Facebook, in the second quarter of the year, 2020 had a record of 10% to $18.3 billion revenue as the monthly active users rose to 2.7 billion ahead of estimates of 2.6 billion.
The social media organization explained that its ad revenue growth in the quarter was stronger in May and June relative to April amidst COVID-19 outbreak in the world.
Second Quarter 2020 Operational and Other Financial Highlights
In terms of verticals, we saw particular strength from both new and existing online commerce and services advertisers who primarily leverage our direct response ad formats.
Facebook has been a lifeline of economic activity during a time when offline activity has been curtailed.
Our growth was primarily driven by small and medium sized businesses around the world who leveraged our advertising platforms to connect with customers.
As a result, we continue to see increased diversification among our advertiser base. In Q2, our top 100 advertisers represented 16% of our ad revenue, which is a lower percentage than a year ago.
On a user regional basis, ad revenue growth was strongest in US & Canada, Asia-Pacific, and Europe which grew 14%, 11%, and 9%, respectively.
Rest of World declined 6% and was impacted by challenging macroeconomic conditions as well as foreign currency headwinds.
Turning now to our price and volume metrics. In Q2, the total number of ad impressions served across our services increased 40% and the average price per ad decreased 21%.
Similar to last quarter, the growth in impressions was primarily driven by Facebook Mobile News Feed, due to product changes and increased engagement compared to last year.
The decline in average price per ad was largely attributable to the economic impact of the pandemic, although we saw year-over-year pricing trends improve in the latter half of the quarter.
Other revenue was $366 million, up 40%, driven primarily by sales of Oculus and Portal products.
Turning now to expenses. Q2 total expenses were $12.7 billion, up 4% on a reported basis. Excluding the $2 billion expense that we recorded in Q2 of last year related to our settlement with the FTC, total expenses were up 24% year-over-year, an 11 percentage point deceleration compared to Q1.
The biggest factor in the deceleration of expense growth from the first quarter was a decline in people-related costs like travel, events and amenities as our employees worked almost entirely from home. By line item, the trends were as follows:
- Cost of revenue increased 16%, driven primarily by depreciation related to our data center spend.
- R&D grew 35%, driven primarily by investments in core products as well as our innovation efforts, notably in AR/VR.
- Marketing and sales grew 18%, driven primarily by consumer and growth marketing.
- Finally, excluding the FTC expense from Q2 of 2019, G&A expenses grew 30%, driven primarily by higher legal expenses.
We continued to invest throughout the economic downturn in order to build products and services for the future.
We had our strongest hiring quarter ever in Q2, adding over 4,200 net new hires, primarily in technical functions. We ended the quarter with over 52,500 full-time employees, up 32% year-over-year. We are pleased with our ability to recruit, onboard, and retain talent in this environment.
Operating income was $6 billion, representing a 32% operating margin. Our tax rate was 16%. Net income was $5.2 billion or $1.80 per share.
Capital expenditures were $3.4 billion driven by investments in data centers, servers, office buildings, and network infrastructure.
Note that this is a decline of 11% compared to last year, primarily due to a pause in data center construction for roughly half of the quarter due to the shelter-in-place measures.
We have since resumed our data center construction efforts with proper safety precautions in place.
In Q2, we announced a new data center in Illinois which will be supported by 100% renewable energy.
We remain committed to minimizing our environmental impact and earlier this month, we published our inaugural Sustainability Report, which is available on Facebook’s Sustainability website.
Free cash flow was $514 million and, as a reminder, this is net of the $5 billion FTC settlement that was paid in Q2 but as previously noted was expensed in 2019.
We purchased $1.4 billion of our Class A common stock and ended the quarter with $58.2 billion in cash and investments. In July, we closed our investment in Jio Platforms Limited and paid approximately $5.8 billion in cash.
As I mentioned earlier, we are seeing signs of normalization in user growth and engagement as shelterin-place measures have eased around the world, particularly in developed markets where Facebook’s
penetration is higher. Looking forward, as shelter-in-place restrictions continue to ease, we expect the number of Facebook DAUs and MAUs to be flat or slightly down in most regions in Q3 compared to Q2.
In the first three weeks of July, our year-over-year ad revenue growth rate was approximately in-line with our Q2 ad revenue growth rate of 10%.
We expect our full quarter Q3 year-over-year ad revenue growth rate to be roughly similar to this July performance. There are several factors contributing to this:
- First, continued macroeconomic uncertainty including the pace of recovery and the prospects
for additional economic stimulus;
- Second, the expectation that some of the recent surge in community engagement will normalize
as regions reopen;
- Third, the impact from certain advertisers pausing spend on our platforms related to the current
boycott which is reflected in our July trends; and
- Lastly, headwinds related to ad targeting and measurement, including the impact of regulation,
such as the California Consumer Privacy Act, as well as headwinds from expected changes to
mobile operating platforms, which we anticipate will be increasingly significant as the year progresses.
Turning now to expenses. We expect total expenses in 2020 to be in the range of $52-55 billion, narrowed slightly from our prior range of $52-56 billion.
We expect capital expenditures to be approximately $16 billion, at the high end of our previous $14-16 billion range1, as we have resumed data center construction efforts earlier than expected.
However, a great deal of uncertainty remains in our outlook, and our full-year capital expenditures will depend on how the pandemic impacts our ability to construct data centers and refresh equipment.
Turning now to tax. We expect our full-year 2020 tax rate to be in the mid-teens, although we may see fluctuations in our quarterly rate depending on our financial results.
We are proud of the role that Facebook has played in keeping people connected during the COVID crisis and the role that we have played in helping businesses reach consumers online during these challenging times.
First Quarter 2020 Operational and Other Financial Highlights
- Facebook’s daily active users (DAUs) – DAUs were 1.73 billion on average for March 2020, an increase of 11% year-over-year.
- Facebook monthly active users (MAUs) – MAUs were 2.60 billion as of March 31, 2020, an increase of 10% year-over-year.
- Family daily active people (DAP) – DAP was 2.36 billion on average for March 2020, an increase of 12% year-over-year.
- Family monthly active people (MAP) – MAP was 2.99 billion as of March 31, 2020, an increase of 11% year-over-year.
- Capital expenditures – Capital expenditures, including principal payments on finance leases, were $3.66 billion for the first quarter of 2020.
- Cash and cash equivalents and marketable securities – Cash and cash equivalents and marketable securities were $60.29 billion as of March 31, 2020.
Following the end of the quarter, we entered into an agreement to invest in Jio Platforms Limited, a subsidiary of Reliance Industries Limited, for approximately $5.7 billion, and we paid the $5.0 billion settlement amount due under our modified consent order with the FTC, which took effect in April 2020.
- Headcount – Headcount was 48,268 as of March 31, 2020, an increase of 28% year-over-year. Impact of COVID-19 on Outlook.
Our business has been impacted by the COVID-19 pandemic and, like all companies, we are facing a period of unprecedented uncertainty in our business outlook.
We expect our business performance will be impacted by issues beyond our control, including the duration and efficacy of shelter-in-place orders, the effectiveness of economic stimuli around the world, and the fluctuations of currencies relative to the U.S. dollar.
- Engagement – Our community metrics, including Facebook DAUs and MAUs and Family MAP and DAP, reflect increased engagement as people around the world sheltered in place and used our products to connect with the people and organizations they care about. We expect that we will lose at least some of this increased engagement when various shelter-in-place restrictions are relaxed in the future.
- Revenue – We experienced a significant reduction in the demand for advertising, as well as a related decline in the pricing of our ads, over the last three weeks of the first quarter of 2020.
Due to the increasing uncertainty in our business outlook, we are not providing specific revenue guidance for the second quarter or full-year 2020, but rather a snapshot on revenue performance in the second quarter thus far.
After the initial steep decrease in advertising revenue in March, we have seen signs of stability reflected in the
first three weeks of April, where advertising revenue has been approximately flat compared to the same period a year ago, down from the 17% year-over-year growth in the first quarter of 2020.
The April trends reflect weakness across all of our user geographies as most of our major countries have had some sort of shelter-in-place guidelines in effect.
- Total expenses – We expect to realize operational expense savings in certain areas such as travel, events, and marketing as well as from slower headcount growth in our business functions.
However, we plan to continue to invest in product development and to recruit technical talent. In addition, we have committed over $300 million to date in investments to help our broader community during the crisis,
which will have an impact on our financial performance this year. As a result, we expect total expenses in 2020 to be between $52-56 billion, down from the prior range of $54-59 billion.
While this reflects a moderate reduction in the planned growth rate of total expenses, our overall expense growth in the face of expected revenue weakness will have a negative impact on 2020 operating margins.
- Capital expenditures – Our significant investments in infrastructure over the past four years have served us well during this period of high user engagement.
We plan to continue to grow our capex investments to enhance and expand our global infrastructure footprint over the long term.
In 2020, we expect capital expenditures to be approximately $14-16 billion, down from the prior range of $17-19 billion. This reduction reflects a significant decrease in our construction efforts globally related to shelter-in-place orders. Given the strong engagement growth and related demands on our infrastructure, this year’s capex reduction should be viewed as a deferral into 2021 rather than savings.
- Tax rates – We expect our full-year 2020 tax rate will be in the high-teens, although we may see fluctuations in our quarterly rate depending on our financial results.
- Webcast and Conference Call Information
Facebook will host a conference call to discuss the results at 2 p.m. PT / 5 p.m. ET today.
The live webcast of Facebook’s earnings conference call can be accessed at investor.fb.com, along with the earnings press release, financial tables, and slide presentation.