Three Key Themes From Social Media Q1 2021 Earnings
An article by • Published May 11, 2021
Three Key Themes From Social Media Q1 2021 Earnings
Social media companies, apart from Twitter (ticker: $TWTR), delivered blowout first quarter earnings results - Facebook (ticker: $FB), Snap (ticker: $SNAP) and Pinterest (ticker: $PINS) all handsomely beat street expectations on EPS and revenue, while Twitter's results were largely in-line.
The outlook for revenue growth in the second quarter looked strong across the board in light of easy comps, but the market remains focused on what happens beyond that period as the comps get tougher.
In this article, we discuss three key themes from social media companies' first quarter earnings calls/shareholder letters that are likely to have implications beyond the next quarter, including:
Change in user engagement patterns as the economy opens up
Structural increase in advertising demand as a result of the pandemic
Improved confidence that Apple's (ticker: $AAPL) recently implemented privacy changes are manageable
Shifting User Behavior
Pinterest, which was the first among its peers to report first quarter earnings, said that user growth in the US slowed down and engagement was down year-over-year as the pandemic restrictions eased.
Since Q2 2020, we have noted the strong correlation between lockdowns and engagement on Pinterest. We believe that lockdowns probably pulled forward some user growth during 2020, particularly in the US where our service has been available longer. Starting in mid-March, the easing of pandemic restrictions slowed US MAU growth and lowered engagement year over year as people spent less time online. In Q1, we saw good retention of the MAUs we gained during 2020, but we still don’t know if or how long this retention will last. Our understanding of future engagement levels is similarly limited.
it expects its Monthly Active Users (MAU) to be flat year over year in 2Q, implying a sequential decrease in US MAUs. This appears to be what's gotten the market spooked - the stock is down ~20% since reporting earnings (aided in part by the broader tech selloff) despite beating expectations on 1Q revenue and 2Q revenue guidance.
In sharp contrast to Pinterest, Snapchat, which relies on users taking more pictures and posting them onto its app, said that it expects to benefit from the reopening.
Additionally, we are optimistic about the engagement trends we are seeing as the world is beginning to open up. As things began to open up in the United States in late February, we saw inflection points in key behaviors like story posting and engagement with the Snap Map. More recently, we saw a rise in the rate of new friendships and bidirectional communication on Snapchat in late March as people have begun to socialize in broader groups. We designed Snapchat to be a useful complement to real-life friendships and are excited about these optimistic trends developing with our audience.
Explaining this further, management
Snapchat compliments real friendships, and that broader social engagement, which went away due to the pandemic and is now starting to return, drives increased use of their app.
...during the pandemic, a lot of folks sort of shrunk their social graph. They started talking more to their family members or really close friends. And what we're seeing now in the United States, which is really exciting is that people are going out more and they're seeing more friends or they're returning to school or work. And so their social graph and the people they're interacting with on a regular basis is starting to expand. And that sort of communication with that wider social graph drives a lot of the frequency of use of Snapchat.
Facebook also said that they're seeing engagement decreasing to a more normalized level as the lockdowns ease up — as a result, they expect increase in ad pricing to be a bigger driver of future revenue growth as compared to growth in impressions.
So I think broadly, what we're seeing is just engagement trends that are going back to a more normalized level. So if you think about the past year, it's been pretty noisy because of COVID. In the first quarter of 2020, we saw a significant increase in engagement as a result of the pandemic. And we've seen some of those trends subside as the year progressed, and we saw gradual phase down of lockdowns. I don't think anything hugely dramatic, but it's certainly something that we're seeing in the engagement trends. And that's one of the factors that's playing into price being a bigger driver of growth on the revenue side because of the impression growth being lower. And I'd say COVID is certainly a factor in that.
Demand Strength Boosting Ad Prices
We're all aware of how the pandemic has lead to acceleration in online commerce. A derivative of that has been increased demand for digital advertising to drive traffic to online stores. The strong advertising demand is showing up in increased ad prices across the industry, and this strength was evident in social media companies first quarter earnings.
Facebook's average price per ad increased 30% year over year in the first quarter. While part of the increase was driven by a low base from the depressed pricing last year, Facebook said that the strong ad demand drove improvements in ad pricing even on a 2-year basis.
I think the really simple story on pricing is that demand has just been higher than we expected for ads...if you had to pick 1 vertical, it would be commerce that outperformed. But...it's really been a broader story than that. Really, almost every vertical was very strong. I think we're still kind of -- we're still seeing recovery in some of the verticals that were weaker from COVID like travel. But we're starting to see, I think, some signs of life there in some other verticals that were negatively impacted by COVID...but really just strong across-the-board demand for ads has been what's driven it for us. I think the 2-year compare that you talked about is a helpful compare because there's a lot of noise in our year-over-year revenue growth rates...but yes, the simple story, advertiser demand, better than we expected.
Better than expected ad demand was contributing to a more positive outlook for 2021,
Snapchat reported that its eCPM, a proxy for ad pricing, increased 67% year over year in the first quarter. While they did not specifically call out increased demand driving eCPM growth (
like they did last quarter
), it's likely that strong ad pricing contributed to the growth in eCPM
in addition to a mix shift towards relatively higher CPM products and regions.
Twitter's cost per ad engagement increased 19% year over year in the first quarter, driven in part by "
like-for-like price increases across most ad formats
". However, the increase in prices for Twitter looks tame as compared to peers. One reason for this discrepancy could be the fact that unlike peers, Twitter does not offer direct response ads that optimize for ecommerce objectives, which has been a key driver of increased ad demand for Facebook, Snapchat and Pinterest.
While Pinterest does not report changes in its realized ad prices on a regular basis, they
on the first quarter earnings call that effective CPMs were up 46% year over year. Pinterest also referenced
increased advertising demand
when discussing the sharp increase in its average revenue per user (ARPU).
Pinterest has previously
(on their 4Q20 earnings call) that they expect pricing to contribute more to revenue growth as compared to increase in impressions, in part due to increased demand for ads across the industry.
Concerns Wane on Apple's Privacy Changes
Ever since Apple announced its new iOS 14 privacy feature called App Tracking Transparency (ATT) which forces apps to obtain explicit user consent to track them across websites and apps, Facebook has lead the outcry against the move,
apple is trying to hurt competitors under the garb of user privacy. Apple's ATT changes impair advertisers' ability serve personalized ads and measure their effectiveness.
Facebook has previously used its earnings calls as an opportunity to warn investors about the impact of Apple's privacy changes, noting in 3Q20 that they face "
" as a result of this change, and
those comments in 4Q20.
In contrast to previous quarters, management's tone on Facebook's 1Q21 earnings call on this topic were surprisingly upbeat.
COO Sheryl Sandberg
in order to mitigate the impact of Apple's ATT changes, Facebook was rebuilding part of their ad tech to ensure that they can continue to deliver ROI for advertisers even as they have less access to data.
She further explained that Facebook would continue to be relatively well-positioned as compared to other digital advertising players in a post-ATT world.
People are going to advertise. They're going to advertise on TV, on radio, on billboards, on different online platforms, and they're looking for relative ROI. That means a signal goes down and it goes down everywhere we're competing differently. Our goal is to make sure that we can still do personalized ads. We do think that our relative competitive advantage has been that our ads are more personalized. And that's really important because as in some of the examples I shared, most small businesses, the yoga studio in Detroit can't afford to advertise to everyone in Detroit, much less everyone in Michigan, much less everyone in the U.S. And so advertising using who lives there and who's likely to be interested in yoga and meditation is really important. We believe we will still be relatively better positioned. Virtual -- based to -- not all players, right, because we're not running the platforms, but based on many, we're still going to do better at that than a lot of digital players. We're still going to do better at that than TV or radio. But when signal goes down, we're going to have to rebuild that capability, and that's what I talked about.
Continuing on the same theme, CFO David Wehner said that impact of Apple's ATT changes on Facebook would be "manageable."
I'd say we continue to be concerned about the impact that this update is going to have on the ability of small businesses to use their advertising budgets effectively. That said, the impact on our own business, we think, will be manageable. We continue to expect it will be a headwind for the remainder of the year, but we're making encouraging progress, as Sheryl mentioned, on our own solutions to help advertisers navigate these changes.
Twitter, which lags behind its peers when it comes to ad targeting capabilities, said that their integration with Apple's SKAdNetwork as part of efforts to prepare for Apple's ATT changes actually improves their targeting abilities such that it
expands their audience
for Mobile App Promotion (MAP) ads on iOS by 30%. Overall, Twitter has assumed a "
" from Apple ATT changes in its 2021 outlook.
Snapchat, which has taken the opposite approach to Facebook and openly supported Apple's privacy moves, said that the delay in implementation has allowed them to better prepare advertisers for the ATT change. Advertisers that represent the majority of Snapchat's direct-response ad revenue have implemented Apple's SKAdNetwork solution, and Snapchat is continuing to work with Apple as well as its advertisers to ensure a smooth transition to the new rules,
management said on the 1Q21 earnings call
. Apple's changes, which were originally scheduled to be implemented with the roll-out of iOS 14 in late 2020, actually went live at the end of April 2021 with the release of iOS 14.5.
Pinteresthas previously said that the strong first party purchase intent signal on its app makes it
less reliant on off-site signal for ad targeting
, and thus less susceptible to Apple's ATT changes, and the management
these comments in the first quarter earnings call. Pinterest is also investing in first-party measurement solutions to mitigate the IDFA impact, and management said that they're
moving closer to their goal of allowing users to complete seamless on-platform transactions
- which they will test later this year - to mitigate measurement headwinds from ATT changes.