Facebook Q2 Earnings Preview: What We Will Be Watching

Facebook (NASDAQ:FB) is scheduled to report its second quarter results on Wednesday, July 26th. We expect the company to report revenue growth of around 47% year-over-year (y-o-y) and meet consensus estimates of $9.1 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 a recent announcement, Facebook said that its monthly active users (MAUs) grew to over 2 billion. While this is encouraging, as Facebook and its platforms (Whatsapp, Instagram) now have close to 59% penetration among internet users, average revenue per user for the company might decline as new users were mostly added from international markets that have lower monetization rates. Other important metrics to watch out for on Wednesday will be growth in mobile usage and Instagram’s revenue growth, as mobile advertising contributes over 85% of FB’s advertising revenues. Recently, the company rolled out ads for Messenger in order to improve its monetization rate. We expect management to share some insights on how well this strategy has fared among users and advertisers. We also expect the company to share some insights about its instant article monetization strategy going forward as it looks to implement a paywall for these articles.

Key Metrics In Focus

• Advertising Revenue Set To Grow: Advertising revenue, Facebook’s primary source of revenue, grew 44% to over $7.2 billion in the first quarter of 2017 driven by growth in mobile ad revenues across geographies. This trend is expected to persist in Q2 and drive revenues.

• ARPU To Decline: 88% of Facebook’s users are outside of North America, but they contribute less than 50% of the company’s total revenues. If we exclude the relatively mature European market, 69% of Facebook’s users in Asia-Pacific and rest of the world contribute just 25% of the company’s revenues. While this presents a huge opportunity for growth for the social media giant, its ARPU will likely decline in Q2 as we believe that Facebook has added more users from international markets due to expanded internet connectivity and smartphone usage. Digital marketing is still in a relatively nascent stage in many of these regions, and monetization rates are lower compared to the U.S. However, as digital marketing continues to gain in popularity over traditional advertising channels, ARPU can increase significantly over the long run.

Please refer to our complete analysis for Facebook here.

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