Facebook posted its Q2 2018 earnings report. The company missed the street estimate of $13.36 billion, and instead posted $13.2 billion in revenue. The revenue nevertheless grew by 42% year-on-year, but Facebook’s stock fell 8% after-hours. Within a few hours, the share price fell 20% and wiped out $123 billion market capitalization.

The General Data Protection Centre (GDPR), Cambridge Analytica, CEO Mark Zuckerburg’s Senate hearing and Facebook’s meddling and mismanagement with user data, privacy and fake news seem to have finally hit the company. The last time the company missed market expectation was about three years ago; this is still the slowest quarterly user growth Facebook has seen since 2011.

Facebook reached 2.23 billion monthly active users, up 1.7% from Q1, which isn’t a lot considering that it increased by 3.1% in Q1 and 2.7% in Q4 2017. DAUs were 1.47 billion on average for June 2018. However, both MAUs and DAUs have grown 11% year-on-year, and things look great if you considering the annual growth numbers. As expected, advertising revenue is the primary source of revenue for Facebook, with ads bringing in $13 billion of the total revenue. Mobile advertising revenue makes up 91% of ad revenue in this quarter and is up from 87% in the same quarter last year, reflecting a reduction in Facebook’s website.

No new users in lucrative North American market

The top guns at Facebook were also trying to skirt around the fact that the company’s share of users in the US and Canada has remained flat for this quarter, with 241 million from the last quarter remaining the same. Facebook CEO Mark Zuckerburg and COO Sheryl Sandberg both tried to highlight that the Facebook’s products as a whole have more unique when users have been de-duplicated from the apps — therefore, 2.5 billion people compares to 2.23 billion monthly users on Facebook, 1 billion users on Instagram, 1.5 billion users on WhatsApp, and 1.3 billion users on Messenger. 2.5 billion use at least one of its apps. The trend of no new users being added in US and Canada may be worrying as North America contributes most to revenue as compared to any other geographies. For example, in this quarter, 47% of Facebook’s total $13.2 billion revenue came from US and Canada. The number has remained a good 47-48% of all of Facebook’s revenue flowing from the two countries and to top it off, it earns the highest revenue per user — as much as $26 in this quarter — from the two countries. The EU comes in next with $8.6 ARPU, which does not even come close.

Users shrink in EU: GDPR effect

The effect of the implementation of the GDPR is showing up; Q2 saw the beginning of adjustments to Facebook’s privacy policies and get users to agree to how it collects data about them. Facebook lost 1 million users in the EU this quarter. It has also lost 3 million daily users in EU, as compared to the 5 million daily users the company had added in the last quarter. Revenue earned from the EU bounced back to $3.3 million, close what is what at the end of FY 2017. Anticipating the GDPR, revenue from the EU fell 6.5% in Q1 2018. The effects of decreased revenue and users may have arisen out of new ads transparency requirements, developer platform crackdown and Facebook’s quest to make using the platform healthy.

Zuckerburg said the decline in monthly active users in EU was expected, partly owing to the implementation of GDPR, but also because of investments in ad transparency, security and privacy of users, and a “responsibility to keep people safe.” He added that “our investments in security will significantly impact profit, which is what we see in this quarter.”

India market and WhatsApp

Zuckerburg said that the company was keen on expanding its WhatsApp service and has received positive feedback on WhatsApp Payments’ test launch so far. “There are a lot of people wanting to use the service when the government green-lights it,” he said. As opposed to the EU and North America, where Facebook as taken a backseat, the company added 138 million users in Asia-Pacific between Q2 2017 to now. From the last quarter, that’s 21 million new monthly active users in three months. CFO David Wehner said DAUs was up by 11% year-on-year, and countries like India, Philippines, Indonesia contributed a large portion of this growth.

On privacy and ‘meaningful time’

Zuckerburg opened up the conference call with investors with an emphasis on security of data, privacy. He talked about how time spent on Facebook’s products should be “meaningful over passive consumption”.

“We have launched changes to encourage interaction at the expense of some passive consumption on the platforms. We have started getting feedback, and want Facebook to more about connecting with people, and less about news content or viral videos. We understand the effect of using our service on people’s well-being.” said Zuckerburg in a call with investors.

Facebook leadership did say that giving users more privacy controls would in the future cut into its advertising revenues, as ads become less targeted and thus less effective as a result, resulting in lower prices for placement. Regardless, it seems as if Facebook is not the untouchable behemoth investors seem to think it is. Wehner also outlined how this recent instability in user growth would only continue to accelerate, and it may rise to as much as a single digit percentage point decline in the third and fourth quarter of this year.

Earnings Call Transcript
Earnings report