What To Expect From Facebook’s Q4 Earnings

Facebook (NASDAQ:FB) is scheduled to report its fourth quarter results on Wednesday, February 1st. We expect the company to report revenue growth of around 44% year-over-year (y-o-y) and meet consensus estimates of $8.4 billion, driven by advertising revenue growth. Advertising revenue growth is likely to be driven by an increase in average price per ad and higher user engagement.In terms of engagement metrics, there was over 4% sequential growth each in Facebook’s daily active users (DAUs) and monthly active users (MAUs) to 1.18 billion and 1.79 billion in Q3 2016, respectively. We expect the company to report similar growth rates in Q4 2016 as well. Other important metrics to watch out for on Wednesday will be growth in mobile usage and Instagram’s revenue growth. We also expect Mark Zuckerberg to share some insights about Messenger’s monetization strategy going forward, considering the messaging app crossed the billion user mark in July last year.

Facebook’s VP of messaging products, David Marcus, highlighted at the TechCrunch Disrupt event in September last year that “native” payments could help monetize Messenger going forward. Native payments essentially means that people will be able to send/accept payments for commerce using bots on Messenger without having to visit any external site. Marcus mentioned that the number of bots on Messenger had crossed 33,000 in September compared to 18,000 in July 2016. We will keep an eye on any updates on this front at the upcoming earnings call. ^[1]

Key Metrics In Focus

• Advertising Revenue Growth: Advertising, Facebook’s primary source of revenue, grew 60% to over $18.3 billion in the first nine months of 2016 driven by growth in mobile ad revenues across geographies. Mobile ad revenues contributed 83% of total advertising revenues, up from 76% in the same period last year.

• Free Cash Flow Growth: One of the impressive things about Facebook’s business model is its ability to increase free cash flows faster than its top line. Despite a 76% increase in capital investments over the same period in 2015, Facebook’s free cash flows increased 66% y-o-y in the first three quarters of 2016. This should help the company continue to make investments into newer areas such as its internet.org venture, virtual reality, augmented reality and artificial intelligence.

• International ARPU: 87% of Facebook’s users are outside North America, but they contribute less than 50% of the company’s total revenues. If we exclude the relatively mature European market, 68% of Facebook’s users in Asia-Pacific and rest of the world contribute just 26% of the company’s revenues. This can also be gauged from the fact that the average revenue per user (ARPU) in the Rest of the World region was only $1.21 in Q3 2016 compared to $15.65 in North America. This presents a huge opportunity of growth for the social media giant and this metric is bound to improve going forward, as internet connectivity and smartphone usage increases in these regions and digital marketing gains acceptance over traditional advertising channels.
  Please refer to our complete analysis for Facebook here.
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1. Facebook VP David Marcus explains how Messenger will make money, CNBC, Sept 12 2016 [↩]