Facebook sets aside $4.3bn to cover expected US fine

Facebook has set aside $4.3bn for an expected fine from US regulators over privacy issues.

Facebook CEO Mark Zuckerberg. Picture: AP

Facebook has set aside $US3 billion ($4.3bn) for an expected fine from the Federal Trade Commission over privacy issues, cutting into the social-media giant’s profits even as its underlying business remained strong.

Facebook posted $US15.08bn ($21.5bn) in revenue, up 26 per cent from $US11.97bn in the same period last year, but profits of only $US2.43bn ($3.46bn) in the first quarter, as the one-time reserve wiped out most of its income.

The company reported per-share earnings of US85 cents in the first quarter, down from $US1.69 a year ago. Including the money being reserved for the estimated legal settlement, Facebook would have had earnings of $US1.89 a share. Analysts, on average, were expecting per-share earnings of $US1.62, according to FactSet.

In announcing its earnings, Facebook estimated that the cost of the FTC settlement would range between $US3bn ($4.3bn) and $US5bn ($7.1bn), though it said “there can be no assurance as to the timing or the terms of any final outcome.”

The FTC has been probing whether Facebook violated terms of an earlier consent decree when data of tens of millions of its users was transferred to Cambridge Analytica, a data firm that did work for the campaign of US President Trump. Under the decree, approved in 2012, Facebook agreed to get user consent for collecting personal data and sharing it with others. The Wall Street Journal reported in February that FTC staff had discussed a fine of up to $US5bn.

The fine would mark the largest privacy-related action in FTC history, and the first major regulatory penalty for Facebook after a bruising period in which its business practices have been under intense scrutiny around the world.

“We are focused on building out our privacy-focused vision for the future of social networking, and working collaboratively to address important issues around the internet,” Facebook chief executive Mark Zuckerberg said in a statement.

Excluding the reserve for the FTC settlement, Facebook’s operating margin fell to 42 per cent — a stellar number for virtually any business but nonetheless a step down from the 46 per cent it reported a year earlier, as costs rose to $US8.76bn from $US6.52bn. Facebook has been warning that its margins will decline as a result of its increased investment in moderating user-generated content.

Following the company’s first-quarter earnings report, Facebook stock rose about 4 per cent in after-hours trading. Before the close of trading on Wednesday, the company’s stock had risen roughly 35 per cent year-to-date.

The strong operating results cap a quarter in which corporate developments occurred at a hectic pace, even by Facebook standards.

In early March, Mr Zuckerberg said the company would increasingly shift to private and ephemeral messaging, a notable change for a company that derives nearly all of its existing revenue from advertising. Dissent among top executives over plans to integrate Facebook, WhatsApp and Instagram’s messaging systems precipitated the departure of Zuckerberg deputy Chris Cox and WhatsApp chief executive Chris Daniels.

On March 15, a white supremacist broadcast the murder of 50 people at two mosques in New Zealand on Facebook Live, leading to urgent calls for the company to do more to stop the spread of such content after it was posted. Weeks later, the Department of Housing and Urban Development sued Facebook over alleged housing discrimination on its platform, attacking basic features of targeted digital advertising business in the process. And to cap off the quarter, Mr Zuckerberg announced that Facebook supports more regulation of the internet, including the establishment of an American consumer-data privacy regime similar to Europe’s.

The bumpy ride wouldn’t be visible to anyone looking at the Facebook’s user metrics. Despite independent research suggesting that Facebook users are spending less time on the company’s main app, the company reported 1.56 billion daily active users globally, up 8 per cent from 1.45 billion a year ago and continuing the company’s expansion streak.

The company said around 2.7 billion people use Facebook, WhatsApp, Instagram, or Messenger each month.

Facebook reported nearly no user growth in the US, Canada and Europe, markets that produce around 70 per cent of the company’s revenues but are approaching saturation and offer reduced opportunities for growth. Its fastest-growing market was Asia, where users grew by nearly 4 per cent since the fourth quarter.

The Wall Street Journal