Earnings: Facebook and Merck Scheduled to Open Their Books

Facebook FB has managed to turn in some solid revenue gains in the last four reporting periods, as its ad revenues have grown at rates of 57% and above since Q4 2015, according to company reports. Might the social-media juggernaut have done it again in the last quarter? And if so, is that kind of growth sustainable? Investors are slated to find out when FB earnings come out after the market closes today.

Then, on docket for Thursday pre-market, Merck MRK opens the books on its Q4 results, with some analysts keen to hear more about Keytruda and other drugs in its pipeline.

What’s Been Driving FB Revenues?

There are a lot of moving parts with FB that go beyond the eponymous social-media site, including Instagram, WhatsApp, Messenger and Oculus, into which some analysts say they want more insight. Other analysts say they’ll be looking for growth in user numbers and what they call “engagement,” or how much time people are devoting to their FB page.

But it’s FB’s mobile advertising revenue, which cuts across other units beyond the Facebook site, that has carried the bulk of its top line revenue. In its Q3 release, FB reported that total ad revenues surged 59% on a year-over-year basis, which fed a 166% jump in net income. Mobile ad revenues contributed some 84% of the $6.81 billion in total advertising dollars it collected, according to the company’s financial statements.

But on the Q3 conference call, David Wehner, chief financial officer, warned that such high double-digit year-over-year gains in ad revenue might be tough to scale, since Q4 2015 was such a strong quarter. He also cautioned about ad revenue gains into 2017, which he expects will “come down meaningfully” because they were being fueled by what’s called “ad load.”

Ad load is the number of ads you see popping up on your Facebook page in between posts. While FB has been priming that pump for many quarters, Wehner has said in the last two conference calls that there is a point of supply-and-demand that will have to slow down considerably. If it doesn’t, he said, Facebook users might see more ads on their pages than posts. He says ad load will be less of a factor in the second half of this year.

Still, some analysts are betting that FB could beat Q4 expectations despite those remarks. Digital data researcher eMarketer, for example, is forecasting FB ad revenue will reach $33.76 billion in 2017, nearly double the $17.08 billion in ad revenue it booked in 2015.  

What might drive that besides ad load? Chief Executive Mark Zuckerberg has said FB’s next aim is to put video first across all applications. “People are creating and sharing more video, and we think it's pretty clear that video is only going to become more important,” he said on the Q3 conference call. “So that's why we're prioritizing putting video first across our family of apps and taking steps to make it even easier for people to express themselves in richer ways.”

On Wall Street, analysts reporting to third parties have a Q4 consensus earnings estimate of $1.34 a share, up from $0.79 per share in the year-ago period, according to the Earnings Analysis tab on the thinkorswim platform from TD Ameritrade. Revenue is projected to jump to $8.47 billion from $5.84 billion a year ago.

The options market has priced in an expected share price move of 4.6% in either direction around the earnings release, according to the Market Maker Move indicator on the thinkorswim platform.

Calls have been active at the weekly 130 and 135 strikes while put activity is noted at the weekly 129 and 125 strikes. The implied volatility sits just above the midpoint at the 55^th percentile. (Please remember past performance is no guarantee of future results.)

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation, to sell the underlying security at a predetermined price over a set period of time.

MRK’s Drug Pricing Reveal

As with its big-pharma competitors, some analysts following MRK say that, beyond the earnings results, they will be interested in the company’s comments on drug pricing and tax policies, two big issues on the industry’s plate.

Last week, MRK posted seven years of pricing information to its web site. The upshot, according to a Reuters article, is that, in every year after 2010, MRK’s price increases, over the entire drug portfolio, was more than 9%.

Some analysts also say they hope to hear more insight about the meeting between big pharma executives and President Trump on Tuesday. MRK Chief Executive Kenneth Frazier was at the table, and he told reporters afterward that he thought there was “real opportunity” to work on how to give patients better choices, and to help them to deal with their medical bills.

As for MRKs drug portfolio in Q4, some analysts say they will be looking for more information on how its cancer drug Keytruda, what many consider its key new revenue growth driver, has performed on patients. Keytruda, which is aimed at helping the immune system attack tumors, lists for about $150,000 per treatment, according to Reuters.

On Wall Street, analysts reporting to third parties have a Q4 consensus earnings estimate of $0.88 a share, down from $0.93 in the year-ago period, according to the Earnings Analysis tab on the thinkorswim® platform. Revenue is projected at $10.19 billion, slightly lower than the $10.21 billion reported a year ago.

The options market has priced in an expected share price move of just under 2% in either direction around the earnings release, according to the Market Maker Move indicator on the thinkorswim platform.

Calls have been active at the weekly 62 and 62.5 strikes while puts have been active at the 60.5 strike. The implied volatility is at the 27^th percentile. (Please remember past performance is no guarantee of future results.)

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation, to sell the underlying security at a predetermined price over a set period of time.