Facebook is expecting to pay as much as $5bn to the US Federal Trade Commission (FTC), it revealed in first quarter financial reports, which otherwise showed continued revenue growth to more than $15bn for the first three months of the year.
Facebook recorded a $3bn legal expense “in connection with the inquiry of the FTC into our platform and user data practices”, the company said. The expenses result in a 51% year-over-year decline in net income, to just $2.4bn. Absent this one-time expense, the company noted, Facebook’s earnings per share would have beaten analyst expectations, and its operating margin (22%) would have been 20 points higher.
“We estimate that the range of loss in this matter is $3.0bn to $5.0bn,” the company said. “The matter remains unresolved, and there can be no assurance as to the timing or the terms of any final outcome.”
The FTC launched an investigation into Facebook’s privacy practices in March 2018 in response to the Cambridge Analytica revelations. The inquiry has focused on whether the data practices that allowed Cambridge Analytica to obtain Facebook user data violated the company’s 2011 agreement with the FTC. Facebook and the FTC have reportedly been negotiating over the settlement, which will dwarf the prior largest penalty for a privacy lapse, a $22.5m fine against Google in 2012.
Facebook’s results were otherwise strong, with total revenue and monthly active users beating analyst expectations. Shares jumped more than 4.5% in after hours trading.
But the expectation of an FTC fine may portend future trouble, warned the eMarketer analyst Debra Aho Williamson.
“This is a significant development, and any settlement with the FTC may impact the ways advertisers can use the platform in the future,” she said.
In a statement, the CEO, Mark Zuckerberg, said: “We had a good quarter and our business and community continue to grow,” adding: “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.”
Zuckerberg’s reference to “issues around the internet” echoes the CEO’s messaging from last quarter, when he expressed confidence that Facebook had “started to turn a corner” on the laundry list of “social issues” that have damaged the company’s reputation since 2016.
That plan – to stitch together the various messaging platforms in Facebook’s “family of apps” – was announced in March as a pivot to a “privacy-focused communications platform”. The quarter also saw the launch of an e-commerce tool on Instagram, which has become a key driver of Facebook’s growth and revenue.
But Facebook was also dogged by another string of revelations of improper data practices, the departure of a key executive, intensifying scrutiny by regulators and lawmakers in the US and UK, and international outrage over the company’s role in broadcasting and disseminating video of the terrorist shooting in Christchurch that killed 50 Muslims worshippers.
The quarter also saw Facebook face criticism over rampant anti-vaccine misinformation, a questionable market research app, continuing struggles with its factchecking program, and a belated decision to stop allowing white nationalism.
Facebook needs to show that it’s improving on user data practices and content management, said Jessica Liu, a marketing analyst for Forrester.
“Its track record has been atrocious,” Liu said of Facebook’s data handling. “No more platitudes. What action is Facebook Inc actually taking?”