If you've followed Facebook's (NASDAQ:FB) expectation-crushing quarterly earnings reports over the last several years, you'll know why the social network's earnings release garners so much attention every quarter. When Facebook reports its third-quarter results next week, the company's long-standing track record of beating expectations will be put to the test once again.
If you're looking for some good background information on Facebook's results ahead of its earnings report, look no further. Here's a close look at some of the areas worth checking on when the results go live on Nov. 1.
One important area to look for an update will be Facebook's progress on its new initiative to help spur growth in "meaningful groups," or groups that are an important part of Facebook members' social structure.
Facebook said this summer that it estimates about 130 million of its 2.01 billion monthly active users are in meaningful groups. But the company wants to help over one billion people join these groups. In its second-quarter conference call, Facebook CEO Mark Zuckerberg said the company has been working on tools to help users discover the right groups, as well as features to make leading groups easier.
Given that Facebook recently updated its mission to reflect this initiative, shifting from a focus to connect the world to an emphasis on bringing the world closer together, investors should look for an optimistic update on the company's efforts to help users join meaningful groups.
Facebook's third quarter will mark the first period that the company will lose one of its three main ad revenue drivers. Management has been warning since last year that in the second half of 2017, ad load growth would slow significantly (the other two primary drivers for Facebook's ad revenue growth are growth in users' time spent in its apps and growth in advertiser demand).
Since Facebook doesn't provide revenue guidance, it's difficult to quantify what this deceleration in ad revenue growth could look like. For context, Facebook's advertising revenue climbed 47% year over year in its most recent quarter. Accounting for the bulk of Facebook's overall revenue, this helped total revenue climb 45% year over year.
Facebook emphasized the impact of losing this catalyst in its first-quarter earnings call: "We continue to expect that we'll see deceleration in ad revenue growth. And that's going to be particularly pronounced as we get into the second half of 2017 because ad load will be a less significant factor driving growth."
With these comments from management in mind, investors should look for third-quarter year-over-year revenue growth between 38% and 40% -- a deceleration from Q2's 45% year-over-year revenue growth, but still strong.
Facebook's profitability has benefited from the economies of scale of its business, despite its fast-rising expenses. But outsized growth in profitability compared to growth in revenue in recent periods has been enabled primarily by Facebook's breakneck revenue growth. Since revenue growth is expected to come down meaningfully in the second half of 2017, it will be interesting to see what Facebook's operating income and earnings-per-share growth will look like.
Another factor that could weigh on Facebook's profitability in Q3 is the company's aggressive spending. In its second-quarter earnings call, management said Facebook remains "solidly in investment mode." Specifically, management said it expects an acceleration in head-count growth and higher video content investments to drive operating expense growth in the second half of the year.
In Facebook's second quarter, operating income and EPS increased 61% and 69% year over year, respectively.
Investors should look for year-over-year growth in these key profitability metrics to come down meaningfully from growth in Q2. Given Facebook's outlook for aggressive spending, as well as its forecast for decelerating revenue growth, I expect EPS to increase more slowly than revenue, likely around 20% year over year.
Overall, Facebook investors should look for strong growth, albeit at a decelerated pace. Facebook reports its third-quarter earnings after market close on Wednesday, Nov. 1. Management will host a conference call to discuss its quarterly results at 2 p.m. PDT on the same day.