Russian Ads Overshadow Facebook's Otherwise Fabulous Quarter

After last quarter's blowout performance, Facebook, Inc.'s (NASDAQ: FB) third-quarter financial release came against the backdrop of company executives' testimony in Congressional hearings about Russian-bought political ads during the U.S. election. The controversy didn't seem to have any impact on current results, but the company announced plans to increase its safety and security spending to address this and other issues, which will affect coming quarters.

For the just completed quarter, Facebook produced revenue of $10.33 billion, a 47% year-over-year increase, and exceeding analysts' consensus estimates of $9.8 billion. This was the first time the company exceeded $10 billion in revenue in a quarter. Net income grew a whopping 79% over the prior-year quarter, producing diluted earnings per share of $1.59, up 77% year over year and eclipsing the $1.28 analysts expected.

Mobile advertising revenue grew to $8.9 billion, up 57% year over year, and now represents 88% of the total, up from 84% in the prior-year period. The average price per ad was up 35%, while ad impressions grew 10% over the prior-year quarter. Average revenue per user worldwide grew to $5.07, up 26% over the same quarter last year.

If you build it, they will come

The number of monthly active users on the social-media site hit 2.07 billion, a 16% increase over the prior-year quarter, while daily visitors to the platform jumped to 1.37 billion, also up 16% year over year. Instagram hit a milestone during the quarter, passing 500 million daily active users. Stories on Instagram and Status on WhatsApp have each seen users exceed 300 million each day.

Facebook also revealed that in less than a year since it launched Workplace, more than 30,000 companies are using its internal business communication tool, which recently included Wal-Mart, the largest employer in the United States.

Next year will see significant investments

Facebook executives outlined several areas where they will be spending aggressively in the coming year.

The biggest revelation was that Facebook would double the ranks of its safety and security staff to 20,000 over the coming year. In a prepared statement, CEO Mark Zuckerberg said: "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."

Facebook also plans to spend heavily on video content for its recently launched Watch feature, which the company describes as "a new platform for shows on Facebook." Sheryl Sandberg, the company's chief operating officer, pointed out that "video is exploding, and mobile video advertising is a big opportunity."

The company will also continue to invest in the long term opportunities it sees in the areas of augmented reality, virtual reality, artificial intelligence, and connectivity.

Facebook believes 2018 full-year expenses will grow between 45% and 60% and that these significant investments combined with decelerating growth rates will put pressure on operating margins.

Continued focus on AI

Facebook continues to see significant benefits in the realm of artificial intelligence and announced it was building a new AI system designed to "detect bad content and bad actors -- just like we've done with terrorist propaganda." The company opened a new AI lab in Montreal during the quarter and is building one in Paris as well.

During the third quarter, Facebook introduced new machine learning tools designed to help advertisers better connect with the right consumer. Early results seemed promising.

The big story was "foreign interference"

The hottest topic on the call was that of the Russian-bought political ads. Zuckerberg was animated when addressing the topic. The emphasis is mine:

A recurring theme on the call was securing the platform and ensuring that the ads that users see are authentic, and Facebook said it is taking steps to ensure transparency. The company is working with Congress on new legislation for online political advertisements and developing tools internally to help users track political ads.

What's ahead for Facebook

Based on much of the information Facebook executives provided, investors will need to adjust their expectations because of decelerating growth and increased spending. It may not happen in the next quarter, or even the one after that, but slower growth and slimmer margins will soon be the new normal for Facebook.

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Danny Vena owns shares of Facebook. The Motley Fool owns shares of and recommends Facebook. The Motley Fool has a disclosure policy.