Going into Facebook's (FB +0.28%) earnings report on Thursday, investors were looking for an acceleration in ad growth following a slowdown during peak business shutdowns amid the coronavirus pandemic. Business shutdowns and limited operations earlier this year weighed heavily on ad spend, with Facebook's revenue only growing 11% year over year in Q2. This was compared to 18% growth in Q1.
Analysts, on average, expected growth to accelerate to a rate of about 12% in Q3. But the social network crushed estimates, delivering 22% year-over-year revenue growth. Even more impressive, management has optimistic expectations for Q4.
Strong advertising spend is back, to say the least. Here's a closer look at some key takeaways from Facebook's third quarter.
Facebook CEO Mark Zuckerberg. Image source: Facebook.
Strong growth, huge profits
Facebook's financial and operational metrics were impressive across the board.
- Total advertising revenue increased 22% year over year, driving virtually all of the tech company's revenue growth.
- Daily active users on the company's namesake platform increased 12% year over year to 1.82 billion.
- Unique daily active users across Facebook's family of apps (Facebook, Messenger, Instagram, and WhatsApp) increased 15% year over year to 3.21 billion.
- Net income jumped 29% year over year to $7.8 billion.
- Earnings per share rose 28% to $2.71.
"We had a strong quarter as people and businesses continue to rely on our services to stay connected and create economic opportunity during these tough times," said Facebook CEO Mark Zuckerberg in the company's third-quarter earnings release. "We continue to make significant investments in our products and hiring in order to deliver new and meaningful experiences for our community around the world."
If there's one thing that's clear from Facebooks' results it's this: Businesses aren't holding back on digital ad spend. This sentiment is echoed at Alphabet, which reported earnings on the same day. The company saw revenue growth increase 20% year over year, with management noting that an increase in advertiser demand was a primary catalyst for Alphabet.
Looking ahead
But here's where things get particularly interesting for Facebook. Despite the current uncertain environment, the social network expects its year-over-year growth rate in ad revenue to accelerate further in Q4. What will drive this acceleration? "[C]ontinued strong advertiser demand during the holiday season," management said in Facebook's earnings release.
"We believe the pandemic has contributed to an acceleration in the shift of commerce from offline to online, and we experienced increasing demand for advertising as a result of this acceleration," explained Facebook CFO David Wehner.
Investors should note that Facebook has historically been conservative about its revenue-growth forecasts, so Q4 must really be kicking off with a bang.
