Facebook Inc (FB) Earnings Preview: Ad Revenue Growth, Operating Expenditures In Focus

Facebook Inc (NASDAQ:FB) is scheduled to release its next earnings report on Wednesday after closing bell, and aside from the headline numbers, management’s guide for operating expenditures this year will be in focus. Other items include user growth and engagement and ad revenue growth, which management spooked investors about by warning about a deceleration this year.

The consensus numbers for the fourth quarter report currently stand at $1.33 per share for non-GAAP earnings, $8.5 billion for revenue and $5.11 billion for adjusted EBIT.

Mixed user engagement trends

RBC Capital Markets analyst Mark Mahaney said in his earnings preview note that comScore traffic trends for Facebook Inc (NASDAQ:FB) were “slightly negative,” with a one-point deterioration for a 5% year over year decline. However, the social network was facing a more difficult comparison, by two points. On the flip side, total minutes per unique visitor rose 21 points for a 1% gain year over year, but the comparison was 18 points easier.

Seth Klarman Tells His Investors: Central Banks Are Treating Investors Like “Foolish Children”

Volatility"Surreal doesn't even begin to describe this moment," Seth Klarman noted in his second-quarter letter to the Baupost Group investors.  Commenting on the market developments over the past six months, the value investor stated that events, which would typically occur over an extended time frame, had been compressed into just a few months. He noted Read More


The analyst noted that Facebook Inc (NASDAQ:FB) has been able to keep adding users at a “reasonably robust” rate off a user base that’s quite large. User growth accelerated to 16% year over year, as the social network had 1.79 billion users in the third quarter. Engagement reached 66% globally in the third quarter, marking a record high based on daily and monthly average user numbers. For the fourth quarter, he’s expecting a 14% increase in monthly active users, bringing the total to 1.81 billion, and a slight sequential decline in the daily to monthly active user ratio, bringing it to 65.9%.

Facebook warns about ad revenue growth

Mahaney notes that Facebook Inc (NASDAQ:FB)’s ad revenue grew 59% in the third quarter, but for the fourth, it’s up against a nine-point tougher comparison.  He’s expecting only a 48% increase in ad revenue for the fourth quarter.

JPMorgan analyst Doug Anmuth projects $8.4 billion in ad revenue for a 50% growth rate, which he believes is about what investors are expecting. He adds that his quarterly checks were positive as Merkle reported a 65% growth rate in ad spend, compared to 63% in the third quarter, and Kenshoo reported a 64% growth rate from 45% in the third quarter.

Looking to guidance

For this year, Anmuth looks for Facebook Inc (NASDAQ:FB) to guide for 45% to 55% growth in operating expenditures, with investors liking 40% to 50% growth but disliking 50% to 60% growth. He’s projecting a 42% increase in operating expenditures and noted that the company guided for 45% to 55% growth in cash operating expenditures at the beginning of last year.

Nomura analyst Anthony DiClemente, however, notes that Facebook Inc (NASDAQ:FB)’s job listings have jumped 60% recently, which suggests that this year could be an investing year. He explained in his preview note that the surge in hiring is now at the fastest rate since the first quarter of 2015. Due to this, he expects Facebook Inc (NASDAQ:FB)’s margins to compress 130 basis points year over year to 59% in the fourth quarter and 220 basis points to 56% for fiscal 2017.

Anmuth expects management’s commentary on revenue and ad load to remain consistent with further warnings about “meaningfully” lower ad revenue growth this year. They are also expected to warn again that ad load growth will become less and less of a revenue growth driver after the middle of this year. However, Anmuth believes investors already understand this and that consensus is already accounting for a “healthy deceleration.”

Shares of Facebook Inc (NASDAQ:FB) stock edged lower by as much as 0.89% to $129.82 during regular trading hours on Tuesday.