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Facebook Emphasizes Shift to Stories as User Growth Continues to Slow in Q3

Facebook is still adding users every quarter, just not in the U.S. or Europe: The social networking giant revealed as part of its Q3 earnings results Tuesday that its number of daily active users has been flat in the U.S. for all of 2018, while it continues to lose users in Europe.

“We may be close to saturated in developed countries,” admitted Facebook CEO Mark Zuckerberg during the company’s earnings call.

Investors briefly sent Facebook’s stock down 3% in after-hours trading following the release of these results. However, the company’s share price quickly recovered on news of better-than expected earnings.

Facebook generated some $13.73 billion in revenue during the third quarter, compared to $10.33 billion during the same quarter a year ago. Net income for the quarter came in at $5.14 billion, compared to $4.71 billion in Q3 of 2017. Diluted earnings per share came in at $1.76, compared to $1.59 the year before. Analysts had expected earnings of $1.46 per share on revenue of $13.77 billion.

The social network saw some 2.27 billion monthly active users in September of 2018, compared to 2.07 billion a year ago. Daily active users averaged 1.49 billion in September, up 9% over last year’s results.

However, U.S. and Canada daily averages have been flat at 185 million since Q1 of 2018, and daily active users in Europe declined to 278 million, down from 279 million in Q2 and 282 million in Q1.

Zuckerberg seemingly tried to shift the conversation to some of Facebook’s other services in a quote supplied with the earnings release:

“Our community and business continue to grow quickly, and now more than 2 billion people use at least one of our services every day,” he was quoted saying. “We’re building the best services for private messaging and stories, and there are huge opportunities ahead in video and commerce as well.”

That kind of positive outlook may have helped to calm investors’ nerves, and prevent a sell-off panic like the one that followed Facebook’s Q2 results. Following its quarterly report in July investors sent Facebook’s stock off a cliff after the company posted a miss on revenue and user growth.

Investors were particularly scared by Facebook’s forecasts, with executives telling Wall Street that Facebook’s operating margin would sink from the mid-forties to the mid-30% range. In Q3, Facebook’s operating margin was 42%, 2% lower than a year before.

Those revelations weren’t entirely new to anyone who had been following Facebook for some time. Executives had long warned that the good times wouldn’t last forever, and that the move to new media formats like long-form video and Stories would come with higher costs and lower margins. However, Wall Street had been brushing off any warnings in light of Facebook’s past stellar results.

Zuckerberg used Tuesday’s call to more carefully lay out the changing landscape of social networking. He specifically called out video as both an opportunity and a challenge for the company, openly admitting that it was still playing catch-up to some of its competitors.

“We are well behind YouTube,” he said. Zuckerberg said that Facebook in the past had to limit the amount of video it was serving to people on the newsfeed to make sure that it wouldn’t adversely impact social interaction. He painted Facebook Watch as well as Instagram’s IGTV as effort to launch video services that don’t replace social interactions, but also said that video wasn’t necessarily the revenue driver that some had assumed it would be.

“Video monetizes significantly less well per minute than users interacting in feed,” he said, while adding: “Video is a critical part of the future. It will end up being a large part of our business as well.”

Zuckerberg also highlighted Stories, which Facebook has added to everything from Instagram to Messenger as well as its core app, as a key initiative to remain relevant to consumers. “People now share more than 1 billion Stories every day.” Zuckerberg said. “I think that this is the future.”

However, he admitted that Stories haven’t been a success for Stories everywhere. “Our effort to start shifting Facebook from Newsfeed first to Stories first hasn’t been as smooth as I had hoped.” He also once again cautioned that Stories may not monetize as well as the Newsfeed for some time to come.

Still, Zuckerberg reiterated that the company is betting on Stories as the next big thing: “In the not-too-distant future, people will be sharing more into Stories than into Feeds.”

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