Why Facebook's revenue growth decelerated in Q2 and will slip further in H2

Dive Brief:

Facebook posted $13.2 billion in revenue for Q2 2018, a 42% year-over-year increase, according to a news release. Ad revenue totaled $13 billion, also up 42%. Mobile ad revenue made up about 91% of ad revenue for the quarter, an increase over 87% from Q2 2017, for a total of $11.9 billion, which is up 50%.
In Q2, the average price per ad increased 17% while the number of ad impressions served increased 21%. Growth was driven primarily by ads in feed on Instagram and Facebook.
Q2's revenue growth rate decelerated approximately 7 percentage points from Q1 and further deceleration is expected in the second half, with the rate forecast to decline by high single digit percentages, company executives said during a conference call with analysts to discuss the quarterly results.

Dive Insight:

While Facebook posted solid revenue growth for Q2, the company failed to meet analysts’ estimates for the quarter, the first time since 2015, which sent the company's stock value into a tumble, per The Wall Street Journal. The slowdown suggests that Facebook’s high-profile privacy issues and negative press over the past few months may be catching up to it.

In a conference call with analysts, company officials suggested that a bigger focus on privacy, including giving users the option to opt-out of third-party data sharing, and on certain ad products could impede future growth.

"We plan to grow and promote certain engaging experiences like Stories that currently have lower levels of monetization, and we are also giving people who use our services more choices around data privacy, which may have an impact on our revenue growth," said David M. Wehner, chief financial officer at Facebook, during the call.

Despite the bad news, there are signs that Facebook could be strong enough to ride out the storm. While revenue growth is slowing, it is still above 40%. In comparison, Google's parent Alphabet reported a 23.6% increase in Q2 revenues a couple of days ago. Facebook also continues to see user growth, reporting an 11% increase in daily active users, reaching 1.47 billion, and 2.23 billion in monthly active users. Instagram reached more than 1 billion active users.

Following news of the Cambridge Analtyica scandal, 45% of Internet users said they would use Facebook less, per a Raymond James survey, and a handful of advertisers, including Mozilla and SpaceX, said they would pull ads from the platform. However, Facebook hasn’t seen a mass exodus of users or advertisers, which is evident from its Q2 growth. Zuckerberg touted the company’s investments in improving privacy and preventing fraud and abuse on the platform, during the earnings call. Earlier this week, Facebook suspended analytics firm Crimson Hexagon, which has contracts with U.S. government agencies and a Russian nonprofit with Kremlin ties, over allegations that it violated the platform’s data privacy.

And while Facebook's user base is growing, it isn't clear how satisfied those users are. Overall, consumer satisfaction with social media dropped 1.4%, with Facebook ranked one of the lowest, according to an American Customer Satisfaction Index released this week. Facebook is trying to address these issues by focusing on more engaging content and showing users more content from friends and family.

Over the past few months, Facebook has rolled out a number of changes to improve user experience, transparency and privacy on the platform. Facebook began prioritizing user posts in the News Feed earlier this year, and announced in June that it will start requiring advertisers to tell users if data brokers provided information that led to them being targeted with ads. Facebook also said it would be shutting down its Partner Categories program that helps brands target ads using third-party data.