Facebook earnings preview: changes to ads, payments, gifts and other revenue streams in Q1

facebook logoFacebook plans to announce its 2013 first quarter earnings tomorrow after the stock market closes.

Analysts expect earnings of 13 cents per share on revenue of $1.44 billion during the period of Jan. 1 to March 31. In Q4 2012, which included the holiday season, Facebook had earnings of 17 cents per share on revenue of $1.585 billion.

Here we’ll review the changes Facebook made in the first quarter across each of its areas of monetization.

ads logoAds

Last year advertising made up 84 percent of Facebook’s overall revenue. In the first quarter of this year, the social network introduced new targeting capabilities and made a number of adjustments to the look and performance of its ads. The company also continued to ramp up the amount of ads in News Feed and on mobile, adding a three-in-one “Pages You May Like” unit and a new type of Page-Like ads to the mobile feed.

Partnerships with data vendors Datalogix, Epsilon, Acxiom and BlueKai opened up the opportunities for advertisers to reach new audiences based on third-party data, such as offline purchase behavior. This feature was in limited beta during Q1, but rolled out more widely as “partner categories” earlier this month.

Lookalike Audiences, which help advertisers target users similar to those in their Custom Audience databases, was another exciting new beta feature for advertisers last quarter. Facebook launched it globally in March.

A tool that was available for most advertisers throughout the quarter was conversion tracking. This allows advertisers to measure and optimize their ads leading off-Facebook. It’s particularly important to direct response advertisers and app developers.

Other improvements for DR advertisers were an increase in the size of link previews in News Feed and a redesign for mobile and desktop, which could make ads larger, more visual and even more effective. Facebook also launched a small test to introduce Facebook Exchange Ads in the desktop feed just before Q1 ended.

Tests of the “Promote Page” button, which rolled out globally today, might have started to have in impact on SMB advertising last quarter.

creditsGame Payments 

Developer fees from in-game purchases make up the vast majority of Facebook’s payments revenue. In Q4 2012, only $5 million of its $256 million in payments revenue was from sources besides games.

Facebook announced last quarter that more than 250 million people play games on Facebook each month. The company also said it has seen an increase in users who spend money in Facebook games monthly.

Facebook did a number of things in Q1 to optimize its channels for game discovery and promotion. It tweaked the recommendations bar on canvas games to increase installs 5x over the last several months, improve the bookmarks bar menu 17 percent, notifications 15 percent, and App Center 30 percent. The company also promoted games in a homepage banner earlier this year and started running new News Feed stories about the games a user’s friends play.

However, Zynga, which has made up a large portion of Facebook’s payments revenue in the past has seen drop-off in revenue as players shift to mobile. That could have an impact on Facebook as well, though the social network has been seeking to diversify its platform with international developers and a better range in game genres.

giftsGifts

Facebook says that it expects Gifts to continue to grow slowly, but believes it could be a big business over time. For now, the company is working to get the user experience right. It is for the most part limited to the U.S., though at the start of April, Facebook began letting international users buy gifts for their friends in the U.S. That happened after Q1 had ended so it wouldn’t have an effect on revenue.