Facebook Already Warned You It Would Be Spending Big This Year

By Markets Fool.com

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Image source: Facebook

Despite the fact that social network Facebook reported a solid earnings release this week, shares still fell.

Monthly active users have now grown to 1.5 billion; mobile usage and overall engagement is on the rise by just about any metric. Revenue was up 39% to just over $4 billion, and mobile represented a wholehearted 76% of advertising revenue. Adjusted net income was $1.4 billion, or $0.50 per share. Facebook beat consensus estimates on both the top and bottom lines.

The main reason why investors weren't happier with the results were that costs continued to soar: total costs and expenses skyrocketed by 82% to $2.8 billion. That jump is largely why operating income was down modestly despite the increase in sales. The problem with that particular rationale is that Facebook already warned investors that 2015 would be a year of investment, so this should hardly be a surprise to anyone.

Told you so
On the conference call, CFO David Wehner said that full-year 2015 expenses are expected to increase by 55% to 60% compared to full-year 2014 expenses. That's actually an improvement, as Facebook has now narrowed this guidance range a couple of times now. For reference, total costs and expenses in 2014 were $7.5 billion.

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Date Provided

2015 GAAP Expense Guidance

October 2014

Increase 55% to 75%

January 2015

Increase 55% to 70%

April 2015

Increase 55% to 65%

July 2015

Increase 55% to 60%

Source: conference calls

As you can see, Facebook has steadily brought down the high end of its expense guidance over the past several earnings releases, as it gets a better feel for what the total bill for 2015 will be. Investors should be happy about these improvements, even if the low end of expense guidance hasn't changed. Facebook has shaved a cool $1 billion off its potential 2015 spending by narrowing this range, and total costs and expenses this year should now be in the range of $11.6 billion to $12 billion.

Money well spent
I've said it before and I'll say it again, but investors shouldn't be overly concerned with Facebook's soaring costs. The social network is still very much in growth mode, and it needs to invest in that growth. The company has advised investors to categorize its spending in three general categories: people, product, and infrastructure.

Not only does people continue to grow it headcount (Facebook now has nearly 11,000 employees, up 52% from a year ago), particularly in R&D, it's aggressively building out the infrastructure necessary to deliver a seamless social networking experience for its 1.5 billion Facebookers. Facebook just announced its fifth data center, a massive wind-powered data center in Texas. Capital expenditures this year are also turning out lower than previously anticipated, now forecast at $2.5 billion to $3 billion (down from the prior range of $2.7 billion to $3.2 billion).

With products, Messenger also continues to grow, and now boasts over 700 million monthly active users. Facebook clearly has ambitions of making Messenger into a vibrant platform with a variety of features. The last thing that Facebook investors should want is for the company's products to fall flat, which is exactly what's happening over at Twitter. No pain, no gain.

Spoiler alert
For all of these reasons, the share weakness and concerns around Facebook's rising costs are unwarranted. The company gave investors plenty of visibility and has spent several quarters setting expectations, yet the market was still somehow caught off guard when said expenses are coming in better than expected. And spoiler alert: The spending isn't stopping anytime soon. For the latter half of the year, Facebook is prepared to spend another $6.2 billion to $6.6 billion.

Besides, solar-powered Internet delivery drones made out of carbon fiber don't come cheap.

The article Facebook Already Warned You It Would Be Spending Big This Year originally appeared on Fool.com.

Evan Niu, CFA owns shares of Facebook. The Motley Fool recommends Facebook and Twitter. The Motley Fool owns shares of Facebook and Twitter. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.