Legal woes dent Facebook's Q2 profit but revenue, user base grow

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Facebook on Wednesday beat Wall Street outlooks on second quarter earnings even as the company got slapped with the biggest ever FTC fine of US$5 billion (S$7 billion).
The US Justice Department has said it will investigate "whether and how" online platforms in "search, social media, and some retail services online" are engaging in behavior that stifles competition and harms consumers. PHOTO: AFP

SAN FRANCISCO (AFP) - Facebook reported on Wednesday (July 24) that its quarterly profit plummeted due to the cost of a US privacy settlement and forecast that regulation would slow its money-making ad machine.

Profit in the second quarter fell 49 per cent from a year ago to US$2.6 billion (S$3.55 billion), while revenues increased 28 per cent to US$16.9 billion.

The lower profits were due in part to Facebook setting aside an extra US$2 billion to cover a massive settlement with US regulators on privacy and data protection.

The US$5 billion settlement announced by the Federal Trade Commission calls for revamped federal oversight of the social network's privacy policies.

Facebook also will be required to conduct a privacy review of every new or modified product, service, or practice before it is implemented, including for its WhatsApp and Instagram services.

In the earnings report, the leading online social network beat market expectations on revenue and user growth, and shares rose slightly in after-hours trade that followed release of the earnings figures.

"We had a strong quarter and our business and community continue to grow," said Facebook chief executive Mark Zuckerberg.

The number of people using Facebook monthly grew 8 per cent to 2.41 billion in the quarter that ended June 30.

The number of monthly users topped 2.7 billion when taking into account Instagram, WhatsApp and Messenger, along with the main social network, according to Facebook.

"This company has repeatedly shown that it can grow both its ad revenue and its user base, even in the face of enormous challenges," said eMarketer analyst Debra Aho Williamson.

"Today's earnings release demonstrates that it still has that power."

Ms Williamson said that for the moment, advertisers "remain dedicated to Facebook despite its problems. However, they are also paying more attention than ever to those problems".


During an earnings call, Facebook executives warned that regulation and efforts inside the company to ramp up privacy would be "headwinds" to ad targeting that powers the company's revenue.

Compounding the effect of controls such as the General Data Protection Regulation in Europe and increased focus on privacy in operating systems and products are "creating headwinds that we think are going to impact us as we get later in the year and into 2020". said chief financial officer David Wehner.

Privacy and compliance efforts also require significant investment in process, people and infrastructure, he added.

The Facebook workforce had grown to 39,651 by the end of the quarter, with the Silicon Valley company hiring aggressively, particularly workers focused on security, privacy and eliminating content deemed unacceptable.

Mr Zuckerberg renewed his call for legislators around the world to set clear, uniform standards on important issues such balancing free speech with fighting online bullying or election meddling.

"Either the right regulations will get put into place, or we expect frustration with our industry will continue to grow," he said.

"We think that having a more democratic process for setting what some of those norms are would be helpful."

Also factored into the quarterly results was a tax expense of US$1.1 billion stemming from a court decision on the treatment of stock-based compensation.

Facebook shares gained 1.1 per cent during Wednesday's trading session and swung slightly higher in after-hours exchanges following the earnings release.

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