The Conference Call That Shook Investor Faith in Facebook

Chief Executive Mark Zuckerberg opened the call just after 5 p.m. Eastern time by saying the company had​“a solid quarter.” He crowed about Instagram, calling it an “amazing success” and said he believed that the unit grew twice as quickly under Facebook than it would have solo. About 12 minutes into the call, Chief Operating Officer Sheryl Sandberg chimed in, providing her usual litany of examples of how advertisers were adopting its various ad tools.

There were few signs that anything major was amiss.

And then around 5:20 p.m., Chief Financial Officer Dave Wehner addressed analysts and dropped one bombshell after another, rattling investors and raising red flags about whether Facebook’s powerful moneymaking machine is starting to sputter.

First he said the advertising revenue growth slowed down more in Europe than anywhere else in the world partly because of new privacy laws there. That was a bit jarring, as most investors had come to believe the new law that went into effect in May would have minimal, if any, impact.

Then, he noted that the overall revenue growth rate wasn’t just slowing in the second quarter, but would continue to do so in the third and fourth. He partly blamed “currency headwinds” and new privacy options for users but also revealed that new ad formats such as those within Instagram Stories weren’t pulling in the same amount of money as ads shown in the Facebook and Instagram feeds.

.. Ads shown in feeds are where Facebook generates the bulk of its revenue. Now, Facebook executives were saying that people were spending more time using a less-lucrative product.
Operating margins, Mr. Wehner added, would fall ​to the “mid-30s” from about 44% currently over the next few years, stemming in part from investments in security and safety

.. Mr. Wehner and Ms. Sandberg noted that Facebook had yet to feel the full effects of the new European privacy laws. Mr. Wehner pointed out that Facebook would see a hit to revenue growth owing to changes to its products that would boost privacy.

“The question is will this monetize at the same rate as News Feed?” Ms. Sandberg replied to one question about the moneymaking potential of Stories. “And we honestly don’t know, we’ll have to see what happens.”

.. Ms. Sandberg replied: “I mean, even at decreasing growth rates, we are still growing and predicting growth at very healthy rates.”

.. they must grapple with the question of whether Facebook, too, has limits.

.. “While the company is still growing at a fast clip, the days of 30%+ growth are numbered.”