Facespend

Did you see Mark Zuckerberg in an interview at Beijing's Tsinghua University? If not, here it is, a condensed first part of the interview: Watch Mark Zuckerberg Speak Mandarin. I love the crowd reaction, I have read that his mandarin is not great, he seems to be understood and it is far better than most of the languages that I can speak! As he points out, his wife and her family are Chinese, so he needed to communicate with all of them, hence the need to learn the language.


This is not a piece on the Zuck however, he is seemingly a private person in that part of his life, hence the ability to shock people with his skills. Whilst he is a private person, in the information segment about Facebook, the founder and CEO's Facebook page (link above to the Zuck) can be used as means of disclosing material non-public information and for complying with its disclosure obligations under Regulation FD. That is right, on his Facebook page he has 30.5 million followers. His recent activity includes the aforementioned university Q&A in mandarin Chinese, a meeting with the Japanese PM, Shinzo Abe and visiting one of Samsung's manufacturing facilities in South Korea, he has certainly been busy!


When the Zuck founded/conceptualised/built the company in his dorm room over a decade ago, who would have thought that there would be 1.35 billion monthly active users connected across the planet, with 864 million active daily users. That last number represents a 19 percent increase year over year, as the base grows the user growth has to start moderating. In mobile the growth rates from a user perspective are pretty impressive, there are currently 1.12 billion active monthly users, that is up 29 percent year over year, indicating that many people who have a Facebook account interact more and more on the move.


The company reported post the market last evening, revenues registered 3.2 billion Dollars for the quarter which was a fairly remarkable 59 percent increase year over year, most of that advertising revenue (2.96 billion Dollars). Costs and expenses soared 41 percent from the comparable quarter, non-GAAP net income grew 73 percent to more than 1 billion, 1.15 billion Dollars. On an adjusted non GAAP basis, EPS registered a beat of 43 cents for the quarter. Of course the company does not pay a dividend for the time being, more on cash utilisation in a bit.


All the metrics looked good, everything looks like a beat to me, so why is the share price trading down 8.2 percent? A lot of what was revealed was on the conference call, you can get the whole interview from SeekingAlpha (you will have to sign up for free): Mark Zuckerberg on Q3 2014 Results - Earnings Call Transcript. The falling short of the guidance for the next quarter is possibly one of the two reasons for the fall in the share price.

The plan to invest heavily in some of the businesses that the company has acquired, with the goal, as the Zuck says on the conference call, to "make Facebook a cross platform that allows developers to build, grow and monetize their apps across every major mobile platform" over the next few years. The longer term goal, the ten year goal is to continue to connect the world. Internet.org, providing a platform to help with the "things" that developed world people take for granted, sharing of health services and improving education leading to better employment prospects.


Facebook costs are going to rise significantly next year as they invest heavily in Oculus and WhatsApp (expected to get to 1 billion users in the coming years), as well as the existing core business. More investing equals lower profitability in the short term, we previewed Amazon.com of course just the other day, they continue to invest heavily in their business. Something interesting on the conference call that the Zuck said: "Some of the things like Search and some of these other products, this may sound a little ridiculous to say, but for us, products don't really get that interesting to turn into businesses until they have about a 1 billion people using them." News feed is there, but nothing else yet, obviously WhatsApp, Search and of course Instagram.


E-Marketer suggests that Facebook continues to capture the mobile market ad share (remember when the anxiety was that they couldn't monetize mobile, that is now two thirds of revenue!!!!), the age and gender targeting of the Facebook adverts is much more accurate and pointed than their peers. More people will use the platform. Think for a second about the average revenue per month of the average monthly users (1.12 billion). 3.2 billion Dollars for 91 days, roughly 1.067 billion Dollars a month. ARPU's are a mere 95 US cents. There is definitely a tipping point at some level here, more aggressive monetisation of the platform.


Do not think of their platforms as somehow a way that people sink themselves into an information world, escaping from the real world. It is the real world, you can just see it instantaneously from wherever you are. I read in the earnings call that the average Instagram user spends 21 minutes a day on the platform, looking at pictures is addictive. That is roughly the same as your favourite sitcom, the time, of course the Instagram experience is completely personalised! Think of the platforms as yet another form of communication, I would not know what my old school mates were up to if it was not for Facebook and WhatsApp.


We maintain our long stance on Facebook, they may be investing heavily in the short term in their business (both new people and the existing platforms), we like that in the long run. The business will in the coming years have four core platforms (Facebook News Feed, Facebook Search, WhatsApp and Instagram) with a billion people across both platforms, there is no other business of that sort. The eyeballs and users are there, the talent at the company will look to monetize the user base more and more over time. We maintain our buy recommendation.