| 1 | With Facebook's stock rising by over 15% over the last three months, expectations will be high from the company on Wednesday, July 29th, when it reports its financial results for the second quarter of 2015. |
| 2 | With the average consensus for top-line pegged at around $4 billion in Q2, we expect the company's growth to have been driven by significant increase in average ad pricing during the past quarter. |
| 3 | This will likely also push up mobile monetization on the platform, which likely posted share gains in overall advertising that crossed above 75% in Q2. |
| 4 | The ongoing roll-out of better and more targeted ads (including video-based ads), as well as rise in the number of marketers on the platform likely lifted demand for its advertising, in our view. |
| 5 | In terms of profitability, we believe the company's planned increase in expenses weighed on margins during the second quarter. |
| 6 | However, we expect these investments to translate into significant streams of revenue from Facebook's other platforms, including Instagram, WhatsApp, Messenger and Oculus in the coming years. |
| 7 | Ad Monetization Trends During The Second Quarter: We think Facebook could report strong growth in advertising revenues during Q2, despite the adverse impact of currency translation. |
| 8 | This will likely be driven by considerable increase in ad pricing, coupled with a decrease in the overall number of ad engagements. |
| 9 | These price-volume dynamics will result from changes in right-hand column ads, and increased usage on mobile platform (where fewer ads are shown). |
| 10 | We expect ad pricing to be the key driving factor for ad revenue growth in the future, owing to improvement in the quality, relevance, target-ability, and measurement of ads. |
| 11 | Further, we expect mobile advertising revenues on Facebook to see sharp growth in the coming quarters, on account of secular trends towards mobile advertising. |
| 12 | Moreover, the rising usage of the mobile platform, which contributed for over-85% of the total monthly active user base in Q1 2015, will also fuel the overall ad business in the future. |
| 13 | In contrast, we expect the PC-advertising business to decline in the near-term. |
| 14 | Growth In User Base: The sequential growth rate in Facebook's monthly active user base rose to 3.6% in Q1 2015, as compared to 3.0% in the prior quarter. |
| 15 | We expect the company to report healthy growth in user base during the second quarter as well. |
| 16 | Additionally, it will be interesting to get an update on the current user bases of Instagram, Messenger and WhatsApp ? which were seen at 300, 600 and 800 million, respectively at the end of last quarter. |
| 17 | Additional Information On Short-Term Drivers To Revenue Growth (Video Ads And Instagram): Facebook seems to be increasingly focusing on videos to raise its growth outlook ? the number of video views per day surpassed four billion in April 2015, as compared to one billion in September 2014. |
| 18 | While the recent launch of spherical and embedded videos could contribute to large increase in this metric in Q2, we are also interested to learn more about their impact on monetization. |
| 19 | Additionally, Instagram's revenue is expected to rise significantly in the near-future, and hence we will look for details related to advertising trends on this photo-sharing platform during the earnings call. |