Earnings Results: Facebook stock seesaws after earnings beat, but gains after forecast isn’t as scary

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Facebook Inc. beat Wall Street expectations for profit Tuesday, despite numerous public-relations crises over the past several months and a forecast that led to a record drop for shares three months ago.

Facebook FB, +3.00%  stock seesawed after third-quarter earnings were released Tuesday afternoon, but settled at gains of roughly 3% once the conference call with executives concluded. As the numbers hit the wire, Facebook stock fell almost 4% in after-hours trading, but recovered minutes later and kicked off the call barely in the red, then headed south during prepared remarks before recovering for gains after executives wrapped up without delivering another guidance surprise. The stock was up about 4% in premarket trade Wednesday.

Last quarter, Facebook stock dove deep into the red when Chief Financial Officer David Wehner delivered a weak forecast. Tuesday, though, Wehner seemed to help bring the stock back from its deepest after-hours ravine. Investors had begun to drive the price down as Chief Executive Mark Zuckerberg launched the call, and by the time Wehner began to deliver his prepared remarks, the stock was already sliding and continued to its worst point in after-hours trading, roughly a 5% drop.

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After Wehner wrapped up without devastating news and Facebook turned to analyst questions, shares rebounded and continued to do so until the call wrapped up just after 6 p.m. Eastern.

The CFO said Facebook expects revenue growth to slow by a “mid-to-high single-digit percentage” compared with its third quarter, which is slightly better than the high-single-digits forecast Wehner delivered three months ago. Wehner explained that growth is coming from services that make Facebook less money, data-privacy is having an effect on “pricing grow” and the company is focusing on Stories, which “will displace some ad impression opportunities.” These same factors will continue to slow revenue growth in 2019, he said.

The Menlo Park, Calif.-based company reported $5.14 billion in net income for the quarter, which amounts to $1.76 a share, up from $1.59 a share in the year-ago period. Analysts’ average estimates for third-quarter profits called for $1.46 a share, according to FactSet.

Overall, Facebook logged sales of $13.73 billion, up from $10.14 billion in the year-go period, but slightly missing expectations for sales of $13.77 billion, according to FactSet. Facebook’s main source of revenue is ads, which brought in $13.54 billion, up from $10.14 billion in the year-earlier period. Facebook’s payments and other fees category — which includes its Oculus virtual-reality hardware — banked $188 million compared with $186 million last year.

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Facebook reported 2.27 billion monthly active users and a daily user count of 1.49 billion, up 10% and 9%, respectively. In the U.S. and Canada, the company’s most profitable markets, the daily member count remained flat at 185 million, the fifth consecutive quarter the daily user total has remained flat or dropped; monthly users ticked up to 242 million from 241 million in the first and second quarters of this year.

Despite the flat or declining member growth in the U.S. and Canada, Facebook was able to earn more money from each user in those countries: It banked $27.11 in revenue per user, up from $21.20 in the year-earlier period.

“Although revenue came in slightly lower than Wall Street expectations, it wasn’t a significant shortfall,” eMarketer principal analyst Debra Aho Williamson wrote in an email. “Importantly, Facebook grew revenue at a nice pace in the important U.S. and Canada markets. Facebook also managed to eke out a small usage gain in the U.S. and Canada. After the flatness we saw last quarter, that’s a good sign.”

“Overall, given all the challenges Facebook has faced this year, this is a decent earnings report,” Williamson concluded.

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Those challenges showed up again in Facebook’s spending, as total costs and expenses grew 53% to $7.95 billion in the third quarter, while profits grew by 9%. Facebook continued to add to its workforce, growing its head count 45% to 33,606 in the third quarter, compared with the same period last year. Co-founder Zuckerberg has said in the past the company planned to hire 20,000 people to handle safety and security on its platforms.

Zuckerberg did not dwell on the issues Facebook has faced in the past year, as he has done in previous conference calls since the Cambridge Analytical data-privacy scandal. Zuckerberg did not apologize a single time during the call.

Ahead of Facebook’s earnings, several analysts published notes suggesting that advertisers were beginning to take note of the wave of public-relations crises the company has been dealing with. Brand advertisers especially were said to be less willing to increase their budgets than in the past. For most major brands and companies, media buyers have considered Facebook a requirement when building a digital ad campaign, while smaller rivals such as Twitter Inc. TWTR, +1.88%  and Snap Inc. SNAP, +1.87%  are seen as more useful for product launches or specific, short-term objectives.

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In a phone interview late Tuesday, PMX Agency vice president of social and display Jesse Math said that clients have had conversations about Facebook’s issues — “it’s been a core part of conversations with Facebook too” — but PMX hasn’t seen an impact related to budgets.

“I like a platform that has 1.5 billion people,” Math said. “We’re focused on driving performance for clients and Facebook is going to be a primary driver of that success.”

Math says that because of some of the changes Facebook has made to its platform, his organization has suffered “short-term pain” in terms of the insights it can glean from running ad campaigns on the social network. “But that will be solved in the long term,” Math said.

Before Tuesday’s after-hours trading, Facebook stock had fallen 17.1% this year as the S&P 500 index gained 0.3%. The company’s stock dropped roughly 20% after its second-quarter earnings missed sales expectations and showed slowing user growth.