Facebook Earnings Preview: What to Watch

By Deepa Seetharaman Features Dow Jones Newswires

Facebook Inc. is scheduled to announce its second-quarter earnings after the market closes Wednesday. Here is what you need to know:

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EARNINGS FORECAST: Facebook is expected to report quarterly earnings per share of $1.12, up from 71 cents a year ago. In May, Facebook said it would only provide key financial metrics based on generally accepted accounting principles, following the path of Alphabet Inc. Previously, Facebook also reported non-GAAP figures, which excluded stock-based compensation and other expenses.

REVENUE FORECAST: Analysts predict Facebook will report quarterly revenue of $9.2 billion, up 43% from the prior year's $6.4 billion.

WHAT TO WATCH:

SHRINKING GROWTH, RISING COSTS: Last year, Facebook warned that it would stop squeezing more ads in users' news feeds in mid-2017, at which point ad revenue growth would shrink "meaningfully." At the same time, Facebook also plans to spend as much as 50% more in 2017 on building new data centers, recruiting new engineers and content moderators, and buying original content. Investors will want a sharper picture of what the one-two punch of slowing ad growth and rising costs will do to Facebook's bottom line. Macquarie Research expects Facebook's ad revenue growth in 2017 will shrink to 36% while operating expenses will rise 44%.

NEW AREAS OF AD GROWTH: Investors are eager for details about Facebook's growth plans beyond the news feed. "It increasingly feels like Facebook is under some pressure to find its next leg of growth," said MoffettNathanson analyst Michael Nathanson in a recent note. Facebook has made some moves on that front. This month, it started showing ads in its Messenger chat app and testing ads in Marketplace, a Craigslist-like feature in the core Facebook app. Facebook has also been testing "ad breaks" in the middle of Facebook videos and ramping up ads in its photo-sharing app Instagram. But analysts say it remains to be seen if these new ads can command news-feed level prices.

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VIDEO-FIRST: A year ago, Chief Executive Mark Zuckerberg said Facebook was on its way to becoming "video-first." Nearly all its product teams are incorporating video across Facebook's features and apps; Facebook also is on the hunt for TV-quality original programming for its video tab and has indicated it could spend up to $3 million an episode in some cases. Analysts want to know how much Facebook is spending on video right now, its importance to the company's bottom line and the size of the future opportunity.

Write to Deepa Seetharaman at Deepa.Seetharaman@wsj.com

(END) Dow Jones Newswires

July 26, 2017 06:14 ET (10:14 GMT)