Facebook preps for earnings close-up as questions abound

Facebook will report its first quarter as a public company on Thursday and could face a rough crowd as worries persist about growth rates, the social network's mobile strategy, and monetization. 

Welcome to the public markets Mark Zuckerberg. 

Depending on Wall Street's reaction to the second quarter results, Zuckerberg may wish Facebook was still private. At least Zuckerberg has his net worth as balm for any really tricky questions.

Wall Street is expecting Facebook to report earnings of 12 cents a share on revenue of $1.15 billion. 

According to Thomson Reuters, analysts project Facebook's third quarter revenue to accelerate to $1.24 billion and then $1.45 billion in the December quarter, which is historically strong for advertising. 

Facebook's stock price since the company's much maligned initial public offering illustrates that investors aren't quite sure what to make of the company. Certainly, investors aren't buying Facebook's initial $100 billion valuation. Today, Facebook is valued a bit north of $60 billion. 

Simply put, Facebook has a bevy of question marks surrounding it. The second quarter results won't resolve those questions, but with any luck Facebook management can put a few worries to bed. Here's a look at Facebook's challenges going into its first quarter as a public company. 

The expectations game. Analysts widely expect Facebook to meet or beat Wall Street estimates. Facebook's IPO underwriters have mostly cut estimates since the company went public. Those moves should allow Facebook to top expectations. Wedbush analyst Michael Pachter takes a slightly skeptical view of Facebook's ability to play the underpromise-overdeliver game. Pachter said in a research note:

We think it is unlikely that Facebook will miss Q2 consensus estimates, which dropped after May 9's revised Form S-1. In that document, Facebook mentioned, in broad terms, that mobile usage growth at the expense of PC usage growth could negatively impact financial results, and that increasing mobile usage led to daily active users growing faster than the number of ads served. We viewed the disclosure as a warning that expectations were too high, and estimates were subsequently lowered by several underwriters. Also, the underwriters likely advised Facebook to beat Street expectations for its first public quarter; this became more achievable now that estimates have declined.

Management's performance and script. How will Zuckerberg sound on an earnings conference call? Will he even show up? Does Zuckerberg have to say much? The likely formula for Facebook will go something like this: 

• Quote in earnings release from Zuckerberg; 
• Maybe a cameo on the conference call; 
• Allow Sheryl Sandberg, chief operating officer of Facebook, and David Ebersman, chief financial officer, do all the talking. 

It's worth noting that Ebersman, former CFO at Genentech, knows the Wall Street game well. You don't hear Jeff Bezos on Amazon's earnings conference calls and you probably won't hear much from Zuckerberg either going forward. 

Advertising growth and Facebook's ability to monetize. For a young company, Facebook sure has to face a lot of questions about saturation and its ability to grow at a fast clip. Facebook has more than 901 million monthly active users and can hit expectations for years to come just by monetizing about 2 percent of the global ad market. Nevertheless, concerns about Facebook's advertising prospects abound. 

Citi Research analyst Mark Mahaney lays out Facebook's challenges. 

We expect revenue growth to decelerate to 25 percent year over year vs. the first quarter's 45 percent year over year growth. The deceleration is driven in part by a weak display ad market in Europe, greater use of Facebook on mobile (where monetization has been deminimus), and the law of large numbers impacting its monthly active user growth rate.

Payments revenue. Today, Facebook is a one-trick ad pony. Tomorrow, Facebook needs to be about Facebook Payments smoothing out any ad gyrations. Mahaney projects Facebook to deliver $196 million in payments revenue---think virtual goods in a Zynga game. 

The mobile strategy. Any comments about developing mobile ads will be viewed as a positive for Facebook. Few analysts expect mobile advertising to deliver near-term returns for Facebook. It's quite possible that just having a mobile plan may be enough. 

JMP Securities Mark Harding said: 

While we do not expect mobile to contribute materially to second quarter revenue, we are optimistic that the company's new initiatives will eventually gain traction. 

Ad rates. Facebook's average revenue per user on advertising is expected to be about 32 cents, on par with the first quarter. Any movement in ad rates on Facebook's user base will amount to real money.