Privacy concerns take toll on Facebook as stock sinks on revenue miss

Facebook’s Q2 earnings showed a share drop of 22% which is said to be the impact of privacy issues hitting the social media platform.

Facebook had cautioned investors to expect a big jump in costs because of efforts to address concerns about poor handling of users’ privacy. (REUTERS)

Facebook on Wednesday published its Q2 earnings report. As expected and warned by the company, shares fell by 22% over concerns about the impact of privacy issues on the social media platform. Total expenses in the second quarter surged to $7.4 billion, up 50% compared with a year ago.

Facebook was hit with the biggest privacy scandal involving a political consulting firm Cambridge Analytica. The data breach resulted in accessing user data and information of over 87 million people globally. The Cambridge Analytica scandal prompted several apologies from Chief Executive Mark Zuckerberg and generated calls for users to desert Facebook, which has grown strongly since launching as a public company in 2012.

In India, Facebook-onwed WhatsApp has been broiled in another major controversy leading to mob killings. Misinformation spread in India through WhatsApp have added to the pressure on Facebook to re-evaluate how its services maintain security and decorum.

In addition to share drops, Facebook has also seen a drop in its user base.Growth in new users slowed with Facebook adding 11% more daily and monthly active users on the main Facebook app in the second quarter, compared with 13% in the first quarter.

Facebook warns that the fall in company's growth will be witnessed later this year as well.

"Our total revenue growth rates will continue to decelerate in the second half of 2018, and we expect our revenue growth rates to decline by high single-digit percentages from prior quarters sequentially in both Q3 and Q4," said Chief Financial Officer David Wehner.

Expenses are expected to grow 50% to 60% compared with last year as the company invests in security, marketing and content acquisition, he said.

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

Facebook's operating margin fell to 44% in the second quarter from 47% a year ago. Facebook's revenue grew at its slowest pace in almost three years. Sales grew 14% to $13.2 billion in the second quarter compared with $9.3 billion a year ago. The company reported $5.1 billion in profit, or $1.74 per share, compared with the average estimates of $5.1 billion and $1.72 per share among research gathered by Thomson Reuters.

User base

Daily user growth for Facebook's namesake service has slid in six straight quarters, bringing it to 1.47 billion users in the second quarter from 1.23 billion at the end of 2016 when it became embroiled in political issues.

Instagram has grown to 1 billion monthly users from 600 million in late 2016, while Facebook's two messaging apps, Messenger and WhatsApp have each reported well over 1 billion monthly users.

About 2.5 billion people use at least one of the company's apps each month, Facebook said on a conference call with investors and analysts.

Instagram is expected to account for 18% of Facebook's revenue this year and 23%next year, according to research firm EMarketer.

"It appears that stronger Instagram performance (according to our checks) was not enough to offset some of the core app headwinds," said Colin Sebastian, analyst at Robert W. Baird & Co in a note.

Nearly all social media services have received greater scrutiny since US intelligence agencies in January 2017 revealed that organisations tied to the Russian government had seeded content on the platform to shake up the 2016 U.S. presidential election.

"GDPR was an important moment for our industry. We did see a decline in monthly actives in Europe, down by about 1 million people as a result," Zuckerberg said on conference call.

The threat of additional regulatory setbacks remains a concern, according to analysts.

Facebook China withdrawal

Facebook suffered a blow in China on Wednesday when regulators there withdrew their approval of a company innovation hub to support local startups, the New York Times reported on Wednesday, citing a person familiar with the matter.

For advertisers, though, Facebook and Instagram are performing as well as ever. Advertising systems on WhatsApp and Messenger remain in the trial phase.

Cowen & Co analysts found 37% of ad buyers they surveyed increased spending on Instagram in the first half of this year.

The biggest chunk of online advertising budgets tend to flow to the services with the most data on their users and the broadest set of users in terms of age. That has left Facebook as a leader alongside Alphabet Inc's Google search engine and YouTube video service.