Facebook's Wild Growth Continues

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Despite Facebook's (NASDAQ: FB) better-than-expected fourth-quarter revenue and earnings-per-share growth, there were still challenges CEO Mark Zuckerberg turned investors' attention toward. Specifically, he said Facebook's recent efforts to prioritize meaningful connections over passive consumption of content reduced time spent on the platform.

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Nevertheless, the quarter featured extraordinary growth in revenue, active users, and profits, as well as an optimistic outlook for advertising revenue growth.

The raw numbers

Metric

Q4 2017

Q4 2016

Year-Over-Year Change

Revenue

$12.9 billion

$8.8 billion

47%

Adjusted earnings per share*

$2.21*

$1.21

83%

Monthly active users

2.13 billion

1.86 billion

14%

So much for a deceleration in Facebook's revenue growth in Q4. Fourth-quarter revenue surged 47% higher than a year ago. That was the same year-over-year revenue growth rate Facebook reported in its third quarter. The sharp increase was driven primarily by a 48% year-over-year boost to its advertising revenue.

Though operating costs increased 32% year over year, Facebook's outsize revenue growth meant that earnings per share, when excluding the impact of the 2017 Tax Cuts and Jobs Act on earnings, soared 83%. Including this $0.77 charge to Facebook's fourth-quarter earnings per share, EPS still climbed 19% year over year.

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Facebook's active user count marched higher, even as total time spent on the social network during the quarter decreased. Monthly active users were 2.13 billion, up 14% year over year and about 3% sequentially.

Fourth-quarter highlights

  • Zuckerberg said changes to its news feed led to a total of approximately 50 million fewer hours spent on Facebook every day.
  • Measured another way, time spent on Facebook decreased about 5% in Q4.
  • Similar to its growth in monthly active users, daily active users increased nicely, rising 14% year over year to 1.4 billion. On a sequential basis, daily active users were up about 2%.
  • But daily active users didn't increase in every market. In "some countries," Facebook saw a decline in daily active users after its changes to improve the quality of its news feed, management said in its fourth-quarter conference call.

Outlook

Even as time spent on Facebook decreased during the quarter, the social network still believes revenue growth in 2018 is going to be incredibly strong. Management said it expected its ad revenue growth rates during the year to "decelerate consistent with the trends we have seen over the past year" -- a notable forecast, considering quarterly year-over-year growth rates for advertising revenue decelerated only from 51% in the first quarter of 2017 to 48% in Q4.

Facebook CFO David Wehner explained the drivers behind the company's expectations for strong revenue growth:

We believe we have good opportunities to grow the business across both Facebook and Instagram in 2018. We continue to improve the effectiveness of our ads, which helps drive ROI [return on investment] for advertisers and demand for our ad products. On the supply side, we expect we will be able to continue to grow ad impressions at a modest pace.

Facebook's continued optimism for business growth even as recent changes reduce time spent on the platform reflect management's belief that time spent on Facebook after these changes will be more valuable.

Zuckerberg explained:

So I want to be clear: The most important driver of our business has never been time spent by itself. It's the quality of the conversations and connections. And that's why I believe this focus on meaningful social interactions is the right one.

But management still expects huge expense growth in 2018, driven by aggressive investments in security, video content, and long-term initiatives around augmented and virtual reality, artificial intelligence, and connectivity. Facebook expects 2018 expenses to rise 45% to 60% compared with 2017.

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Daniel Sparks owns shares of Facebook. The Motley Fool owns shares of and recommends Facebook. The Motley Fool has the following options: long March 2018 $200 calls on Facebook and long March 2018 $170 puts on Facebook. The Motley Fool has a disclosure policy.