Facebook Proves Adept at Beating Lowered Expectations

(Bloomberg Opinion) -- This shouldn't be a surprising quality in one of the world's most valuable companies, but it's worth saying: Facebook Inc. is savvy. 

This company has a list of problems longer than a drugstore receipt. It's a creepy data hoarder. It has botched efforts around the globe to stem violence or other abuses on its internet hangouts, and it was an unwitting star of the recent special counsel investigation involving President Donald Trump. Regulators and politicians worldwide are screaming constantly at the company for its various sins — and that's starting to hit Facebook in its pocketbook. It shed more stock market value last July than any company in U.S. history when it warned that revenue growth would slow, profit margins would shrink and steam was running out in its most successful form of advertising. 

Those problems aren't going away. But Facebook reset expectations for investors a year ago, and now it's clearing that lowered bar in what promises to be a year of awkward transition. Facebook may have a host of flaws; stupidity is not one of them. 

The company on Wednesday posted its earnings for the first three months of the year, and they were good. Revenue rose a better-than-expected 26 percent in the first quarter. Its operating profit margin was also better than expected, at 42 percent, excluding what Facebook estimates could be a fine of at least $3 billion from the U.S. Federal Trade Commission, which is investigating whether the company violated promises to protect consumer privacy. In places where Facebook use is pervasive, there was a slight increase in the number of people who use it or the company's Messenger app at least once a day in North America and Europe. 

The same figures might have been underwhelming a year ago, when the company seemed to be untouchable financially. Since then, Facebook prepared investors for softer results and then topped those lowered expectations. Like I said: savvy. 

The big surprise was Facebook's relatively modest spending growth. Excluding the accrual for the expected FTC fine, Facebook's expenses rose 34 percent from a year earlier. The company had previously said that its expenses were going to shoot up as much as 50 percent this year as it splurges on all sorts of priorities, including developing video programming for its TV-like hub, hiring more people to police its internet hangouts for abuses and building computer centers to handle all these Instagram posts and Messenger chat sessions. 

Facebook has a reputation now for overstating its expense growth, and during a conference call with investors the company pared its 2019 expense growth forecast by a touch. It now expects costs to increase by about 37 percent to 45 percent from 2018, excluding the FTC hit. Yes, that's still a faster rate than Facebook's slowing pace of revenue. Again, though, Facebook has told investors to expect slimming profit margins, so what the company delivered on Wednesday looked like a relief. In after-market trading, shares rose as much as 9 percent.

Let's not forget, though, that drugstore-receipt-length list of problems. The most serious among them for Facebook's business is that the company is having a harder time finding new people to surf its main social network, and it has acknowledged it will be tricky to make as much money as it used to from emerging ways people are using the internet, including web video and the short video-and-photo diaries that Facebook calls “stories.” 

Use is also shifting from places like the U.S. and Europe, where Facebook's advertising revenue is huge, to countries such as India, where advertising potential is relatively small for now. Those are existential problems for Facebook, and it won't be clear this year at least whether the company has successfully figured out ways to make money from stories or from its owned apps such as Messenger and WhatsApp. 

My favorite thing to say about Facebook is that the company is excellent at making money. Even in what promises to be a fallow year, Facebook is delivering the goods while it tries to figure out its next acts. 

To contact the editor responsible for this story: Daniel Niemi at dniemi1@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Shira Ovide is a Bloomberg Opinion columnist covering technology. She previously was a reporter for the Wall Street Journal.

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