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Shifting to Mobile

With its Q1 2014 earnings, Facebook revealed its continued structural shift to a mobile company. The company’s mobile active users for the first time crossed the 1B mark. Mobile active users are also growing faster than any other user base segment. This user base shift is reflected in Facebook’s changing revenue composition, bearing out the company’s past commitment to transition to a mobile-first company.1

Facebook’s user base now sits just below 1.28B MAUs (monthly active users). When we visualize Facebook’s usage composition we can see that its mobile user base is on track to reach or exceed its current total user base. We can also see that mobile-only usage is growing quickly, increasing 15% sequentially. We can conclude that Facebook is increasingly hired as a mobile platform.2 It is unsurprising, then, that Facebook’s revenue composition reflects this shift.

Facebook's usage composition: monthly active users (desktop + mobile), daily active users (desktop + mobile), mobile monthly active users, mobile-only monthly active users, Instagram, WhatsApp

Facebook saw $2.5B in revenue in the first quarter, a 72% year-over-year increase. The company’s payments business saw only a modest year-over-year increase. The bulk of its revenue growth accrued to its advertising business. And it is here that we see the consequence of the shift in Facebook’s user base composition. In the first quarter, Facebook’s mobile ad revenue was 59% of its total ad revenue, up from 30% over the year-ago quarter.

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Revisiting capex

When we last examined Facebook’s capex, we observed that year-over-year the company’s spending on property and equipment has been declining. We concluded that the reduction in network infrastructure spending reflected a maturation of the company’s infrastructure and platform. Facebook’s somewhat modest FY 2013 capex bears out this thesis. However, Facebook’s WhatsApp acquisition raises questions about capex going forward.

Facebook estimated that capex in 2013 would grow at only 12%, totalling an estimated $1.8B (later revised down to $1.6B). As we noted previously, this would reflect a slowing capex growth rate. In fact, a combination of efficiency investments on the hardware and the software side have further driven down realized capital spending in the year. According to its 10-K, as a result of these investments, total capex was a more modest $1.36B.

By tracking the historical cost of Facebook’s property and equipment we can see that the majority of capital spending is directed to growing or maintaining the company’s network infrastructure. This includes the purchase or lease of servers and other network equipment, and building costs for Facebook’s growing list of data centers. This also explains the bulk of the decline in capex over the year, with only a small increase in nominal cost in Q4 2013.

Facebook's quarterly property and equipment historical cost

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The Case for WhatsApp

Facebook recently announced its acquisition of WhatsApp for $16B in cash and stock, plus another $3B in RSUs.1 The acquisition was not surprising; mobile messaging is clearly of systemic importance to any mobile platform (except according to Twitter). However, the terms of the acquisition elicited some surprise, given Facebook’s recently failed attempt to acquire SnapChat for a more modest reportedly $1B. Putting aside its valuation for now, we should realize that WhatsApp’s strategic value to Facebook is substantive:

One might be tempted to define the acquisition in terms of technology or intellectual capital (32 engineers); however, WhatsApp’s value to Facebook is properly defined as user acquisition. The messaging app boasts 450M monthly active users, with an estimated 315M daily active users. This puts WhatsApp almost on equal footing with Facebook in terms of its active mobile user base. The significance of this position cannot be understated.

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Continuance - Facebook Analysis by . @jonmilani. Copyright © 2014. All rights reserved. Hosted by (mt) Media Temple.