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How Rising Expenses Are Pressuring Facebook’s Margins

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Facebook’s rising expenses

Facebook’s (FB) total costs and expenses rose more than 80% YoY to $11.7 billion in the first quarter of 2019. The quarter’s expenses surged as the figure included $3.0 billion in legal costs related to the ongoing federal probe. Currently, the matter remains unsolved, and the company expects a fine in between $3 billion and $5 billion. The rise in expenses also hit the operating margin, which declined to 22% from 46% in the year-ago quarter. Excluding the $3 billion penalty fine, the company’s expense rate would have been 46 percentage points lower. The company anticipates its expenses to rise by 40% to 50% YoY in 2019.

Facebook increased spending to safeguard its platform

The company’s expenses have risen as Facebook is spending significantly on its Snapchat (SNAP)-like Stories product, which is available across Instagram, Messenger, and WhatsApp Status. Facebook believes that users will use the Stories feature more than the Feed on the Facebook platform.

Facebook has also been spending billions to maintain the security and compliance of its platform and has even hired thousands of people to check unusual activity on the platform and remove fake accounts and pages. Total headcount also increased by 36% YoY to 37,700 in the quarter.

However, Facebook’s issues related to privacy, fake news, and other scandals have continued to increase. Most recently, it was revealed that millions of Instagram user passwords that were stored in a plain readable format had been leaked. Then, the company uploaded email contacts of nearly 1.5 million new users without permission. Earlier this month, millions of Facebook users’ data was exposed by two apps that have access to Facebook user data. Facebook’s platform was also criticized when a terrorist used the Facebook platform to live-stream an attack in New Zealand that killed 49 people. The live streaming of the terrorist attack was later uploaded on Twitter (TWTR) and Alphabet’s (GOOGL) YouTube.

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