 500 basis points to 57%.
The stock initially fell after CEO Mark Zuckerberg said time spent on Facebook fell by 5%, or 50 million hours, during the quarter. That means people spend 1 billion hours on Facebook everyday, implying the 1.4 billion global daily active users spend ~42 minutes on Facebook each day.
Daily active users (DAU) in the US and Canada actually fell for the first time: to 184 mln from 185 mln in Q3. US and Canada monthly active users (MAU) were flat Q/Q at 239 mln (note that accounts for 67% of the two countries' population).
Management cited changes being made to the News Feed. Last month, Mr. Zuckerberg said he wanted to make sure time on Facebook was 'well spent'. Facebook is choosing to emphasize content from family and friends to increase the healthy interaction between users over passive content consumption like viral videos from publishers.
On the call, management said they don't think the trend in decreased engagement will continue, although the number will fluctuate given saturation.
Importantly, Facebook expects ad impressions will continue to grow at a modest pace. Meanwhile, the price on the company's very effective ads continues to surge (up 43% in Q4).
The company guided for fiscal 2018 constant currency ad revenue growth to decelerate, consistent with the trends seen over the past year. That doesn't come has much of a surprise as user growth slows.
It seems the reduced engagement won't impact the top line for now. However, reduced engagement is more of a concern if it is not mostly or entirely the result of the company's strategic actions.
Expenses are going way up. Facebook reaffirmed expenses up +45-60% year-over year with continued acceleration in security costs, content (video) investment for Watch and long-term initiatives like AR/VR and AI. Capital expenditures will more than double, driven by increased investment in data centers, servers, office facilities and network infrastructure.
Still, adjusted earnings are expected to grow to ~18% with sales up ~36% this year.
One thing's for sure, the company's advertising businesses are dominant. Meanwhile, Facebook continues to have the behemoths of Instagram, WhatsApp and Facebook Messenger in its back pocket as well. Instagram stories has 300 million DAUs vs. Snapchat's (SNAP) 178 mln total DAUs. WhatsApp hit 1.5 billion MAUs.
Facebook's market capitalization is a whopping ~$560 billion. That equates to ~26x adjusted 2018 earnings estimates, which appears to be reasonable given the growth.