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Facebook has 700Mn Active Messenger Users

August 17th, 2015

Facebook Messenger MonetizationFacebook reported another upside quarter with above Street revenue and EPS driven by strong advertising segment growth (ad revenue growth was stable at up 55%. User monetization increased with ARPU up 23% y/y to $2.76 reflecting higher usage and better average ad pricing.

Messenger users grew significantly in 2Q at 700mn vs. 600mn in 1Q and 500mn in 4Q, increasing its monetization potential. Management highlighted that Facebook, Messenger, and Instagram users spend 46 minutes per day on average (ex-WhatsApp) on FB sites and that engagement grew across all platforms.

Ad formats and products that drove ad revenue performance in 2Q include video, carousel ads, dynamic product ads, and conversion tracking products. Payments revenue missed due to the usage transition to mobile (FB generates games revenue on PC games only) and management guided to bigger declines in future quarters. Instagram had a small revenue contribution in the quarter, we see potential for Instagram revenues to ramp rapidly in 2016.

Next catalyst is likely to be opening of Instagram to all advertisers in the Fall, and we also think Facebook is in good position for 4Q retail season optimism with adoption of conversion tracking ads and possibly a Buy button thus launching its e-commerce operations. On the call, management repeatedly said that Instagram will contribute to a small % of Facebook’s revenue and that the company will focus on driving user and usage growth first.

Facebook Search Opportunity
Facebook indicated that the company has 1.5bn searches a day (up from prior 1bn disclosure). While most FB searches are not commercial today, we think the types of searches can evolve over time (recommendations?), and we see a $5bn opportunity assuming $0.01 average incremental revenue per search with search ads, which is a fraction our estimate per search revenue for Google.

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