Facebook (FB) is set to report third quarter fiscal 2019 earnings results after the closing bell Wednesday. Facebook shares, which have risen 40% year to date, compared to a 22% rise in the S&P 500 index, have been one of the better-performing FAANG names.
While issues surrounding data privacy and antitrust regulatory probes have kept Facebook at the center of controversy for the past two years, investors seem little swayed as long as the company maintains its user growth metrics, namely its monthly active users (MAU), and more importantly, its average revenue per user. The Street expects these figures to rise Wednesday.
For the three months that ended September, the Menlo Park, Calif.-based company is expected to earn $1.91 per share on revenue of $17.36 billion. This compares to the year-ago quarter when earnings came to $1.76 per share on revenue of $13.73 billion. For the full year, ending in December, earnings are projected to decline 17% year over year to $7.28 per share, while full-year revenue of $70.24 billion would rise 25.8% year over year.
The projected full-year decline in earnings is due to the legal settlements and increased investments the company has made in security measures. Notably, the projected 17% EPS decline for fiscal year 2019 would mark the first year of negative EPS growth in seven years. In the second quarter, the company posted adjusted EPS of 91 cents, which, in addition to a $1.1 billion in income tax expense, also included a one-time charge of $2 billion related to Facebook’s settlement with the Federal Trade Commission (FTC).
Without those expenses, the company’s Q2 EPS would have been $1.99, a 6.13% positive surprise above analyst estimates. While revenue is still growing, the growth rate has decelerated given the larger base Facebook was working with. Even then, Q2 revenues beat consensus estimates by $400 million and the CFO estimated that another $574 million in revenues were hit by currency. Its lifeblood, user growth, is nonetheless positive.
In the Q2 MAU rose 8% to 2.41 billion and the company now has 2.1 billion in its service "family" (Facebook, Instagram, WhatsApp or Messenger) every day on average, while reporting 2.7 billion use one of the family each month. The company is still finding users in other parts of the world such as India and the Philippines. These figures have kept the analysts community broadly positive about the underlying health of the company; it guided for Q3 revenue growth to decelerate from Q2.
Facebook also forecasted 2019 operating expenses to grow between 37% and 48%, which could pressure EPS. Understanding that the company has a history of guiding too aggressively on expenses, it’s possible that the full-year EPS decline of 17% could easily come on the lower end. On Wednesday analysts will want to see how the company guides for the Q4 and full year. Investors will also want progress on attempts to monetize Messenger and WhatsApp.
All told, the investment thesis in Facebook remains strong based on sustained user growth in its family user base of 2.1 billion users, especially given that some 10% of ad spending in the U.S. this year is expected to go to Facebook. Investors will nonetheless want confirmation that Facebook can remain the go-to platform for digital advertising.
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