Facebook warns growth will slow after posting strong quarter, shares fall

Mark Zuckerberg speaking during an event at the Facebook headquarters in Menlo Park, California.
Mark Zuckerberg speaking during an event at the Facebook headquarters in Menlo Park, California.PHOTO: EPA

NEW YORK (REUTERS) - Facebook Inc shares tumbled more than 7 per cent in after-hours trading on Wednesday (Nov 2) after the company warned that revenue growth would slow this quarter, offsetting strong earnings that handily beat Wall Street estimates.

In a call with analysts, Facebook chief financial officer David Wehner said ad growth would likely slow "meaningfully" due to limits on "ad load", or the number of ads that Facebook can put in front of customers without alienating them.

He also said 2017 would be a year of aggressive investment that will see a substantial increase in expenses.

Facebook shares were down 7.7 per cent in after hours trading, at US$117.35.

"They have reached the limit of the ad frequency on news feed, so they are going to have to find revenue growth from other areas like pricing, user engagement, user base growth," said Mr Josh Olson, an analyst at Edward Jones.

However, he said investment in the business should benefit Facebook in the longer term. "We have been down this road before with Facebook, they have invested something like this in mobile and we have seen it pay off. So we are looking at it as an opportunity," said Mr Olson.

While the warning about the fourth quarter sent some investors running, by most metrics the company beat analysts' expectations on torrid mobile ad growth.

Mobile ads accounted for 84 per cent of Facebook's total advertising revenue of US$6.82 billion in the third quarter that ended Sept 30, compared with 78 per cent a year earlier.

The company is also reaping the benefits of a big push into video, both on Facebook itself and on the Instagram photo app.

Facebook reported a 55.8 per cent rise in quarterly revenue, to US$7.01 billion, beating analysts' average estimate of US$6.92 billion, according to Thomson Reuters I/B/E/S.

Excluding items, the company earned US$1.09 per share. On that basis, analysts had expected 97 cents per share.

Facebook said about 1.79 billion people were using its site monthly as of Sept 30, up 16 per cent from a year earlier.

The strong numbers come as Facebook has struggled in recent months to combat allegations that it unfairly removes certain content on its service, and news in September that the company had for years overestimated how it calculates the average time users spend watching video.

But investors appear optimistic Facebook will continue to grow revenue through its aggressive expansion of mobile and video advertising.

More than 90 per cent of Facebook's users access the social network through mobile devices, and the company now boasts daily average mobile users of 1.09 billion, up 22 per cent from last year.