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Facebook shareholders got a sobering reminder on Tuesday: It's Mark Zuckerberg's company, and he is determined to spend billions of dollars over the next decade on ventures that might never generate substantial profits.
Facebook reported strong growth in revenue and profit for the third quarter, continuing its recent string of impressive performances.
But in a conference call to discuss the results with investors, Zuckerberg, Facebook's co-founder and chief executive, focused more on his vision for the company over the next three, five and 10 years.
He talked about his recent $21.8-billion acquisition of WhatsApp and how he wanted to take the mobile messaging app quickly to a billion users from 600 million. ("For us, products really don't get that interesting to turn into businesses until they have about one billion people using them," he said.)
He mused about the potential of Oculus VR, the virtual reality company that Facebook bought for $2 billion, which will need "a bunch of years" to sell enough of its still-unfinished headsets to contribute to Facebook's bottom line.
And he waxed eloquent about the prospect of bringing people in poor countries like Zambia onto the Internet, an almost charitable endeavour that won't reap financial returns for a long time.
Not once did he utter the word profit.
Zuckerberg has 55 per cent voting control over Facebook, according to the company's most recent proxy statement. So if investors do not agree with his vision, they don't have much choice but to sell. And many did, sending the company's stock down 8.3 per cent in after-hours trading.
"Wall Street cares about the business model. We care less about changing the world," said Laura Martin, an analyst with Needham & Company.
Zuckerberg's emphasis on the company's long-term plans echoes similar pronouncements from other founder-controlled tech companies like Google and Amazon, which have periodically shocked investors with enormous investments in goofy-sounding projects like self-driving cars and video streaming services.
His comments, along with the disclosure that expenses could rise as much as 75 per cent next year to help carry out that vision, overshadowed what was an otherwise great quarter for the company.
Facebook said third-quarter revenue grew 59 per cent from the same period a year earlier, to $3.2 billion. Most of Facebook's revenue comes from advertising, and the company said about two-thirds of those dollars now come from ads on mobile devices, up from half a year ago.
"Our strong results show the shift to mobile is working," Sheryl Sandberg, Facebook's chief operating officer, said in an interview. "Our performance is very broad-based. Our growth is across all of our regions."
Net income in the quarter was $806 million, or 30 cents a share, up 90 per cent from the $425 million, or 17 cents a share, it earned a year ago. Excluding costs related to acquisitions, employee compensation and taxes, Facebook made a profit of $1.15 billion, or 43 cents a share, up 73 per cent from last year.
Wall Street analysts had expected the company to earn 40 cents a share on that adjusted basis and to post revenue of $3.1 billion.
Facebook, already the world's largest social network, said it had 1.35 billion monthly users in September, up from 1.32 billion in June, and 64 per cent of them used the service daily, up slightly from the second quarter.
Expenses were low enough that the company posted an operating profit margin of 44 per cent - normally a figure that would thrill investors.
"The core business is phenomenal. Outside of Google search ads, this is the best business we've seen on the internet," said Ben Schachter, an analyst with Macquarie Securities.
But the enthusiasm faded as Zuckerberg started talking about the company's long-term investments. Facebook's chief financial officer, David Wehner, then warned that next year, expenses would rise 55 per cent to 75 per cent as the company invested in its new initiatives, including WhatsApp, Oculus and advertising platforms like Atlas that allow marketers to choose the age, gender and other attributes they want to target for ads delivered beyond Facebook.
"They're really starting to stretch into new and different territories," said Debra Aho Williamson, a principal analyst with the research firm eMarketer. "They're going to make some big bets that may or may not be successful."
Atlas, for example, will allow Facebook to use its knowledge of its users to deliver finely targeted ads on other sites.
"Facebook Atlas is the biggest thing to take on Google in a long time," said Jan Rezab, chief executive of Socialbakers, a social media analytics firm.
Rezab also said he expected Facebook to improve the ability of businesses to aim ads at mobile users based on their current locations - a feature that could be attractive to, say, a pizzeria that wants to reach potential customers at lunch time.
But many such long-term investments never pan out, and even if they do, they could take years to pay off.
That underscores the fundamental tension between Silicon Valley founders like Zuckerberg, who think about the long haul, and Wall Street, which is lucky to think ahead a year or two.
"Truly long-term investors won't mind these things," Mr. Schachter said. "But for anyone invested in the near term, they are going to spend a lot of money for returns that might or might not come. That is a different mind-set than investors have been used to."
©2014 The New York Times News Service
