Facebook's Super Tuesday Hinges on Mobile Transition

NEW YORK (TheStreet) -- As Facebook (FB) prepares to report earnings after the market closes on Tuesday, investors will be looking for signs the social network is making progress on efforts to monetize its billion-member-plus user base and that it has a strategy to transition users and advertisers to mobile devices.

In fact, Facebook's earnings may be more about whether trends in the social network's usage and revenue generation improve its earnings outlook over whether the Mark Zuckerberg-run company meets Wall Street estimates for the quarter. The company's quarterly results also come just days after Google's (GOOG) weaker-than-forecast earnings indicate the company is struggling to shift its search results mobile.

Analysts polled by Thomson Reuters expect Facebook to earn 11 cents a share on sales of $1.2 billion in the third quarter, and few have made big changes to the company's earnings outlook headed into the quarter.

While some are bracing for Zuckerberg & Co. to beat consensus, the real question that may drive shares is whether revenue and usage trends are on the upswing after the company's earnings debut failed to impress. Key to Facebook's outlook will be progress on its mobile revenue as desktop ad sales are expected to drop.

Evan Wilson of Pacific Crest Securities said he sees reason to be cautious as decelerating usage trends on the social network may outweigh what could be an earnings beat on revenue and estimates on earnings per share.

"We continue to see risk to Facebook in the near term, but are not as concerned about headline revenue and EPS relative to Street estimates. We believe Face- book's increasingly aggressive monetization tactics should reaccelerate revenue the way the market is expecting," wrote Wilson in a research report outlining earnings estimates. "Facebook has been aggressive on monetization, but we still think it is in search of the original promise of social advertising," the analyst added.

Of particular interest will be whether non-social ads that Facebook is now selling into desktop user's news feeds will generate meaningful revenue, and whether the notion of social ads based on "likes" and comments begin to bear fruit. On the downside, user time and visits to the social network may continue to fall as consumers shift from desktops to mobile devices.

"With the focus on monetization, we think this could be a negative surprise that would make the revenue acceleration look to be lower quality," wrote Wilson of the prospect daily average user numbers could fall.

Like many businesses undergoing rapid growth and transformation, Facebook's earnings appear to hinge on whether the company's overall earnings prospects improve as users shift from desktops to mobile devices.

Justin Post of Bank of America Merrill Lynch said he sees Facebook beating third- quarter earnings estimates but said the key will be whether the direction of overall ad revenue is accelerating or decelerating. The key for Facebook will be whether surging mobile revenue growth rates are enough to offset an expected decline in desktop usage and revenue.

Post is optimistic Facebook can deliver on a mobile transformation that will bolster the company's 2013 earnings outlook.

"We estimate that mobile revenues could reach $90mn in Q3, up from roughly $25mn in 2Q, although PC revenues could be down q/q (some revenue cannibalization)," writes the analyst in an earnings primer.

Still there's reason tor investors to temper optimism because of the execution risks in Facebook's shift to mobile.

"Facebook is in the midst of a mobile usage transition and we are cautious on Facebook's near-term revenue trends until new mobile ad revenue models start driving the top line," noted Post.

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