What Led to Facebook’s Margin Expansion?

Facebook (FB) posted strong 2Q16 margins, as you can see in the chart below, thanks to its growing advertising revenue and reduction in cost as a percentage of sales.

In 2Q16, Facebook generated total revenues of $6.4 billion, which represented an increase of 59% YoY (year-over-year), while its GAAP[1. generally accepted accounting principles] operating profit more than doubled to $2.7 billion. However, on a non-GAAP basis, operating profit increased by 69% YoY to $3.8 billion, reflecting a better growth rate than in revenue.

Facebook’s operating margin on a non-GAAP basis stood at 58.5%, representing an increase of 3.4% YoY in 2Q16. The company’s net income margin expanded by 8.3% YoY to reach 44%.

As stated earlier, Facebook’s strong advertising revenue, especially mobile advertising, coupled with a decrease in total costs and expenses as a percentage of revenue, is driving the margins for the company.

Facebook achieved cost efficiency with its operations, and almost every cost driver saw a relative decline on a YoY (year-over-year) basis. Facebook’s operating expense margin saw a decline of 3.4% YoY over 2Q15.

There’s a huge gap that remains between the company’s GAAP and non-GAAP operations due to high non-cash expenditure from operations. That being said, the majority of Facebook’s non-cash expenses are due to the share-based compensation and amortization of intangible assets.