Associated legal expenses reduced operating margin, increased effective tax rate and lowered earnings for Q1 2019.

According to The New York Times, a $5 billion penalty from the FTC would be a record fine against a technology company and could be sending a statement to the technology industry that it won’t tolerate privacy violations or misuse of data. To date, the FTC’s largest fine against a tech company is $22 million levied against Google in 2012 for misrepresenting how it used some online tracking tools, said The Times.

During the first quarter of 2019, Facebook said it had accrued a $3 billion legal expense related to the investigation. Without the legal expense, Facebook said its operating margin would have been 20% higher, the effective tax rate would have been 14% lower, and diluted earnings per share would have been $1.04 higher.

In spite of the pending fine and negative publicity surrounding Facebook, CEO and founder Zuckerberg addressed neither in his comments.

“We had a good quarter and our business and community continue to grow. We are focused on building out our privacy-focused vision for the future of social networking and working collaboratively to address important issues around the internet,” Zuckerberg said.

Financial highlights from the first quarter earnings report include the following:

• The company had total revenue of $15.1 billion, including $14.9 billion in advertising revenue and $0.2 billion in payments and other fees, a 26 percent increase year-over-year.
• Total costs and expenses were $11.8 billion, compared to $6.5 billion during Q1 2018. This year’s figure includes the $3 billion in legal expenses.
• Operating margin was 22% compared to 46% for the same period last year.
• Facebook reported net income of $2.4 billion, or $0.85 diluted earnings per share, compared to $5.0 billion, or $1.69 diluted earnings per share during Q1 2018.
• Mobile advertising revenue represented about 93% of total ad revenue, a 2% increase year-over-year.
• Facebook reported $3.96 billion in capital expenditures during the first quarter.
• Cash, cash equivalents and marketable securities were $45.24 billion.

Operational highlights for the quarter include:

• Daily Active Users: 1.56 billion on average for March, an 8% increase year-over-year
• Monthly Active Users: 2.38 billion on average for March, an 8% increase year-over-year
• Facebook’s headcount was 37,773 as of March 31, 2019.

Facebook investors do not seem to be phased by the pending FTC fine. In fact, on April 23, the day the earnings report came out, Facebook stock was valued at $183.78 per share. It dipped only $0.20 on April 24 to $183.58 per share and has since increased to $193.40 per share as of 4:45 a.m. Eastern today.

Insider Take:

If Facebook’s annual revenue follows the first quarter revenue, it could potentially bring in $60 billion in revenue in 2019. A $5 billion fine would represent 8.3% of that, and a fine that size would only be 11.1% of the company’s cash, cash equivalents and marketable securities. In other words, a $5 billion fine would have an impact, but not a significant one.

For the FTC’s actions to be meaningful, Facebook needs to be held to the same standard of the law that other companies are held to in terms of privacy practices and how it safeguards user data. The FTC needs to hold Facebook accountable by requiring immediate change and closely monitoring the company’s business practices going forward. Otherwise the fine amounts to a slap on the wrist.

Dana Neuts is Subscription Insider's Senior Staff Writer, covering our daily subscription news as well as member features, case studies, and reports.  

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