All eyes on mobile revenue in Facebook's Q1 report

Analysts expect to see earnings of 13 cents per share and revenue of $1.44 billion

When Facebook reports its fourth quarterly report as a publicly-traded company at the close of trading on Wednesday, all eyes will be on the company's ability to position itself for the mobile world.

Ahead of the news, shares of Facebook rose 3% Tuesday to $27.77, the eighth day in a row that the stock has gained. Shares were up slightly from trading at around $25 at the start of the month, but are also slightly down from $28 at the beginning of this year.

Facebook shares are currently down 1.10% in Wednesday trading, to $27.36 a share,

Analysts are expecting the social network to post first-quarter earnings of 13 cents per share on revenue of $1.44 billion, up 30% and 36%, respectively from the same quarter a year ago.

Facebook's revenue is expected to increase by more than 30% year-to-year for the fourth time in a row, having gone up 40% in the last three months of 2012, and up 32% in both the second and third quarter of last year. But a 36% increase this quarter would also indicate that Facebook's revenue is slowing-down for the first time. 

If trends continue, this should be the second quarter in a row that Facebook posts a GAAP profit. In the second quarter, Facebook reported a net loss of $157 million. That number went down to a loss of $59 million in the third quarter, before Facebook finally posted a profit of $64 million in the fourth quarter.

So what will investors be looking for in tomorrow's report? Here are a few key indicators:

Mobile numbers

As always, mobile is critical to Facebook's long-term success.

For this quarter, Sterne Agee analyst Arvind Bhatia is projecting that Facebook will post $360 million in mobile ad revenue, up 18% sequentially.

"Our estimate is based on the assumption of an average run rate of$4M/ day in mobile advertising revenue, up from $3.4M/day in 4Q. Recall, this was the metric that disappointed the Street last quarter, mainly because the “whisper”expectation was too high. We remain quite comfortable with our estimate of $360M but believe less than $380M of revenue in this segment could disappoint the Street," Bhatia wrote.

Bhatia is also expecting that 65% of all Facebook users will have accessed the site from a mobile device, up from 64% last quarter.

JP Morgan analyst Doug Anmuth reiterated this sentiment, but said that he believes that "mobile ad revenue number of at least $320M would be positive."

"Mobile ad revenue remains a key focus for investors, even though Facebook has some discretion in where it places ads. While we hear some concerns that Mobile ad revenue could be flat to down Q/Q in 1Q13, we would still expect the early trajectory of the new format to offset typical seasonality."

In Facebook's last earnings report, it saw a healthy increase in mobile usage year-to-year. Mobile MAUs were 680 million, an increase of 57%, while mobile DAUs exceeded web DAUs for the first time in the fourth quarter of 2012.  Mobile revenue was $306 million, approximately 23% of advertising revenue for the fourth quarter of 2012, up from approximately 14% of advertising revenue in the third quarter of 2012.

But the "whisper" numbers, or the numbers that get floated around but that aren't published, were expecting mobile revenue to be in the area of around $350 million. Because Facebook came in low, its stock dropped 3% the next day.

User engagement

Another key aspect for investors to look at is how users are continuing to engage with the site.

When it comes to this aspect of Facebook, Anmuth has some "concern" about engagement, which he says "have intensified through 1Q13 and they are a frequent topic in our discussions with investors."

He believes that Facebook could be losing space in the social media world to other, newer networks, like Instagram (Facebook-owned), Twitter, WhatsApp, and Snapchat. A recent study put out by Piper Jaffray did find that teens are less interested in old guard social media like Facebook. 

When asked to write in their favorite social networks, the top five answers given by the teens in the survey were Wanelo, Vine, Snapchat, Kik, and 4chan. 

Still, Anmuth is still predicting that Facebook's monthly active users (MAUs) will increase, though only 1% quarter-to-quarter in the US & Canada and 3% quarter-to-quarter in Europe. He also expects DAUs as a percentage of MAUs to continue to rise "as mobile devices should increase the frequency of Facebook usage."

DAUs as a percentage of MAUs were 58.5% in Q4 2012, and Anmuth is predicting they will rise to 59.8%.

Bhatia also expects Facebook DAU's to rise, but for growth to slow. While Q4 2012 saw DAUs grow 28% year-to-year, and 6% quarter-to-quarter, Bhatia expects to see 642 million DAUs, or growth of 22% year-to-year, and 4% quarter-to-quarter.

His expectations for DAU percentage of MAU is 59%.

Payments Revenue

With the close relationship between Zynga and Facebook now severed, the social network has lost a big percentage of its payments revenues. Facebook has attempted to make up for this loss with other methods, including teaming up with electronic payment service Bango to power Facebook’s mobile Web carrier billing; making businesses pay to run Offers; allowing users to pay to promote their own statuses; and allowing users to purchase real gifts. But none of this has proven successful enough to make up for lost revenue from social gaming.

"Recall, social games are a big part of Payments revenue and our view is social gaming trends on the web remain challenging. Although a few social gaming companies such as King.com appear to be doing well, in general, it appears trends in the social gaming industry are somewhat tough," said Bhatia.

Bhatia is expecting revenue from payments to drop 3% year-to-year to $180 million, while Anmuth is projecting it will drop 2% to $183 million.

Facebook Home

For the second quarter in a row, Facebook has a big new product that, while it will not have an impact on its quarterly numbers, will be looked to a sign of Facebook's path of innovation going forward.

Last time around it was Graph Search, which was launched in January. The product was still in beta when Facebook released its earnings report, but investors were still looking to hear how Facebook eventually planned to monenetize the product going forward.

This time investors are interested in the fate of Facebook Home, the Android user interface that Facebook released in the United States on April 12 and then to the rest of the world on April 16.

While Home has certainly gotten off to a troubling start, with slow sales and poor reviews, both Bhatia and Anmuth point to it as a good sign for innovation going forward.

"Home will probably be great for the avid Facebook users but it is unlikely to have mass appeal—at least not in its current version. Recall, FB plans to update this app on a monthly basis and we are hopeful the future iterations will make the app more appealing for the broader audience," Bhatia wrote.

"We believe Facebook’s pace of innovation continues to be strong and we expect the company to continue hiring engineers aggressively, as evidenced by products such as Graph Search, Home, and the new News Feed," said Anmuth in his report.

Facebook's previous earnings reports 

For Facebook's third quarter of 2012, it earned 12 cents a share, a penny above expectations, and generated revenue of $1.262 billion for the quarter, beating Wall Street's estimates of $1.23 billion.  

In Q4 2012, Facebook posted revenue of $1.585 billion for the quarter, better than Wall Street's estimates of $1.52 billion. Adjusted earnings per share came in at 17 cents in the fourth quarter, compared with the 15 cents a share that analysts were expecting.

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