Facebook Earnings Preview: Good Performance Expected to Continue

Facebook (NASDAQ:FB)  will release its Q2 2014 results on July 23. The expectations are high considering the company’s performance in recent quarters. We expect a significant year-over-year jump in ad revenues driven by higher ad pricing and the number of ad impressions. Even though Facebook’s user base growth has slowed down, its revenue growth has accelerated on the back of innovation in ad format and delivery. Mobile will remain the focus, and we expect to see the mobile platform’s revenue contribution inching close to 65%. Additionally, we’ll be keenly watching how the company performs in international markets which is where the most of its incremental growth will come from in the future.

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Expect Sequential and Year-Over-Year Growth in Ad Pricing

Facebook has continuously worked on optimizing its ads to make them more relevant for marketers. This will help it sustain the growth in ad pricing, which has been one of the primary reasons behind its stellar revenue jump in recent years. Q1 2014 results perfectly showcased what we can expect this year from Facebook. The second quarter is likely to be no different. In fact, there may be some sequential improvement in the year-over-year jump as the first quarter tends to be seasonally weaker for advertising firms.

Facebook saw 82% growth in its ad revenue during the first quarter of 2014, which was primarily driven by a 118% increase in its average ad pricing. ^[1] This eclipsed Q4 2013 ad pricing growth of 92%, which is encouraging considering tougher year-over-year comparison. The growing proportion of feed-based ads was the primary reason behind this success. The company has been moving advertisements from banner form to its news feed as these feed-based ads have much higher engagement, and therefore, command a higher pricing. Instead of launching new ad products, Facebook seems to be focusing on improving the current ones. More specific audience targeting, higher engagement and better click through rates can give Facebook strong leverage when it comes to negotiating ad prices with advertisers. About 55% of daily active users are logging in only from mobile devices, and mobile platform accounted for 59% of Q1 2014 ad revenue. We expect that second quarter’s efforts were strongly focused on improving ads on mobile devices.

International ARPU (Average Revenue Per User) Will Be in Focus

In the coming quarters, Facebook is likely to focus on improving its monetization in international markets. It’s decision to open a sales office in China and launch ‘missed call’ ads in India are steps in this direction. The incentive comes from the fact that despite harboring most of the world’s population, Asia, Africa and South America haven’t contributed a lot to Facebook’s revenues. Compared to average revenue per user of $5.85 for the U.S. in Q1 2014, the figure for Europe, Asia and rest of the world stood at $2.44, $0.93 and $0.70, respectively. This suggests that Facebook has a  tremendous opportunity to lift its monetization in international markets. We’ll keep an eye out for growth in ARPU for these regions. The online advertising market in Asia is still in its nascent stage as compared to the U.S. and other developed markets, but the growth is imminent and Facebook needs to be ready for it. Establishing strong market position in China and India can give a material boost to the company’s business going forward

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1. Facebook’s Q1 2014 Earnings Transcript [↩]