Facebook Tanks After Management Spooks Investors With Weak Guidance

Mark Zuckerberg suitAlex Wong/ Getty StaffOn Tuesday, Facebook CEO Mark Zuckerberg told investors that 2015 would be a major investment year for the company.

Facebook reported solid third-quarter earnings, but the stock fell after it gave poor 2015 guidance during a call.

The stock is down 10% after hours.

While revenue and EPS were better than expected, Facebook’s new CFO, David Wehner, and CEO Mark Zuckerberg both warned that 2015 will be a major “investment” year for the company.

As a result, Wehner said Facebook’s expenses could grow between 50% and 70% next year. Facebook plans to increase headcount and invest in advertising technology.

Facebook revenue was $US3.2 billion this quarter, nudging past Wall Street’s expectation of $US3.12 billion. Its advertising revenue was $US2.96 billion, a 64% increase from the same quarter one year ago. The rest of it — $US264 million came from payments, which is a 13% increase from the same quarter last year.

EPS is $US0.43 versus an expected $US0.40.

Other than that, Facebook fell exactly in line with expectations. Its monthly active users were 1.35 billion, a 14% increase. Mobile monthly active users were 1.12 billion and daily active users were 864 million.

Facebook’s mobile advertising revenue continues to grow.This quarter, mobile ad revenue was up to 66% of the company’s total revenue. Last quarter it was61%.

WhatsApp’s numbers are also out. WhatsApp is the $US22 billion chat application Facebook recently acquired. It lost $US140 million last year and generated only $US10 million in revenue. However, WhatsApp has 600 million monthly active users. No new monthly user metrics for Instagram were announced, although Zuckerberg says the average global user is spending 21 minutes per day on the photo-sharing app.

Zuckerberg also detailed his three-, five-, and 10-year plans for Facebook and stressed that the company is long-term focused.

In the short term, Facebook’s goal is to continue growing and serving its communities and businesses, and helping them reach full potential. That means Facebook will focus on growing things like Newsfeed, WhatsApp, and Instagram until they each connect at least 1 billion users.

Zuckerberg said his first priority was helping those offshoots of Facebook reach mass scale, then aggressively monetizing them. Sandberg reiterated that Facebook would be slow to monetise video placements and Instagram.

Facebook’s three-year plan also includes making improvements for advertisers. Facebook is particularly focused on helping brands better target users and measure campaigns more effectively.

Over the next five years, Facebook expects its popular Instagram, Search, and WhatsApp offshoots to reach 1 billion connected users. It also wants to become a developer-friendly platform that helps promote and monetise various apps across multiple devices.

Within 10 years, Facebook will strive to help build the next-generation computing platform, which Zuckerberg believes could be Oculus and augmented reality. Facebook acquired the virtual-reality headset company for more than $US1 billion.

Internet.org is also part of Zuckerberg’s 10-year plan. He says efforts like this are driving fundamental changes in the world that Facebook needs to achieve its overall massive-connection mission.

“We’re going to prepare for the future by investing aggressively,” Zuckerberg said.

“The strength of the business today is putting us in a strong position to invest in the future,” Wehner added.

Here’s a summary of the earnings call:

Facebook’s VP of Investor relations kicked off the call. Now Zuckerberg is giving an update: “These results show Facebook is getting stronger every day. While we’re investing aggressively, we continue to execute well against near-term priorities.”

Zuckerberg: Over the next three years, we want to continue to serve existing businesses and help them reach full potential. 864 million people use Facebook everyday.

Around 700 million people now use Facebook Groups every month. This quarter, there are more than 1 billion interactions between public figures and fans on Facebook. This quarter, we achieved 1 billion native video views. More than 10 billion ice bucket challenge views on Facebook.

Instagram has also made a lot of progress. It launched Hyperlapse. Globally people spend 21 minutes per day on Instagram.

Zuckerberg: We’ve made big advances in ad tech. We’re excited about future of Atlas, which Sheryl will talk more about

Over next 5 years, we’ll take WhatsApp, Instagram, Search and make them big businesses in own right. We’re focused on messaging. This quarter we made a change by transitioning people to Messenger on their phones. Our data shows people who use Messenger respond 20% faster.

We completed our acquisition of WhatsApp and the CEO is joining our board.

Another key effort of our strategy is helping developers on our platform build grow and monetize their apps.

Zuckerberg: For next 10 years we want to drive fundamental changes in the world and develop the next generation of platforms in computing. This is a very busy time for Internet.org.

Zuckerberg: Over the last few months I’ve traveled to several countries and met with people who are coming online for the first time. 

Finally, our progress with Oculus. Ever 10-15 years, a new computing platform arrives and we think augmented reality is an important part.

We had the first Oculus developer platform. We continue to see a lot of excitement, and we’ve shipped more than 100,000 (?) deveper kits.

Our efforts here will take longer to make an impact.

Zuckerberg: We have a long journey ahead, and we’re on the right path.

Here’s Sheryl.

Sandberg: I’d like to highlight progress on product front. One of our main ad product goals is to make ads more relevant. 

Sandberg: Facebook’s age and gender advertising is much more more accurate than the average. 

We also offer look-alike audiences to find potential new customers who are similar to current customers. Uses MetLife as an example.

Sandberg: We’re making steady progress with new ad initiatives. We’re implementing auto-play for ads.

We’re going to remain deliberate and slow with Instagram ads.

In Q3 we closed LiveRail acquisition. Here’s our longer ad tech strategy because consumers are shifting to mobile and ad industry isn’t keeping up.

Sandberg: Advertisers only spend 11% of budgets on mobile. One of the main reason budgets aren’t moving as fast as consumers is they don’t have a way to serve and measure the ads as well.

Today people have multiple devices and make purchases in physical stores. Data is less accurate; 4 in 10 people are seeing the wrong ad.

There’s a disproportionate value given to the last ad clicked on.

Sandberg: By using Facebook data, Atlas can offer relevant ads. Importantly, Atlas does this in a privacy protected way. Neither Atlas nor Facebook tells marketers who you are.

Sandberg: The ad tech investment payouts will take time, but they’re important for Facebook’s long-term growth.

In 2015, we’ll capitalize on shift to mobile and build products that make ads more relevant. Investments in ad tech will be an increasingly important part in these efforts.

Here’s our CFO Dave.

Dave: Desktop ad revenue was up 11% from last year but flat sequentially. Total ad impressions declined 56%. The redesign of our right column ads had higher effective prices. They were fewer in number which led to a decrease in impressions.

Wehner: Payments volume from games declined 2% from last year. We expect that to decrease as desktop use declines.

We added 1200 people to Facebook largely due to acquisitions. Overall we’re please with our ability to attract people.

Wehner: Turning to outlook. This will include WhatsApp and Oculus.

In light of our recent acquisitions, we are providing additional guidance this quarter including current quarter revenue and 2015 expenses. 

2014 expenses: We expect full-year total GAP expenses including stock compensation, will grow 45% to 50% versus full-year 2013. This increase is primarily due to WhatsApp compensation based stock.

Wehner: We expect total revenue in Q4 will grow 40% to 47% from last year.

Wehner: Our expense outlook for 2015. We believe we have substantial growth opportunities in front of us. We plan on 2015 being a significant investment year.

Likely for costs to increase 55%+.

The line is open for questions.

JP Morgan: This question’s for Dave Wehner. Explain 50-70% non-GAP expenses in 2015. Also Sheryl, please talk about branded advertising, is there an inflection there as big auto brands come on board?

Wehner: We’re investing in long-term growth opportunities. Also growing talent base of company and investing in product side to invest in new areas like Oculus, ad tech initiatives and WhatsApp. We plan to support growth of core business, like video and Internet.org, so we’re investing across the board on that. In summary, the strength of the business today is putting us in a strong position to invest for future.

Sandberg: We think we’re the first tech platform to offer storytelling at scale. Our clients are in different parts of the adoption curve. We know we need to go client by client and we’re focused on measurement. A lot of products brands are measuring are bought in stores, so showing how online ads candrive that is important.

Q4 is a really important time for our clients, and thus for us. 65% of people use phones while out shopping and people are recognizing that opportunity.

Next question: How have plans for Oculus evolved? And on search, it’s in your five year plan, so should we not expect anything immediately?

Wehner: We’re not giving 2015 revenue guidance.

Zuckerberg: On Oculus, the strategy is to help accelerate their growth. They have these two products, Gear VR and Rift. I’m really excited about both of them. It needs to reach a very large scale, 50-100 million units to be a big comuting platform. It will take years to get there. Not just a few years. When you get to that scale that’s when it gets interesting in building out an ecosystem.

Search and other products, products dont’ really get that interesting until they have about a billion people using them. We’re there with NewsFeed. So we’re focused on continuing to grow and serve that community. Over a 5-year time frame, we think we have a number of services well on their way to getting there, from WhatsApp to Instagram to search. Then they’ll become meaningful businesses in their own right. We won’t try to monetize them very aggressively in the next year or two. The strategy is to connect a billion+ people before aggressively turning them into businesses.

We have a line of businesses on track to reach 1 billion people.

Question for Sheryl: What percent of attribution is given to last click and how overstated is that? And Dave, 50-70% expense range, how should we think about low end versus high end?

Sandberg: We think measurement systems don’t work on mobile. They’re only 59% accurate, we think. They don’t go offline to online. They work for one person with one device that makes online purchases. People look at ads online and purchase offline, and they deserve more relevant ads. We’re looking to solve all of these problems.

Wehner: Guidance is an early view to 2015 so it’s a wide range. It’s the best view we have on it right now. The big drivers will be pace of hiring.

Question for UBS: Sheryl, with ad tech acquisitions, what sort of returns will it give for Facebook.

Zuckerberg: Public content — historically people use Facebook to share moments in their life. NewsFeed is the primary thing people are using. We think public content is a big opportunity. People want to share it. Video is a very big priority. News is a very  big priority.

Those are the areas you’ll probably see us investing the most in. We’re very proud of what we’re doing.

Sandberg: On ad tech, we’re in the middle of a very fundamental shift from cookie-based desktop ads to marketing on multiple devices that affect both online and offline purchases. We have a lot of piece to do. 

Question: Mark, what about payments in youe 3, 5 and 10 year plan? And how do you see social interactions tied in with payments. And Dave, high-end of Q4 revenue guidance is a sharp dropoff

Zuckerberg: Payments is important part of the online ecosystem. It’s very important for all online businesses that there’s a good online payment system. If the system is smooth, people will buy more things which makes ads and online flow more valuable. 

We view the ads part of the business as more efficient than payments themselves. Ads are auction models versus payments which are fixed. We’re excited about partnering with credit card companies and PayPal to make their solutions as good as possible.

Next question is for Sheryl: You talked about being slow to monetize Instagram and video ads. Any user pushback? Why are you cautious?

Sandberg: We’re please with the consumer response on both fronts. We remain really optimistic about both video and Instagram. 

We really believe in going slow. As we grow products we pay attention to the consumer experience and we always want the consumer experience to go first.

We are seeing people using both Facebook and Instagram and other ad products in combination. Mercedes launched on both Facebook and Instagram, and by doing it together they got a 54% increase in website visits.

Next question is from Citi: On guidance for next year.

Wehner: You saw good headcount growth this quarter. We’re going to continue to invest in long-term growth.

Next question is about video. How should we think about it as a video platform? What’s the mix between user-generated, professional etc? Also, please give an update on Instagram user comp.

Zuckerberg: It’s going to be all of the above. Most content on Facebook is stuff people are sharing with friends and we’ll continue to see that in video. Over the last few years there was a trend where most of content was text. Now it’s photos. As networks get better at capturing quality videos, I think a lot of the content people share will be video.

I think we’re going to see an evolution over the next few years.

Wehner: Instagram MAUs, we haven’t announced a new public number.

Next question is about Facebook’s portfolio approach to mobile apps. As people use WhatsApp and Instagram is it hurting Facebook’s metrics to launch apps?

Zuckerberg: One thing that’s happening on mobile is there’s an increase focus for apps to do one thing really well. On desktop, things that would have fit well into a single Facebook website. Now you have to build standalone different apps. We’re seeing that in Messenger as a better standalone experience. We’ll also do more with Creative Labs.

The use case for products like Instagram and WhatsApp is more different and nuanced than the products people compare them to. Messenger is primarily used for peopel to chat with Facebook friends. Maybe it’s not a real-time SMS, but it’s something you’re sending to a Facebook friends and maybe they’ll respond later.

WhatsApp is more for real-time activity. The social graphs between it and Facebook are somewhat different. WhatsApp and Messenger were growing quickly in the same countries. Same with Instagram and type of sharing that happens there versus NewsFeed.

We started doing more to promote Instagram from the Facebook app itself. 

We’re definitely seeing that this is al lpositive and that in the future there will be more room for sharing apps as well. 

Next question: Where do you see Facebook’s place in the hardware ecosystem? Could you get more aggressive in devices and hardware?

Sandberg: Data is really important for both measurement and targeting. A lot of our largest agencies and clients build their own data for measuring. We’re using a combination of first and third party. It gets interesting around relevance. One of the best things we can do is improve relevance through data. For example, with custom audiences. Our clients use the data they have combined with our data that we can target. 

Zuckerberg: We probably do more with hardware than is apparent. We design and work with folks to build our own data centers. If that ever became the right thing for us to focus on we have some of the skills there already.

That was one of the things we were thinking about with Oculus. There’s a huge amount of value in delivering software services which we’ll continue to deliver.

Another question for Zuckerberg: You recently came back from China. How will you be successful where others have failed. We’ve also seen Instagram becoming more popular than ever with brand marketers.

Zuckerberg: On China, we’re already doing more there on the business side than a lot of folks think about. A lot of Chinese businesses use Facebook to find customers around the world and grow Chinese economy there. It’s pretty meaningful for us already. That will be a long-term thing. Our approach to China and every country is very long-term, we’re going to be here for decades, and we want to create good relationships with these companies.

On the Instagram side, I think we’re pretty early. There have been a number of effective video and photo ads. Top priority is to grow from 200 and more to eventually connection 1 billion and more people. That’s what I’m really focused on and excited about now.

Last question: Sheryl, the app download business seems to have grown a lot. How do you think about app reengagement versus downloads.

Sandberg: People get confused about who is using mobile app ads. They’re being used by some of the largest brands in the world. For example, Burger King used it for app installs.

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