Facebook Posts Strong Q1 2020 Results, but Covid-19 Is Starting to Make Its Mark

Facebook reported revenue of $17.74 billion in the first quarter of 2020, up 18% from the same period in 2019. But the effects of the coronavirus pandemic did not make their mark until the last three weeks of the quarter, and the outlook for the second quarter is murky, at best. [kickout id="1"] The company said in its earnings statement: “Our business has been impacted by the Covid-19 pandemic and, like all companies, we are facing a period of unprecedented uncertainty in our business outlook. We expect our business performance will be impacted by issues beyond our control, including the duration and efficacy of shelter-in-place orders, the effectiveness of economic stimuli around the world and the fluctuations of currencies relative to the U.S. dollar.” Facebook said that during the last three weeks of the quarter, it saw a significant decrease in demand for advertising, leading to price drops. The company will not provide specific revenue guidance for the second quarter or the full year due to the ongoing uncertainty, but it offered a snapshot of the first three weeks in April, saying ad revenue was flat versus the same period last year after rising 17% year-over-year in the first quarter. Facebook added that those trends apply globally, as most of the countries where it has a major presence are still under some sort of shelter-in-place guidelines. While Facebook would not speculate on its second-quarter outlook, that didn’t stop analysts from weighing in. BMO Capital Markets managing director, U.S. internet and media equity research Daniel Salmon projected a 17% drop in Facebook ad growth in the second quarter of 2020 and a full-year slippage of 5%, followed by a larger recovery rate in 2021. CCS Insight chief operating officer Martin Garner expressed optimism for a rebound as well, saying, “Like Google, Facebook has an opportunity to emerge from the coronavirus crisis as a stronger player. One key impact of the virus will be to accelerate companies’ use of digital services in everything from advertising to collaboration. Although Google and Facebook will take a hit from Covid-19, we expect them to be leading indicators of recovery, as digital advertising and other services show early growth in economies getting back to normal.” But eMarketer principal analyst Debra Aho Williamson was more cautious, saying in an email Wednesday, “The fact that revenue was flat in the first three weeks of April indicates that the second quarter will be a much more challenging quarter than the first quarter was. Some countries will be open for business sooner than others, and ad spending will start to rise there, but other countries will remain largely on lockdown into May and possibly beyond. Even within countries such as in the U.S., businesses will open up at varying rates, making it incredibly difficult for a company like Facebook to get its ad sales momentum back.” The first notes of caution about the effects of Covid-19 came when Facebook vice president of analytics Alex Schultz and outgoing vp of engineering Jay Parikh said in a Newsroom post March 24 that while the coronavirus pandemic was driving activity up on many of Facebook’s services, many of the services seeing increased engagement were not monetized, and the company was seeing a weakening in its ad business in countries that were taking aggressive measures against Covid-19 at the time. Garner agreed, saying in an email this week, “Facebook saw a potentially costly effect with the coronavirus. Advertising revenue will take a hit to some extent. But usage of other Facebook services, including WhatsApp, has ballooned, pushing the company’s costs up. The problem is that Facebook does not monetize some of those services, so there could be a marked impact on profitability.” Social media marketing platform Socialbakers chimed in early this month, releasing a report that showed a drop in ad spend in regions where the pandemic was becoming more serious (North America, the western and southern parts of Europe and Southeast Asia) but signs of a rebound in East Asia, where businesses were beginning to reopen. Socialbakers said at the time that ad spend on Facebook in North America fell nearly 50% between December 2019 and the middle of March, while cost per click in Western Europe took a similar hit over that time period, dropping from 43 cents to 20 cents. Socialbakers CEO Yuval Ben-Itzhak said in an email this week, “Hope is on the horizon for Facebook as ad spend in East Asia grew 12.7% since the beginning of March, which means ad spend in other regions may soon bounce back. Lower CPC [cost per click] offers increased reach: Brands are starting to see the advantage of lower CPC in reaching a wider audience for less investment, with brands seeing reach increase by 28.6% since lockdown, meaning that dwindling ad spend may be short-lived.” Digital marketing agency Gupta Media reported April 7 that Facebook’s CPMs (cost per thousand impressions) in the U.S. reached an all-time low, falling under $2 for the first time and landing at $1.96, while global CPMs trended the opposite way, topping $1 for the first time since March 20 on the back of increases in France, Germany, Italy, Spain and the U.K. Gupta Media pointed out that the average CPM in the U.S. from March 2018 through February 2020 was $4.67, meaning current levels were down roughly 36%, while globally, average CPMs for that same time period were $3.28, pointing to a 70% plunge. Gupta Media strategy and analytics expert Alex Palmer said in an email at the time, “We’ve observed between a 35% and 50% decline in average CPMs across the Facebook ads marketplace in the countries most affected by Covid-19 in the past couple of weeks. The inevitable decline in digital advertising across the globe for Facebook during this crisis comes at the same time the platform sees its usage soaring over 50% in countries hit hardest by the virus and begs the question of not if businesses should start taking advantage of lower ad-rates, but when?” Facebook reiterated the increased engagement on its services Wednesday, saying that daily active people across its family of applications averaged 2.36 billion in March, up 12% compared with March 2019, while family monthly active people totaled 2.99 billion as of March 31, up 11%. [kickout id="2"] [kickout id="3"] For Facebook itself, its 1.73 billion daily active users in March were up 11% year over year, while monthly active users rose 10% to 2.6 billion as of March 31. [kickout id="4"] [kickout id="5"] Facebook said that while it expects to save money in areas such as travel, events and marketing as well as slower headcount growth, the company will continue to invest in product development and technical talent. It projected total expenses for 2020 of $52 billion to $56 billion, down from its previous call of $54 billion to $59 billion. The company said headcount as of March 31 was 48,268, up 28% from the same time last year. Facebook CEO Mark Zuckerberg said in a statement, "Our work has always been about helping you stay connected with the people you care about. With people relying on our services more than ever, we're focused on keeping people safe, informed and connected."