Analyst: Instagram Video Ads Will Benefit Facebook Top-Line

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

Facebook (NASDAQ:FB) will report Q2:13 (ending June) results after market close on Wednesday, July 24, and host a conference call at 2pm PT (dial-in: 866-554-3009, conf. ID: 99420501, webcast: http://investor.fb.com/results.cfm).

We expect Q2 results slightly above consensus. Our current estimates are for revenue of $1.62 billion and EPS of $0.15, compared to consensus of $1.62 billion and $0.14, respectively. Facebook did not provide guidance. We expect top-line growth to be driven by mobile ads (up to roughly $374 million in Q1:13 from just over $300 million in Q4:12 and $0 in Q2:12) and payments (up 12% in Q1) as Facebook diversifies its developer base beyond Zynga (NASDAQ:ZNGA). EPS growth will be driven by the top-line strength and operating expense growth that lags full-year guidance.

We do not expect Facebook to adjust limited FY:13 guidance. Management expects FY non-GAAP opex to increase by ≈ 50 percent. Actual Q1 expenses were $895 million (up 56 percent), implying to us that expenses will rise more modestly, and implying y-o-y growth of 44%. We do not expect expenses to rise as high as Facebook projects, allowing it to regularly exceed EPS expectations.

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