Social network sets aside billions of dollars for ongoing FTC investigation into its user data practices
Facebook is still growing — despite spending big money on regulatory inquiries into its privacy practices. The social network reported it added another 50 million monthly users — putting it on the verge of passing 2.4 billion users overall — while posting better-than-anticipated sales when it reported its first quarter financials on Wednesday afternoon.
This comes despite Facebook estimating it set aside $3 billion during the quarter to settle an ongoing Federal Trade Commission investigation into its handling of user data. That one-time charge could surge to $5 billion, the company said in its earnings release.
“In the first quarter of 2019, we reasonably estimated a probable loss and recorded an accrual of $3.0 billion in connection with the inquiry of the FTC into our platform and user data practices, which accrual is included in accrued expenses and other current liabilities on our condensed consolidated balance sheet,” Facebook said in its release. “We estimate that the range of loss in this matter is $3.0 billion to $5.0 billion. The matter remains unresolved, and there can be no assurance as to the timing or the terms of any final outcome.”
The fine would be the biggest in FTC history. The FTC is investigating whether Facebook violated a 2011 agreement on protecting user privacy.
For the three months ended March 31, Facebook pulled in $15.1 billion in Q1 revenue, surpassing Wall Street estimates of $15 billion in sales. The company also posted non-GAAP earnings per share of $1.89, compared to analyst estimates of $1.63. Facebook’s sales increased 26% year-over-year, its smallest rate of growth since going public in 2012.
Facebook reported both its monthly active user base and its daily active user base increased 8% year-over-year. The company now has 2.38 billion MAUs and 1.56 billion DAUs. Facebook said 2.7 billion people access its family of apps, including Instagram, Messenger and WhatsApp, each month.
The user growth appeared to trump any investor concerns over its heavy legal spending, at least at first blush. Facebook shares jumped 5% in after-hours trading, hitting $191.20 per share.
“We had a good quarter and our business and community continue to grow,” chief Mark Zuckerberg said in a statement accompanying earnings. “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.”
Net income for the quarter was $5.43 billion, not factoring in the company’s legal charge.
Heading into Wednesday, Facebook’s business had remained teflon, despite a myriad of data privacy issues that have hit the company in the last year. Facebook’s stock price had increased more than 30 percent since the beginning of the year, closing at about $182 per share before releasing its Q1 results. What spurred the stock market rebound? Facebook reported in January it closed 2018 with a company-best $16.9 billion in quarterly revenue and still found a way to increase its daily user base 9%, surpassing the 1.5 billion daily user threshold at the same time. After a year full of privacy issues — underscored by the Cambridge Analytica data leak, which the company later admitted impacted 87 million users — the health of Facebook’s business, and the fact it avoided a user exodus, looked like a good omen for shareholders.
Still, Facebook has been unable to shake its privacy woes in 2019. In March, the company said hundreds of millions of user passwords had been stored in plain text — leaving them exposed to thousands of Facebook employees. Facebook VP Pedro Canahuati later said the company found “no evidence” the passwords were inappropriately accessed by company employees. And just last week, Business Insider reported Facebook harvested the email contacts of 1.5 million users without consent.
Last month, Zuckerberg outlined a company-altering plan to “build a simpler platform that’s based on privacy first.” In a lengthy blog post, Zuckerberg said that the strategic shift will include end-to-end encrypted messaging across all of Facebook’s platforms, barring Facebook and law enforcement from being able to read private conversations. Facebook-owned WhatsApp already has encrypted messaging, and it’s available as an opt-in feature on Messenger.
The revamped privacy approach will also emphasize ephemeral messaging, which was made popular by Snapchat. Facebook is also pledging to abandon storing user data in countries that have “weak records on human rights like privacy and freedom of expression.” Zuckerberg said this could lead to issues in countries like Russia, where lawmakers have attempted to force the social network to keep user data on servers located in the country. So far, Facebook has been quiet on how much Zuckerberg’s privacy mandate will cost the company or how it will affect its business.
The company will hold a call to discuss its earnings at 5:00 p.m. ET.