Facebook Inc. (FB) Q1 2016 Earnings Preview: Video Ads, Instagram Fuel Profits Amid VR Splurge

Digital and mobile ad spending is still in high demand, and Facebook is pulling in the lion’s share. The social networking giant is predicted to announce first-quarter profits of $1.1 billion, with earnings per share at 62 cents, when CEO Mark Zuckerberg reports after the markets close on Wednesday.

Facebook’s continued success is fueled by mobile as well as video ads across Facebook and Instagram. Mobile accounted for 80 percent of Facebook’s revenue last quarter, and that number is expected to rise, eMarketer estimated. E-commerce advertisers’ spending on mobile versus desktop rose 15 percent over last quarter while return on ad spend rose 57 percent year-over-year, according to Nanigans, a Facebook marketing partner.

It's no longer a question of whether to advertise on social networks. "Facebook just keeps getting stronger and stronger every quarter," said Debra Aho Williamson, an analyst at eMarketer, in a statement. "We see advertisers moving past the experimentation stage and beginning to craft advertising specifically for Facebook (rather than simply repurposing TV spots)."

In fact, marketers tout Facebook as the top destination for digital ad spend. “If someone says, ‘Where should I spend my money?’ I have a hard time not saying Facebook. The only fear that I have is more that they’re in control of too much,” said Ian Schafer, CEO of digital agency Deep Focus.

Facebook has been extending its power across its family of apps and services. The company does not break out revenue by product in its earnings, but Instagram may capture 11 percent of its total revenue this quarter and earn $3.2 billion this year, according to a report by Credit Suisse.

Messenger and WhatsApp are still without direct moneymaking options but have been steadily adding users since the last earnings report, in January. Messenger, with 900 million users, now has a bot store, and WhatsApp, with 1 billion users, offers full end-to-end encryption. Plus, this quarter, Facebook can report sales from Oculus Rift, its virtual reality headset, which went on sale in January.

Investors predict Facebook growing in profits, revenue and users. For the first quarter of 2016, Facebook is expected to report $5.25 billion in revenue, up 48 percent from $3.54 billion year over year, according to analysts polled by Thomson Reuters. Profits are projected to be up by 21.1 percent from the first quarter of 2015.

Facebook’s user count could reach 1.64 billion monthly active users, according to Youssef Squali, an analyst at Cantor Fitzgerald. That’s up from its 1.59 billion active users announced last quarter and a 14 percent increase year-over-year.

As its growth in the U.S. has slowed, Facebook is looking to emerging markets for new users. “We want to get a full Facebook experience to every end user, whether that is video or, eventually, virtual reality,” Jay Parikh, Facebook’s vice president for engineering, told the New York Times this week.

But emerging markets have slower -- and less access to -- internet connections. That’s one reason why Facebook has been investing in more technologies to service those areas. Facebook Lite, a data-light version of the app, now has 100 million users and is Facebook’s fastest-growing product, the company said this month at its F8 developer conference.

Facebook has been working with developers in India and other countries to build out its Free Basics service and Internet.org, an initiative to make the internet free and bring everyone online. “Our mission is to truly make the world more open and connected and give people the power to share. We know we can’t do something as crazy and big and as bold as that alone,” Ime Archibong, director of strategic partnerships at Facebook, told International Business Times ahead of F8.

While Internet.org is a long-term strategy for user growth, it’s a lofty initiative that has some investors eyeing the spending. Moonshots are “some of the reasons why we don’t own Amazon and Google [stock],” said Kim Forrest, vice president and senior equity analyst at Fort Pitt Capital Group. “Yeah, it’s a cool thing, but how are you going to pay for that?”

Beyond building internet-beaming planes, Facebook is investing heavily in virtual reality. Of the 12,000 employees at Facebook, more than 400 are working on virtual reality, Wired reported. Facebook started selling Oculus Rift in January for $599 -- and that high price is a concern for some VR developers deciding where to build their products. Facebook does sell a cheaper product, called Gear VR, with Samsung.

Still, investors do not see an immediate cash flow from VR headsets. “I don’t think modern America is going to be twirling around their living room knocking into furniture any time soon,” Forrest said.

For now, Facebook is pulling in revenue from mobile ads and continuing to capture the attention of publishers. Facebook has brought more media companies to increasingly rely on the network for their own revenue. This month, Facebook opened up Instant Articles, its product for media companies to publish stories directly on the network and guarantee faster load time, to any publisher.

Facebook can earn revenue from ads sold in those articles, which has marketers asking for more data on viewership and revenue potential. Facebook is now working with Nielsen and other analytics partners to track success. “I want to know where they’re at generally on a revenue perspective for the publishers and them. I see that increasingly being a place where we place our ads,” said Schafer of Deep Focus.

The top 10 publishers on Facebook, those with the most shares, all use Instant Articles, according to a study from NewsWhip in March.

Those same publishers are tapping Facebook’s new live video offering as Zuckerberg touts the importance and potential of the system. However, live video does not generate revenue for the company. That may not be a concern, yet. Facebook didn't start selling ads in Instagram until three years after it purchased the app, for $1 billion.

Some marketers argue against ads in live video, as it could be a play not for TV ad dollars at the moment but instead as a way to attract users to its network and not Snapchat’s, for example.

“Facebook doesn't need to monetize Live directly, nor should they,” Dave Salinas, CEO and co-founder of marketing company Digital Surgeons, told IBT. “The important thing is, when something is happening in someone’s life, they need to become the app that opens, not the yellow one with a ghost on it.” ​