In 2019, Facebook (NASDAQ: FB) has continued to grow its revenue rapidly. But the company’s bottom line has suffered as it faced steep legal expenses related to a settlement with the Federal Trade Commission (FTC) and heavy investments in privacy protections. Even these headwinds for earnings, however, weren’t enough to keep investors from being optimistic about the stock. Despite these bottom-line challenges, Facebook’s earnings have ultimately been better than feared — and shares have subsequently surged. The stock is up 37% year to date.
While the stock’s strong performance is nice for investors, it means the company will have to deliver impressive third-quarter results to justify this surge. Ahead of Facebook’s third-quarter update on Oct. 30, here’s an overview of a few areas investors may want to check on.
Revenue growth
When Facebook reported its second-quarter results, the biggest surprise was an acceleration in revenue growth. Going into the quarter, management had guided for revenue growth to decelerate during the period. Instead, second-quarter revenue increased 28% — up from 26% growth in Q1.
While this uptick was encouraging, management emphasized in its second-quarter earnings call that investors shouldn’t expect this trend to continue.
“We executed well in Q2 with a number of optimizations and product wins, particularly with the Facebook app that fell in our favor and help combat the overall trend of deceleration,” CFO Dave Wehner said during the call. “However, we continue to expect that our constant-currency revenue growth rates will decelerate sequentially going forward.”
So investors should look for that deceleration. On average, analysts are expecting third-quarter revenue to increase 26.5% year over year, only a moderate slowing from the previous quarter.
Operating margin
Another key metric to watch when Facebook reports earnings will be its operating margin, or its operating profit as a percentage of revenue. In Q2, this figure fell from 44% in the year-ago period to 27%. But management said the figure would have been 39% if it weren’t for its $2 billion accrual in connection with its settlement with the FTC.
While management didn’t provide specific guidance for its operating margin for its third quarter, the company has said that it expects its overall 2019 operating margin to be lower than it was in 2018 as the company invests in important initiatives like privacy, content safety, product infrastructure, and video. So investors should expect more year-over-year contraction in this key metric.
Facebook will report its third-quarter results after market close on Wednesday, Oct. 30.
