Though not getting nearly as much media attention as Mark Zuckerberg's views on political advertising, Facebook (FB) just shared a fresh set of top-line numbers and earnings call remarks that eased worries about slowing ad revenue growth.
Three months after reporting its ad revenue rose 28% in dollars and 32% in constant currency (CC) in Q2, Facebook nearly matched those numbers in its Q3 report, disclosing ad sales rose 28% in dollars and 31% in CC last quarter. With ad revenue accounting for more than 98% of Facebook's total revenue, this growth was mostly responsible for Facebook's Q3 top-line beat.
In addition, the top-line guidance provided on Facebook's Q3 earnings call was on the whole a little more encouraging than what it shared on its Q2 call in July.
The bad news: CFO Dave Wehner stated that Facebook expects its revenue growth rate to drop by a mid-to-high single-digit percentage in Q4. This outlook, which admittedly could prove conservative given Facebook's guidance history, compares with a pre-earnings consensus for revenue growth to slow by 4 points to 24%.
In line with prior remarks, Wehner said Q4 growth would be hurt by "ad targeting-related headwinds" related to diminished user data -- caused by things such as new iOS and Android privacy features, the EU GDPR regulations and Facebook's own rollout of new privacy tools. Likewise, he reiterated that Facebook will be lapping "successful product optimizations" that boosted revenue growth a year ago.
The good news: Whereas in July Wehner simply forecast that Facebook's revenue growth would continue decelerating into 2020, Wehner now made a point of saying that 2020's growth slowdown is expected to be "much less pronounced" than what Facebook expects for Q4. That, combined with Facebook's historical guidance cautiousness, suggests the company thinks it has a good chance of delivering 20%-plus revenue growth in 2020.
Wehner disclosed that Facebook's ad impressions rose 36% annually in Q3, an acceleration from Q2's 33% growth. He indicated that Facebook's news feed, Instagram's main feed and Instagram Stories were all important contributors to this growth.
This ad impression growth was partly offset by a 6% drop in Facebook's average price per ad, a bigger decline than Q2's 4%. This is blamed on both the relatively high ad impression growth Facebook is seeing in emerging markets where its price per ad is lower, and a shift in its impression mix towards Instagram and Facebook Stories ads, which for now have lower average ad prices.
But while stories ads carry lower average prices for now on account of the format being new to many advertisers, there's no reason to think that stories ads, which consist of full-screen photos and videos and can leverage a lot of the same Facebook ad tools and data used for feed ads (and which legions of advertisers swear by), can't monetize at a high level. And in the meantime, they appear to be contributing meaningfully to Facebook's ad impression growth, with the company reporting that 3 million of its 7 million-plus advertisers are now buying stories ads.
At the same time, COO Sheryl Sandberg indicated on Facebook's call that the company's feed ad sales for both Instagram and Facebook proper are still "growing nicely." With Facebook having forecast last year that stories sharing by its user base will eventually surpass feed-based sharing, concerns have been running high about slower feed ad growth (particularly on Facebook proper) badly slowing Facebook's total growth. But between its recent performance and its 2020 outlook, such fears are now looking overblown.
If there's one concern for Facebook amid a shift in usage towards stories services, it's that the company's Facebook Stories service, which is available on the core Facebook app and Messenger, hasn't taken off the way that Instagram Stories and WhatsApp's Status stories service. Should Facebook feed viewing fall significantly down the line, Facebook Stories might not be able to pick up the slack.
But for now, Facebook, which has been trying to keep users of its main feed loyal by emphasizing social interactions and its Groups services on the feed as opposed to news and viral content, hasn't seen this kind of drop in feed usage.
Also, it's worth noting that the company still hasn't begun running ads against WhatsApp Status, which now has more than 500 million daily active users (DAUs). Status ads remain an untapped gold mine, and one that could do a lot to boost Facebook's average revenue per user (ARPU) in various international markets.
Overall, Facebook's top-line momentum looks a lot stronger than many feared in the summer and fall of 2018, as shares nosedived following a revenue miss and a tech selloff. And the company just provided some additional reasons to think its days of 20%-plus growth aren't going to come to an end in the near-term.
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