Facebook (FB) impressed last week with its highest scoring earnings call of the year on 10/30/18, as the stock began to rebound from its 35% slide since the last reported earnings. What about its last call caused Facebook to slide so far off its highs? Has Q3 changed the story?

We used Amenity Viewer to analyze Facebook's recent earnings calls to look for insights related to those key questions within minutes and show you how our Amenity Score (the change in earnings sentiment from the previous quarter) can serve as an important starting point for your analysis.

Company Profile: Amenity Score Rebounds Significantly

At a high level, the following takeaways starting with the Amenity Score provide an overview of the analysis in Amenity Viewer before even opening the transcript and reading the text itself:

• Amenity Score: Q3 registered an Amenity Score of 33, up from 15 in the prior quarter.
• Key Drivers: The model identified a more favorable ratio of Tailwinds to Headwinds, strong Financials, and improved Market Position as drivers that helped Facebook recover with its highest Amenity Score of FY18.
• Historical Scores: While the decline in revenue growth forecasted in the Q2 call catalyzed a 35% drop in the stock over three months, Facebook's Amenity Score saw its precipitous decline in Q1, driven by forecasted spending increases to address safety and security concerns on the heels of Cambridge Analytica data scandal.

Question 1: So What Changed in Q3?

Very Bullish Company Profile: Of the 53 core financial extractions in the Amenity model, 43 (81%), were positive. Key data points included an uptick in mobile and revenue and optimism on monetization of the Stories feature.

• "Hi, everyone. It was another good quarter for our business with ad revenue up 33% year-over-year. Our growth was broad-based across regions, marketer segments and verticals. Mobile ad revenue grew 40% to $12.5 billion, making up approximately 92% of our total ad revenue."
• "But I would say that, at least in the near term, the impression growth opportunity is significant on Stories."
• "...we continue to see good growth opportunities for revenue across both Facebook and Instagram, including both Feed and Stories"

Optimism on market position with diverse portfolio of products: In addition to Stories, optimism on monetizing multiple arms of the business boosted the call's sentiment.

• "In Q3, we expanded Marketplace ads to nearly 70 marketers. It's early days, but advertisers are seeing good results."
• "People now send around 100 billion messages each day using our services that even our second-most popular service, Messenger, has a highly - a higher daily message volume than SMS had globally at its peak."

Most promising collection of external factors: The macroeconomic factors (classified as Headwinds and Tailwinds) referenced in the call were collectively the most bullish of the year. After only two of the ten of such extractions *20%) were bullish in Q2, the Q3 call comprised a much more bullish mix with three positive extractions of the four (75%). Unlike recent calls the highlighted security issues, this call's extractions emphasized initiatives to improve safety and security.

• "That means the trends in how people are interacting have improved"
• "That's why we're making significant ongoing investments to better protect privacy and security."
• "We also continue to invest heavily in technology and people to remove bad content as quickly as possible."

Question 2: Has Q3 Changed Facebook's Story?

The call was far from perfect, but the negatives are ones we've seen before.

1. Safety and Security: Security issues have been at the forefront of investor concerns all year, on the heels of the Cambridge Analytica scandal. These concerns have been prevalent all year and account for much of the negative highlights in the transcript:

• "Three, we continue to face increased safety and security threats. We have significantly improved our systems here but we have more to do."
• "So let me start by saying that last month, we had a serious security issue"
• "Elections are a special case, an extremely important special case of the content and safety issues and security issues that we face"

2. Deception: The Amenity NLP model is trained to capture linguistic patterns that indicate potentially evasive language, particularly in the context of answering questions. Any extractions that fit this criteria are inherently negative; Facebook’s Q3 call had ten captured references, which was the same as in Q2 and twice as many as the five extractions from Q1. Interestingly, like in the Q2 call, much of this revolved around monetization of Stories:

• "And as I said in my opening remarks, I think we're going to be a lot better positioned here in Facebook in the next year."
• "But I can't tell you just yet what that timeframe is going to look like"
• "It's obviously hard to say that because they're both dynamic, they're auctions, there's a lot going on. But I would say that, at least in the near term, the impression growth opportunity is significant on Stories"

FB (Q2):

• "The question is will this monetize at the same rate as News Feed. And we honestly don't know. We'll have to see what happens."

FB (Q3):

• "...but what I can say is that all of the trends that we've seen suggest that in the not-too-distant future, people will be sharing more into Stories than they will into Feeds… But I can't tell you just yet what that time frame is going to look like."

3. Currency Headwinds In-line with Guidance: Viewer identified the changes in currency valuation that adversely affected Facebook’s financial profile; however it’s worth noting Facebook had warned investors about emerging currency pressure in their Q2 call:

FB (Q2):

• "For example, we expect currency to be as light headwind in the second half versus the tailwinds we have experienced over the last several quarters."
• "First of all, there's the currency, which is going from being a tailwind to being a modest headwind"

FB (Q3):

• "Rest of World ad growth trailed at 26% due to both currency weakness and economic challenges in Latin America."

Summary

Lowering guidance in Q2 was very significant to the company’s overall profile, as it was the first revenue miss for the tech-giant in over three years. While it would be unrealistic to expect the story to change substantially after only one quarter,a better quarter highlighted by optimism in newer products bode well for investors. The highlights of last week’s call suggest the monetization of WhatsApp,Stories, and Messenger will be a key gauge in evaluating the next quarter’s call in addition to the company’s progress addressing security concerns.

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This communication does not represent investment advice. Transcript text provided by S&P Global Market Intelligence.

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