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What to expect from Facebook earnings after recent scandals

JP Mangalindan
Chief Tech Correspondent

Facebook (FB) will announce its first-quarter earnings on Wednesday afternoon following one of the most difficult and controversial periods in the social network’s history.

Investors will pay very close attention to whether Facebook profits took a hit in the wake of revelations that Cambridge Analytica, a voter profiling company, harvested the data of up to 87 million Facebook users without their consent. The scandal spooked investors and continues to do so: Facebook stock is down 13.7% since the news broke in mid-March.

However, RBC Capital Markets’ Mark Mahaney expects the social network to report solid earnings of $6.5 billion on revenues of $11.6 billion, with profits potentially slightly lower than expected because it’s investing in beefing up employee headcount and technologies on its security and content reviewing teams.

‘They keep using Facebook’

Another area investors will scrutinize? User engagement, and whether that area suffered during the first quarter. Mahaney doesn’t generally expect a material long-term impact stemming from data privacy concerns, and if there is a short-term dip, he predicts a potentially small decline in Facebook daily active users from 184 million in North America to roughly 180 million in March.

“The vast majority of people just sailed right through the Cambridge Analytica stuff,” Mahaney told Yahoo Finance. “They keep using Facebook because of its ease of use.”  

WASHINGTON, DC – APRIL 10: Facebook co-founder, Chairman and CEO Mark Zuckerberg arrives to testify before a combined Senate Judiciary and Commerce committee hearing. (Photo by Chip Somodevilla/Getty Images)

That supports what Facebook CEO Mark Zuckerberg said on a call with reporters in early April contending the data scandal had no “meaningful impact” on users engaging with the social network. Indeed, even several users affected by the Cambridge Analytica data breach recently told Yahoo Finance they had no plans of actually deleting their Facebook accounts. Those Facebook users were unequivocally unhappy with how their data was misused but apparently not enough to sever ties with the social network.

Mixed feelings from advertisers

Advertiser sentiment may be somewhat mixed, depending on whom you ask.

“If there is any good news to come out of all of the events of the last month or so, it is that all of the conversations we have had with advertisers suggested none of the user data issues had really changed their willingness to allocate budgets to Facebook,” Credit Suisse analyst Stephen Ju wrote in his most recent report, published last Friday.

But while Facebook ad budgets may remain unchanged, advertisers appear somewhat mixed in their feelings towards the social network. In a survey published by RBC Capital Markets and Ad Age in late March that surveyed over 750 advertising professionals, 58% of those surveyed said they planned on increasing their Facebook ad spending — down from the 66% who expressed similar sentiments last September. Likewise, those same ad professionals generally agreed their “perceived” ROI on Facebook from ads was lower, although the survey did not discuss specifics.

“All of this makes us incrementally less bullish on FB, though one survey does not a trend make,” Mahaney wrote in the survey results at the time. “What keeps us still bullish is that FB still ranks as the highest ROI platform and has intrinsically one of the most positive Spend intentions skews.”

The heightened scrutiny  around Facebook stems from reports that emerged in mid-March that Cambridge Analytica had abused Facebook’s terms of service and harvested the data of 50 million users — a number the social network eventually revised to 87 million users — as part of a targeted advertising campaign to help elect President Donald Trump. Facebook management’s initial delay in addressing the controversy head-on stoked the public’s outcry for increased data privacy and government regulation. 

‘Well-crafted regulation is necessary’

Apple CEO Tim Cook has been surprisingly candid on the topic.

“I think that this certain situation is so dire and has become so large that probably some well-crafted regulation is necessary,” Cook said at the annual China Development Forum in Beijing in last month. “The ability of anyone to know what you’ve been browsing about for years, who your contacts are, who their contacts are, things you like and dislike and every intimate detail of your life — from my own point of view it shouldn’t exist.”

Likewise, Ginni Rometty, CEO of IBM (IBM), also stated at the same event in Beijing that companies dealing with customer data have to be transparent in how they use — and allow third-parties to use — that data so “they should never be surprised.”

The brouhaha culminated in two days of hearings in mid-April that saw Zuckerberg grilled by senators on the Senate Judiciary and Commerce Committees, as well as representatives from the U.S. House Energy and Commerce Committees, on a number of issues, including the recent Cambridge Analytica scandal, the company’s role in the 2016 U.S. presidential election, and its position on government regulation regarding user privacy. Although the 33-year-old Facebook executive’s testimony was well-received, Zuckerberg also left a number of questions unanswered.

To that end, Facebook has a long road ahead, which includes hiring more than 20,000 employees and contractors by the end of 2018 to shore up security and privacy, as well as rebuilding public trust with disillusioned politicians on the Hill and disaffected users. The social network’s first-quarter 2018 earnings report may prove another step in accomplishing the latter.

JP Mangalindan is the Chief Tech Correspondent for Yahoo Finance covering the intersection of tech and business. Email story tips and musings to jpm@oath.com. Follow him on Twitter or Facebook.

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