Facebook's CEO Mark Zuckerberg. Picture: GERARD JULIEN / AFP
Facebook's CEO Mark Zuckerberg. Picture: GERARD JULIEN / AFP

Washington — Facebook on Wednesday blew past Wall Street profit estimates in the first quarter and set aside $3bn to cover a settlement with US regulators, calming investors who had worried about the outcome of a months-long federal probe.

Shares of the world’s biggest online social network jumped more than 10% to $200.50 in after-hours trade. They have now regained much of the ground lost in 2018 amid slowing growth and costs associated with the company’s privacy scandals.

The settlement accrual, which Facebook set at $3bn but said could rise as high as $5bn, cut the company’s net income in the first quarter to $2.43bn, or 85c per share.

Excluding the charge, Facebook would have earned $1.89 a share, up from $1.69 in the year-ago quarter and easily beating analysts’ average estimate of $1.63 per share, according to IBES data from Refinitiv.

Total first-quarter revenue rose 26% to $15.1bn from $12bn in 2018, again beating analysts’ average estimate of $15bn.

“This is a strong report suggesting that advertisers still see value in Facebook’s platform, as they did before the controversies and scandals erupted,” said Haris Anwar, senior analyst at financial markets platform Investing.com.

Monthly and daily users of the main Facebook app were both up 8% compared to 2018, to 2.4-billion and 1.6-billion, respectively, in line with forecasts.

Total expenses in the first quarter were $11.8bn, including the settlement accrual, up 80% compared with a year ago as the company hired content moderators and invested in new security controls to make its social networks safer.

Executives said in a conference call with investors that they expect expenses to grow 47%-55% in 2019, updating their earlier forecast of an increase of 40%-50%.

The first-quarter operating margin fell to 22% from 46% a year ago, but would have been a comfortable 42% without the one-time expense.

Biggest penalty

The US Federal Trade Commission (FTC) has been investigating revelations that Facebook inappropriately shared information belonging to 87-million of its users with the now-defunct British political consulting firm Cambridge Analytica. The probe has focused on whether the sharing of data and other disputes violated a 2011 agreement with the FTC to safeguard user privacy.

A settlement of between $3bn and $5bn would be the largest civil penalty ever paid to the agency, said David Vladeck, a former FTC official who is now a professor at Georgetown Law School.

“Everyone expected there would be a substantial civil penalty in this case,” said Vladeck. “There’s no question that Facebook is going to have to settle this matter. Investors want this behind them.”

Even once the FTC probe is resolved, other challenges remain. The number of Facebook users barely budged in the US, Canada and Europe, indicating saturation in the company’s most lucrative markets.

Its largest and fastest-growing user base is now in Asia, where monthly active users jumped 12.4% from 2018. The region represents nearly half of all Facebook users, but brought in less than a fifth of the company’s revenue.

That shift in geography, along with slow advertiser adoption of new services such as Stories, resulted in a 4% decline in the average price per advert in the first quarter.

Facebook plans to shift focus towards private communications, integrating its messaging services across Facebook, Instagram and WhatsApp, but has not yet articulated how it will adapt its advertising-driven business model.

The company launched a sales system in March that enables users to purchase products directly on Instagram and is testing a WhatsApp payments system in India it plans to roll out to other countries, CEO Mark Zuckerberg said.

“In countries where we already are the leading platform there will be more ability to work on things like payments in the near term and build in additional ways that people want to interact privately,” he said. But the services would not be a “major driver” of Facebook’s business for at least a couple of years, he said.

Facebook also faces the prospect of action by legislators, with some calling for federal privacy regulation and antitrust action to break up big tech companies.

Representative David Cicilline, who chairs the US House of Representatives judiciary committee’s subcommittee on antitrust issues, said on Twitter that Facebook was “a repeat offender” and called for an FTC response “strong enough to prevent future violations”.

“A fine in the low billions of dollars would amount to a slap on the wrist for Facebook. Tonight, we learned that’s how Wall Street sees it too — as a slap on the wrist. If the FTC won’t act, Congress has to,” he said.

Reuters