Facebook repeats warning about slower ad growth, shares drop

Facebook shares fell as much as 4.2% as executives repeat warning that there’s a limit to the number of ads it can show on its social network


Facebook is more focused on improving the quality of ads and targeting the messages to make them more valuable. Photo: Reuters
Facebook is more focused on improving the quality of ads and targeting the messages to make them more valuable. Photo: Reuters

San Francisco: Facebook Inc. executives tried to temper investor exuberance about sales-growth prospects, repeating a warning that there’s a limit to the number of ads it can show on its social network.

On a conference call following its first-quarter earnings report, the company said it expects revenue growth to be down “meaningfully” after it stops increasing the frequency of marketing spots in the news feed later this year to avoid driving away users. Facebook shares fell as much as 4.2% as that message overshadowed first-quarter sales that topped estimates and a 17% jump in monthly users to 1.94 billion.

With Facebook’s massive audience and its many options for brands to reach those consumers through its social, messaging and photo-sharing apps, the company has been one of the two main beneficiaries of an uptick in digital ad spending, alongside Google, especially on mobile phones. Yet it will take time for the company to prove that other bets, such as its heavy investment in video and other apps such as Instagram, Messenger and WhatsApp, can start contributing significantly to revenue in future quarters.

“A great quarter, but what comes next?” said Rob Sanderson, analyst at MKM Partners. “We’re just kind of in this wait-and-see mode in terms of the impact on the business. We don’t know how much ad load has driven growth.”

Facebook is more focused on improving the quality of ads and targeting the messages to make them more valuable, rather than their quantity, chief operating officer Sheryl Sandberg said in an interview.

“We carefully track the impact of ads on the user experience,” she said. Ad load won’t be a significant contributor to revenue even after this year, the company said.

The Menlo Park, California-based company said first-quarter sales climbed 49% to $8.03 billion, compared with the $7.83 billion analysts had projected. Net income rose to $3.06 billion, or $1.04 a share, topping the 87-cent average estimate compiled by Bloomberg. Analysts are predicting a 40% sales gain in the current period.

Facebook shares slipped as low as $145.45 in extended trading following the report, after declining less than 1% to $151.80 at the close in New York.

New businesses

Facebook in the last few years has depended on its social network—a mobile-advertising machine— to fund investments in other areas, which are much less developed as businesses. The company spun off its Messenger chat tool as a separate app in 2014, and just this year started testing advertising on it, alongside bot functions that let businesses reach consumers. Messenger now has 1.2 billion users. WhatsApp, which Facebook purchased the same year for $22 billion, hasn’t started making money yet.

The company is also pouring money into longer-term businesses and ideas, such as virtual reality goggles and connecting the world to the internet. In a presentation to developers last month, Facebook discussed further-off projects, like using technology to type directly from brain waves and developing a way to feel words.

Facebook’s work with Instagram is seen as proof that it can replicate its main network’s success in advertising on other properties. Instagram, now with 700 million users, has started adding to revenue growth, though the company doesn’t break out a number. The company has also benefited as more advertisers purchase video ads. Mobile now accounts for 85% of the company’s advertising revenue, the company said Wednesday.

Chief executive officer Mark Zuckerberg has been doubling down on investment in video, even predicting that the news feed will eventually be mostly video. The company added a daily video-story function to all of its apps in the first quarter, cloning a popular feature from its smaller, newly public competitor Snap Inc., the owner of Snapchat.

“We were a little late to the trend initially,” Zuckerberg said on the conference call. “I do think at this point we’re pretty much ahead, in terms of the technology we’re building. I would expect us to continue leading the way forward.” Snap will release its first earnings report as a publicly traded company next week.

Facebook has been making deals for more premium video on its site, with a plan to make money by sticking ads in the middle of the content, which will boost revenue, but with lower margins. The company will eventually roll out a video tab on its application—necessarily separate from news feed because people enter it with different intent, Zuckerberg said.

‘Live’ criticism

The social network has also heavily promoted a function on its site that lets people broadcast videos live, which has been used in ways Facebook didn’t anticipate, such as to stream acts of murder and suicide. After widespread criticism, Zuckerberg on Wednesday said the company will hire 3,000 people to monitor those videos around the world and help prevent instances of violence.

Critiques over Facebook’s handling of its “live” tool comes as the company is battling another public crisis: the proliferation of misleading information on its site, with political consequences. While the issue hasn’t impacted Facebook’s revenue, according to Sandberg, Facebook is working on product solutions and collaborating with journalists to fix the problem.

Fake news and live video murders “need to be taken incredibly seriously because there are implications for user engagement,” said James Cakmak, an analyst at Monness Crespi Hardt & Co. “These are critical issues that need to be addressed.” Bloomberg

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