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.
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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.
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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