Facebook Reports Strong Earnings on Weak Revenue Growth--Update
31 October 2018 - 8:47AM
Dow Jones News
By Deepa Seetharaman
Facebook Inc. recorded lower revenue than expected as the
social-media giant continues to adjust to slowing growth rates.
Facebook's profits, however, were higher than analysts had
expected. Following the results, the company's stock price was
active, recently sliding 1.6% to $143.89 in after-hours
trading.
For the third quarter, Facebook reported per-share earnings of
$1.76, up from $1.59 a year earlier and beating analyst projections
of $1.46, according to data compiled by FactSet. Facebook's net
income rose to $5.13 billion from $4.71 billion a year ago. The 9%
increase in profit was the slowest growth rate in quarterly profit
since the second quarter of 2015, according to FactSet.
Revenue leapt 33% to $13.73 billion, falling slightly short of
expectations of $13.77 billion. The percentage increase was the
lowest in six years, FactSet said.
The company's stock initially fell more than 5% after the
results before rebounding -- a more positive reaction from
investors than in the previous quarter. When the company in July
warned of slowing growth with its second-quarter earnings, Facebook
shares suffered the biggest-ever one-day loss for a U.S.-listed
company, lopping off nearly $120 billion from its market value.
Before Tuesday's earnings report, Facebook shares had fallen
about 20% year to date and about 34% since its last earnings report
in late July. The decline in share price is part of a larger
pattern of investors fleeing giant tech companies like Google
parent Alphabet Inc. and Amazon.com Inc., which posted
underwhelming sales growth last week.
Ahead of today's quarterly results, many investors were
concerned that Facebook would fall short of even lowered
expectations given the company's dismal second-quarter showing and
the growing risk of increased regulatory oversight in the U.S. and
Europe. SunTrust Robinson Humphrey analyst Youssef Squali said he
was "relieved" by Tuesday's report.
"A year ago, when everything was going great, we assumed
everything was going to be great for an extended period of time,"
said Mr. Squali, who has a "buy" rating on Facebook shares. "Now
we've adjusted a little -- we have the fear of God in us."
About 1.5 billion people use Facebook every day and 2.3 billion
use it monthly. The company estimated that more than 2.6 billion
people now use Facebook, WhatsApp, Instagram or Messenger every
month, and more than two billion people use one of its apps every
day. Those figures were roughly in line with expectations.
Facebook's largest sources of user growth are in developing
markets, especially in Asia, where it generates about $2.67 per
user. Facebook's user base didn't grow much in its most lucrative
markets, which are the U.S., Canada and Europe. Facebook earns
$27.61 for every user it has in the U.S. and Canada and $8.82 for
its European user base.
Many investors are bracing for Facebook shares to swing wildly
over the next few days, according to data released before the
earnings report. Options prices forecast a swing of 9.3% in
Facebook shares, much larger than the average move of 5.5%.
This year marks perhaps the most difficult period in Facebook's
nearly 15-year history. Critics have attacked the company's lax
data privacy practices, following Facebook's disclosure that it
provided user records to a third party, which then sold the
information to political analytics firm Cambridge Analytica.
Facebook also has been criticized for its failure to enforce its
content policies and allowing misinformation to infect its various
apps.
Facebook has said it previously moved too slowly to fix problems
underlying its platform and promised to fix these issues.
These problems have brought regulatory and government scrutiny,
and they've cut into Facebook's bottom line, as the company has
said it expects costs to rise and margins to fall in coming years.
Those shifts reflect Chief Executive Mark Zuckerberg's promise to
sacrifice profitability in order to shore up the platform,
stockpile video content and invest in advanced technologies like
artificial intelligence.
Facebook also is bracing for slower growth in its advertising
business, which collects the bulk of its revenue from ads that
appear in the Facebook news feed. Facebook warned that growth would
slow in the second half of the year, triggering a 35% decline in
its stock price since late July. The falling share price has
started to hit morale internally at Facebook, which has been
buffeted by two years of nearly relentless criticism about its
product and culture, according to current and former employees.
In the run-up to Tuesday's results, some advertisers said it
wasn't sustainable for prices to rise on news feed ads, especially
as more users embrace the Stories feature, which allows people to
post text, photo and video montages that vanish within 24 hours.
According to Credit Suisse, ads in Facebook Stories may cost about
half of those in the main news feed.
Facebook's turmoil has hit its executive ranks, where at least a
dozen senior or highly visible executives have left or announced
their departures since the fall of 2017.
Write to Deepa Seetharaman at Deepa.Seetharaman@wsj.com
(END) Dow Jones Newswires
October 30, 2018 17:32 ET (21:32 GMT)
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