Chart 10: 2017 expense forecast now reflected in estimates; potential for favorable revisions ahead
75%
70%
65%
60%
55% I
50% — 4 “a” i L
45% 2015A: 51% U
a es 4.
2016A: 41%
35% ---- - 30%
2014A: 34%
29% 4Q13 1014 2Q14 3014 4014 1Q15 2Q15 3015 4Q15 1016 2016 3016 4Q16
m2014 m2015 m2016 m2017
Source: Company, BofA Merrill Lynch Global Research
Key theme/metric(s) for 1Q
Underlying MAU and DAU trends are still the key metrics for the stock, in our view. We assume MAUs grow 16% y/y to 1.91bn and DAUs 16% to 1.26bn, keeping DAU/MAU at a steady 66%. It’s possible (but hard to predict) that management offers an update on Instagram users (600mn MAU, 400mn DAU in 4Q}, and more specifically, Instagram Stories (150mn DAU in January). On the messaging front, there could be a Messenger user update (1bn as of 7/16), while a WhatsApp update is less likely (1.2bn as of 4Q16). We expect ad impressions to grow 46% y/y (49% in 4Q) and ad prices to increase 2% y/y (3% in 4Q).
Biggest 1Q issues/risks:
¢ Expense trajectory or lack of an expense guidance change could disappoint: While we continue to anticipate favorable revisions to management’s 2017 expense forecast in 2H, near-term adjustments may be less likely given the velocity of new product launches and potential video content investments.
* 1Q ad revenue deceleration possible: We note that 4Q was particularly strong and it’s possible 1Q normalization could result in revenue growth deceleration.
¢ Lack of commentary on monetization strategy: While Messenger/WhatsApp monetization is likely still a 2018 story, lack of constructive commentary on timing could disappoint.
- User deceleration always a risk: MAU and DAU growth has surprised to the upside at mid-to-high teens y/y growth, and any meaningful slowdown could raise competitive concerns.
Top 1Q data point: Instagram reaches 1mn advertisers
Mid-quarter data points were somewhat limited in 1Q, though management did give an update on the Instagram monetization efforts. In a March 2017 update, management indicated that Instagram grew to 1mn advertisers, double the number since 9/16, with business profile pages up to 8mn from 5mn in 4Q. Facebook’s comparable metrics are 4mn advertisers (as of 9/16) and 65mn business pages (4Q16).
For early advertiser checks, general feedback suggested positive trends, but more ‘steady as it goes’ than absolute blow out. The stronger 4Q was highlighted as a tough
; ; BankofAmerica <2” 22 Internet/e-Commerce | 06 April 2017 Merrill Lynch
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