Facebook crushes Q3 earnings but warns that future profit will slow

Facebook CEO Mark Zuckerberg.Getty

Facebook beat Wall Street's expectations for the third quarter and reported its best earnings ever.
But CEO Mark Zuckerberg warned, "We're investing so much in security that it will impact our profitability."
Facebook plans to add 10,000 more employees to aid its safety and security efforts by the end of 2018.

Facebook blew past Wall Street's third-quarter financial targets on Wednesday but cautioned that future profitability will be impacted by increased investments around its efforts to fight fake news and abuse.

The increasing spending, which Facebook executives elaborated on during the conference call with analysts on Wednesday, drove Facebook's shares down 2% in after-hours trading, erasing the stock's initial bump when the results were announced.

The social network grew its daily active users to 1.37 billion, a 50 million user increase from the previous quarter. Revenue for the quarter topped $10 billion for the first time in the company's history.

CEO Mark Zuckerberg warned that Facebook's meteoric profit growth will start to slow as it ramps up hiring. In a statement to investors, he said the company is "investing so much in security" that it will impact future profitability.

"Protecting our community is more important than maximizing our profits," he said.

Facebook's top lawyer, Colin Stretch, told US lawmakers this week that the company planned to add roughly 10,000 more employees by the end of 2018 to aid its efforts in eradicating fake news, misinformation, and state-sponsored efforts to sway public opinion.

Here are the key numbers from Facebook's Q3 results:

Revenue: $10.33 billion vs. $9.84 billion expected, up 47% from the year-ago period.
EPS (GAAP): $1.59 vs. $1.28 expected, up 77% from the year-ago period.
Monthly active users: 2.07 billion, up from 2.01 billion last quarter.
Daily active users: 1.37 billion, up from 1.32 billion last quarter.

Investors are looking for Facebook's ability to grow its ad revenue from sources besides the News Feed, which is nearing the limit of ads it can show. Instagram ads and Facebook's efforts to monetize videos through its Watch tab are considered to be the company's strongest growth bets in the near term.

Wehner reiterated Wednesday that ad revenue growth would continue to slow as the limit of ads that can be shown in the News Feed is reached. “We expect this trend to continue the foreseeable future," he said, adding that future revenue growth will be more based on increases in ad prices and not inventory supply.

Wehner also said that the company planned to dramatically increase spending in 2018 by 45-60%. He said the increase was due to the hiring of more employees to work on security and safety along with upfront payments Facebook is making for episodic shows in its new Watch tab.

Facebook has yet to give any statistics about the early use of Watch, but Zuckerberg said Wednesday that the plan is to eventually monetize all videos through ad breaks.

Despite mounting criticism from US lawmakers over Russia's use of its platform to spread propaganda, Facebook's stock was trading at all-time highs ahead of Wednesday's results. Shares of Facebook have risen more than 5% in the last week alone on the back of strong earnings from Google, Amazon, and Microsoft.