Facebook Earnings: Expect a Bullish Revenue Decline

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Updated from 11:28 a.m. ET with year-over-year comps and Wednesday share prices

NEW YORK (TheStreet) - Facebook is expected to post a quarter-over-quarter drop in total advertising revenue as the growth rate of the company's costs per impressions (CPM's) decline. If slowing engagement and declining ad revenue sound worrying, bullish Facebook analysts seem to have found a way to rationalize it.

Facebook, according to multiple Wall Street analysts, may be in the process of a long-term change to its advertising business that could undermine first quarter results but provide a long-term benefit. Those expectations mean Facebook investors are likely to take quarter-over-quarter ad revenue declines as high as 10% and similarly large CPM declines with a grain of salt.

Since 2013, Facebook has been limiting its advertising load as it tries to show users it is the best online destination for online advertising budgets. That may damper first-quarter earnings results, while setting the stage for long-term revenue gains.

"We see Facebook's strategy to limit ad load (which management began emphasizing in 2Q13) to be a wise move in terms of user experience and believe that rising CPMs can continue to drive upside to consensus forecasts," Goldman Sachs analyst Heath Terry said in an earnings preview.

"Our field work continues to indicate a discernible shift in the way advertisers view the Facebook platform as the burden of proof has been removed and as more and more advertisers start to leverage their vast network," Terry added.

Uptake of Facebook news feed ads will drive CPM's up 88% this quarter versus last, while mobile CPM's may rise 200%, Goldman calculates.

Overall, the firm estimates Facebook will report first-quarter revenue of $2.34 billion and non-GAAP earnings per share of 23 cents. Consensus, according to Bloomberg data, is that Facebook will earn 24 cents in non-GAAP EPS this quarter.

Goldman forecasts total ad revenue of $2.11 billion, a 10% drop from the fourth quarter of 2013, as mobile ad revenue drops to $1.14 billion. The firm, however, said field checks highlight stronger mobile CPM trends then their estimates, suggesting some possible upside in the first and second quarters.

Year-over-year figures still point to strong growth at Facebook. Revenue is still expected to rise 70% from the first quarter of 2013. In the second-quarter, Goldman forecasts a sequential rise in ad revenue to $2.25 billion, indicating a 42% year-over-year rise. Goldman rates Facebook a "buy" with a $78 price target.

Pacific Crest analysts believe Facebook has entered a period of declining ad impressions, softer engagement and greater spending. While those forecasts sound unequivocally negative, Pacific Crest believes Facebook is solidifying its long-term position in the online ad market.

"Facebook's opportunity to use its consumer data to sell ads on other apps and sites diminishes the importance of users spending less time of Facebook. Instead, Facebook, barring any consumer backlash, becomes tied to the activity of its user base across the Web, which continues to grow," analysts at the firm said.