The Washington PostDemocracy Dies in Darkness

Facebook’s latest profits show FTC fine is a blip

The record FTC settlement announced Wednesday raises questions about how the company will operate in the future

Facebook said its second-quarter revenue, which is driven by advertising, grew by 28 percent to $16.9 billion. Net profit fell 49 percent from the same period a year earlier to $2.6 billion, dragged down by the FTC penalty. (Andrew Harrer/Bloomberg News)
Placeholder while article actions load

Facebook on Wednesday announced another quarter of strong revenue growth, as Wall Street appeared unfazed by the company’s historic $5 billion privacy settlement with the U.S. Federal Trade Commission.

The social network said its second-quarter revenue, which is driven by advertising, grew by 28 percent to $16.9 billion, beating analysts’ estimates of $16.49 billion. Net profit fell 49 percent from the same period a year earlier to $2.6 billion, dragged down by the FTC penalty.

But Facebook acknowledged there are more hurdles ahead. In its earnings report, Facebook disclosed that the FTC had informed the company in June that it had opened an antitrust investigation into its business. Adding to the woes, on Tuesday, the Justice Department announced a sweeping antitrust investigation into Silicon Valley tech giants, the latest probe faced by Facebook and other companies around the globe.

U.S. government issues stunning rebuke, historic $5 billion fine against Facebook for repeated privacy violations

Facebook’s stock price approached record levels Wednesday ahead of the earnings release. It was slightly up in after-hours trading.

Over the last year, Facebook has faced withering privacy scandals resulting in Wednesday’s settlements with the U.S. government, as well as slowing revenue and user growth as people in the United States and Europe abandon the platform — but its stock price has largely resisted.

Facebook on Wednesday said it set aside an additional $2 billion for the FTC fine after booking $3 billion of it last quarter, and another $1.1 billion for income taxes stemming from a legal case, called Altera Corp. v. Commissioner, governing how corporate stock-based compensation is calculated and taxed.

Read the Facebook order from the FTC here

Wednesday’s FTC settlement concluded a 16-month federal investigation prompted by revelations last year that political consultancy Cambridge Analytica had improperly accessed data on 87 million Facebook users.

Facebook’s stock “has been almost Teflon-like over the last two years,” said Daniel Ives, managing director, equity research for Wedbush. “I think it just speaks to the fact that, despite all the noise, they continue to execute. And as long as they continue to execute, all the other issues — FTC fine, the DOJ — will become background noise.”

Ives said that the settlement announced Wednesday raises questions about how Facebook will operate in the future in light of the stipulations contained in the agreement. They require the company to submit to greater oversight of its privacy practices, and Facebook chief executive Mark Zuckerberg must personally certify every three months that those practices are in compliance with the law.

Facebook will have to pay a record-breaking fine for violating users’ privacy. But the FTC wanted more.

“We are investing in building stronger privacy protections for everyone and on delivering new experiences for the people who use our services,” Zuckerberg said in the earnings statement.

Since the Cambridge scandal broke, the CEO has repeatedly emphasized that the company is chastened and changed. Facebook has cracked down and restricted access to developers even further since the controversy. In announcing recent initiatives, such as plans for a new cryptocurrency, Facebook executives have stressed that they are taking a more cautious approach than in the past.

Facebook privately pitched its cryptocurrency plan last month to regulators. They were left even more scared.

While regulators and lawmakers appear skeptical of that argument, Wall Street traders and Facebook’s business partners do not.

“Advertisers remain dedicated to Facebook despite its problems,” said eMarketer Principal Analyst Debra Aho Williamson. “This company has repeatedly shown that it can grow both its ad revenue and its user base, even in the face of enormous challenges. Today’s earnings release demonstrates that it still has that power."

In a Facebook post, Facebook’s top lawyer, Colin Stretch, said the agreement would “require a fundamental shift” in the way Facebook approaches its operations. The agreement “will mark a sharper turn toward privacy, on a different scale than anything we’ve done in the past,” he wrote.

He also announced Facebook had settled another investigation by the Securities and Exchange Commission, which requires the company to pay $100 million for failing to disclose information about its privacy violations to investors.

On the earnings call, Zuckerberg said the FTC settlement would push Facebook to create an independent privacy committee on its board of directors. He said he was tapping the company’s most experienced leaders and committing significant engineering resources to building privacy controls into all of its products. “Together we expect these changes will set a new standard for our industry,” he said, adding that the result would be longer times for shipping new products than in the past. “It’s critical that we get this right, and we are going to build this into all our systems.”

Continuing a trend from the last few years, Facebook’s daily and monthly active user base remained relatively flat, while its user numbers climbed steadily upward in Asia, Africa, and other developing countries.

On the earnings call, analysts asked several questions about Facebook’s planned cryptocurrency, Libra. They barely brought up the settlement and Facebook’s regulatory hurdles.