Meanwhile, Twitter is seeing a record number of users flock to its service amid the COVID-19 pandemic, but the economic impact of the virus is also hurting advertising.

(Bloomberg)—Facebook Inc.’s revenue held up better than expected in the early months of the COVID-19 pandemic. But the company warned that the worst of the slowdown in ad spending isn’t over, raising the prospect of a bigger hit across the digital-advertising market.

Chief financial officer Dave Wehner noted the “potential for an even more severe advertising industry contraction.” His prediction is significant, given that Facebook accepts ads from all industries, and owns apps that now reach 3 billion people every month. There’s been a particular drop-off in the travel and auto industries, he said on Wednesday’s earnings call.

Mark Zuckerberg, Facebook’s CEO, underlined the concern, saying that if shelter-in-place orders end too soon, the economic fallout could be even more pronounced. “I worry that this could be worse than at least some people are predicting,” Zuckerberg said.

The warnings from the world’s largest social network echoed those heard in earlier calls from Google parent Alphabet Inc. and Snap Inc.: While the first quarter remained upbeat, the real impact could come in a few months. Alphabet CFO Ruth Porat said the second quarter will be “difficult,” while Snap finance chief Derek Andersen last week spoke of “factors beyond our control.”

The comments from across the advertising-dependent part of the tech industry also portend the beginning of a trend—for the first time, an uptick in user attention to an app doesn’t necessarily mean that ad growth will follow. They also indicate the visibility these companies have into the broader economy, where advertising revenues are a leading indicator of optimism about the future.

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During the Great Recession of the late 2000s, overall ad spending declined for two years straight, with annual digital advertising revenue dropping in 2009 for the first and only time, according to EMarketer. But most of the advertising industry thinks the coronavirus impact will be worse, the researcher said, citing a recent study by the Interactive Advertising Bureau.

Facebook reported an 18% increase in first-quarter revenue, showing advertising demand was strong before the Covid-19 pandemic hit budgets. The results include just a few weeks in March when coronavirus lockdowns began to hammer the economy. The company also said business was steady in the first few weeks of April, sparking a surge in its shares in late trading.

“After the initial steep decrease in advertising revenue in March, we have seen signs of stability,” the company said in a statement.

Like Google and Snapchat, Facebook said it’s seeing a surge of usage and engagement as millions of people shelter in place and look for entertainment and ways to keep in touch online. Daily users of all Facebook’s apps, including Instagram and WhatsApp, averaged 2.36 billion in March, up from 2.26 billion in December, the company said. Facebook’s core social network now has 1.73 billion daily users, compared with 1.66 billion during the final month of 2019.

For Facebook, the spike in usage will likely have less impact on its business than in prior quarters. Many of the company’s most popular features during the pandemic – including voice calling and direct messaging – are not areas where the company makes significant revenue. Facebook also gets more than half of its sales from small businesses, a group that is hit especially hard by the Covid-19 lockdown and recession.

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Snap may be more insulated from the downturn than Facebook and Twitter because it doesn’t have as many small advertisers, Jim Cridlin, global head of innovation and partnerships at WPP Plc’s Mindshare media agency, said last week. Though the company didn’t provide forecasts for the current period, it said advertising revenue was still growing, albeit at a slower pace.

For its part, Google, which is heavily dependent on search and display advertising, has a more diversified business and therefore may have a greater cushion against a further slump in marketing budgets. Shares jumped following its own earnings report, which showed strong growth in cloud computing and at the YouTube digital-video site.

The tech giants are navigating the pullback from advertising as their workers mostly remain at home, but they’re not advocating for a return to normal. When governments say it’s time to return to work, Facebook is likely to advise its employees to stay at home, Wehner said. Since the company can still ship products remotely, there’s no use overloading public transportation systems. Meanwhile, Facebook is thinking about how to reconfigure its offices, to ensure that once people are back, they are working at a safe distance from colleagues. “I think we’ll be more cautious,” Wehner said on Bloomberg Television.

Twitter’s record user gain can’t offset a steep drop in ads

Twitter Inc. is seeing a record number of users flock to its service amid the COVID-19 pandemic, but the economic impact of the virus is also hurting advertising, the social media company’s main source of revenue.

Sales rose just 3% year over year in the first three months of 2020 amid a broad advertising pullback as companies cut spending. From March 11 to the end of the quarter, sales were down 27% from a year earlier, and April shows a similar trajectory, the company said. The decline was particularly pronounced in the U.S., Twitter’s most valuable market. The social-media company reported revenue of $808 million in the first quarter, ahead of Wall Street estimates of $773 million, according to data compiled by Bloomberg.

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Like other social platforms including Snap Inc. and Facebook Inc., Twitter is showing that for the first time, an increase in users doesn’t correlate to a similar rise in ad revenue. Twitter now has 166 million daily users, up from 152 million at the end of 2019, and 24% higher than a year earlier. That’s the fastest growth since the company started reporting the metric in 2016. Twitter credited the gains to “typical seasonal strength, ongoing product improvements, and global conversation related to the COVID-19 pandemic.” Twitter shares turned negative after chief financial officer Ned Segal gave the April outlook on an earnings call, after being up more than 10% earlier.

Twitter said Thursday that improving its ad products is now the company’s “top priority,” and that direct response ads are at the top of the list. In a letter to shareholders, the company said these marketing spots could “increase our addressable market, with more access to advertising demand that may be more resilient through an economic downturn.”

Segal said Twitter has mostly attracted brand marketing, rather than “direct response” ads that are easier to measure, grow faster and have been more resilient during the crisis so far.

Twitter reported a net loss of $8 million, its first unprofitable quarter in more than two years, though less than analysts had expected. The company previously announced it was cutting full-year guidance and expected an operating loss in the quarter. It did not issue new guidance on Thursday.

The San Francisco-based company plans to reduce costs by slowing hiring and eliminating travel and events that are no longer necessary because employees are working from home. It still plans to build a new data center in 2020 as was previously announced.

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Not addressed in Twitter’s shareholder letter was whether the recession threatens CEO Jack Dorsey’s job. Activist investors tried to push him out earlier this year. Dorsey survived, but the two sides agreed to a series of performance goals that include accelerating revenue growth. The coronavirus outbreak will make that particularly difficult.

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