Facebook earnings: User engagement, ads under scrutiny after data breach

Wall Street will be watching for signs of how users and advertisers are responding to Facebook’s data privacy scandal on Wednesday when the embattled social media giant reports first-quarter earnings.

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Facebook and Alphabet-owned Google have a virtual duopoly on the digital advertising space, controlling roughly 60% to 70% market share, according to various estimates. Mark Zuckerberg’s company earned nearly $40 billion in advertising revenue in fiscal 2017 alone. Facebook also touts a base of more than 2 billion active users, more than any other social media platform.

But revelations last month that British data firm Cambridge Analytica accessed the personal data of up to 87 million users without consent have roiled Facebook’s stock and led some advertisers – and users – to question the company’s tactics. Facebook Chief Operating Officer Sheryl Sandberg told Bloomberg on April 5 that some Facebook advertisers paused spending on the platform in the scandal’s wake.

Facebook reported a downtick in user engagement in its last earnings report, with its number of daily active users in North America declining for the first time from 185 million to 184 million. Any further downtick could represent a cause for concern, Stifel analysts Scott Devitt and D. Logan Thomas wrote in a research note Monday.

“Should recent negative engagement trends in North America and Europe persist, we believe forward engagement estimates could prove optimistic,” the analysts said. “Overall, we continue to see heightened risk around regulation, consumer trust, and consumer usage levels of the platform.”

Despite concern related to the Cambridge Analytica saga, Facebook’s revenue is expected to rise 42% to $11.41 billion in its first fiscal quarter of 2018, according to analysts polled by Thomson Reuters. Earnings per share are projected to rise 30% to $1.35.

Facebook shares fell 3.7% in trading Monday after the company outlined its methods for policing inappropriate content, and the stock is down more than 10% so far this year.

Facebook has rolled out a host of policy changes to allay user concerns, and Zuckerberg appeared before both houses of Congress to answer questions about the company’s data practices. Zuckerberg denied that Facebook has lost a significant number of users since the data breach was uncovered.

While Stifel analysts called out potential risks associated with declining user engagement, the firm said it does not expect the scandal to have a “material impact” on Facebook’s quarterly advertising revenue.

Daniel Ives, head of technology research at GBH Insights, played down concerns about ad spending losses and predicted an earnings beat.

"We estimate in a worst-case scenario that between $1 billion to $2 billion of annual advertising [about 3% of annual revenue] is potentially at risk in 2018," Ives added in a note obtained by Barron’s.