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An Uptick in Facebook’s Payments Business

As we noted in February, Facebook recorded an increase in payments revenue in the fourth quarter of 2012; however, the increase in payments revenue was the result of deferred revenue recognition. In fact, when accounting for the $66 million in deferred revenue, Facebook’s payments revenue remained essentially unchanged over the year ago quarter. We concluded that Facebook’s payments business has remained flat for the past five quarters.

However, Facebook’s Q1 2013 earnings shows a slightly different picture for Facebook’s payments business. According to its 10-Q, Facebook earned $213 million in revenue from payments and other fees, a 15% increase from the year ago quarter. According to the company, the uptick in quarterly payments revenue is primarily the result of increased games revenue, and to a lesser extent revenue from Promoted Posts and Gifts.1

Facebook’s payments revenue from games increased by 12%; however, the company admitted that when accounting for deferred revenue recognition in the fourth quarter, the increase in payments revenue over the year ago quarter was closer to 6%. Despite a 37% decline in bookings from Zynga, Facebook’s largest games developer, the company still enjoyed a 60% increase in games-related payments volumes.

Facebook's payments business revenue by region

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Slowing Growth in Facebook’s Mature Regions

In our earlier analyses, we observed that Facebook’s user base growth in North America region was outpaced by Facebook’s other regions, especially its emerging market regions Asia and rest of world. In fact, Facebook’s S-1 filing revealed to an extent that this was occurring. Based on the latest quarterly data, we can see that Facebook’s emerging market regions continue to outgrow its established markets on a sequential basis.

Facebook provides data about monthly active users (MAUs) and daily active users (DAUs). MAU data show that Facebook’s growth in North America has slowed substantially relative to growth in its other markets. At a reported 195 million monthly active users, Facebook continues to edge closer to market saturation in North America. As we can see, the growth rate has slowed to between 1% and 2% for the past three quarters.1

Facebook's monthly active users per region

According to its 10-Q, Europe region includes all users from Russia and Turkey. Europe region is therefore larger than North America; however, it shows simliar user base growth deceleration. According to Facebook, Europe region accounted for 269 million monthly active users. The region is still growing slightly faster than North America, showing 3% sequential growth. However, Europe region shows a maturation trend simliar to North America.

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Assessing Facebook’s Advertising Business

As we have come to expect, advertising continues to comprise the majority of Facebook’s revenue. According to the company’s 10-Q filing, advertising accounted for about 86% of Facebook’s revenue in the quarter. Its filings also continue to illustrate the extent to which seasonality affects the company’s advertising revenue. We can also observed the effect of Facebook’s mobile monetization effort, which resulted in about 43% revenue growth over the year ago quarter.1

Facebook generates its advertising revenue from delivery of click-based advertisements on its website and mobile products. According to its 10-Q filing, Facebook’s advertising revenue increased from $872 million in Q1 2012 to $1.245 billion in Q1 2013, a 43% increase in revenue. As the company notes, this was due to a 39% increase in the number of ads delivered to users, and a 3% increase in the average price per ad paid by advertisers over the year ago quarter.

Facebook's quarterly advertising revenue

We can attribute these increases in ads delivered and price paid per ad primarily to the introduction of News Feed advertisements on Facebook’s desktop product, and later on its mobile products. Concurrently, increases in monthly and daily user engagement allowed the company to deliver more ads to users in the quarter. Finally, Facebook’s decision to lower the market reserve price increased the number of click-based advertisements hired on the network.

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Continuance - Facebook Analysis by . @jonmilani. Copyright © 2017. All rights reserved. Hosted by (mt) Media Temple.