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Facebook Q2 Earnings: Users And Advertisers Lean Out

Facebook‘s stock price plunged Wednesday (July 25) after the social media operator’s Q2 financial report showed missed targets on revenue and users, and the ongoing costs of the privacy and data scandals to hit the company gained clarity. Facebook’s stock price declined by as much as 24 percent Wednesday in after-hours trading, which reportedly erased $150 billion in Facebook’s market capitalization.

Since the second quarter ended on June 30, Facebook reported a 42 percent year-over-year revenue increase to about $13.23 billion. That missed an analyst target of $13.36 billion. Earnings per share, meanwhile, reached $1.74 against analyst estimates of $1.72.

Facebook also had an 11 percent year-over-year growth in daily active users to a 1.47 billion average for June. Analysts had anticipated 1.49 billion. Broken down by region, the misses continued: North America had 185 million reported daily active users against an anticipated 185.4 million, while Europe had 279 million against an anticipated 279.4 million.

Post-GDPR Losses

Europe provided an example of the challenges Facebook faced in the second quarter as it responded to the new reality of online privacy. In his comments during the post-earnings conference call, Facebook CEO Mark Zuckerberg said that Europe lost 1 million monthly active users as a result of the EU’s General Data Protection Regulation (GDPR), enacted in late May.

GDPR was an important moment for our industry,” he said. “We did see a decline in monthly actives in Europe. At the same time, it was encouraging to see the vast majority of people affirm that they want us to use context — including from websites they visit — to make their ads more relevant, and improve their overall product experience.”

Besides GDPR, Facebook has also been weathering the impact of the Cambridge Analytica scandal. The company accessed the information on 87 million Facebook users without their consent, starting in May of 2017. The company’s cost and expenses increased 50 percent year over year to $7.4 billion, a trend related to privacy and security.

“We’re investing so much in security that it will significantly impact our profitability,” Zuckerberg said.

Expense Trends

Facebook expenses will grow 50 percent to 60 percent compared with last year, thanks to security investments, and along with marketing and content acquisition efforts, according to CFO David Wehner. Revenue growth rates, meanwhile, will decline by “high single-digit percentages from prior quarters, sequentially in both Q3 and Q4,” he said.

Privacy will have a major role in that, according to one analyst quoted by Reuters. Morningstar analyst Ali Mogharabi said, “When it comes to much slower revenue growth, they’re talking about currency headwinds, but more we think it’s due to slower user growth given GDPR and more focus on privacy.”

Net income increased 31 percent year over year to $5.1 billion. The company’s operating margin declined to 44 percent from 47 percent in the second quarter of 2017.

“Over the next several years, we would anticipate that our operating margins will trend towards the mid-30s on a percentage basis,” Wehner said.

Mobile Gains

Mobile, however, continues to grow. In Q2, mobile accounted for about 91 percent of the company’s ad revenue, up from 87 percent in the same period last year. Mobile ad revenue increased 50 percent year over year, reaching $11.9 billion.

“We’re seeing healthy growth in video ads among all advertiser segments,” said Sheryl Sandberg, chief operating officer.

She recounted recent Facebook video feature improvements — including the release earlier this year of Ad Animator, which employs images from company Facebook pages — and promoted new ad-favorable features on Instagram and Stories, designed to make it easier for consumers to interact with merchants. Running video ads in Instagram Stories with a Shop Now button results in an 18 percent increase in ad spending for online retailer Overstock, along with 20 percent decrease in cost per acquisition, she said.

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