Chart 10: 2017 expense forecast now reflected in estimates; potential for favorable revisions ahead 15% 10% 65% 60% on | 4 50% i “a i L 45% 2015A: 51% [J ma ------4-. 2016A: 41% ol] 30% 2014A: 34% 25% 4013 1014 2014 3014 4014 1015 2Q15 3015 4015 1016 2016 3016 4Q16 m2014 2015 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. e 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 effort