Facebook sales surge overshadowed by concerns of future

SAN FRANCISCO — Facebook CEO Mark Zuckerberg called it "another good quarter."

You can say that again.

Fueled by the might of its mobile advertising business, Facebook crushed Wall Street expectations, topping analyst expectations for earnings and revenue for the sixth straight quarter.

But Facebook shares plunged 7% to $118.75 after hours as the company warned that advertising revenue growth could slow "meaningfully" in mid-2017 as it reduces its "ad load," the number of ads it shows in a user's News Feed. Increasing the ad load has been one of three major drivers of Facebook growth along with user growth and increased time spent on the social-media service. Facebook also said it expected 2017 will be an "aggressive" investment year in which capital expenditures increase "substantially."

"Facebook is signaling that one of the major drivers of growth is going to slow significantly. It’s only one driver of growth —  user growth continues to be strong, and so does engagement growth. But the implication is that ad revenue growth will be slower going forward, and ads are over 95% of revenues today," said Jan Dawson, chief analyst with Jackdaw Research.

Net income tripled to $2.38 billion from $896 million a year earlier. Excluding certain expenses, Facebook reported earnings per share of $1.09, up from 57 cents a year earlier. Analysts had expected a profit of 97 cents.

Revenue rose 56% to $7.01 billion in the third quarter, beating estimates of $6.9 billion. Facebook has increased sales by more than 50% the past four quarters.

Facebook, a digital advertising juggernaut that trails only Google, "just has so much momentum," said eMarketer analyst Debra Aho Williamson.

"Increasingly these two companies are the ones that are controlling digital advertising and, not only that, they are becoming major players in all of advertising," Williamson said.

Mobile advertising revenue represented about 84% of total advertising revenue in the quarter, unchanged from the second quarter. Until the third quarter, the percentage of Facebook ad revenue that comes from mobile had increased every quarter since the company began reporting the figure in 2012.

"Facebook has played a huge role in making mobile advertising what it is today and pushing advertisers to think mobile when comes to advertising strategies," Williamson said.

Perhaps most impressive, said Wedbush Securities analyst Michael Pachter, was sequential revenue growth of $606 million, or just slightly less than Twitter’s overall third-quarter revenue.

In other words, "they grew by a Twitter," Pachter said. "Amazing company."

Enthusiasm was reined in by comments from Facebook's chief financial officer David Wehner during a conference call with analysts on Wednesday.

"We expect revenue growth rates will decline as we lap strong quarters," Wehner told analysts.

Facebook also plans to hire aggressively and invest in data centers in 2017, even as Facebook reaches a limit in how many ads it can show users.

"Adding top engineering talent remains one of our key investment priorities as we continue to execute on our three, five and 10 year roadmaps," Wehner said. "In addition, we expect to grow capital expenditures substantially."

But, Wehner said, Facebook has other levers it can pull to grow revenue.

"We continue to see good opportunities to grow time spent. We see good opportunities to grow users. We continue to see good opportunities to grow advertiser demand," he said.

The social-media giant reported third-quarter earnings on Wednesday after the markets closed. Facebook shares closed down 2% to $127.17 in regular trading.

The number of people who log into Facebook at least once a month increased 16% year over year to 1.79 billion. Over the past year, Facebook has added 243 million monthly active users, nearly the size of all of Twitter, which has 317 million people who use the social-media service at least once a month. Facebook's monthly active users on mobile devices rose to 1.66 billion, a 20% increase year over year.


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