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.

In its 10-Q, Facebook estimated that 30% of its total advertising revenue was derived from mobile advertising. Facebook has diversified its advertising among its desktop and mobile products, which now contribute meaningfully to top line revenue; however, the company’s overall dependence on advertising increased from 82% to 85% of its total revenue on a year-over-year basis. This is unsurprising given the continued stagnation of Facebook’s payments business.

A geographical breakdown of Facebook’s advertising revenue demonstrates the relative increases in revenue from the year ago quarter. On an absolute basis Facebook’s advertising revenue in the first quarter was derived primarily from North America and Europe regions. However, Asia and rest of world regions have shown the highest growth over the year ago quarter, at 77.7% and 89.9%, respectively. That Facebook has paired emerging market user base growth with revenue growth is encouraging.

Facebook's quarterly advertising revenue by region

Facebook’s advertising revenue has shown stable seasonality. Based on data from the past 13 quarters, we can see that Q1 shows the lowest advertising revenue in the fiscal year. In the first quarter of 2013, Facebook generated only marginally less advertising revenue than in Q4, 2012, it’s strongest quarter. Growth is attributed to mobile monetization. It also suggests that Facebook will see larger subsequent quarterly gains, especially in the fourth quarter.

Facebook’s advertising revenue in Q1 2013 demonstrates the company’s ability to meaningfully monetize its increasingly mobile first and mobile only user base. This affirms to an extent Facebook’s commitment to mobile. It has also seen a meaningful revenue growth rate in its high growth regions. A closer inspection of Facebook’s ARPU will help us to better understand geographical revenue distribution and the opportunity for meaningful revenue growth for the company.

Sources

  1. Form 10-Q, Facebook Inc., 2013.