Facebook Inc. Earnings: It's All About the Users

By Markets Fool.com

Facebook will be in the spotlight this week as one of the first of the popular tech giants to report quarterly results in this earnings season. The social network is scheduled to release first-quarter numbers after market close on Wednesday, a day before Googleand Microsoft and about a week ahead ofApple.With the stock just $3 off its all-time high of $86.07 and up about 8% since the company last reported earnings, investors will be looking for evidence Facebook can keep up its rapid business growth as user growth slows and engagement appears to be peaking.

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While Facebook's primary source of revenue is digital advertising, it's ultimately the health of the social network's user base that makes this revenue stream possible. This is why it's good to keep a close eye on that user base, particularly as the company matures. An examination of user growth, average revenue per user, and engagement will help give investors a good idea of the state of the social network's user base.

Facebook CEO Mark Zuckerberg (right) in his conference room. Image source: Facebook.

User growth
In the fourth quarter, Facebook's monthly and daily active users, or MAUs and DAUs, hit 1.4 billion and 890 million, respectively. Sequentially, MAUs and DAUs were up 3.2% and 3%. When Facebook reports the results, look for the company to post slightly lower sequential growth for MAUs and DAUs, somewhere in the range of 2.5% to 3%. Modestly decelerating sequential growth would be in line with the sort of user growth Facebook has reported in recent quarters.

Of course, a higher rate would be nice. But investors shouldn't get their hopes up. Fat or negative growth, meanwhile, would be particular red flags. If the social network's user growth comes in lower than expected, look for explanations from management.

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Facebook video advertisement. By continually optimizing its advertising offerings and how they are displayed, Facebook had exceeded expectations when it comes to monetization. Image source: Facebook.

Monetization
Facebook's average revenue per user, or ARPU, has been a strong point for the company since it launched a mobile app. The social network reported a record ARPU of $2.81 in the fourth quarter, up 31% from the year-ago quarter and 17% sequentially. While investors should hope for similar year-over-year growth in ARPU for the first quarter, the sequential growth probably won't look as hot; seasonality of digital advertising revenue is likely to lead to a slight sequential decline from the fourth quarter to first quarter. Last year the sequential ARPU decline was 6.5%.

Engagement
While Facebook bulls cite the company's network effect -- which is the fact that the platform becomes more useful with every additional user -- as one of the social network's key competitive advantages, there's always a risk that this advantage proves less sustainable than investors thought. For this reason, investors should watch the engagement level of Facebook's user base. If engagement ever begins to fall, it could signal that users are finding Facebook less useful and entertaining, or that users are spending more time in other apps.

Engagement can be defined by the number of DAUs divided by Facebook's MAUs. In the fourth quarter, Facebook's engagement rate leveled off for the first time, holding steady at 64%. In the first quarter and the rest of 2015 it will be interesting to see if Facebook can reinvigorate growth in its engagement rate. On the flip side, if 64% turns out to be Facebook's max engagement rate, can the company sustain this impressive engagement for the long haul?

While it's worth checking in on a fast-growing company such as Facebook every quarter, investors should view individual quarterly metrics in the context of the bigger picture and the commentary from management.

As for the big two metrics, with estimates from 42 analysts, the consensus expectation is for revenueof $3.56 billion and non-generally accepted accounting principles earnings per share of $0.40, respectively up 42.5% and 17.6% from the year-ago quarter.

Find Facebook's earnings release about 10 to 30 minutes after market close at the company's investor relations home page. Tune into the conference call at 5 p.m. EDThere.

Stay tuned at The Motley Fool for post-earnings analysis of Facebook's first-quarter results.

The article Facebook Inc. Earnings: It's All About the Users originally appeared on Fool.com.

Daniel Sparks owns shares of Apple. The Motley Fool recommends Apple, Facebook, Google (A shares), and Google (C shares). The Motley Fool owns shares of Apple, Facebook, Google (A shares), and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.