Facebook sees 26% revenue growth as $5B FTC fine looms

Brief:

Facebook reported Q1 2019 ad revenue of $14.9 billion, jumping 26% from $11.8 billion a year earlier, while its average revenue per user rose 16% to $6.42 during the period, according to a company announcement. Mobile ad revenue grew 30% to $13.9 billion, making up about 93% of its total ad revenue, Facebook COO Sheryl Sandberg said in a conference call with analysts.
Stories Ads grew to 3 million advertisers on Facebook, Instagram and Messenger from 2 million last quarter. Its top 100 advertisers made up less than 20% of total ad revenue, indicating its advertiser base has diversified, Sandberg said.
The company reported global growth of 8% to 2.38 billion monthly users for Q1 2019, beating estimates of 2.37 billion. About 2.7 billion people use one or more of Facebook's apps — Instagram, Messenger and WhatsApp — at least once a month. However, the company says it faces a Federal Trade Commission fine of as much as $5 billion for violating a data-privacy agreement.

Insight:

Facebook's quarterly earnings report shows that its advertising sales continue to outpace growth in the broader ad market, which is forecast to rise 4.7% this year from $522 billion in 2018, according to media agency Magna. Facebook is almost entirely dependent on mobile advertising, whose share of the total ad market is expanding. In the U.S., the digital ad market is set to grow 19% to $129.3 billion, and $87.1 billion of that will go to mobile platforms, eMarketer recently estimated. Those trends bode well for Facebook's continued growth, although the company faces greater competition from digital ad newcomers like Amazon, which reports its earnings later today. Facebook's yearly ad sales growth slipped to 26% in Q1 from 38% in the prior quarter, another sign of maturation for the social networking giant.

The growth in Stories Ads demonstrates that mobile marketers are embracing the new format across Facebook's apps. The company began pushing Stories Ads last year to reignite ad growth. About half a billion people look at Stories on Facebook, Instagram or WhatsApp every day, Facebook founder and CEO Mark Zuckerberg said during the conference call. Businesses are using Interactive Stories Ads, introduced globally last month on Instagram, to engage with customers. For example, Dunkin's promotion of its doughnut fries used an interactive poll in Stories ads, resulting in votes by more than one in five people who saw the ad, which boosted engagement and drove 20% lower cost-per-video, Sandberg said on the call.

Meanwhile, the looming FTC fine highlights that Facebook's lax data-privacy controls continue to haunt the company, although it can easily pay the fine of as much as $5 billion. It set aside $3 billion to cover the possible penalty, which would be a record-setting U.S. fine for a tech company, but Facebook is on track to reach revenue of $70 billion this year if its current 26% growth rate lasts through December. The FTC declined to comment on the possible penalty, while unnamed sources told The New York Times that the agency hasn't reached a final decision. Facebook's stock surged 9% after it reported results, indicating that investors see the fine as merely a slap on the wrist.

As Facebook grapples with criticism about its continued privacy woes, the company plans to expand services like encrypted messaging that would strengthen privacy but may reduce the effectiveness of ad targeting. On the conference call, Zuckerberg said the company will announce more details about its business strategy for encrypted messaging in the coming weeks, but said that he didn't think it would be a "major driver" over the next few years.

While the U.S., Canada and Europe are Facebook's most lucrative markets for ad sales, user growth has stalled. The company added just 2 million monthly active users (MAUs) in the U.S. and Canada from Q1 2018 to Q1 2019, a growth rate of 1%. Daily active users (DAUs) barely nudged upward to 186 million from 185 million a year earlier. Average revenue per user (ARPU) grew 30% to $30.12 in Q1 from a year earlier, indicating that Facebook continues to improve monetization of its U.S. and Canadian user base. Instagram has become the major source of sales growth for the company as ad spend on Facebook's main platform declines, a study indicated this month.

As for user growth, Facebook is now mostly dependent on Asia and other emerging markets to expand its footprint. The social giant doesn't operate in mainland China, but other parts of the Asia-Pacific region grew 12% to 981 million MAUs and by 13% to 600 million DAUs. Being allowed back into China would be a boon to the company. However, the Chinese government hasn't shown signs of letting Facebook, Twitter or YouTube back into the country, where tech giant Tencent's WeChat is the dominant social media company with more than 1 billion DAUs, per ZDNet.