Facebook revenue grows 25% in Q4 as company warns of rising expenses

Facebook has been under fierce scrutiny worldwide in recent years over its privacy practices.

Facebook Inc said on Wednesday that growth would continue to slow as its business matured and reported a surge in quarterly expenses, disappointing Wall Street expectations that the costs of improving privacy would level off.

The news raised concerns that Facebook's best days were behind it, and shares of the world's biggest social network dropped 7.2% in extended trading.

Chief Financial Officer David Wehner said on a call with investors that the company's pace of expansion will slow further in the first quarter of 2020, with a percentage point decline in the low- to mid-single digits, citing its maturing business, the impact of global privacy regulation and concerns about ad targeting.

"We have experienced some modest impact from these headwinds to date. The majority of the impact lies in front of us," Wehner said.

He specifically noted changes made by Apple Inc and Alphabet Inc's Google, which have both announced new restrictions on browser cookies used to track users online.

Global scrutiny

Facebook, the world's second-biggest seller of online ads, has been under fierce scrutiny worldwide in recent years over its privacy practices. It is also facing heat over how its services have been manipulated to spread misinformation.

The company addressed those issues starting in mid-2018 following repeated scandals, causing growth in expenses to surge to more than 100% for several quarters as it hired new privacy staff and invested in content moderation.

That investment began coming down last year, leading analysts to believe Facebook was largely finished building out its new systems and beginning to find efficiencies that could whittle costs further.

But the company reported that its total costs and expenses increased 34% to $12.22 billion in the fourth quarter, more than double the 14% that analysts had forecast and dragging down operating margins to 42% from 46% a year earlier.

It also announced that it had reached a $550 million settlement in principle related to an Illinois lawsuit that claimed it illegally collected and stored biometric data for millions of users without their consent.

Revenue growth in the fourth quarter was Facebook's slowest-ever at 25%, although it beat analysts' expectations of a dip to 23%. This is the company's fourth straight quarter of revenue growth less than 30%, playing to concerns that Facebook is struggling to restore its pre-2018 momentum when sales regularly grew upwards of 40%.

Still, Facebook's shares were up more than 50% over the last year, raising pressure for a strong performance.

"FB stock had made a big run-up in anticipation of the report ...so the room for error was low," said Daniel Morgan, a portfolio manager at Synovus Trust Co.

The company continued to add users, beating estimates.

Monthly users of Facebook's core social network climbed 8% to 2.5 billion, while 2.9 billion people used one of its apps—Facebook, WhatsApp, Instagram or Messenger—each month.

That unique reach keeps advertisers dependent on Facebook's apps and online ad network. Facebook has also been trying to build out e-commerce offerings in the last year like Instagram Checkout, which make shopping more convenient by allowing users to complete transactions from within Facebook's apps.

However, Chief Operating Officer Sheryl Sandberg acknowledged in the investor call that the company is moving "very slowly and very, very carefully" with those products.