Archived entries for payments

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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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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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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Facebook’s Payments Flatline

At a glace, Facebook appears to have realized an increase in payments revenue in Q4 2012; however, upon closer inspection we can see that payments revenue from the quarter was actually flat (barring a one-time accounting recognition). In fact, Facebook advised investors of this development in its 10-Q filing, where it remarked that an accounting change would recognize deferred revenue in the fourth quarter.

In its October 24 10-Q filing, the company explained that its terms and conditions provide for a 30-day claim period where a customer may dispute a virtual goods transaction. Facebook’s payments revenue deference stems from the company’s admission that it would not be able to reasonably or reliably estimate future refunds or chargebacks arising during the claim period, due to a lack of historical transactional information.1

Facebook’s 8-K shows $256 million in revenue from payments and other fees in the fourth quarter. Adjusting for the $66 million in deferred revenue, we can see that revenue remained essentially unchanged, compared both to the previous quarter and the year ago quarter. Assuming approximately $190 million in payments revenue in the quarter, Facebook saw only a 7% increase over the previous quarter, and a more modest 1% increase over the year-ago quarter.2

Facebook's payments revenue

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