Following a year of controversies and privacy scandals, last quarter marked a turning point for Facebook (NASDAQ:FB), as the company missed analysts' estimates for the first time in three years and revenue growth decelerated. Facebook warned that slowing growth would continue into the second half of 2018, expecting declines in the high single-digits sequentially.
The drama at Facebook has continued over the past several months. Instagram founders Kevin Systrom and Mike Krieger recently resigned unexpectedly, leaving many investors to fear that Facebook's largest growth engine may now be at risk. These high-profile losses came on the heels of a new hack that compromised an estimated 30 million Facebook accounts, calling into question the company's security initiatives.
Things have escalated recently, as several public funds and a growing number of state officials have called for the ouster of Mark Zuckerberg as chairman of Facebook's board of directors for not taking more decisive steps in response to the ongoing breaches.
Many of these issues will be front and center when the company reports the financial results of its third quarter after the market close on October 30. Let's take a look at last quarter's results and see what to expect when Facebook reports earnings.
Strong -- but slowing -- growth
For the second quarter, Facebook reported revenue of $13.2 billion, up 42% year over year -- strong by any measure -- but a significant deceleration from the 50% year-over-year growth the company generated in the first quarter. Net income of $5.1 billion resulted in diluted earnings per share of $1.74, up 32% compared to the prior-year quarter.
Expenses ramped up faster than revenue, as operating expenses climbed 50% year over year. Facebook execs signaled that profitability would be affected as the company ramped up its digital security efforts and hired more staff for content review. Operating margins fell to 44% from 47% in the year-ago quarter, and the company expects that trend to continue into 2019.
While monthly active users (MAUs) worldwide increased to 2.23 billion, up 11% year over year, the recent enactment of GDPR in Europe contributed to a decline in users in the region. Daily users in Europe fell from 282 million to 279 million, and MAUs declined from 377 million to 376 million. This could signal a longer-term problem if the trend persists.
Things won't improve in the near term
Facebook CFO Dave Wehner provided the following insight into the company's future on the conference call to discuss the second-quarter results:
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.
That will likely result in a marked decline from the 42% revenue growth in the second quarter.
Wehner cited several reasons for the slowing revenue growth. He said the company will be promoting Stories and giving customers more choice concerning their privacy, both of which would have a negative impact on revenue growth. He also pointed to currency headwinds as a contributing factor.
While we won't be beholden to the whims of Wall Street, checking in on analysts' expectations can help provide context, given Facebook's somewhat vague guidance. Consensus estimates are calling for revenue of $13.78 billion, up 33% year over year, and earnings per share of $1.47, a decline of 7.5%.
The coming quarters will likely be challenging for both Facebook and its investors, as the company deals with a range of issues that will affect its revenue growth and profitability, all while trying to improve public perception. All of that takes time and money. Only time will tell whether Facebook can right the ship, but it certainly isn't going to happen overnight.