|An earnings preview for Facebook:|
Facebook, which has delivered a long string of sales/EPS beats, reports on the afternoon of Nov. 1. The consensus is for revenue of $9.85 billion (up 41%) and GAAP EPS of $1.27. What to watch:
- Ad sales growth, and its contributing factors. Facebook's ad sales, which account for the lion's share of its revenue, rose 47% in Q2 to $9.16 billion, a rate not far removed from Q1's 51% and Q4 2016's 53%. This growth was driven by a 19% increase in the number of ad impressions for which Facebook recorded revenue, and a 24% increase in average price per ad.
Management has been warning for a while that ad growth will be pressured starting in the second half of 2017 by the fact that Facebook will no longer see major increases in ad load (the amount of ads it shows over a given amount of viewing time) for its core news feed. The company still has other levers to grow ad sales, such as user growth, higher ad prices, Instagram and the company's Watch video platform (and further down the line, Messenger and WhatsApp), but the impact of diminishing ad load growth certainly bears watching. The consensus is for ad revenue to grow 42% in Q3 to $9.71 billion.
- Daily active users (DAUs). DAUs for Facebook's core platform and Messenger rose 3% sequentially and 17% annually in Q2 to 1.33 billion. Though those are impressive numbers for a company of Facebook's size, sequential DAU growth trailed the 4% sequential growth seen in monthly active users (MAUs), after many quarters of outpacing MAU growth. That points to slightly lower per-user engagement.
The Q3 report should provide us with a better idea of whether this was a one-time blip, or something to be more concerned about. From the looks of things, Facebook has been getting more aggressive about sending notifications to users in an attempt to get them to visit its site and apps more often.
- Spending guidance. In July, investors cheered Facebook's cutting of its annual spending guidance: The company now forecasts 40% to 45% GAAP cost and expense growth (adjusted from prior 40% to 50%), and predicted its capital spending would be at the low end of a $7 billion to $7.5 billion guidance range.
Much like Amazon, markets have signaled that they trust Facebook to make big investments wisely. Nonetheless, there will likely be another positive reaction if Facebook once more cuts its spending plans.
- Ad product commentary. Mark Zuckerberg mentioned on Facebook's Q2 earnings call that he wants his company to speed up the pace at which it monetizes its messaging apps. Look for analysts to press management once more on what they're planning. Any commentary given about Facebook's efforts to grow video ad sales will also be closely watched, particularly given reports of early issues with the mid-stream video ads it has begun running against professional content.