Facebook Earnings Preview: Q2 2014

posted by Alex Cho | published by Amigobulls on
  • Facebook’s revenue to top $3.6 billion for the second quarter of 2014.
  • Facebook non-GAAP EPS will exceed 0.41.
  • Growth in non-core web properties may surprise to the upside (WhatsApp, Instagram, Messenger).

Facebook 2014 Q2 Earnings

I think Facebook is set to report a fairly solid quarter. Investors should position to the upside, and should review conference notes carefully. I think revenues will come in well ahead of estimates due to user growth, pricing, and higher engagement. The three combined gives me reasonable suspicion that a sizeable earnings beat is in store.

What to expect from Facebook Q2 Earnings

Facebook (NASDAQ:FB) doesn't provide guidance on their earnings conference calls, so if anything, the consensus EPS estimates are likely guesses, and if anything, without any clear indication of how much revenue management expects in future quarters, we end up having to extrapolate historical data into the future.

Analysts on consensus basis anticipate Non-GAAP EPS to come in at around $.32 per share, which is 68.4% year-over-year earnings growth. The growth is expected to come from above average revenue growth, paired with modest increases in operating costs. I think operating costs will trend higher, but not too significantly, which will directly contribute to bottom line growth in this specific quarter.

Also, analysts anticipate that revenues will come in at around $2.81 billion, which is a 55.10% year-over-year growth rate on sales. The sales growth comes from higher monetization metrics per user, along with user growth.

Nanigans, a Facebook ad partner released data that year-over-year click through rates increased by 146% on Facebook, paired with incremental price increases of 29% year-over-year. The combined impact of higher click through rates, paired with higher cost per clicks should result in a meaningful boost to top line results.

In Q2 2013, Facebook reported revenue of $1.81 billion. Therefore, if the average user clicked an ad by 146% more than they did the previous year, and advertisers ended up paying 29% more per click, it’s highly likely that Facebook grew revenue by more than 100% on a year-over-year basis.

Facebook Global CTR

Facebook Earnings CPC Global

Source: Nanigans

In previous articles, I have reiterated that Facebook would most likely outperform on the basis of higher ad pricing, along with better engagement. Assuming those two trends hold, Facebook will continue to beat earnings for the duration of the fiscal year.

Below, I break down results assuming 100% YoY sales growth, paired with profit margins that were extrapolated from historical data.

Breakdown of 2014 Q2 Facebook Earnings

In millions USD (unless otherwise noted)
Revenue 3,600
Cost of revenue 648
Gross profit 2,952
Operating expenses 1,332
Operating income 1,620
Taxes 567
Net income 1,053
EPS estimate for 2014 Q2 (in $ only) 0.41
Shares outstanding 2566

Source: AlexLeAnders

I think the company can generate net profit margins of 29.6%, based on the company’s historical ability to boost profitability through falling operating costs. Also I anticipate sales growth of at least 100% assuming the proprietary data from Nanigans is correct. This indicates that non-GAAP EPS will be .41, which is above the consensus analyst non-GAAP EPS estimates of 0.32.

Bottom line

I think investors should pay close attention to video ad monetization, and whether those efforts have resulted in a significant gain on average revenue per user metrics. Furthermore, investors should watch Mark Zuckerberg’s language closely when it comes to capital outlays. Perhaps, Facebook may decide to acquire more companies in the second half of 2014. Analysts will watch audience growth in some of its smaller mobile properties like Facebook messenger, Instagram, and WhatsApp. Assuming Facebook continues to develop non-core businesses, even as its core business drives better sales growth, the quarter will be considered a blowout.

Overall, I think there’s a very high chance EPS comes in well ahead of analyst consensus estimates.

Amigobulls has a hold rating on FB stock. View FB stock analysis.

Disclaimer: The views expressed in the article are of individual authors and are not necessarily supported by Amigobulls. We do not hold any stake in the aforesaid stocks. Please read our detailed disclaimer.

About the author

Alex Cho
Alex Cho is a guest contributor at Amigobulls. He specializes in equity analysis, and writes opinion for some of the worlds most prestigious financial websites. Alex Cho started of as a contributor for Seeking Alpha, and went onto write for the Motley Fool for a brief period of time. By the end of 2013, Alex Cho's analysis of current events, and equities attracted a fairly massive following, and has earned him a reputation for firing straight from the hip. At times, Alex Cho can be extremely opinionated and controversial, but he always comes prepared with a solid stack of research. Currently, Alex Cho is the Senior Analyst and founder of AlexLeAnders.
You can follow Alex Cho on Twitter.

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emailfounder1 profile picture
emailfounder1 bullish
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