Analyst: Here’s Our Model Adjustments After Facebook Earnings

The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.

Facebook’s (NASDAQ:FB) Q4 revenue and EPS beat from solid advertising revenue growth and lower expenses. Total revenue was $1.59 billion, vs. our estimate and consensus of $1.52 billion. Advertising revenue was $1.33 billion, vs. our estimate of $1.28 billion, while Payments and other fees revenue was $256 million, vs. our estimate of $240 million. Non-GAAP EPS was $0.17 (excluding $0.14 in charges related to share-based compensation and tax adjustments), vs.  our estimate of $0.14 and consensus of $0.15. The company did not provide quarterly guidance.

Better-than-expected Q4 advertising revenue driven largely by mobile. Advertising revenue was up 41% in Q4, above our 36% estimate, driven primarily by an increase in mobile advertising via news feed. In Q4, 23% of ad revenue was from mobile, representing $306 million, up 100% sequentially. Approximately 65% of Facebook’s advertisers now advertise on the mobile platform, due primarily to the company’s enhanced data tracking abilities. As a result of increased mobile advertising, ARPU increased 12% in Q4 year-over-year.

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Better-than-expected operating margin despite management’s focus on investing in the business. Operating margin was 46% in Q4, above our estimate of 40%. However, the company reiterated its intent to drive future growth by investing in the business, and does not intend to manage to a target margin. We believe the decision is appropriate, as the immense mobile advertising opportunity remains largely unclaimed. We have modeled operating expenses to grow ≈ 50% in 2013, well in excess of revenue growth for the year, causing negative leverage. We expect Facebook to…

deliver significant operating leverage from future revenue growth once it invests in expanding its product development teams.

Adjusting our estimates. We increased our FY:13 estimates for revenue to $6.81 billion from $6.37 billion to reflect higher advertising revenue, as we expect greater monetization per user in 2013 from Facebook’s  variety of non-intrusive advertising solutions. We lowered our payments revenue estimate, assuming flattening gaming revenue and a slower ramp in non-gaming revenue than we had previously modeled. We are decreasing our estimate for EPS to $0.58 from $0.65 to reflect significantly higher expenses, primarily in product development, as well as a higher tax rate, both in line with management guidance.

Maintaining our OUTPERFORM rating and our price target of $35. Our price target reflects a value of $60 per MAU at Facebook’s peak MAU level with a conservative monetization assumption of $1 per MAU per month for five years.

Michael Pachter is an analyst at Wedbush Securities.

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