Facebook beats in Q2 with $9.32B revenue despite slower user growth

Facebook’s hot streak continued with a strong Q2 2017 earnings report. It earned $9.32 billion and $1.32 in GAAP actual EPS, compared to estimates of $9.2 billion revenue and $1.13 EPS. Revenue growth was 44.7 percent year-over-year, compared to 59 percent in Q2 2016, indicating that revenue growth is slowing down in line with Facebook’s warning to investors that it was running out of space to show ads in the News Feed.

For reference, here’s how Facebook’s revenue growth has declined as it reaches maximum ad load:

  • Q2 2017: 45 percent
  • Q1 2017: 49 percent
  • Q4 2016: 51 percent
  • Q3 2016: 56 percent
  • Q2 2016: 59 percent

That revenue came from Facebook’s 2.006 billion monthly users, which grew 3.4 percent from 1.94 billion users last quarter when its growth rate was 4.3 percent. Facebook now has 1.32 billion daily active users, up from 1.28 billion in Q1 and up 17 percent year-over-year. Facebook’s share price closed at $165.61 before earnings were announced, and, after a short-lived fall, jumped 1.35 percent after earnings were announced to hover around $167.85 in after-hours trading.

Facebook’s profits reached $3.894 billion in Q2, up 71 percent year-over-year. That means Facebook made more profit than Google for the first time in history — though Google’s Q2 profit only slumped to $3.524 billion because it was slapped with a $2.7 billion anti-trust fine from the EU, which it will appeal.

Facebook had costs of $4.920 billion and a 47 percent operating margin, compared to Q1’s $3.06 billion in profit and 41 percent operating margin. Headcount reached 20,658, up 43 percent year-over-year — a sign that Facebook is rapidly reinvesting in staff to fuel future growth. Capital expenditures reached $1.44 billion, while cash and equivalents on hand soared to $35.45 billion, with years of profits giving Facebook an ample war chest to acquire other companies.

Capital expenditures for the second quarter of 2017 were $1.44 billion. Cash and cash equivalents and marketable securities — cash and cash equivalents and marketable securities were $35.45 billion at the end of the second quarter of 2017. Headcount — headcount was 20,658 as of June 30, 2017, an increase of 43 percent.

Mobile now accounts for 87 percent of ad revenue, or $8 billion, compared to 85 percent last quarter and 84 percent a year ago. Total ad revenue was $9.16 billion.

In Q2, Facebook began testing a free version of its Workplace enterprise collaboration suite. This could become a powerful funnel into the paid version of the software, which may evolve into a significant revenue source for Facebook. The company hit 5 million advertisers, and says 1 in 5 videos shared are Live.

Instagram continued its explosive growth, reaching 700 million users, 375 million users for its Direct messaging feature, and 250 million for its Snapchat Stories clone. Meanwhile, Messenger hit 1.2 billion monthly users.

WhatsApp Status is growing fast by copying Snapchat Stories

During the earnings call, CEO Mark Zuckerberg discussed how he sees artificial intelligence changing Facebook’s business. He believes AI will be able to replace some of Facebook’s human content moderators, flagging offensive content before anyone sees it. AI could help Facebook find relevant content to show from people and Pages you don’t follow. Ad targeting can also be optimized by AI in ways that would be impossible to do manually.

Most notably, Zuckerberg revealed that WhatsApp now has 1 billion daily users, and 250 million daily users of WhatsApp Status — its Snapchat Stories clone.

On a more ominous note, Zuckerberg took a moment to say he was unsatisfied with the progress of monetizing Messenger, saying “I want to see us move a little faster here, but I’m confident we’re going to get it right.”

Facebook CFO David Wehner reaffirmed that Facebook expected to see the impact of running out of News Feed ad space in 2017, and also mentioned that declining Facebook Desktop usage and the removal of its sidebar ads could further hamper revenue growth in the second half of 2017. Facebook will also have to learn how to better monetize video ads, since users watching videos may stay in one spot on the News Feed rather than scrolling past more ads.

Overall, though, Facebook’s momentum looks strong despite its age. If Facebook can use its AI and massive brand to turn its enterprise, messaging and Instagram arms into serious revenue generators, it may not matter that it’s already stuffed as many ads in News Feed as possible.