Facebook: Slowing User Growth, Margin Compression, And The Challenge Of Mobile Monetization

Almost a year after going public, Facebook is set to post first quarter earnings after the bell on Wednesday.  While the stock has divided investors, the company has pushed forth on its path, investing in infrastructure and product development while trying to drive user engagement and, more recently, monetize mobile.  Analysts at UBS expect Facebook’s earnings to come in line with estimates, with 25% of revenues derived from mobile and earnings per share hitting 12 cents.  Margin pressure, though, will continue as Zuckerberg faces higher operating and capital expenses.

Facebook is still growing, even though it is clearly slowing down.  UBS estimates the social network giant will see daily active users grow to 669 million in the first quarter, up 8% sequentially and 27% over last year; in the fourth quarter, yearly growth was 28%.

Monthly active users are forecast to hit 1.1 billion, a 4% sequential gain and 22% more than in 2012.  Last quarter, Facebook grew its user base at a 25% rate on a yearly basis.  Growth, UBS’ research team says, will come from Asia and the rest of the world; in the U.S. and Canada, they expect 137 million daily active users, up 6% year-over-year.

Advertising revenues could hit $1.2 billion, a 39.5% increase, while mobile revenues should jump 23% to $340 million.  Once again, Facebook’s ad revenues could slow sequentially, 8.5% according to UBS, given tough comparisons in the fourth quarter where the U.S. Presidential election that secured Obama a second term ramped up spending.

Wall Street expects Facebook’s adjusted EBITDA to come in at $760 million (UBS’ estimate is $744 million), which should result in continued margin pressure.  Zuckerberg’s management team has continued to spend on developing product offerings and expanding infrastructure, which should push EBITDA margins down 140 basis points to 54.8% in the quarter.  This is expected to continue throughout the year, which would result in a fiscal year margin contraction to 54.4%, UBS’ team expects.

Another revenue stream, payments, is also showing signs of cooling.  While UBS’ first quarter estimate puts payment revenues at $197 million, up 6% over Q1 2012, they would fall 23% from the fourth quarter.  Their estimate is based on numbers from Zynga, which showed Facebook-related bookings down 38%, but the social network has indicated its reliance on Zynga is decreasing in this channel.  In the third quarter, “management disclosed that 43% of its Q3 Payments revenue was derived from Zynga, down from 51% in Q2 2012 and 62% in Q3 2011.”

Facebook's challenge remains monetization on its growing user base of mobile users.  Worldwide desktop traffic grew 3.3% in terms of unique visitors, comScore data show, yet fell 0.6% in total minutes and 11% in page views.  Mobile unique, which include those coming from Apple and Android devices, were flat on a sequential basis, but minutes increased 21%, comScore said.  Facebook Home, an Android-based smartphone interface, reached about 500,000 downloads in just five days, but reviews have been mixed, according to UBS, suggesting Facebook has ample room for improvement.

How will the stock react?  Shares in Facebook have been highly volatile in the aftermath of earnings releases, falling nearly 12% in the second quarter of 2012, and then jumping 19.1% in the third.  Last quarter, the stock was relatively flat, sliding 0.8%.  “We note that sentiment around the name has been quite bearish, so better than expected results could result in positive volatility,” UBS research team said.