A little while back, I went over how social media giant Facebook (NASDAQ:FB) is planning to boost its capital expenditure in 2019 after increasing that spending significantly in 2018. Those spending increases, company CFO David Wehner said, are "driven by increased investments in data centers, servers, office facilities and network infrastructure."
Another way that Facebook is planning to significantly up its investments in its business during 2019 is through increases in its operating expenses, with Wehner referring to 2019 as "a big investment year." Let's take a closer look at what management had to say about those expense increases and what they mean for investors.
A big jump in spending
Wehner said on the company's third-quarter earnings conference call that, "we plan to continue to invest aggressively across the business and expect that full-year 2019 total expenses will grow 40% to 50% compared to full-year 2018."
That's a huge increase in spending, although on a percentage basis, it's lower than the "approximately 50% to 55%" in year-over-year operating expense growth that the executive said to expect for 2018.
During the question-and-answer session of the call, Wehner explained that the company's planned operating expense growth in 2019 "is consistent with what we've been talking about as our big investment areas."
Rewinding back to the company's second-quarter earnings call, Wehner explained its planned 2018 operating expense growth by saying that "[in] addition to increases in core product development and infrastructure, this growth is driven by increasing investment in areas like safety and security, AR/VR, marketing, and content acquisition."
Some of these investments -- such as "core product development and infrastructure" -- are likely to pay off in the near to medium term as those affect the things that drive Facebook's revenue and profits today. Others, like the company's investments in augmented reality (AR) and virtual reality (VR), Wehner said on the company's second-quarter earnings call are "attractive investments, we believe, but ones that will take [longer] to pay off, and those would have a dilutive effect on margins in the near term."
Even back then, he'd warned that the company "[anticipates] that total expense growth will exceed revenue growth in 2019."
The margin reset in 2019
Facebook had previously told investors that "[over] the next several years, we would anticipate that our operating margins will trend toward the mid-30s on a percentage basis."
On the third-quarter earnings call, Wehner said, "I would expect ... the biggest change in our margin structure to happen in 2019, and for it to moderate from there." The executive admitted, though, that "[it's] hard to be prescriptive about 2020 and beyond, but I think the biggest change will be in 2019."
To put all of this into perspective, analysts still expect Facebook's operating profit to grow over the next few years. Indeed, analysts call for Facebook's operating profit to jump 21.2% in 2018, before that growth slows to a little over 4.8% in 2019 (the year of the operating margin reset). In 2020, though, analyst consensus calls for the company's operating profit growth to accelerate to over 16%. (However, it's important to keep in mind that analyst estimates are simply educated guesses that can change -- sometimes dramatically -- over time.)
The point, though, is that even though Facebook's operating margins are coming down, and although the company's operating profit growth looks set to slow to a crawl in 2019 as a result, the company is still extremely profitable, and it even looks set to grow its raw operating profit dollars over the next couple of years.