Facebook projects 'more difficult' quarter as CEO spends

Facebook Inc. Chief Executive Officer Mark Zuckerberg has spent freely on long-term bets including virtual reality and connecting the world to the Web. Now those moves are set to face increased scrutiny.

Facebook yesterday projected fourth-quarter sales that fell short of the highest analysts' predictions and said spending would increase 50 percent to 70 percent next year as the company hires more and invests in newer products. The combination of slower revenue growth and higher costs triggered a selloff in the company's shares, with the stock falling more than 11 percent in extended trading.

Yet Zuckerberg yesterday dwelled little on revenue and expenses, instead focusing on opportunities for the social network that might not bear fruit for several years. On a conference call yesterday, the CEO discussed Facebook's $22 billion acquisition of mobile-messaging company WhatsApp Inc., as well as the purchase of virtual-reality goggles maker Oculus and the importance of getting more people onto the Web.

"For the next 10 years, our focus is on driving the fundamental changes in the world that we need to achieve our mission, connecting the whole world," Zuckerberg said on the call.

The message was jarring as Facebook forecast fourth-quarter revenue that will be 40 percent to 47 percent above that of a year earlier, indicating sales of $3.6 billion to $3.8 billion. That compares with analysts' average projection of $3.73 billion, according to data compiled by Bloomberg. The growth rate would be the slowest since the first quarter of 2013, when revenue rose 38 percent, according to Bloomberg data.

Making Adjustments

As Facebook's revenue growth decelerates and expenses rise, that "will likely force investors to adjust their near-term profit outlook," said Paul Sweeney, an analyst at Bloomberg Intelligence.

Facebook shares fell 8.3 percent to $74.04 at 7:27 a.m in New York before the start of regular trading. The stock closed at $80.77 in New York yesterday and has added 48 percent this year, pushing the company's market capitalization past $209 billion.

Facebook's results add to a spate of disappointing earnings from Internet companies. Google Inc. earlier this month posted a 20 percent sales increase for the third quarter, missing analysts' estimates, with the number of clicks on ads decelerating from the prior period. Twitter Inc. earlier this week reported sales that more than doubled, though user growth slowed, sending its shares down.

Brian Wieser, an analyst at Pivotal Research Group, said Facebook has to meet a high bar, with Wall Street anticipating that results will blow past estimates each quarter.

"To the extent that expectations are generally above- consensus figures, there wasn't a major surprise," he said.

Chief Financial Officer David Wehner said on a conference call yesterday that the Menlo Park, California-based company faces a tough comparison in the current period compared with a year earlier. That's because the social network rolled out ads in members' News Feeds on a large scale at the end of 2013, which helped spur results at the time. Costs are also set to go up as Facebook plans to spend more to hire people, expand internationally and work on newer products, he added.

"We're comparing against a really outstanding quarter last year," Wehner said on the call.

For the third quarter, Facebook reported sales of $3.2 billion, exceeding the $3.1 billion average estimate from analysts. Mobile promotions accounted for 66 percent of ad sales, up from 62 percent in the prior period and 59 percent in the first quarter, the company said in a statement yesterday. Profit excluding some items was $1.15 billion, or 43 cents a share, compared with the 40 cents that analysts projected.

Net income rose to $806 million, almost doubling from $425 million a year ago. Expenses totaled $1.8 billion for the third quarter, up about 41 percent from a year ago.

The company said its user base expanded to 1.35 billion members in the third quarter, up about 2.3 percent from 1.32 billion in the prior quarter and up 14 percent from a year earlier.

Advertisers are paying more for fewer Facebook ads. Higher- quality ads, including improved targeting and premium video advertising, led the company to more than triple prices for promotions compared with last year. Total ad impressions declined 56 percent, as the company got rid of some right-hand column ads, Wehner said.

Facebook expanded ad initiatives this year by opening up its network of advertisers to software developers who can now run Facebook ads on their apps. The company also acquired LiveRail Inc., which will help it serve video ad across the Web.

WhatsApp Rewards

Facebook also filed a financial statement yesterday saying WhatsApp generated $10.2 million in revenue in 2013 and an operating loss of $138.5 million. Facebook plans to register to resell the approximately 178 million shares used in the deal. They'll hit the market within the next couple quarters, Wehner said.

Facebook is projected to take 8 percent of the $140.7 billion global ad market this year, up from 5.8 percent last year, according to EMarketer. Its share of the mobile ad market could reach 20 percent, up from 17 percent last year, the research firm said.

"It's becoming much more ambitious in offering digital services far beyond what the company was initially created to do as a social network," said Debra Aho Williamson, an EMarketer analyst.

To contact the reporter on this story: Sarah Frier in San Francisco at sfrier1bloomberg.net To contact the editors responsible for this story: Pui-Wing Tam at ptam13bloomberg.net Reed Stevenson