Facebook is expecting to pay as much as $5bn to the US Federal Trade Commission (FTC), it revealed in first quarter financial reports, which otherwise showed continued revenue growth to more than $15bn for the first three months of the year.
Facebook recorded a $3bn legal expense “in connection with the inquiry of the FTC into our platform and user data practices”, the company said. The expenses result in a 51% year-over-year decline in net income, to just $2.4bn. Absent this one-time expense, the company noted, Facebook’s earnings per share would have beaten analyst expectations, and its operating margin (22%) would have been 20 points higher.
“We estimate that the range of loss in this matter is $3.0bn to $5.0bn,” the company said. “The matter remains unresolved, and there can be no assurance as to the timing or the terms of any final outcome.”
The FTC launched an investigation into Facebook’s privacy practices in March 2018 in response to the Cambridge Analytica revelations. The inquiry has focused on whether the data practices that allowed Cambridge Analytica to obtain Facebook user data violated the company’s 2011 agreement with the FTC. Facebook and the FTC have reportedly been negotiating over the settlement, which will dwarf the prior largest penalty for a privacy lapse, a $22.5m fine against Google in 2012.
Facebook’s results were otherwise strong, with total revenue and monthly active users beating analyst expectations. Shares soared more than 9% in after hours trading.
But the expectation of an FTC fine may portend future trouble, warned the eMarketer analyst Debra Aho Williamson.
“This is a significant development, and any settlement with the FTC may impact the ways advertisers can use the platform in the future,” she said.
The stock market’s positive response to the results drew the immediate ire of the Democratic congressman David Cicilline, who chairs the House subcommittee on antitrust, commercial and administrative law.
“Last month, I said that a fine in the low billions of dollars would amount to a slap on the wrist for Facebook,” he wrote on Twitter. “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.”
On a conference call with investors, the CEO, Mark Zuckerberg, focused his remarks on the plan to build out a “privacy-focused” encrypted messaging platform and his thinking about regulation and the “important social issues facing the internet”.
The plan to stitch together the various messaging platforms in Facebook’s “family of apps” was announced in March as a pivot to a “privacy-focused communications platform”. Zuckerberg said that he anticipates the build-out of the new service to take “five years or longer”.
“We’re going to intentionally take a longer period of time than we might have in order to get safety right,” he said. “A few years ago we probably would have rolled this out and then dealt with issues later.”
Zuckerberg also expressed confidence that the company could “strengthen privacy without meaningfully impacting our business”, though the chief financial officer, David Wehner, warned that the company expects revenue growth rates to “decelerate sequentially” due to “ad targeting-related headwinds”.
Those “headwinds” include increasing numbers of people taking advantage of Europe’s privacy regulation by opting out of ad targeting and Facebook’s long-promised “clear history” tool, which Wehner said would launch in the fall.
Zuckerberg’s reference to “issues facing the internet” echoes the CEO’s messaging from last quarter, when he began characterizing Facebook’s numerous scandals as being challenges for the entire internet, and not just his company.
Facebook was dogged during the quarter by another string of revelations of improper data practices, the departure of a key executive, intensifying scrutiny by regulators and lawmakers in the US and UK, and international outrage over the company’s role in broadcasting and disseminating video of the terrorist shooting in Christchurch that killed 50 Muslims worshippers.
The quarter also saw Facebook face criticism over rampant anti-vaccine misinformation, a questionable market research app, continuing struggles with its factchecking program, and a belated decision to stop allowing white nationalism.
Facebook needs to show that it’s improving on user data practices and content management, said Jessica Liu, a marketing analyst for Forrester.
“Its track record has been atrocious,” Liu said of Facebook’s data handling. “No more platitudes. What action is Facebook Inc actually taking?”
