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What to Expect When Facebook Reports Earnings

Danny Vena, The Motley Fool

It's been a tumultuous year for Facebook. The company has tried to get past the data scandal that occurred earlier this year, but new revelations continue to add fuel to the fire. Word recently broke that Facebook faces a 500,000 pound fine -- about $663,000 at current exchange rates -- imposed by British authorities who allege Facebook failed to protect user data. 

So far, these issues haven't stopped the stock, which is within striking distance of its all-time highs.

Facebook previously showed no ill effects from the controversy surrounding its data sharing policies when it reported significant growth in the first quarter, and we may see the same again. Facebook is scheduled to report the results of the second quarter on July 25, after the market close. Let's look briefly at how the company did last quarter and review a few metrics that investors will find of interest.

The Facebook thumbs-up on the company's address sign at its corporate headquarters.

Image source: Facebook.

A look back

In its first-quarter release, Facebook reported revenue of $11.79 billion, up 49% year over year, producing $1.69 in earnings per share, with both numbers blowing past analysts' expectations. The blockbuster results were driven by a 50% increase in advertising sales, which generates nearly all of Facebook's revenue. The company also increased its operating margins to 46%, up from 41% in the prior-year quarter. Increased revenue and margin expansion helped drive net income up 63% compared to the year-ago quarter.

What to watch

There are several metrics that should be of interest to investors. The most obvious is revenue, and frankly, it will be difficult to match the 50% year-over-year growth produced last quarter, but growth in that range is to be expected. Advertising is the cornerstone of Facebook's revenue, so investors should watch for increases in the average ad price, which grew 39% year over year during the last quarter, as well as improvements in ad impressions, which grew 8%.

Continued growth in the user base for its flagship social media site is another metric to watch. Facebook's monthly active users (MAUs) grew 13% year over year in its most recent quarter. Investors should look for similar growth in this report.

Investors will also be looking for updates regarding developments at Instagram. The photo- and video-sharing app recently revealed it had become Facebook's fourth platform to exceed 1 billion users, while launching IGTV, Instagram's long-form video service. Look to see if Facebook provides any updated user growth or engagement information. Since adoption of the app is accelerating, Facebook's future growth may well depend on the success of Instagram, as its own user growth is slowing.

Finally, the company's messaging apps will be in the spotlight. Last quarter, Facebook reported that WhatsApp and Messenger users were sending a combined 100 billion messages per day, along with 3 billion minutes of video and voice calls.

Two screenshots from the Instagram video app: one capturing three friends sitting on a rail, the other of white, fluffy clouds.

Image source: Instagram.

Looking ahead

Facebook has been warning investors for some time that revenue growth would eventually slow, though that has not yet come to pass. Last quarter, the company said revenue growth rates would "decelerate on a constant currency basis" as the year goes on, though it didn't provide a specific number. In the first quarter, revenue grew 50% year over year, so expect growth that is potentially lower than that. On its conference call, Facebook said it expects expenses for the year to grow 50% to 60% compared to 2017, seeing significant investments in "safety and security, content acquisition, and our long-term innovation efforts."  

For their part, analysts' consensus estimates are calling for revenue of $13.34 billion, which would represent 43% year-over-year growth, while earnings per share are expected to clock in at $1.72, up 30% compared to the prior-year quarter. 

Obviously, the long-awaited deceleration in revenue growth -- or lack thereof -- will be one of the biggest factors playing out for shareholders this quarter. Additionally, any update on the data scandal could potentially pressure the shares.

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Danny Vena owns shares of Facebook. The Motley Fool owns shares of and recommends Facebook. The Motley Fool has a disclosure policy.