META Meta Platforms Inc

Social-media giant absorbs record penalty of $5 billion after strong second quarter

By Jeff Horwitz and Deepa Seetharaman 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (July 25, 2019).

Facebook Inc. pushed past a record-setting privacy fine, posting strong second-quarter earnings that show the resilience of its social-media empire despite persistent negative headlines and intensifying Washington scrutiny.

The tech giant earned $16.9 billion in revenue, up 28% from a year ago. The company posted $2.6 billion in profit, or $0.91 a share, reflecting a one-time $2 billion charge as part of its $5 billion settlement with the Federal Trade Commission announced earlier on Wednesday, and an accounting change regarding tax deductions for stock-based compensation. Without those two charges, the company would have earned $1.99 a share, beating analysts' expectations of $1.88.

Yet even as Facebook resolved one major federal probe, it disclosed the existence of another: an FTC antitrust review that the company said began in June.

Facebook's results show the duality that currently defines the company: It is a punching bag for critics, who pummel it for repeated privacy missteps and misinformation on its platforms, but a darling of investors, who prize the earning power of its targeted advertising.

The company's top executives said they believe they can continue to grow the business even while investing further in security and privacy. "This quarter shows once again we can do both," Chief Operating Officer Sheryl Sandberg said on an earnings call.

Facebook's earnings landed hours after a press conference in which FTC officials announced a historic penalty against the social-media giant that they hoped would prompt other companies to take privacy concerns more seriously. Some lawmakers and two of the FTC's five commissioners, however, have said the fine won't be enough to prevent future violations.

The results also come as Facebook and other tech giants brace for a wave of heightening scrutiny -- from the U.S. and abroad -- as lawmakers, regulators and rivals push for checks on Silicon Valley's dominance over key markets.

In addition to disclosing the FTC's antitrust probe, Facebook referenced Attorney General William Barr's announcement this week that the Justice Department plans to begin its own review of leading internet companies.

Facebook co-founder and chief executive Mark Zuckerberg on the call repeated his support for more regulation but was more explicit about part of his motivation: self-preservation.

"My broader concern is that if that doesn't get put in place, then frustration with the industry will continue to grow," he said, referring to new industrywide rules. "We're trying to do our part to advocate for a good regulatory framework in each area."

While Facebook's adjusted earnings surpassed most analyst estimates, all had predicted steady growth, reflecting Wall Street's confidence that the company's financial performance would continue to diverge from its reputational issues.

The tech giant's stock has risen 56% since the beginning of the year, despite a pile of regulatory and legal challenges and a skeptical reception for its plans to develop a global cryptocurrency called Libra. Facebook shares climbed more than 3% in after-hours trading Wednesday before dropping slightly.

The FTC settlement puts new guardrails around the company's management and how it approaches privacy but doesn't severely curtail Facebook's data-collection or ability to sell ads based on it. The pact keeps Mr. Zuckerberg's power over the company largely intact, while requiring the board to keep closer watch on privacy matters.

Facebook now has a clear path forward, Mr. Zuckerberg said. "Not just in terms of product and business -- in terms of guidance from regulators, which sets clear expectations and gives us a foundation to build on."

Even with the negative publicity and restrictions related to Europe's new privacy law, Facebook continues to grow at twice the rate of global internet advertising, said analyst Mark Mahaney of RBC Capital Markets. He said it is possible that continued regulatory scrutiny will impact the business, but the risk seems manageable. Google has annually paid $2 billion to $3 billion to regulators, he noted. "For Facebook, I won't treat it as a recurring expense until it becomes one."

The idea that paying billions in fines is merely the cost of doing business for a tech giant is precisely what animated many critics of the Facebook settlement, who said it didn't go far enough to enact changes to the business.

The earnings report demonstrated continued growth in Facebook's "blue" app, its oldest and largest product. The company said 1.59 billion accounts used Facebook daily, up 8% over the 1.56 billion reporter last quarter, with 2.41 billion accessing Facebook on a monthly basis -- also up 8%.

Some of the risks around Facebook's rocky trajectory were evident in its introduction of Libra, a new cryptocurrency aimed at average consumers. In congressional hearings earlier this month, lawmakers said they would insist on strict oversight of the new digital money and questioned whether the company had earned the trust such a project required.

Mr. Zuckerberg said the Libra project's rollout demonstrated Facebook has learned some valuable lessons in previous years, with many partners and ample time for regulators to weigh in.

"Facebook from a few years ago would probably have just shown up and tried to release a product on our own," he said.

Write to Jeff Horwitz at jeff.horwitz@wsj.com and Deepa Seetharaman at Deepa.Seetharaman@wsj.com

(END) Dow Jones Newswires

July 25, 2019 02:47 ET (06:47 GMT)

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