What marketers should know from Facebook’s Q2 2017 earnings report

Facebook’s ad revenue growth hasn’t slowed yet but will soon, and don’t expect ads in videos or Messenger to offset its ad load issue just yet.

Chat with MarTechBot

Facebook Money Revenue Dollars2 Ss 1920 Picjsb

Here’s the money quote from Facebook CFO David Wehner that summarizes everything marketers need to know about what happened during Facebook’s second quarter earnings call on Wednesday.

“We continue to expect that Facebook ad load will play a less significant factor driving advertising revenue growth going forward. And the desktop ad revenue growth rates will slow in the second half of 2017 when we begin to lap efforts to limit the impact of ad blockers. In addition we expect that our strategic focus on driving engagement with mobile video may slow advertising impression growth given the relatively fewer ad impressions in video relative to news feed. I would also note that we do not see our early efforts in Messenger monetization offsetting the factors that I just mentioned. For these reasons we continue to expect that our ad revenue growth rate will come down as the year progresses.”

That quote puts a neat bow on where Facebook’s advertising business stands today and where it’s headed in the near future. So let’s break it down, sentence by sentence.

“We continue to expect that Facebook ad load will play a less significant factor driving advertising revenue growth going forward.”

For the past year Facebook execs have been warning that the social network’s advertising revenue growth would slow in 2017. That hasn’t happened yet.

In the second quarter of 2017, Facebook’s ad revenue increased by 47 percent year over year to $9.16 billion as its overall revenue increased by 45 percent to $9.32 billion. Fueling Facebook’s ad revenue growth is its ability to get more people using Facebook so that it serve more ads and its ability to better pinpoint ads so that advertisers are willing to pay more money per ad. In Q2 2.01 billion people used Facebook every month, including 1.33 billion who used it every day. Facebook served 19 percent more ads than it had in Q2 2016 and for 24 percent more money per ad, on average.

“And the desktop ad revenue growth rates will slow in the second half of 2017 when we begin to lap efforts to limit the impact of ad blockers.”

Mobile has been Facebook’s big moneymaker for years and continues to balloon. In Q2 mobile ads generated $7.97 billion, up 52 percent year over year, and accounted for 87 percent of Facebook’s ad revenue. That doesn’t mean Facebook’s desktop ad business is on the wane — quite the opposite — in Q2 Facebook made $1.19 billion from desktop advertising, up 19 percent from a year ago.

Facebook’s desktop ad revenue growth has been helped by Facebook’s efforts to prevent people from blocking ads while using Facebook’s desktop site. Those efforts started in August 2016. Now that Facebook’s coming up on a year since it decided to stop leaving money on the table, we’ll begin to see how Facebook’s desktop advertising business is actually doing.

“In addition we expect that our strategic focus on driving engagement with mobile video may slow advertising impression growth given the relatively fewer ad impressions in video relative to news feed.”

This part sounds worse than it actually is, probably. What Wehner is saying is that people scroll through their news feeds really quickly, so Facebook is able to show them a lot of ads between all those posts. When people stop to watch a video, that’s time taken away from all the ads they would have seen had they kept scrolling. Wehner spelled this out later during the earnings call:

“As people spend more time with video, that is going to have a limiting factor to how much time they spend in news feed and so that’s going to have an impact on impression rate growth. So there is, in that sense, a cannibalistic effect of sorts that happens there,” he said in a way that makes the dilemma sound even worse.

The thing to focus on here is that Wehner is talking about how many ads Facebook can show people, not how much money Facebook is able to make per ad. Facebook has already started testing ads slotted in the middle of the videos. If it’s able to get people to sit through those ads and then use its tracking tools to monitor when those ads lead people to eventually do something like buy a brand’s product, then it stands to fetch even more money per ad than it’s already receiving for video ads that people typically stop watching after a few seconds. More to the point, if Facebook’s mid-roll ads become more desirable to advertisers because of the time people spend watching them — thanks to the law of supply and demand — any negative impact video had on impression growth would result in an at least proportionally positive impact on pricing growth.

“I would also note that we do not see our early efforts in Messenger monetization offsetting the factors that I just mentioned.”

Wehner may wish he had never said this part, and Facebook CEO Mark Zuckerberg may wish that he had not said “I want to see us move a little faster here” while talking about making money from Messenger and Facebook’s other messaging service, WhatsApp. Both of those comments led to questions about Facebook’s messaging revenue prospects dominating the earnings call.

After the umpteenth question about why Facebook sounds so unsure about the business side of messaging, Zuckerberg tried to stamp out the concern. “Over the next few years, the much bigger driver of the business and determinant of how we do is going to be video, not Messenger,” he said as the roughly 64-minute earnings call ticked toward the 59th minute.

Facebook is earlier in monetization for its messaging apps than for video. It was only a few weeks ago that Messenger started testing ads globally. And while the expectation might be that Facebook will succeed in applying its large advertiser base and ad-tech infrastructure to Messenger (as it did to Instagram), Instagram was more aligned to Facebook than Messenger. “Unlike Instagram, this isn’t a feed product, so there are more unknowns,” said Wehner. Among those unknowns — given that Messenger isn’t a feed product — why Facebook decided to start by syndicating its news feed ads within the messaging app.

Facebook COO Sheryl Sandberg seemed to acknowledge that discrepancy during Wednesday’s call. “We have a lot of work to do, to work on the format of the ads. This is not a feed-based product. This is a messaging product. So this is a different consumer format, and we believe that the ad format should follow the consumer format. And that’s where we have a lot of work to do,” she said.

“For these reasons we continue to expect that our ad revenue growth rate will come down as the year progresses.”

Clearly, winter is coming.


Opinions expressed in this article are those of the guest author and not necessarily MarTech. Staff authors are listed here.


About the author

Tim Peterson
Contributor
Tim Peterson, Third Door Media's Social Media Reporter, has been covering the digital marketing industry since 2011. He has reported for Advertising Age, Adweek and Direct Marketing News. A born-and-raised Angeleno who graduated from New York University, he currently lives in Los Angeles. He has broken stories on Snapchat's ad plans, Hulu founding CEO Jason Kilar's attempt to take on YouTube and the assemblage of Amazon's ad-tech stack; analyzed YouTube's programming strategy, Facebook's ad-tech ambitions and ad blocking's rise; and documented digital video's biggest annual event VidCon, BuzzFeed's branded video production process and Snapchat Discover's ad load six months after launch. He has also developed tools to monitor brands' early adoption of live-streaming apps, compare Yahoo's and Google's search designs and examine the NFL's YouTube and Facebook video strategies.

Get the must-read newsletter for marketers.