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Facebook users rise as revenue growth looks set to stall on COVID-19 impact

April 30, 2020  | Subscribers Only


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  • Total revenues grew 18% year-on-year (y/y) to $17.7 billion
  • Advertising revenue increased 17% y/y to $17.4 billion from $14.9 billion
  • Other revenue rose 80% y/y from $165 million to $297 million 
  • Daily active users (DAU) grew 11% y/y to 1.734 billion 
  • Monthly active users (MAU) grew 10% y/y to 2.603 billion
  • Average revenue per user (ARPU) rose by 8% y/y to $6.95
  • Family Daily Active People grew 12% y/y from 2.10 billion to 2.36 billion 
  • Family Monthly Active People rose 11% y/y from 2.69 billion to 2.99 billion 
  • Family ARPU grew 7% to $6.03 from $5.66

The start of 2020 was marked by what appeared to be a new wave of regulatory pressure on major tech firms, with the FTC requesting data on all mergers and acquisitions by Alphabet (including Google), Amazon.com, Apple, Facebook and Microsoft cover the period from January 2010 to the end of 2019. Meanwhile, the EU released papers on on AI, Business to Government data sharing and its broader Data Strategy which will have significant impacts on Facebook. Facebook attempted to steer the conversation with the release of several papers on topics including “Data Portability and Privacy” in September followed up by “Online Content Regulation” in February but appeared to have little success.

While the EU has noted that it intends to resume these investigations, by the release of the first quarter results this week, the pressures and focus for the company have significantly changed as the world deals with changes wrought by the COVID-19 epidemic.  That has not however derailed Facebook’s long term vision, with the companies’ largest investment since the $16 billion WhatsApp acquisition in the form of a $5.7 billion investment in Indian operator Reliance Jio.  

Overview: Growth limiting impact of COVID-19

Facebook has continued to post high top line growth, even as the world moved into global lockdown, with total revenues rising by 18% year on year. While that is an impressive growth rate for any company, for Facebook it represents a significant slowdown, with year-on-year growth decelerating as the impact of COVID-19 began to hit key advertising markets at the end of the quarter even as user growth and engagement with the platform rose. While non-advertising revenues posted high growth, up from $167 million a year earlier to $297 million mainly due to improving sales of Oculus devices, this remains less than 2% of total revenues.

With total revenues for the first quarter of $17.7 billion, year-on-year revenue growth to Q1 fell from 26% in 2018 to 18% in 2019 as Facebook added $2.7 billion to quarterly total revenues over the year. Total growth has naturally been falling as Facebook takes a greater share of the market - the global mobile advertising market was valued at around $170 billion in 2019. While growth rate declines are therefore to be expected, there is a notable acceleration to the fall in the first quarter.  Facebook also reported that revenues so far for the second quarter are effectively flat on the prior year.

Facebook reports several user metrics, covering both just the core Facebook platform, and the aggregated wider ‘family’ of services including Instagram, WhatsApp and Messenger.  A user with all four accounts would be counted a single time by this metric. Growth in users across all metrics continues to be strong as people seek new venues for interaction and distraction.

After ticking along at around 2% per quarter since the start of 2018, the Facebook platform saw daily active users grow by 4.6% while monthly active users grew by 4.2% quarter on quarter.  That differential pushed the Monthly / Daily Active Users, an indicator of active users’ engagement with the platform from 66% to 67%.

However, the 17% y/y growth in advertising revenue is by far the lowest growth the company had experienced since 2011. According to Facebook, during the last three weeks of the quarter, a decrease in demand for advertising started to show and eventually led to price drops. The growth of global ARPU halved to 8% year on year, in comparison to 16% in the same period a year ago, and the seasonal Q4 to Q1 fall increased from the -10-12% range seen in previous years to -18%. Facebook noted that the fall in revenues looked to have stabilized at the start of the second quarter, but are level with revenues a year earlier.  

While Instagram generates significant revenues from a large user base, these metrics which are not directly broken out by the company.  Monetization of other products is limited. Messenger carries limited advertising in the ‘Chat’ area of the app while WhatsApp is mainly monetized through use as a B2C communications channel. However, WhatsApp is also being pushed as a potential retail and payments platform, particularly suited to the Indian market where the app is used by over 400 million users.

Other revenue, which consists of revenue generated from the sale of consumer hardware devices and fees from payment infrastructure, grew 80% mainly driven by the sales of the company’s VR product Oculus. Sales are likely to have been buoyed by emerging deals with operators as they seek to promote 5G networks, with SK Telecom in Korea and O2 in the UK offering the Oculus Go in bundles with VR content and services. The launch of the Half Life Alyx game is also credited with spurring demand for VR headsets and supply has been constrained, in part due to coronavirus. If those supply constraints can be dealt with, gaming is one of the sectors that is likely to benefit from the pandemic as people stay home and seek alternative entertainment.

Facebook’s Family metrics were introduced in Q4 2019 to measure its total user base across its main app plus Instagram, Messenger and WhatsApp. Family ARPU of $6.03, is lower than Facebook’s ARPU of $6.95, which is due to Messenger and Whatsapp, lacking effective monetization .

Growth slowed in all regions  in Q1 2020, in line with the company’s overall growth rate. Asia Pacific remained the fastest-growing region in terms of advertising revenue and monthly active users. Advertising revenue grew 21% year-on-year to $3.2 billion, faster than the company’s global advertising revenue growth of 17%. The region is now responsible for 42% of Facebook’s monthly active users; but only 18% of revenue. ARPU in this region was $3.06 in Q1 2020, dwarfed by the $34.18 generated by each user in the US and Canada.

Despite the growth in Oculus revenues, advertising still accounts for 98% of Facebook’s revenues. The heavy reliance on advertising makes companies such as Facebook and Google more vulnerable to economic volatility. However,  these companies have the advantage of being the dominant players in the market and will continue to retain market share during the crisis  thanks to increased user engagement with their platforms and services. Additionally, some ad verticals, such as gaming and e-commerce, are growing during the pandemic and this will boost established platforms offering such advertising. Facebook’s “shoppable” ad formats and Facebook Audience Network offering put it in a good position to capitalize on this growth.

Investing in India and online to offline commerce

CEO Mark Zuckerberg highlighted that it was a shared vision for an integrated advertising – retail space – communication - payments platform that drive the deal to acquire 10% of Reliance Jio for $5.7 billion on 21 April. This was seen to align with the Mukesh Ambani’s vison for Jio Mart, which launched in December 2019. That taps into the network of up to twelve million local shops known as ‘kiranas’ by providing wholesale goods at competitive prices, while also leveraging the network of shops for local delivery or pickup of goods sold online. A pilot has already been implemented allowing users of WhatsApp – which has over 400 million users in India – to browse groceries and place orders which are then fulfilled by a local shop.  

That brings Facebook into closer competition with Amazon in India where both appear to be targeting the retail and grocery sector. Taking a slightly variation on Facebook’s approach, since 2015 Amazon has operated a program called ‘I have space’ whereby kiranas work with Amazon by receiving, holding and delivering goods to customers for a commission. Amazon has also taken an indirect stake in Future Groups’ Big Bazaar hypermarket operations.

While payments have not been implemented in the trial service, WhatsApp Pay was granted approval by the National Payments Corporation to launch in India in February 2020. The partnership with Jio, a savvy local operator, will help Facebook to compete with local e-commerce platforms like Flipkart (acquired by Walmart) and Paytm (backed by Softbank and Alibaba), both offering e-commerce and digital payment platform in India and are pursuing a comprehensive online to offline ‘super app’ strategy.

Product launch: Messenger Rooms

A significant product update was also announced only this week, with the launch of Messenger Rooms upgrading the platform’s video calling capabilities. That came on top of the launch earlier in April of the first desktop app for messenger. These moves are widely seen as an attempt to match the capabilities and growing popularity of Zoom video conferencing. The main change from the legacy Messenger video calling app will see the participant limit raised – albeit gradually – to 50 people, where Messenger video calling previously supported only up to 8 users while WhatsApp is raising limits from 4 to 8 users. Rooms also supports various peripheral video features such as backgrounds and visual augmentations.

Rooms will allow those without Facebook accounts to join – removing resistance from Facebook objectors, but losing incentivization effects for new users to join the network. Rooms will also be integrated with the core app, adding some value there by promoting and supporting live video interaction. When a Room is created within a Facebook Group or Event, it will appear on news feed and allow members of the group to join the call, by creating a virtual “hangout” session where members are free to drop in.

While the update will be gradually rolled out geographically, Facebook noted that the global lockdown has already seen an immediate impact on video calling, with voice and video calling using WhatsApp and Messenger both doubling, while in Italy, group video calling increased by 1000% over March. By building out more functionality Facebook aims to head off threats from other platforms such as Zoom, which while not aimed at consumers has rapidly gained a following that could see it pivot the user base on to a more directly competitive product.

Outlook

Omdia expects Facebook’s Q2 2020 advertising sales to be hit moderately by the impact of COVID-19, depending on how long the lockdown lasts and the speed of the economic recovery. On a regional basis, Asia Pacific will continue to perform well given the quick recovery in countries like South Korea and Taiwan and relatively less severe impact of COVID-19 compared to the current situations in the US and Western Europe.

With income from operations at $5.9 billion for a margin of 33%, and net income of $4.9 billion, alongside a balance sheet with nearly $24 billion in cash and $37 billion in marketable securities, Facebook is well set to ride out what could be an extended recessionary period. The investment in Jio is a sign that the company is confident in its long-term strategy and looking for growth opportunities in developing markets. As overinflated asset values have returned to a more viable level, additional opportunities are likely to be taken. The company has already started to divert investment to e-commerce and gaming, including recently launching the Facebook Gaming app on Google Play with features including an instant game library, Twitch-like streaming and social features.

Geography
Global
Organization
Facebook
Research by Market
Mobile & Telecom
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