Facebook, Inc. Management Talks Video, Security, and Ad Pricing

Published November 02, 2017
Motley Fool

Facebook's (NASDAQ: FB) third-quarter results blew past estimates. Revenue surged as Facebook benefited from strong growth in ad pricing. But during the earnings call, management also turned investors' attention to its expectations for a steep increase in expenses next year.

Here are three topics from Facebook's earnings call that capture the company's strong revenue growth and explain why management anticipates much-higher spending in 2018.

Why video is key

Facebook has been bullish on video for some time. But management was particularly excited about video in the company's third-quarter earnings call.

"Video is exploding, and mobile video advertising is a big opportunity," said Facebook COO Sheryl Sandberg.

Facebook CEO Mark Zuckerberg was similarly optimistic about video: "Over the next three years, the biggest trend in our products will be the growth of video. This goes both for sharing, where we've seen Stories in Instagram and Status in WhatsApp grow very quickly, each with more than 300 million daily actives, and also for consuming video content."

Zuckerberg said Facebook's recently launched Watch tab is an example of how it is capitalizing on this opportunity. Indeed, Facebook said a planned surge in investments in video content to help support the Watch tab is one of the main reasons for its forecast for a 45% to 60% year-over-year increase in operating expenses in 2018.

Facebook is taking security seriously

Zuckerberg was vehement about how disappointed he was that Russian entities used Facebook ads to try to influence Americans during the presidential campaign. But he was just as heated about Facebook's steadfastness to prevent this sort of manipulation in the future.

I've expressed how upset I am that the Russians tried to use our tools to sow mistrust. We build these tools to help people connect and bring us closer together. And they used them to try to undermine our values. What they did is wrong and we're not going to stand for it.

Now, for those who have followed Facebook, you know that when we set our minds to something, we're going to do it. It may be harder than we realize upfront, it may take longer, and we won't be perfect, but we will get it done. We're bringing the same intensity to these security issues that we've brought to any adversary or challenge that we've faced.

Alongside video and long-term initiatives in augmented and virtual reality, artificial intelligence, and connectivity, Facebook said "sizable security investments in people and technology to strengthen our systems and prevent abuse" would represent one of the company's major drivers of expense growth in 2018.

The growing importance of ad pricing

Despite repeated warnings that revenue growth would decelerate meaningfully in the second half of the year as growth in ad load slowed, Facebook's third-quarter year-over-year ad revenue growth actually accelerated, rising from 47% in Q2 to 49% in Q3. Another catalyst during the quarter more than made up for slow growth in ad load: Ad prices increased 35% year over year.

"I would note that, compared to a year ago, price is a much more important driver of our ads revenue growth," Facebook CFO David Wehner said. Wehner went on to note that he expects advertising revenue to "increasingly be driven by price" in the future. "This is a shift from prior years when growth was primarily driven by increases in supply," he said.

In some ways, Facebook's earnings call highlighted a bittersweet situation. While Facebook's business is growing faster than expected, with the help of significantly higher ad prices, management is planning for an enormous increase in spending next year.

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Daniel Sparks owns shares of Facebook. The Motley Fool owns shares of and recommends Facebook. The Motley Fool has a disclosure policy.