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Facebook’s Gains Show User Growth Still Possible in the U.S.

Kurt Wagner

(Bloomberg) -- Facebook Inc. delivered better-than-projected third-quarter sales and steady user growth, proving that its business can endure increasing regulatory scrutiny and criticism over its immense reach and influence.

The social-media giant’s monthly global user base grew by 35 million -- including 3 million new users in the lucrative North American market, which had looked like it reached a plateau in recent years. Facebook added as many new users in the U.S. and Canada last quarter as it did the previous five quarters combined.

“We are building products that people want to use all over the world,” Facebook Chief Operating Officer Sheryl Sandberg said in an interview with Bloomberg Television late Wednesday following the company’s earnings report. “Importantly, the Facebook core app is growing, including in the United States.”

That user growth came even as regulators and lawmakers began to step up probes into the world’s largest social network, including antitrust investigations by the U.S. Federal Trade Commission, the Department of Justice and a broad group of U.S. state attorneys general. The inquiries haven’t scared off advertisers either, and third-quarter sales rose 29% to $17.7 billion, the company’s highest ever for any single quarter.

On an earnings call with analysts, Facebook executives pointed to ads in Stories, where posts disappear after 24 hours, as a key growth area. They also mentioned ads in the Explore section of its Instagram photo-sharing app, where users go to discover posts from people they don’t follow. Research firm EMarketer estimates Instagram will generate more than $15 billion in ad revenue this year, up from $9.1 billion in 2018, though Facebook doesn’t break out results from that business.

Read more about analysts’ reaction to the report here.

Sandberg reiterated what she has said in past quarters: While Stories ads are popular and growing, they still aren’t as expensive as some other kinds of Facebook ads. “Stories still don’t monetize at the same rate as News Feed right now,” Sandberg said. Finance chief Dave Wehner said that in the short term, that probably won’t change. He said that Stories revenue will increase because of more ad impressions, not necessarily higher prices. Instagram is also rolling out a shopping feature, and Sandberg said there’s a nascent commerce effort across all of Facebook’s properties.

Facebook shares rose 5.3% in early trading after closing at $188.25 in New York on Wednesday. The stock is up 44% this year.

Separately, Facebook also said Susan Desmond-Hellmann, the company’s lead independent director, is stepping down from the board. In a statement, she cited “increasing demands” from her role running the Bill & Melinda Gates Foundation, her family and her health as reasons for her resignation.

Third-quarter net income rose 19% to $6.09 billion, or $2.12 a share, Facebook said in a statement. That beat predictions for $1.91 in per-share profit. Monthly average users at the Facebook app reached 2.45 billion, matching estimates.

Despite the rosy earnings report, Facebook Chief Executive Mark Zuckerberg used his opening remarks to deliver an impassioned speech about his views on how Facebook handles issues like free expression and political ads. Just an hour earlier, Twitter Inc. CEO Jack Dorsey announced his company would no longer sell political ads, a stance that runs counter to Facebook’s own policy, which stipulates the company will run ads from politicians -- and won’t fact-check them. Dorsey tweeted Wednesday that “political message reach should be earned, not bought.”

Zuckerberg responded without directly mentioning Dorsey or Twitter by name. “In a democracy, I don’t think it’s right for private companies to censor politicians or the news,” Zuckerberg said, echoing a sentiment he has shared repeatedly in recent weeks. “And although I’ve considered whether we should not carry these ads in the past and I’ll continue to do so, on balance so far I’ve thought we should continue.”

Sandberg acknowledged that Facebook’s policy is “controversial,” but said Facebook’s policies aren’t driven by financial motivations. “This is less than 1% of our revenue,” she said on Bloomberg TV. “The revenue is not worth the controversy. But what Mark said is that we believe in free expression, we believe in political speech, and ads can be an important part of that.”

One consequence of Facebook’s policy is that political candidates can lie in their ads, and pay Facebook to promote those ads more widely to its users. On Tuesday, U.S. Senator Mark Warner, a Democrat of Virginia, joined the list of politicians decrying the company’s policy, joining presidential hopefuls Joe Biden and Elizabeth Warren, who have also called on the company to change its stance on fact-checking political ads.

Zuckerberg noted that this political ad controversy and similar debates will likely follow the company as it prepares for the U.S. presidential election in November 2020. “I expect that this is going to be a very tough year. We try to do what we think is right but we’re not going to get everything right,” the CEO said. “I don’t think that anyone can say that we’re not doing what we believe, or that we haven’t thought hard enough about these issues.”

Somewhat overshadowed on the earnings call was the discussion of Desmond-Hellmann’s immediate departure from the board.

Because of her role as lead independent director, Facebook has pointed to Desmond-Hellmann in the past as evidence that Zuckerberg, who is chairman and has a controlling stake in the company, is accountable to someone. According to Facebook’s proxy statement from April, the lead independent director is tasked with “providing the chairman with feedback and counsel concerning his interactions with the board of directors,” and also “providing leadership to the board of directors if circumstances arise in which the role of the chairman may be, or may be perceived to be, in conflict.”

Desmond-Hellmann has been on the panel since 2013, and has served as lead independent director since 2015. Facebook’s remaining outside directors, including early company investors Marc Andreessen and Peter Thiel, will look for her replacement. They expect to appoint someone “over the coming months,” according to a Facebook statement.

“Sue has been a wonderful and thoughtful voice on our board for six years, and I’m deeply, personally grateful for everything she has done for this company,“ Zuckerberg said on the call.

Facebook also shared estimates for 2020 spending, which was a focus for Wall Street analysts after two years of heavy investment in areas such as data centers, and efforts to better secure the platform from misinformation and abuse. Total expenses will rise to $54 billion to $59 billion next year, Facebook executives said Wednesday on the conference call, with capital expenditures projected to be $17 billion to $19 billion. Capital spending will come in at $16 billion for all of 2019, the company said.

Operating margin, a measure of profitability, for the recent quarter was 41%, up from 27% in the second quarter and 22% in the first. In both of those periods, Facebook’s operating expenses included billions set aside for an eventual $5 billion fine as part of a settlement with the Federal Trade Commission that was finalized in July.

(Updates share price in seventh paragraph.)

--With assistance from Sarah Frier.

To contact the reporter on this story: Kurt Wagner in San Francisco at kwagner71@bloomberg.net

To contact the editors responsible for this story: Jillian Ward at jward56@bloomberg.net, Andrew Pollack

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