Facebook’s Strong Results Offset By Profit Warning

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Investors take fright after Facebook warns that profit margins will be squeezed by ad slowdown and privacy demands

Facebook has produced another set of stunning financial results for its second quarter, but Wall Street took fright at its grim outlook going forward.

Shares lost as much as a quarter of their value on Wednesday according to Reuters, after executives warned that the costs associated with improving privacy safeguards and slowing usage in the biggest advertising markets will squeeze its profit margins.

It is not as if Facebook’s warning is new however. In May 2017 the social networked warned of ad saturation and a looming slowdown in the growth of ad revenues, its principle money maker.

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Strong results

But it is clear from the results, that Facebook is very good shape financially.

For the quarter ending 30 June, Facebook posted a net profit up 31 percent at $5.1bn (£3.9bn) compared to a profit of $3.9bn (£2.9bn) a year earlier.

Revenues rose 42 percent to $13.2bn (£10bn) from $9.3bn (£7.1bn) a year ago. Advertising revenue makes up the majority of Facebook’s sales.

“Our community and business continue to grow quickly,” said Mark Zuckerberg, founder and CEO. “We are committed to investing to keep people safe and secure, and to keep building meaningful new ways to help people connect.”

Facebook also revealed that its daily active users (DAUs) stood at 1.47 billion on average for June 2018, an 11 percent increase year-over-year.

Monthly active users (MAUs) meanwhile stood at 2.23 billion, an increase of 11 percent year-over-year.

And it seems that mobile advertising revenue continues to be the principle money maker for Facebook, as mobile advertising revenue represented approximately 91 percent of advertising revenue.

And Facebook’s workforce has swelled to 30,275 staffers worldwide, an increase of 47 percent year-over-year.

Storm clouds

Yet there storm clouds on the horizon, as Facebook is now have to contend with the new European GDPR privacy rules, and has spent a great deal of time dealing with the fallout from the Cambridge Analytica data sharing scandal.

The company also dampened the mood when it warned that the above would impact revenue growth from emerging markets and Facebook’s Instagram app.

But investors really took fright when Facebook confirmed that revenue and user growth had missed expectations. The firm then issued warnings about future growth and expenses.

Operating profit margin, which fell to 44 percent in the second quarter from 47 percent a year ago, will sink to the “mid-30s” for more than two years, Chief Financial Officer David Wehner was quoted by Reuters as saying in investor guidance.

This resulted in $150bn (£114bn) being wiped off the value of Facebook’s stock.

Facebook earlier this week revealed it was planning to open an “innovation hub” in China, despite the fact that its social network remains blocked in that country.

However it has now been reported by the New York times that China has withdrawn its approval for Facebook’s plan to open a new venture in the eastern province of Zhejiang.

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Author: Tom Jowitt
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