Archived entries for ARPU

Prospects for Facebook’s Payments Business [SeekingAlpha Exclusive]

When we last looked at Facebook’s (NASDAQ:FB) payments business we predicted that revenue would plateau as more of its user base transitioned to mobile usage. We made this deduction by observing the trend in payments revenue and ARPU in Asia and rest of world regions, where platform usage is mobile-first or mobile-only. We can now conclude that payments revenue has plateaued as Facebook continues its structural shift to mobile. Further, by using games revenue as an indicator we can deduce that payments revenue will remain flat or decline in the short run.

Payments revenue in Q1 2015 was $226 million, a decline of 5% over the year-ago quarter. According to the company, the year-over-year decrease in payments revenue resulted from a decline in revenue (including in-app transaction revenue) from games played on Facebook on desktop computers. Games revenue makes up materially all of Facebook’s payments revenue, so it serves as a strong proxy for the viability of the payments business. The downward trend in games revenue has been acknowledged by Facebook in successive earnings calls since Q3 2014, and it is reflected in flat revenue for payments.

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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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Incentives and the Mobile Payments Problem

We last looked at Facebook’s payments business in Q1 2013, where we observed a slight increase in payments revenue. Payments in the second and third quarters remained relatively flat across regions, reflecting seasonality. Facebook’s payments revenue in Q4 appears to be down 6% year-over-year; however, this is due to last year’s deferred revenue recognition. Despite the expected seasonal increase in Q4, payments growth actually saw approximately 27% growth over the year ago quarter.

Facebook’s payments business earned $241 million in the quarter, making up a modest 9.3% of its total $2.58 billion in revenue in the quarter. The lion’s share accrued to North America with $138 million, an approximately 6% increase over Q4 2012. Facebook’s largest year-over-year increase occurred in Europe, where revenue increased by 21%, from $56 million to $69 million. Payments revenue in Asia and rest of world regions remain relatively unchanged year-over-year.1

Facebook's payments business revenue by region

According to the company, after adjusting for a deferred revenue recognition, payments revenue from games grew 8% over the year ago quarter. Facebook noted that games revenue, which comprises the majority of its payments business, is limited to its desktop user base. And, that the desktop segment of its user base is declining. Facebook’s tacit admission that, despite games revenue growth, its payments business effectively monetizes an increasingly less important segment of its user base is telling.2

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The Rise of Facebook’s Mobile Advertising Business

In the second quarter Facebook continued its trend of growing mobile ad revenue to a larger share of its total advertising revenue. Although this result is in line with our conclusions based on Facebook’s performance in the first quarter, the significant beat on estimates has resulted in the stock price rising to pre-IPO levels. In order to understand how Facebook has continued to grow mobile ad revenue, we need to reassess its advertising business.

We determined that in the first quarter increases in advertisements delivered and price paid per ad resulted primarily from News Feed ads on Facebook’s desktop product, and to a lesser extent on its mobile products. We also observed increases in user engagement in the quarter. Finally, Facebook’s decision to lower the market reserve price increased market supply for ads on the network essentially by reducing the input costs for advertisers.

Revenue in the second quarter remains highest in North America and Europe; however, the growth in Facebook’s emerging market regions continues to outpace the established markets. The North America region saw $721 million in revenue, an increase of 51% over the year ago quarter. Europe region’s revenue grew from $294 to $479 million, a 53% year-over-year increase. In Asia and rest of world revenue essentially doubled over the year ago quarter.1

Facebook's quarterly advertising revenue by region

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