FB: Look Ahead to December 2020 Quarterly Results

This "look-ahead" post discusses how I came up with an estimate for Facebook's earnings for fiscal 2020's fourth quarter, which ended on December 31, 2020, by predicting each element of its Income Statement, from top-line Revenue to bottom-line Earnings Per Share (EPS) and everything in between.

Once the company’s official results become available on January 27, I will compare the published Income Statement to the prediction and identify any surprises, positive or negative.  Examining these differences can identify what factors (e.g., profit margins, non-GAAP expenses, tax rates, share buybacks) are driving changes to a company's financial performance.

But, before getting into the details, let's take a step back and start with background information about Facebook.

Facebook operates its eponymous and widely used social network, plus Instagram, WhatsApp, and Messenger. Advertising is responsible for the bulk of the company's revenue.  COVID-19 accelerated a shift from offline to online commerce, and this has increased demand for online advertising.  Facebook has been under fire for some time about how it protects (or doesn't) the privacy of its users, how it manages (or doesn't) inappropriate content, and whether it has abused its dominant position in the market.  In December 2020, the Federal Trade Commission sued Facebook, claiming the company's anticompetitive conduct helped it maintain a monopoly. 

Shares of Facebook now trade for about $251 each, giving the company a market value of $727 billion. These shares can be found in the Standard and Poors 500, Standard and Poors 100, NASDAQ 100, and Russell 1000 stock indices.

Facebook recorded profits of $25 billion on revenue of $79 billion during the last year. In the quarter that ended on 30 September 2020, Facebook earned $2.71 per share, which significantly beat the $1.90 Wall Street consensus forecast. See https://tinyurl.com/yyzvclj2 for Facebook's most recent quarterly report.

Revenue in the September 2020 quarter totaled $21.5 billion, 22 percent more than last year's $17.7 billion. The Advertising business was responsible for 99 percent of overall revenue, and this unit's revenue grew by 22.1 percent compared to the year-earlier result. The Payments/Fees business contributed 1 percent of revenue, and this unit's revenue decreased by 7.4 percent.

My starting point, if available, when estimating earnings is guidance provided by the company's management to financial analysts.  It's true that the company may downplay expectations somewhat to avoid disappointments, but the top managers ought to know better than anyone else how well their products and services are selling.  I also look for other information about the company in the news, and I take advantage of trends in the company's historical results.  While it makes my task a little more difficult, I also try to estimate earnings that conform to Generally Accepted Accounting Principles (GAAP).  Non-GAAP results, which most professionals focus on, are somewhat arbitrary and often exclude meaningful items.

Facebook described its expectations for the fourth quarter of 2020 in October after the company last reported quarterly results.  Here are some of the most salient comments:

In the fourth quarter of 2020, we expect this trend to continue and that the number of DAUs and MAUs in the US & Canada will be flat or slightly down compared to the third quarter of 2020.

We expect our fourth quarter 2020 year-over-year ad revenue growth rate to be higher than our reported third quarter 2020 rate, driven by continued strong advertiser demand during the holiday season. Additionally, Oculus Quest 2 orders have been strong which should benefit Other Revenue.

We expect 2020 total expenses to be in the range of $53-54 billion, narrowed from our prior range of $52-55 billion.

We expect 2020 capital expenditures to be approximately $16 billion, unchanged from our prior outlook.

We expect our fourth quarter 2020 effective tax rate to be in the mid-teens and our full-year 2021 tax rate to be in the high-teens.

With respect to revenue in the fourth quarter, the key statement above is "fourth quarter 2020 year-over-year ad revenue growth rate to be higher than our reported third quarter 2020 rate."  Facebook's revenue in the third quarter of 2020 was 21.6 percent higher than in the third quarter of 2019.  Given this, I'm going to assume, somewhat arbitrarily, revenue in the fourth quarter will grow by 24 percent.  Since Facebook's revenue was $21.1 billion in the fourth quarter of 2019, my estimate for the latest quarter becomes $26.1 billion.

The guidance indicates that Facebook's total expenses for the entirety of 2020 are expected to be between $53 and $54 billion.  The figure presumably covers cost of sales, research and development, and sales, general, and administrative costs.  During the first nine months of 2020, these expenses totaled $38 billion.  So, the guidance is really indicating that the expenses are expected to be $15 to $16 billion in the fourth quarter.  I used historical ratios to split the $16 billion expense figure across cost of sales, R&D, and SG&A.

The final critical figure is the income tax rate.  The company's guidance suggests "mid-teens," and I have used 16 percent.

The resulting estimate for Net Income is $8.67 billion ($3.00 per share).

The following Income Statement summarizes the estimates made as discussed above. 

Please note that my organization of revenues, expenses, gains, and losses, which I use for all analyses, can and often does differ in material respects from company-used formats.  The standardization facilitates cross-company comparisons.

#facebook  #fb  #gauges #gcfr  #gcfr2 #lookahead #nac_financialanalysis