How Facebook "Beat" 2016 Earnings On A $1 Billion Tax Benefit From Accounting Change

Tyler Durden's picture

Yesterday evening we noted that Facebook's stock soared in after-hours trading after the company announced inline revenue results for 4Q 2016 but blew away street EPS estimates of $1.34 with an actual EPS of $1.44.  But, like with most tech company earnings, a slightly deeper dive into the results reveals that a conveniently timed accounting change created $214 million of extra net income in 4Q and drove about 73% of the earnings "beat" for the quarter.

On an annual basis, the earnings farce is even more drastic.  For the full year of 2016, the tax accounting changes added $934 million in net income to Facebook's P&L, or roughly $0.32 per share.

So what changed?  Well, turns out that the Financial Accounting Standards Board suddenly figures that tech companies should be allowed to run the "excess tax benefits" derived from stock option exercises through their P&L.  Here's how it works per the The Wall Street Journal:

The Financial Accounting Standards Board, which sets U.S. accounting rules, approved the change in an attempt to simplify companies’ accounting for employee stock payments. The accounting is changing in several different ways, but most of the effect on earnings has to do with the tax benefits that companies get when their employees exercise the stock options they’ve been granted.

 

That is a compensation cost to the company, and it is tax-deductible. When options are exercised, it is typically after the company’s stock price has risen, making them more valuable, and so the company recognizes “excess tax benefits”—the deductions over and above those it expected to realize when the options were first granted.

 

Under the old rules, those excess tax benefits go into the company’s shareholder equity. But under the FASB change, they will be recognized on the income statement immediately—and that reduces the company’s provision for taxes, boosting net income.

As an added bonus, the FASB change also boosts Facebook’s operating cash flow, because the excess tax benefits are now classified as cash flow from operations instead of from financing.  Even though total cash flow is not impacted at all, we're sure this is positive in some way.

Just so we're all on the same page, here is how the process works:

  1. Employee is issued stock options
  2. Stock soars (because what else would a tech stock do?)
  3. Employee feels stock is fully valued and exercises options
  4. Bubbly stock price creates "excess tax benefits" upon option exercise and drives earnings "beat"
  5. Earnings "beat" drives stock even higher
  6. Process is repeated quarterly in perpetuity

In summary, bubbly stock price necessarily equals even bubblier stock price.

* * *

For those who missed it, here's our summary of Facebook earnings from yesterday.

So much for worries about tech companies rolling over.

After yesterday's AAPL beat which nonetheless resulted in one of the biggest intraday jumps in its stock in history, sending it highest over 6% today, moments ago Facebook reported results which crushed expectations, and have sent the company higher as much as 3%. The street was expecting $8.81 billion in revenue and EPS of $1.34. Instead it got revenue of $8.81 billion, a 51% increase from 2015 - 84% of which came from mobile - and EPS of $1.44, a 78% increase.

It achieved this with Daily Average Users of 1.23billion, above the 1.21billion expected, up 18% Y/Y, while Monthly active users soared to 1.86 billion, also above the 1.84 billion expected, and up 17% from a year ago. This means that as of this moment more than a quarter of the world's population logs in to Facebook at least once a month.

Putting Facebook's results and unprecedented user growth in context, in one year, Facebook added some 269 million monthly active users, roughly all of Twitter's user base, in just the past year.

Here are the details reported by Facebook.

  • Daily active users (DAUs) – DAUs were 1.23 billion on average for December 2016, an increase of 18% year-over-year.
  • Mobile DAUs – Mobile DAUs were 1.15 billion on average for December 2016, an increase of 23% year-over-year.
  • Monthly active users (MAUs) – MAUs were 1.86 billion as of December 31, 2016, an increase of 17% year-over-year.
  • Mobile MAUs – Mobile MAUs were 1.74 billion as of December 31, 2016, an increase of 21% year-over-year.

Finally, the biggest factor was Mobile monthly users, which soared to 1.74 billion as of Dec. 31, an increase of 21% Y/Y.  Also, if there was any concern about ad revenue slowing down, that too can be ignored for now: Mobile advertising revenue represented approximately 84% of advertising revenue for the second quarter of 2016, up from approximately 80%  in Q4 2015.

* * *

All the record breaking detail in charts (source):

DAUs:

 

Mobile DAUs:

 

MAUs:

 

Mobile Monthly Active Users

Revenue by geography

 

ARPU

 

EPS: GAAP and non-GAAP

 

Income statement reconciliation:

* * *

The stock, predictably, is soaring into new all time high territory, up almost 3% in the after hours session, to new records.

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peddling-fiction's picture

Talk to my handle and moniker.

Shemp 4 Victory's picture

FASB: Fraudulent Accounting Swindler's Board

OfAllElaboratePlans's picture
OfAllElaboratePlans (not verified) Shemp 4 Victory Feb 2, 2017 2:56 PM

Fuckerberg ~ Jews just raped the taxpayer again. (I PAID mine 100% BTW ~ didn't like it, but I did bcuz I didn't want a jew judge to throw me in jail).

 

Whoodathunkitall?

XqWretch's picture

It does seem that these jews gravitate towards the most parisitic industries... law, medicine, etc

OfAllElaboratePlans's picture
OfAllElaboratePlans (not verified) XqWretch Feb 2, 2017 3:09 PM

See ROUBINI thread (now also on ZH) ~ same thing... IT.NEVER.ENDS.

knukles's picture

Drain Silicon Valley and Hollyweird while you're at it please, sir.

John_Law's picture

For those of us who own Facebook stock I have just another great investment to propose: Lehman paper for only 20ct on the dollar. I believe one can be certain it will end up at par value ... just as certain as the kike's business is of great value to one's equity portfolio.

Consuelo's picture

 

 

'ELF'

 

- Entertainment

- Law (politics/poliical operatives is included here)

- Finance

 

BabaLooey's picture

RELEASE YOUR TAX RETURNS, ZUCKERFUCK!

RELEASE YOUR TAX RETURNS, ZUCKERSCHMUCK!

RELEASE YOUR TAX RETURNS, HAWAII LAND GRABBER!!!!

RELEASE YOUR TAX RETURNS, THUMB UP YOUR ASSHOLE!

(how's it feel, tee shirt boy?)

balolalo's picture

and how about Orange Jesus????

no, RELEASE YOUR TAXES TRUMP?!?!?!

wow, cognitive dissonance much......?

NEOCON1's picture

All you loser anti-semites couldn't get out of the dark with a lit flashlight.  All circle jerking each other in the 'secret' knowlege that Jews rule the world.  You're as pathetic as your girlfriends---your right hands!

BabaLooey's picture

Weak as two day old dishwater pukey.

Try stepping up your game - the one you have is lame. 

Otherwise, go sharting on HuffyPoop....more your speed.

Hatti_fattener's picture

PWC, Deloitte&Douche, Earnst&Y etc. "accounting" firms are almost bigger criminals than the thin air FIAT Banksters and their politico cabal enablers... BIS/FED/BOE/BOJ/GroupOF30 (Dirty)/FASB is the "legal" front. TarNfeathers for the criminals soon... Lamposts might follow...

Darktarra's picture

FarceBook!  Noting but the farce! 

Evil Peanut's picture

more proof the American economy is reliant on nothing more than a product for people to "LIKE" "THumbs Up" and repost content...

SloMoe's picture

Cat and dog GIFs? Really? WTF America? You could be out there Snapping, for fuck's sake.

ZeroIntelligence's picture

So what you're saying is that I should double down on my FANGs?? OK!!!!!

 

NoDebt's picture

When in doubt, just buy more of them.

NoPension's picture

I'd be  willing to bet, Facefuck costs US GDP at least $100 billion a year in lost productivity.

NoDebt's picture

"Under the old rules, those excess tax benefits go into the company’s shareholder equity. But under the FASB change, they will be recognized on the income statement immediately—and that reduces the company’s provision for taxes, boosting net income."

BOOM!  My head just exploded.

 

knukles's picture

Hah ha ha ha ha ha
Best fuckin' investments since the last dot.com bubble burst

Luckhasit's picture

I understand what Tyler and you are saying.  But how does this make it different, they just pay less in taxes and also the self feeding bubble cycle of the rinse and repeat stock rise options? (stock rises,employee uses options (cash out, loans against principal, moar stawks) and that causes the stock to rise even more, i have no idea how or why the employee using stock options would cause the stock to rise higher).

VWAndy's picture

 That place is sick now.

knukles's picture

I'm starting to actually see the world differently.
I now look for the well amongst the sick and gravitate toward the light of sanity.
Pretty selfish, but what the hey.

Do you have any idea what it is like trying to comfort crazy people?

HRH Feant's picture
HRH Feant (not verified) knukles Feb 2, 2017 4:28 PM

Yes. Which is why I stay as far away as possible from those that are mentally challenged!

DirkDiggler11's picture

Time to buy some seriously out of the money put leaps ... I can be patient as Fuckerberg gets buried underneath the collapse of his house of shit..

Buck Johnson's picture

I agree, Fuckberg is going to have his whole facebook wealth collapse in on him.

Shitonya Serfs's picture

I disagree that his entire FB wealth will crash down on him. Most? Probably. But FB has been issuing new shares to The Turd and Sanberg, in which they have been dumping them back into the market. Ever wonder how Turd's "Shares Owned" never change after each of his Option dumps $100M at a time.

He's basically printing money and cashing out with his right hand, while you watch his magic left hand twiddle the dreidel.

atomp's picture

lol. what is it they make, again?

Newbie lurker's picture

A self absorbed people more so.

peddling-fiction's picture

"lol. what is it they make, again?"

They make people prepare their own intel files for the CIA and NSA.

tripletail's picture

Brilliant! Funny because it's so damn true!

Wow72's picture

FYI..... If you support FACEBOOK your a fucking idiot... Guaranteed..

SilverRoofer's picture

I must agree with you on this one

Never had any social media account

Never will

spanish inquisition's picture

 

One of my email accounts is still getting Emails from a fake inactive Facebook account I set up years ago just to see what would happen.

carbonmutant's picture

We're gonna believe the numbers from a Fake Social media source?

WTFUD's picture

Who'd grow tired of kicking Suckberk in the face? Smarmy little cunt!

adr's picture

So you create income out of thin air? 

What else is new in Wall Street la la land. 

Here's a simple thing. Revenue minus expenses equals profit. Profit minus taxes equals net icome. 

It should be really easy to figure out without accounting gimmicks, but without the gimmicks anyone can see these corporations are actually bankrupt and we can't have that. 

Winston Churchill's picture

Thats SO 20th century of you.

Those ADU figures are pure BS as well.Thats half the worlds adult population FFS.

Garbage in = garbage out.

J bones's picture

So due to a policy change that shouldn't have happened. It caused an increase of net income that made people want to invest in their stock which in turn is taking money from the poor and giving the rich more on essentially the same growth but just looks better on paper. WoW!!

Pasadena Phil's picture

It appears that algos are blind to these things. That means they can be manipulated.

orangegeek's picture

Facebook - the tool for all snowflakes, cucks, and rioters (paid for protestors).

Yen Cross's picture

   The Farcebook is a piece of shit. The only reason AAPL beat was because Samsung imploded, with it's " flaming Galaxy" recall.

People bought i-shit instead of frying thier balls off with a galaxy.

Jim in MN's picture

No one BUYS cell phones in the USA any more, with the carrier discounts gone.

They take possession of said bricks.  Pay and pay and pay.

But they don't ever own the brick.  They just pay for it!!!!

LOL we are doomed indeed.

Barrock's picture

I own all of my bricks.

Jim in MN's picture

When was the last time you got a new one?  I am honestly curious about this. 

With no discounts the $500+ brick seems excessive.