Facebook has not had a worse quarter than the recent earning’s since going public in 2012, according to Wall Street and City analysts’ notes this morning. Their headlines are almost comically brutal:
New Existential Crisis – Credit Suisse
FB Throws Some Napalm On The Fire – Barclays
Threw out the Kitchen Sink – Jefferies
Worse than expected – Cowen
Tough outlook but largely self-inflicted – Deutsche Bank
Outlook Suggests Growth “Wall” In Sight – Pivotal
Bombshell Guidance – Macquarie
Total Reset; Major Management Credibility Rebuild Ahead – Stifel
Taking a Break from Being Friends – UBS
Facebook stock plunged nearly 24% last night after CEO Mark Zuckerberg warned of slowing revenue growth. In after-hours trading, the stock was down 20.2% at $217.50.
But here is the thing: Zuckerberg, COO Sheryl Sandberg, and CFO David Wehner warned everyone three months ago that bad news was coming, and no one listened . (No one? Goldman Sachs might have been an exception .)
To understand what happened last night, and to comprehend why one of the most successful stocks in tech history is now being utterly battered by the market, you need to go back to the Q1 2018 earnings call and read what Zuck et al actually said. Then compare that to last night’s call. Once you’ve done that, you’ll know that the worst might be yet to come.
First, here is what happened three months ago on the Q1 call
- Focus on safety, security, and privacy.
- Prevent harm, hate speech.
- Restrict developers.
- Force transparency on advertisers.
- Focus on “meaningful” engagement, and tolerate declines of non-meaningful engagement.
- Cut passive interaction.
- “2018 is a year of important investment.”
- Caution on GDPR: “There’s certainly potential for some impact. Any change of the ability for us and our advertisers to use data can impact our optimization potential at the margin, which could impact our ability to drive price improvements in the long run. So we’ll just have to watch how that plays out over time.”
Crucially, none of those priorities were about audience or revenue growth. Most of them are clearly negative for both those issues.
- Users will get option to cut ads.
- Users get more control over ads.
That’s the same thing. More hurdles for advertisers.
CFO David Wehner said:
- “We’re seeing a decrease in certain types of time spent such as passive video consumption as a result of that and an increase in areas like sharing. So, we’re not really optimizing the business on time spent, but rather the kind of quality of conversations and connections.”
- “On the GDPR trend, … [we] expect there would be a flat to down impact on MAU and DAU.”
- “I don’t know that we really see a doomsday scenario here. I think what we think is that depending on how people react to the controls and the ad settings, there could be some limitations to data usage. We believe that those will be relatively minor. … there is a potential to impact targeting for our advertisers. Obviously, if they are less able to target effectively, they’ll get a lower ROI on their advertising campaigns.”
They’re not talking about growth. They’re talking about cutting bad activity. Tolerating reductions in engagement and revenue. That’s all negative for revenue and audience growth.
Now look at Q2 2018, last night’s call
- More security around elections.
- More AI vs bad content.
- GDPR was bad.
- Security and privacy.
- News feed restricted to friends and family – more of that coming.
- “We’re going to keep on moving in this direction.”
Zuck is very, very concerned that when people use social they feel miserable. He is focused on only positive interactions, not total interactions or growth. And that is not about revenue or audience growth.
- We’re working on safety.
- “GDPR has not had a revenue impact, but we also recognize it wasn’t fully rolled out this quarter. It was very encouraging for us to see that the vast majority of people affirmed that they want us to use information, including from the websites they visit, to make their ads more relevant. But, as we look further out, we recognize that there’s still risk, and we’re going to watch closely.”
Translation: IT’S GOING TO GET WORSE. Only one-third of the GDPR impact has actually reached Facebook’s accounts . And Europe is a bigger market than the US for Facebook (a fact which probably does not get the profile it deserves on The Street).
- We suffer from currency headwinds (take that with a pinch of salt — they have currency issues every quarter).
- Awful guidance: “Our total revenue growth rates will continue to decelerate in the second half of 2018, and we expect our revenue growth rates to decline by high-single digit percentages from prior quarters sequentially in both Q3 and Q4.”
- “We plan to grow and promote certain engaging experiences like Stories that currently have lower levels of monetization, and we are also giving people who use our services more choices around data privacy, which may have an impact on our revenue growth.”
- “We would expect decel in the high-single digits for the next couple quarters. In terms of what is driving the deceleration, it’s a combination of factors … we’re going to be focusing on growing engaging new experiences like Stories and promoting those. And that’s going to have a negative impact on revenue growth. And then, finally, we’re giving people who use the services more choice around privacy, and that’s coming both in terms of impacts that could be ongoing from things like GDPR as well as other product options that we’re providing that could have an impact on revenue growth. So it’s a combination of all those factors that is leading to the deceleration of revenue growth in the second half.”
- “We had indicated in the first quarter that we would expect to see a decline. We’re not providing any guidance on MAU and DAU in Europe on this call.”
- “When you look at the deceleration, the one that I called out was really Europe where you saw the currency impact as well as, to a lesser extent, GDPR causing sort of faster deceleration than in the other regions.”
- “So GDPR didn’t have a significant impact in Q2, partially because of its implementation date. So you’re just seeing effectively one month of it in terms of revenue. “
- “Obviously, on the safety and security side, those are costs that are layering in that we think are the right thing to do for the business but don’t necessarily have a revenue impact.”
The translation of what Wehner said is: Facebook is doing a bunch of stuff that doesn’t drive revenue. Everything Facebook told us in Q1 turned out to be true — it hurt engagement and therefore revenue. And it could get worse! Or at least he cannot say it will get better, because the biggest hit from GDPR is yet to come. Facebook has only booked one month of GDPR impact in Q2. That means Q3 will be the first full quarter of GDPR impact.