- Given some preliminary data points on app installs, foreign exchange, and expense guidance -- Facebook will top consensus estimates.
- Expectations by the sell side were lowered going into Q1'16 earnings, which reduces the likelihood of a miss.
- Also, there are meaningful sales/earnings catalysts to drive outlook on 2H'16 higher.
Facebook (NASDAQ:FB) will be reporting earnings on April 27th 2016, and is expected to report revenue of $5.25 billion and EPS of $0.62. Despite the mixed commentary among analysts, I believe there’s enough data to suggest some added upside to consensus models.
Since Facebook’s Audience Network contributes a minor fraction of revenue (roughly $1 billion/year bookings trajectory according to Credit Suisse), the impact of a potential 20% drop-off in engagement isn’t too significant. Furthermore, the Digi Day report came from the largest Instant Article publishers, therefore, the drop-off among the bigger publishers was mostly attributable to the opening of Instant Articles to other/all publishers. Furthermore, it was noted at f8 that the newsfeed algorithm is starting to accommodate a much higher volume of video and photo content because it ranks higher for FB users.
On the analyst front, despite some positive commentary across mobile advertising channels, I haven’t seen estimate revisions to the upside. This implies that results are still “beatable”, despite some uncertainty in comScore data points.
Mizuho Securities had some conflicting commentary on pricing and app installs:
Most of the developers we spoke with indicated that pricing on FB mobile app install ads has increased significantly, and a few told us that they are reducing overall marketing spend or moving some spend to other sites like Twitter or Google for app install ads. On the other hand, two agencies we spoke with noted that spend on FB continues to be robust, and brands are now increasing spend on Mobile with new formats like video and Canvas ads. Netnet, we believe that Street estimates for 1Q seem reasonable, but upside potential could be limited.
Given Facebook’s Q4’15 sales growth was partially attributed to dynamic product ads and pricing improvements, the sensitivity to pricing shouldn’t be too surprising. There’s usually a Q1’ to Q4’ drop-off due to seasonality. I’ve already anticipated some weakness on seasonality but I anticipate y/y compares to still remain strong given the ramping budgets of some of the bigger apps in North America like Groupon and Yelp.
Facebook is one of the bigger platforms for app installs and according to Deutsche Bank’s Ross Sandler, the f8 conference implied 54% y/y growth in app installs and 1b billion installs, which roughly translates to 6 percentage points above the consensus revenue growth estimate for Q1’16. This is not inclusive of pricing growth; therefore, app installs remain a positive needle mover in Q1’16 as the segment is growing faster than consolidated revenue growth.
Credit Suisse mentioned in a report released on April 18th:
Looking near term, our channel checks for this quarter have been relatively positive, with incremental budgets allocated to Instagram and Video ads and continued pricing strength across Facebook's mobile and desktop newsfeed ad inventory despite typical seasonality and modest sequential declines of mid-to-high single digits from a seasonally strong 4Q.
I’m optimistic due to favorable F/X impact, which could offset a significant chunk of the seasonal drop-off. But to remain conservative I still modeled a 11% q/q decline to ARPU (average revenue per user) and anticipate MAUs (monthly active users) to grow sequentially by 2.9% in Q1’16. The main reason Facebook beat the consensus last quarter was due to ARPU metrics (roughly $0.59 above the consensus). Given the favorable data points on app installs, pricing and F/X I believe there’s a reasonable likelihood of a sales/earnings beat in Q’16.
Furthermore, the dollar is declining partially due to $45.23 billion in equity outflows from the United States (Bank of America Merrill Lynch figures). On a global basis, investors are reverting back to cash. Since returns are negatively impacted by a weak dollar, the level of redemptions from funds and outflows out of the United States has continued. The heightened F/X volatility has this recursive and pervasive effect of necessitating further movements of cash outside of the United States. Therefore, F/X becomes both a Q1 and Q2 story for Facebook, which has favorable implications on cost/margin guidance as Facebook doesn’t provide estimates on revenue.
Furthermore, I’m fairly confident that MAU metrics will continue to grow at healthy rates given the rapid adoption of Facebook Lite. The data seems broadly supportive and the prior cost guidance was inclusive of negative F/X headwinds.
Analysts have either maintained or lowered estimates going into earnings, which de-risks the likelihood of an earnings miss, and widens the delta of an earnings beat.
Source: Alex Cho
Going into the quarter, I’m forecasting revenue of $5.428 billion revenue and $0.58 non-GAAP diluted EPS. Both figures are comparable to consensus analyst estimates. My revenue estimate is roughly 3.33% above the consensus, and my EPS figure is $.04 below. I’m conservative on costs, and sit at the middle of Facebook’s outlook range, and model 50% non-GAAP operating expense growth.
Clearly, there’s upside to margins given the potential for massive revenue beats in any given quarter. I’m also anticipating some revenue contribution from VR headsets and FB Messenger in FY’16, but anticipate revenue recognition to be most heavily concentrated in the back half of the current fiscal year. Therefore, investors could see some revenue upside beyond the 5% to 7% seasonal boost in 2H’16.
Given all of these factors, I feel fairly confident in my forecast assumptions. Therefore, I continue to reiterate my high conviction buy recommendation and $163.21 price target.