For the 2nd qtr in a row, Facebook Inc (NASDAQ:FB) produced solid across the board performance – user growth & engagement were inline, monetization (especially mobile) surprised to the upside, and costs (both in the qtr & mgmt forward guide) dispelled a lingering investor fear. Our ad industry conversations continue to point to sustained operating momentum for FB as Instagram scales and video efforts are supported with investments in content & measurement. As 2017 comes into better focus, UBS sees Facebook continuing to surprise on balancing engagement & monetization across multiple platforms/products (Core NewsFeed, Video, Instagram, FB Messenger) – longer term, UBS still sees call options centered on messaging as a platform, VR/AR & eCommerce.
Positives in the qtr: a) better than expected FXN ad rev growth (+49% YoY vs. UBSe +43% YoY) with strength in mobile ad revs (+52% YoY vs. UBSe of +48% YoY) and better than feared NA decel (-270bps vs. UBSe -550bps); b) lower than expected GAAP expense growth (+33% YoY vs. UBSe of +46% YoY) and FY17 guide narrowing to 40- 45% YoY (from 40-50% prior); c) sustained strength in user growth & engagement trends (global MAUs & DAUs beat; DAU/MAU ratio remains stable) aided by Android product improvements; d) mgmt commentary which reflected a new urgency to test/learn on messaging platform monetization. Negatives in the qtr: a) reiterated strategic focus on video (slowing overall ad impression growth) & content spend (pressuring both S&M and COGS); b) payments & other revs below expectation, down 20% YoY; c) less than expected share repurchases ($150m vs. UBSe of $250m).
Q3'17 – revs $9.72b (vs. $9.53b); GAAP operating income of $4.16b (vs. $3.97b); GAAP EPS $1.22 (vs. $1.16). FY17 – revs $38.80b (vs. $38.10b); GAAP operating income of $17.51b (vs. $16.51b); GAAP EPS $5.22 (vs. $4.88). UBS expects 40% GAAP expense growth in '17 at the lower end of mgmt guidance (+40-45% YoY). UBS $190 PT is based on weighted avg. approach (EV/Sales, EV/GAAP EBITDA, EV/(FCF-SBC)).