Facebook projects greater costs, slowdown in ad sales

Bloomberg

Facebook Inc. reported a quarter that blew past expectations. But its shares fell after executives suggested they won’t be able to repeat the performance.
The stock dropped as much as 7.1 percent on Thursday in premarket trading after two sobering comments on its conference call the night before. First, Chief Financial Officer David Wehner said revenue growth rates will come down “meaningfully” next year, because the company won’t keep increasing the percentage of ads that Facebook users see in their news feed. Second, capital expenditures will rise “substantially” in 2017 as the social network works to build data centers and recruit the best engineers, he said.
“As we slow ad load growth, we’re going to have a slowing of revenue as well,” Wehner said. “it’s been one of the key factors in terms of driving growth.”
Menlo Park, California-based Facebook reported third-quarter sales grew 56 percent to $7.01 billion, topping analysts’ average estimate of $6.92 billion. It was the fourth straight quarter of more than 50 percent revenue growth. Facebook generated 84 percent of its advertising sales from mobile phones, unchanged from the prior quarter.
Advertising provides more than 97 percent of the social network’s revenue. As the company spends money on new areas like virtual reality and mobile messaging that may not generate revenue for years, its performance is tied to its main advertising business, particularly on mobile phones. Facebook and Alphabet Inc.’s Google, have driven the growth in digital advertising spending, together capturing 68 percent of that revenue in the first half of this year, according to the Interactive Advertising Bureau, a nonprofit industry group.
Facebook will begin limiting its ad load — the number of ads it allows per the number of news feed stories — to keep from turning away users, who come to the site to see updates from their friends and family, not ads, Wehner said on the call. The comments help push shares to a low of $118.16 in early trading Thursday after closing at $127.17 in New York. Facebook’s stock gained 22 percent this year through Wednesday.

GAIN IN USERS
In the third quarter, Facebook increased its monthly active users 4.7 percent from the previous quarter to 1.79 billion, topping analysts’ estimates of 1.76 billion. Daily users rose to 1.18 billion.
Facebook expanded its mobile ads business to Instagram, its photo-sharing application, which has started to contribute to the growth. While the company doesn’t break out sales, Instagram’s advertising revenue is rising faster than for Facebook’s main product, Wehner said in an interview. Still, Facebook’s main app was the bigger contributor to the sales increase, he said.
Even if Facebook’s sales gains start to slow by the middle of next year, Chief Executive Officer Mark Zuckerberg has plenty of other levers he can pull to make money. In addition to Instagram, the company has two chat apps, Messenger and WhatsApp, with more than 1 billion users each. Facebook is testing models for revenue from the properties, such as letting users talk to businesses to book trips or send flowers.
Meanwhile, Zuckerberg is changing the nature of the Facebook app to focus more on video. “In most social apps today, a text box is still the default way we share,” Zuckerberg said. “Soon, we believe a camera will be the main way that we share.”
The Facebook app is being updated to have camera-first sharing — something that a smaller competitor, Snapchat, pioneered.