Sterne Agee analysts Arvind Bhatia and Brett Strauser preview the 4Q13 earnings for Facebook Inc (NASDAQ:FB) with a focus on teen engagement and ads.


Expectations from Facebook’s earnings

We think 4Q results will further cement Facebook Inc (NASDAQ:FB)’s positioning in and growing share of digital advertising. We expect mobile advertising revenue to be up 25% sequentially (+260% y/y) and represent 52% of advertising revenue mix. On the earnings call, we expect more color on issues such as 1) “teen engagement”; 2) Ad Load in News Feeds; and 3) Video Ads on Instagram and Facebook. Reiterating Buy and $60 target.

We are looking for revenue/adjusted earning before interest, taxes, depreciation and amortization (EBITDA) of $2.34B / $1.37B representing 48% / 43% y/y growth, respectively. Our estimates compare to consensus revenue/adjusted EBITDA estimates of $2.35B / $1.44B, respectively.

Mobile Trends will be key

We believe investors remain focused on this metric. We have modeled $1.1B in Facebook Inc (NASDAQ:FB)’s mobile advertising revenue, up 25% sequentially and representing 52% of overall advertising revenue mix (up from a 49% mix in 3Q and 41% in 2Q). Our estimate implies a daily average mobile ad revenue run rate of $12M, up from $9.7M in 3Q, $7.3M in 2Q, $4.15M in 1Q, and $3.4M in 4Q12. Consensus 4Q mobile advertising revenue estimate is $1.1B.

Mobile advertising industry growth

The secular shift from off-line to on-line advertising continues to be a powerful trend for companies such as Facebook Inc (NASDAQ:FB). Within on-line advertising, the shift from desktop to mobile advertising appears to be happening at a faster pace than was expected even 3 or 6 months ago. eMarketer now forecasts U.S. mobile advertising revenue growth of 120% / 56% in 2013 / 2014, respectively, up from 99%/56% previously. In dollar terms, the forecast calls for mobile advertising revenue of $9.6B / $15B, up from $8.54B/$13.3B in 2013 / 2014, respectively.

Catalysts for Facebook’s growth

We believe two key drivers of results and possible upside in 2014 include 1) the rollout of Video Ads on Facebook, which could be as early as 1Q14; and 2) more aggressive monetization of Instagram.

Facebook Video Ads Seem Imminent

The launch of Video Ads on Facebook has been expected for some time but management has delayed the introduction a few times to ensure user experience remains positive. Based on the recent introduction of the auto-play video feature on Facebook and a leaked presentation that speaks to the 1Q14 introduction of new video insights for advertisers, it appears video ads