Facebook (NASDAQ: FB) reported third-quarter earnings last night, and despite the ongoing scandal surrounding Russian political ads, ad revenue soared 49%, to $10.1 billion. Net income skyrocketed by 79%, to $4.7 billion, or $1.59 per share. Monthly active users (MAUs) now stand at 2.07 billion, including 1.37 billion daily active users (DAUs). Mobile continues to drive the business, comprising 88% of all ad revenue during the quarter.
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Shares are down modestly today, though, likely due to the company's expense outlook for next year.
Operating expenses and capital expenditures will soar next year
On the earnings call, CFO David Wehner said that full-year 2018 operating expenses are expected to rise by 45% to 60%. There are three primary factors that will drive that operating expense growth:
First, as Mark outlined in his earlier comments, we are making sizable security investments in people and technology to strengthen our systems and prevent abuse. Secondly, we are investing aggressively in video content to support the Watch tab. Finally, we continue to invest in our long-term initiatives around augmented and virtual reality, AI and connectivity.
For context, here are CEO Mark Zuckerberg's prepared remarks that Wehner is referring to:
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We're doing a lot here with investment both in people and technology. Some of this is focused on finding bad actors and bad behavior. Some is focused on removing false news, hate speech, bullying and other problematic content that we don't want in our community. We already have about 10,000 people working on safety and security, and we're planning to double that to 20,000 in the next year to better enforce our community standards and review ads.
Meanwhile, revenue growth continues to decelerate, in part due to a larger revenue base that Facebook is working with. The combined effect is expected to be "net negative" for operating margins.
Additionally, capital expenditures are forecast to "roughly double" from 2017 levels as the company continues to invest in infrastructure. Capital expenditures for 2017 should be about $7 billion, so we're talking about approximately $14 billion in capital spending next year. That's a lot.
Stop me if you've heard this one before
Here's the thing: This isn't the first time that investors have freaked out about Facebook's expense outlook. There were similar episodes in 2014 and 2016. In each of those instances, shares dipped on expense guidance only to subsequently recover once those investments continued to fuel top-line growth. Wehner even used the exact same language, saying 2018 looks like it will be a "significant investment year."
It's worth noting that Facebook often overestimates expense growth, and has consistently come in below its forecasts. For example, 2017 operating expenses are now expected to grow 35% to 40%, much better than the prior forecast of 40% to 45% growth. The same is true for 2015 and 2016. It's a real possibility that 2018 operating expense growth comes in near the low end of guidance, or better.
If there's one thing that Facebook has proven over the years, it's that it can execute, and that its aggressive growth investments are well worth the money.
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