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Facebook's security woes will be in focus during earnings this week

Daniel Howley
Technology Editor
Facebook could end up spending a lot of money to improve network health and stability in Q1 2019. (Image: AP Photo/Elise Amendola, File)

Facebook (FB) is scheduled to announce its Q1 2019 earnings on Wednesday, and investors will be keeping a close eye on how much it’s spending on security.

In its Q4 2018 earnings call, the social networking giant announced that it would see a mid-single-digit decline in growth for this quarter. In February, meanwhile, CEO Mark Zuckerberg announced via a Facebook post that the company would spend a whopping $3.8 billion on safety and security for the platform.

Stifel Equity analysts Scott Devitt and D. Logan Thomas explained in a research note that operational expenses for Facebook will increase in 2019, as the company tries to address platform and security health.

Many of these security issues are Facebook’s own doing, and now it’s paying the price for its rapid growth.

Facebook’s ongoing security woes

Facebook is no stranger to controversy. The social networking site has seemingly dealt with crisis after crisis since the Cambridge Analytica debacle revealed that a political consultancy firm used consumers’ Facebook data in an attempt to help Donald Trump win the 2016 election.

Then there are the company’s ceaseless security problems. Most recently, Facebook announced that an earlier report that it stored passwords in an unsecured format was far worse than the firm had initially let on.

What was originally supposed to be tens of thousands of affected Instagram users was revised to tens of millions. That’s in addition to the hundreds of millions of Facebook Lite users impacted. Facebook Lite is a version of the social network designed for use by consumers with slow or poor internet connections.

The proliferation of fake news and hate speech, including a live stream by one of the gunmen in an attack on a mosque in Christchurch, New Zealand, on the social network has also drawn the ire of politicians in both Europe and the U.S., where Congress is currently mulling legislation regulating social media sites.

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Paying for better security

To combat such problems, Zuckerberg announced that Facebook is spending more than $3.8 billion on improving security for Facebook, Instagram, and Whatsapp.

Facebook's Mark Zuckerberg is expected to provide color on the company's 2019 earnings later this week. (Charles Platiau/Pool Photo via AP, File)

Those expenses, however necessary, will eat into Facebook’s revenue.

Needham analyst Laura Martin explained in a research note that while she doesn’t agree that Facebook should be used as a political football, regulators’ demands will impact the company’s shareholders.

“It is popular with politicians to bash Facebook. Each incremental demand by regulators costs [Facebook] shareholders more money (ie, lower margins) and causes senior managers to react to past events rather than moving forward,” Martin wrote.

Needham estimates that Facebook’s operating margin will fall from 50% in 2017 to 34% in 2020, as a result of increased costs and expenses.

But Facebook’s problems are largely of its own making. Storing passwords in unsecure formats, allowing third-parties to gain access to user data and enabling the proliferation of hate speech and fake news are issues that Facebook brought on itself in its bid to expand as quickly as possible.

Interestingly, however, analysts say advertisers aren’t bothered much by Facebook’s negative headlines. Mizuho Securities recently surveyed an ad agency to get its take on Facebook’s overall performance, and found that the agency wasn’t worried about the company’s security problems.

“The agency is not too concerned about recent negative headlines on data security because they have had limited impact on ad spending,” Mizuho’s James Lee wrote in a research note.

Still, if Facebook is going to win back the trust of its users, before it impacts its bottom line, it’s going to need to address the company’s problems.

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