Home » Facebook’s (FB) CEO Mark Zuckerberg on Q2 2014 Results – Earnings Call Transcript

Facebook’s (FB) CEO Mark Zuckerberg on Q2 2014 Results – Earnings Call Transcript

We also introduced premium autoplay video ads this year. Video on Facebook helps brands extend their TV investments by combining traditional reach focus campaigns with our unparalleled targeting abilities. Today, we run about a dozen campaigns and the early data show promising results. We’ll continue to roll this product out slowly and carefully. Similarly we’re seeing positive early demand for marketers for ads on Instagram and we’re rolling these ads outs carefully as well.

In all of this we remained focused on the transition to mobile. Our recently launched audience network lets advertisers use Facebook targeting while extending their campaign beyond Facebook. This can improve the relevance of ad peoples see both on and off Facebook and we’re encouraged by the early response.

Finally, earlier this summer we announced the acquisition of LiveRail, a leading online video advertising platform that enables customers like MLB.com and A&E Networks to monetize their video inventory efficiently. We have a lot to do here, but with LiveRail we’re investing in tools that can improve the relevance of video ads across the web.

In summary, we’re pleased with our performance and the progress we’re making. We’re the first platform that can deliver personalized marketing at scale and marketers are increasingly recognizing to great result so we can drive for them. Staying focused and executing will remain a major thing for us moving forward. Our teams know that our future success depends upon our continued acquisition and our plan is to stay focused.

Thanks. And now here is Dave.

Dave Wehner

Thanks, Sheryl. And good afternoon everyone. Q2 was a good quarter for us across our key operating and financial metrics. We generated strong revenue growth in operating margins and delivered $872 million of free cash flow and we continue to make investments to drive our core business, as well as to support our long term strategic priorities.

Let’s start with a review of our network. We are executing well on our ongoing mission to connect everyone. 829 million people use Facebook on an average day in June, up 130 million from a year ago. This represents 63% of the 1.32 billion people who used Facebook during June.

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Mobile continues to be a strong driver of our growth with over 1 billion people using Facebook monthly on mobile. At the same time we’re enabling more ways for people to connect and share beyond the core Facebook app. For instance, both Instagram and Messenger have each passed over 200 million MAU and continue to grow nicely.

Turning now to the financials, total revenue in the second quarter was 2.9 billion up 61% or 59% on a constant currency basis. Total ad revenue was $2.7 billion, up 67% or 65% on a constant currency basis. Ad revenue growth was strong around the world with each of our four geographic regions growing by over 60%. Mobile ad revenue was approximately 1.66 billion or 62% of ad revenue, compared to approximately $660 million or 41% of ad revenue last year.

Desktop ad revenue was up 8% year-over-year. In Q2, the average affective price per ad increased 123% compared to last year, while total ad impressions declined 25%. The decrease in ad impressions continues to be driven by the shift towards mobile usage where people are shown fewer ads compared to desktop.

The increase in the average price per ad was primarily driven by an increase in the percentage of our ads being served in News Feed. The price volume trends were generally consistent across all four reported geographic regions.

Total payments and other fees revenue was $234 million up 9% versus last year. As we have noted in the past we believe the more meaningful comparison that better reflects the organic growth rate of the payments business, comes from looking at payments volume from games specifically, which was up 1% in Q2 versus last year.

Our current games payment revenue comes entirely from desktop usage and we are seeing declines in the number of people using Facebook on desktop, a trend that will make growing this business challenging going forward.

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Turning to expenses, our Q2 GAAP expenses were $1.5 billion, up 22%, and our non-GAAP expenses were $1.2 billion, up 18%. Note that cost of revenue grew 2% on a GAAP basis and 1% on a non-GAAP basis, mainly driven by unusually high expenses in 2013 related to the transition out of certain leased data centers. This flatness in cost of revenue was the primary reason overall expenses grew relatively slowly.

Operating expenses excluding cost of revenue grew 33% on a GAAP basis and 31% on a non-GAAP basis. We ended Q2 with 7185 employees, up 36% from last year. Our Q2 GAAP operating income was $1.4 billion, representing a 48% operating margin, up from 31% last year and our non-GAAP operating income was $1.7 billion, representing a 59% non-GAAP operating margin, up from 44% last year. Our GAAP and non-GAAP tax rates were 43% and 36%, respectively. GAAP net income was $791 million or $0.30 per share, and non-GAAP net income was $1.1 billion or $0.42 per share.

In Q2, we spent $469 million on CapEx and generated $872 million of free cash flow. We ended Q2 with approximately $14 billion in cash and investments. This excludes the impact of the Oculus acquisition which was closed earlier this week and included am approximately $400 million cash payment.

Now looking forward, let me start by noting that the forward-looking comments I’ll share today for 2014 include the impact from the recently closed acquisition of Oculus, but exclude except where otherwise noted the impact from WhatsApp which we continue to expect will close later this year.

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