UPDATED 16:35 EDT / OCTOBER 30 2018

APPS

Tepid revenue and user growth dims Facebook earnings – and it won’t end soon

Updated:

Facebook Inc. took its medicine a few months ago when it said revenue growth would slow down, knocking 19 percent off its stock in a single day. So it’s no surprise that today’s third-quarter earnings report and guidance for the current quarter, essentially showing no worsening of that trend, didn’t look half-bad to investors.

The massive social network slightly missed estimates for revenue as well as user growth while topping profit forecasts. Facebook said its profit rose 9 percent from a year ago, to $5.1 billion or $1.76 a share, on a 33 percent jump in revenue, to $13.7 billion.

Analysts had forecast an adjusted profit of $1.47 per share on a 34 percent rise in revenue, to $13.78 billion. The number of daily active users hit 1.49 billion in the quarter, up 9 percent and just shy of analysts’ average forecast of 1.5 billion.

Facebook’s shares were on a roller coaster in after-hours trading, falling, then rising, then heading back down about 4 percent after comments by Chief Executive Mark Zuckerberg (pictured) on the earnings conference call. The Facebook founder indicated that challenges to revenue, profit and user growth would continue into 2019.

But later, as Chief Financial Officer David Wehner signaled no actual worsening ahead in the revenue growth slowdown, shares recovered, rising about 4 percent from the regular session close, which was up 2.9 percent, to $146.22. It’s anyone’s guess what will happen in the market Wednesday. Update: No more guessing: On Wednesday, shares rose 3.8 percent, to $151.79.

In essence, it appears investors had already priced in a negative outlook. After reporting its second-quarter results in July, Facebook executives had said they expected revenue growth to decelerate over the next few quarters thanks to more attention on business challenges such as customer security, community growth and long-term investment strategies that don’t make money. Shares promptly fell almost 19 percent the next day, erasing almost $120 billion from the company’s market value in what was believed to be the largest one-day drop in stock market history in absolute dollars.

Zuckerberg emphasized that more people are sharing through private messaging and Stories, or short user-generated photo or video collections uploaded to Facebook, instead of through posts to their news feeds. Facebook’s WhatsApp and Messenger apps are seeing 100 billion messages a day, he said on the earnings conference call, while more than 1 billion people a day are sharing Stories.

Zuckerberg said these more private modes of sharing are gaining in popularity, a claim backed up by outsiders. “With the increased desire for privacy, users are looking more and more toward services like Messenger and WhatsApp to interact with brands and organizations in a safe and convenient way,” Yuval Ben-Itzhak, CEO of the social media marketing firm Socialbakers, told SiliconANGLE.

However, ads around those modes of interaction don’t produce as much ad revenue as ads in the news feed, which could mean slower revenue growth for a while. “Our revenue growth may be slower as we make that transition,” he said. Specifically, Wehner said, Facebook’s overall revenue growth will slow by a mid- to a high single-digit percentage in 2019, though that’s ostensibly a bit better than the high single digits to which the company previously had guided.

And the tough earnings trend is likely to continue into the next year. “2019 will be another year of significant investment,” Zuckerberg said. He implied, however, that in 2020 and beyond, Facebook would be focusing more on profit growth.

Moreover, although Stories are growing quickly, they were slower to take off than Instagram and WhatsApp. The transition to Stories, Zuckerberg said, “hasn’t been as smooth as I’d hoped.”

All this did little to change the mind of skeptics. “We continue to view the long-run revenue opportunities for Facebook more negatively than much of the investment community does because we see limits to growth for the overall advertising industry,” Brian Wieser, an analyst with Pivotal Research Group, wrote in a note to clients today. “Facebook’s budgets won’t be meaningfully altered by the establishment of new ad products for Stories, unless they appeal to advertisers the company doesn’t already serve comprehensively.”

On the upside, Zuckerberg added, “we’ve seen video grow dramatically,” though video on Facebook trails far behind Google LLC’s YouTube.

In any case, Facebook’s earnings have taken a back seat to other issues lately: data breaches, struggles to stop fake news and election meddling on the site and criticism by lawmakers for both. “We have a long road ahead to prevent these attacks in our future,” Zuckerberg said.

Asked if security and safety efforts are an arms race, he replied that “there’s not a silver bullet.” That said, he implied that the biggest investments that began two years ago, when the company was “way behind” on adequate safeguards, could ease by the end of 2019. “Even at that point, we’re not going to be perfect,” he said. “We are up against sophisticated adversaries.”

Wieser was notably bearish on the potential costs of those activities, which he said could be “substantially greater than even the company anticipates.” As a result, he said, “We see downside risks to opex relative to guidance because of what we think are continuing systemic problems that manifest themselves through an underinvestment in operating resources and efforts to mitigate risks caused by the platform.”

In other challenges, Facebook has recently seen a stream of executive departures, including the co-founders of all its big acquisitions, Instagram, WhatsApp and Oculus.

Photo: Robert Hof/SiliconANGLE

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