Facebook warns of costly privacy changes, faces another US probe

July 25, 2019 07:46
Facebook said revenue rose to US$16.9 billion in the second quarter from US$13.2 billion a year ago, beating analysts’ average estimate of US$16.5 billion. Photo: AFP

Facebook Inc. said new data privacy rules and forthcoming privacy-focused product changes would slow its revenue growth and significantly raise expenses, driving down its shares in after-hours trade even as quarterly revenue topped estimates, Reuters reports.

The outlook came soon after the company agreed to pay US$5 billion to settle a data privacy probe and disclosed that it faces a new US government antitrust investigation.

While the quarterly results and the settlement with the US Federal Trade Commission over privacy issues demonstrate significant progress in tackling two of Facebook’s biggest challenges, the newly disclosed FTC antitrust probe and the continuing privacy scrutiny show that hurdles remain on the road ahead. Facebook said the FTC had told it in June of the antitrust probe.

Shares of Facebook, which also owns WhatsApp and Instagram, fell 1 percent to US$202.50 in after-hours trading on Wednesday after initially rising on its quarterly results.

The shares have recouped most of the losses sparked a year ago on concerns of slowing usage and the costs of improving privacy, which had spurred the biggest ever one-day drop in Facebook.

On Wednesday, Facebook’s chief financial officer, Dave Wehner, told analysts that the FTC settlement would require “significant investment” in people and technology.

He said ad revenue would be affected by new privacy laws rolling out globally, changes in privacy rules by the operating systems on which Facebook relies, and the company’s tweaking its own services.

Facebook has increased the number and variety of ads, which are the foundation of its business, as users gravitate toward private and interactive features such as Stories.

It has responded to political and regulatory pressure by expanding programs and promises related to securing data and policing objectionable content.

The initiatives remain a drag on earnings, but the company’s wealth of information on its users remains valuable to advertisers.

Facebook, which had set aside US$3 billion in the first quarter to cover a regulatory settlement, said it took a US$2 billion charge in the second quarter to account for the remainder of the US$5 billion settlement with the FTC. The settlement is still subject to court approval.

Facebook also acknowledged in a statement the US Justice Department’s announcement on Tuesday of an “antitrust review of market-leading online platforms”.

For the second quarter, Facebook reported 2.7 billion monthly users and 2.1 billion daily users across Facebook, Messenger, Instagram and WhatsApp, both figures about same as last quarter.

Revenue beats estimates

Quarterly revenue rose to US$16.9 billion from US$13.2 billion a year ago, beating analysts’ average estimate of US$16.5 billion, according to IBES data from Refinitiv.

“News regarding FTC and data privacy, along with antitrust investigations and additional headline risks [are] likely to continue to hang over the stock, but it looks like the platform still remains a very popular destination for the users,” Morningstar analyst Ali Mogharabi said in an email to Reuters.

Excluding the fine and a US$1.1 billion one-time tax expense, earnings would have been US$1.99 per share, Facebook said.

The tax expense stemmed from a court ruling, in which the company was not involved, that it said required accounting changes for stock-based compensation.

Costs jumped 66 percent compared to a year ago, to nearly US$12.3 billion, as Facebook continues to ramp up spending to improve content and security across its platforms.

Facebook has said it expects expenses and revenue growth to come back closer to even but several hurdles remain.

In emerging markets such as India, revenue is lagging behind Facebook’s number of users. Efforts to enter new businesses, such as recently announced plans for a cryptocurrency called Libra as part of a move into digital payments, have faced pushback from lawmakers and regulators.

Meanwhile, the company is developing additional hardware products, which can be more costly to build than apps.

There were bright spots in the second-quarter results. For instance, revenue from Europe accelerated for the first time in several quarters, growing 24 percent compared to 20 percent last quarter.

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