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Reuters/Stephen Lam
Getting real.
FACING THE FACTS

Mark Zuckerberg just outlined all the ways Facebook is behind its competitors

By Hanna Kozlowska

Facebook knows it has a lot of work to do.

The social network sent the market mixed signals when it reported its earnings Tuesday (Oct. 30). It beat analyst expectations on earnings per share, but missed on revenue and number of active users—two crucial figures for measuring the company’s health—as founder and CEO Mark Zuckerberg tried to allay some of Wall Street’s worries after a turbulent year.

Revenue continues to rise for the Silicon Valley giant, but its growth is slowing. Users who check the social network in the US have remained stable (after a blip earlier this year), but fell by about 1 million in Europe.

“Our community and business continue to grow quickly, and now more than 2 billion people use at least one of our services every day,” Zuckerberg said in a statement. He added that he believed there to be ”huge opportunities ahead in video and commerce as well.”

The revenue hit was expected: During the company’s second-quarter earnings call, Facebook chief financial officer Dave Wehner said revenue growth would be impacted by privacy scandals and other “headwinds.” On top of that, Facebook is no longer a young company that “moves fast and breaks things”—in the third quarter of 2017, it grew 47% on a yearly basis. This year, that rate fell to 33%.

Particularly important to Facebook are user numbers in the US, which remains by far the company’s most profitable market. US daily users are stable, for now, but in Europe—the second most lucrative region for the company—Facebook lost 1 million users in the quarter, an expected fallout from the region’s new sweeping privacy laws. Facebook gained the most users in the less profitable Asia-Pacific and “Rest of World” regions, as the company defines them.

Whether the company loses even more users over its October discovery of coordinated misinformation attacks by Iran and Russia remains to be seen. Tuesday’s earnings report is only for the months through September.

Already, many company observers and analysts see Instagram as the future of Facebook. The company doesn’t break down its results by app, but Zuckerberg said during the earnings call that the app still has significant monetization opportunity—for example in the Explore tab, where users spend 20% of their time, but which doesn’t have ads. Surveys consistently show that Facebook’s primary app is among the most-used apps by teenagers.

Zuckerberg was also unusually candid on the company’s earnings call. In February, he said that Stories, the disappearing post format Facebook stole from Snapchat, will soon be “the most common way that people share” across every Facebook app. On today’s call, he said that the transition from news-feed posts to Stories and messaging was “not as smooth” as he had hoped.

He also mentioned competitors in his initial statement, saying that Facebook was “well behind YouTube” in making its video offerings engaging. Zuckerberg added that Facebook is “still working to make a unique people-centric experience” on his platforms.

Zuckerberg also said that Apple’s iMessage was Facebook’s “biggest competitor by far” in messaging, and ahead in important countries like the US. “Apple bundles iMessage as a default texting app and it’s still ahead,” he added, acknowledging that in countries where Android smartphones are more popular, ”people tend to prefer” Facebook services like WhatsApp “because of its stronger record on privacy.”

Zuckerberg even took a dig at Apple, saying that WhatsApp “doesn’t store the keys to your messages in China or anywhere else,” seemingly referencing reports from earlier this year that iMessage data might be on Chinese state-owned servers, (reports that were later revised). Zuckerberg and Apple CEO Tim Cook have been trading jabs in the press throughout the year.

How Facebook might address these shortcomings remains unclear, but it does seem Zuckerberg knows changes need to be made. That’s good, since in a tough year for Facebook—longtime executives departed, and the company is still facing backlash over hacks and misinformation—the past three months were particularly tough. The market was extremely disappointed with Facebook’s second-quarter earnings, which led to a record drop in its share price, around 20%. The stock has yet to recover; it’s been swept up in an overall slump in tech shares, falling a total of more than 33% since a high on July 25.

Facebook’s stock price oscillated wildly after the company’s earnings report Tuesday, and was up about 3.6% to $157.47 at the time of publishing.

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