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What to Watch For When Facebook Reports Earnings

Facebook (NASDAQ: FB) will report its second-quarter earnings results after the bell on Wednesday. The social-media giant should report over 2 billion monthly active users, after announcing that it surpassed the milestone by the end June.

But investors should also pay attention to Facebook's other apps -- Instagram, Messenger, and WhatsApp -- especially considering management's comments over the past few quarters that revenue growth will slow in the second half of this year. While Facebook doesn't break out results from any of these apps individually, management may provide some commentary to clue investors in.

Here's what investors should be watching when Facebook reports its second-quarter results.

Image source: Facebook

The measuring stick

Here's a quick overview of Facebook's previous results and what analysts are expecting the company to report on Wednesday.

Metric

Q2 2016

Q1 2017

Q2 2017 Consensus Estimate

Revenue

$6.44 billion

$8.03 billion

$9.2 billion

Earnings per share

$0.97

$1.04

$1.13

Data source: Yahoo! Finance.

Analysts are expecting Facebook to continue its explosive revenue growth, but earnings growth should be more tempered. The company is investing heavily this year, and it laid out expectations that its total expenses will climb 40% to 50% this year. Last quarter, expenses increased 40%.

As Facebook's revenue growth slows down and its expense growth accelerates, it faces a significant slowdown in earnings growth. Still, the investments should pay off in long-term growth, allowing Facebook to accelerate earnings growth in the future.

Pay attention to where Facebook is adding new users

While Facebook continues to add massive amounts of new users, investors should pay attention to where all of those new users are coming from. Nearly all of Facebook's new users in recent quarters have come from its Asia-Pacific and rest-of-world regions. Those markets generate significantly lower average revenue per user (ARPU) than the United States, Canada, and Europe do.

As Facebook comes up against tougher comparable quarters in the second half of the year, its saturation in more developed markets could result in a decline in ARPU. That said, emerging markets present a great opportunity for Facebook, as they still have so much potential to increase ARPU in the long term. Facebook has been focusing primarily on expanding its reach in emerging markets and growing revenue per user in developed markets. That's led ARPU growth to lag behind in the Asia-Pacific and rest-of-world regions.

Investors should look for acceleration in ARPU growth for Asia-Pacific and the rest-of-world region to get an understanding of how the outsize growth in those regions will affect the company's results. In the short term, we should see a slowdown in global ARPU growth.

Beyond the numbers

As mentioned, Facebook's management has warned investors that revenue should slow meaningfully in the second half of 2017. It's hit the limit on the number of ads it can show in people's news feeds -- known as "ad load" -- before it starts having a negative impact on revenue.

That means there may be increased focus on how Facebook plans to increase its ad prices. The company has been investing heavily in video, which could produce both higher engagement and higher ad prices. Facebook is still experimenting with ways to monetize video, and users' increasing engagement with video represents a huge opportunity for Facebook if it can figure it out.

There's also Instagram, which Facebook has successfully monetized with the same strategy as its flagship app. What's more, the app is growing rapidly and at an accelerating pace. As Facebook's ad-saturation challenge slows revenue growth of its flagship app, Instagram will account for a larger share of Facebook's total sales. Investors should look for commentary on Instagram-specific initiatives and results.

On top of that, there's Facebook's messaging apps, Messenger and WhatsApp. The company is finally gearing up to monetize both of them. They could each provide another source of fresh revenue growth, so investors should look for comments on the early results to get a better gauge of their potential.

Facebook's outlook for the rest of the year -- and the rest of the decade, for that matter -- may be more important than the numbers it reports for the second quarter. Wall Street has high expectations for the company's long-term growth, and investors should pay attention to any information management is willing to give on that front.

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Adam Levy has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Facebook. The Motley Fool has a disclosure policy.