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Facebook investors spooked by spending warning

News of continued growth in users and profit last quarter gets overshadowed by concerns over future spending on acquisitions, headcount and other items.

Ian Sherr Former Editor at Large / News
Ian Sherr (he/him/his) grew up in the San Francisco Bay Area, so he's always had a connection to the tech world. At CNET, he wrote about Apple, Microsoft, VR, video games and internet troubles. Aside from writing, he tinkers with tech at home, is a longtime fencer -- the kind with swords -- and began woodworking during the pandemic.
Ian Sherr
3 min read

Facebook CEO Mark Zuckerberg James Martin/CNET

Facebook's executives often talk of the future: connecting people around the world, creating new computing platforms and helping advertisers reach new customers.

But there's a darker side to this too: The potential for increased costs from acquisitions and headcount to fulfill that mission.

Those competing interests came to a head Tuesday, when the company told investors it expects costs to rise as much as 75 percent over the next year, while revenue may not jump as quickly.

"We plan on 2015 being a significant investment year," said Dave Wehner, Facebook's chief financial officer, on a conference call.

Facebook's executives said the company's costs have been increasing steadily, in part due to head count, which rose 44 percent over the past year to more than 8,000 employees.

Of the nearly 1,200 people the company brought on board in the past year, about a quarter of them were through acquisitions.

This is not a new problem. Silicon Valley companies have long struggled against concerns from investors about the money it spends on both acquisitions of competitors and employees. Amazon, Google and other high-profile tech firms have tussled with investors over this concern.

Beyond lavish spending on employees, such as with free food, transportation and high-cost health care, Facebook has also shown willingness to loosen its purse strings for long-term bets.

The company spent $1 billion dollars on Instagram in 2012, just before it went public. Facebook then spent $2 billion on Oculus, a virtual reality goggles maker, earlier this year. Its largest acquisition, WhatsApp, closed earlier this month for $22 billion. None of these products so far has posted returns. Facebook executives have often said these are long-term bets.

Investors aren't convinced. Shares fell more than 10 percent in after-hours trading following remarks from Facebook's CFO Wehner, saying costs would continue to rise precipitously next year. When asked whether revenue would also rise, he demurred.

Mobile, mobile, mobile

Still, Facebook reported other aspects of its business that are looking up. Mobile users are checking in, uploading photos and liking posts at record rates, attracting advertisers who pushed revenue and profit up with them.

The world's largest social network said more than 81 percent of the 864 million people who used its service daily during the third fiscal quarter did so on a mobile phone. Mobile device users represented an even larger share of the 1.35 billion people who accessed Facebook each month, itself a new record.

Advertising has followed suit, jumping 64 percent from a year ago to $2.96 billion. Advertising on mobile devices accounted for 66 percent of ad dollars.

Facebook wants to encourage this trend further. One way is by creating new apps and refining current ones to entice users to its service. Facebook is also creating software tools to encourage app developers to plug into its network, with products like its Atlas advertising service and Parse coding tools.

"Over the next few years our goal is to make Facebook the cross-platform platform that allows developers to build grow and monetize their apps across every major mobile platform," said Mark Zuckerberg, Facebook's CEO, on a conference call.

Facebook is just the latest company finding itself increasingly reliant on mobile devices for its business. Much of Silicon Valley has become fixated on smartphones and tablets, as people throughout the world switch away from desktop computers. Investors are now paying more attention to the mobile aspects of Facebook and its competitors. Few companies have successfully navigated the switch to mobile devices as effectively as social networks, like Facebook and Twitter.

Twitter said Monday that 80 percent of the 284 million users who log on at least once a month do so from a mobile phone. But they aren't alone; Facebook's advertising efforts have jumped from almost nothing at its initial public offering in 2012 to an outsized portion of its revenue today.

The number of people accessing Facebook at least once a month jumped to 1.12 billion, up 29 percent from a year ago. Each day, 703 million people access the service, up 39 percent form a year ago.

Overall revenue hit $3.2 billion for the company's third quarter, ended September 30, up nearly 59 percent from the same time a year ago. Profits jumped to $806 million, nearly double what they were last year.

After adjustments for items such as stock-based compensation, Facebook said it earned 43 cents per share, above the 40 cents per share analysts had been expecting.