Facebook Inc. (FB.O) is still adding users and exceeding analysts’ estimates for advertising sales, showing that the size and power of its social network have so far been unhindered by new regulatory constraints and criticism of its business model.
In its second-quarter earnings report, the company also disclosed that the U.S. Federal Trade Commission, which earlier Wednesday announced the settlement of an inquiry into Facebook’s privacy practices, has opened a formal antitrust investigation into its business. In June, the agency was given jurisdiction over the social network as the U.S. government stepped up scrutiny of the biggest technology companies.
Facebook has been embroiled in constant crisis over leaks of users’ data, the spread of violent or false content on its apps, and scrutiny of its power to influence public discourse. That hasn’t deterred advertisers, who have flocked to Facebook’s sites for the broad reach and precise targeting they offer. While growth at the main Facebook app has slowed, the company is still adding users quickly on other properties, and has embarked on a project to weave its platforms together, creating an even bigger network. A total of 2.7 billion people use at least one Facebook-owned app -- Facebook, Instagram, WhatsApp or Messenger -- every month.
“Despite horrific headlines for almost two years, usage trends remain strong,” said Benjamin Schachter, an analyst at Macquarie, in a note to investors. As long as the users are still coming, “we think advertisers will continue to show up.”
Menlo Park, California-based Facebook said second-quarter sales rose 28 per cent to US$16.9 billion, compared with an average analyst projection of US$16.5 billion. In a statement Wednesday, the company said 1.59 billion people log into the main social-media service daily, compared with the 1.57 billion users projected in a Bloomberg survey.
The financial results came hours after the announcement of a $5 billion settlement with the FTC -- a deal that doesn’t require the company to alter how it collects data or uses personal information for targeting advertising. Facebook said it set aside US$2 billion in the recent period to cover the remainder of that settlement, after allocating US$3 billion in the previous quarter.
Including the costs set aside for the settlements and a tax-related charge, Facebook said second-quarter net income was US$2.62 billion, or 91 cents U.S. a share. Excluding the items, the company said profit was US$1.99 a share, exceeding the US$1.88 per-share average analyst estimate. A year earlier, Facebook posted earnings of US$5.11 billion, or US$1.74 a share, on sales of US$13.2 billion.
Shares were little changed in extended trading, after fluctuating up and down following the report. On a conference call to discuss earnings, the company said it expects revenue growth to decelerate, especially in the fourth quarter and into 2020.
The main social network and its News Feed ads bring in most of the company’s revenue, but the Instagram photo-sharing app, which has ads in its photo feed and recently added e-commerce tools, is becoming a more significant part of the business. Facebook’s business models for Messenger and WhatsApp, each with more than 1 billion users, are less mature.
Facebook’s user gains by region show that the main app has almost fully tapped out growth in Europe and the U.S., the company’s most lucrative ad markets. It added the most users in Asia, where it makes an average of only US$3.04 per user, compared with US$33.27 in the U.S. and Canada.
On the call Wednesday, Chief Financial Officer David Wehner gave three reasons for the expected slowdown in sales growth. First, there may be more pressure from regulation, such as Europe’s new rules governing data collection. Second, there may be changes to privacy rules governed by Apple Inc.’s iOS and Google’s Android mobile operating systems, where Facebook offers its app. Recently, Apple banned one of Facebook’s data-gathering apps. And third, Facebook is making its own privacy tweaks, Wehner said, which could rein in growth.
Besides the FTC settlement, the company on Wednesday said it will pay US$100 million to resolve U.S. Securities and Exchange Commission claims that it misled investors about misuse of personal information. The U.S. Department of Justice has opened an inquiry into possible antitrust violations by Facebook and other large tech companies.
Chief Executive Officer Mark Zuckerberg said he hoped the government would help define how Facebook should handle privacy issues, competition and other matters, so that there is more clarity about what is allowed.
“If that doesn’t get put in place, then frustration with the industry will continue to grow,” he said on the call.
Facebook shares have gained 56 per cent so far this year. They gained 1.1 per cent to US$204.66 at the close in New York, about 5.9 per cent below a record high reached on July 25, 2018.
Facebook has tried to keep innovating despite the regulatory pressure. In June, the company unveiled plans for a new global cryptocurrency, called Libra, that it hopes will lower the cost of sending money internationally and help increase payments and commerce across Facebook’s stable of apps. Libra quickly drew ire from politicians and regulators, and executive David Marcus testified before multiple congressional committees last week in Washington to explain the company’s plans. Facebook is now promising to appease all regulators before launching the cryptocurrency, a process that could take some time.
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