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Facebook (META 2.67%) is scheduled to report earnings for the second quarter of 2016 on Wednesday, July 27, after the market close. The social network has delivered impressive performance over the past quarters, and investors will be closely watching variables such as users count, monetization, and financial performance in the coming earnings release.

It all begins with users

Users are the lifeblood of the business, meaning that Facebook needs to keep its user base growing and engaged in order to drive sustainable growth in sales and earnings. The company is doing quite well in this area, Facebook reported 1.65 billion monthly users in the first quarter of 2016, an increase of 15% versus the same quarter in 2015.

This puts Facebook substantially ahead of competitors such as Twitter (TWTR) and LinkedIn (LNKD.DL) in the social media space. Twitter ended the first quarter of 2016 with 310 million monthly users, and it increased its user base by a much smaller 3% year over year. LinkedIn reports registered users as opposed to monthly active ones, so comparisons are not completely straightforward. Nevertheless, LinkedIn reported 433 million members in the first quarter of 2016, so the platform is no match for Facebook in terms of size.

Facebook has reached a massive scale, since growth tends to slow down with size, and it makes sense to expect a deceleration in user growth over the middle term. However, this should be no reason for concern as long as engagement levels remain healthy. 

Facebook announced a 16% increase in daily users last quarter, amounting to 1.09 billion. Daily users are growing at a faster rate than monthly ones, and this shows engagement is moving in the right direction. Mobile is a much important area for Facebook -- nearly 82% of the company's advertising revenue came from mobile devices last quarter. As of the end of the first quarter, Facebook has 989 million mobile daily users, growing 24% year over year.

The company made aggressive bets with big acquisitions such as Instagram and WhatsApp over the past couple of years, and investors may want to closely watch these platforms in the coming earnings release. Instagram reported 500 million monthly users and 300 million daily users in June, while WhatsApp ended the first quarter of 2016 with over a billion users.  

Getting down to business

Facebook is permanently looking for new ways to transform its user base and data into growing revenue for investors. The company needs to be careful not to hurt the user experience with too much advertising, so growth via rising ad prices is preferable to a growing volume of ads. Facebook is increasingly venturing into video advertising, which according to management is going to be a "huge opportunity" in the coming years.

Average revenue per user was $3.32 last quarter, an increase of 33% versus $2.5 per user in the first quarter of 2015. The average price per ad increased 5% during the period, while ad impressions declined 50%.

On the back of a growing user base and improving monetization, Facebook delivered $5.2 billion in revenue during the first quarter, growing 52% in U.S. dollars and 63% in constant currency terms. Wall Street analysts are forecasting $6.01 billion in sales during the quarter ended in June, this would represent an annual increase of 48.8%.

The company is aggressively investing for growth, and management expects total expenses to increase between 30% and 40% during the full year of 2016. Still, chances are that sales will outgrow expenses, so profit margins should be on the rise. Analysts are on average expecting $0.81 in earnings per share in the coming earnings report, a huge increase from $0.25 during the second quarter of 2015.