Future growth, in part, hinges on Facebook (FB) monetizing its WhatsApp and Messenger applications. The services compete against Apple’s iMessage which CEO Mark Zuckerberg acknowledges is the most popular messaging service in the U.S. With Apple increasingly prioritizing privacy, assuring consumers their messages remain private is critical.

In its 2019 10-K, Facebook announced its intention to encrypt messaging services:

“...we have announced plans to implement end-to-end encryption across our messaging services, as well as facilitate interoperability between these platforms…”

In its 2020 10-K, Facebook indicated it had made some headway:

“...we are moving forward with plans to implement end-to-end encryption across our messaging services, as well as facilitate cross-app communication between these platforms…”

Though progress is being made, the new language clearly indicates the work isn’t complete.
This contradicts what Zuckerberg told analysts on the company’s fourth quarter 2020 earnings call just hours prior to filing Facebook’s 10-K. On the call, Zuckerberg said unequivocally that messages are encrypted:

“All of these messages are end-to-end encrypted, which means we can't see or hear what you say, and we never will unless the person that you message chooses to share it.”

Zuckerberg’s statement is not consistent with what is stated in the filing. It’s possible Zuckerberg misspoke while attempting to differentiate his messaging applications— a portion of the call was dedicated to attacking Apple’s commitment to privacy. For example, Zuckerberg stated even encrypted messages should disappear when users are through with them while accusing Apple of storing backup copies of iMessages.

Regardless, investors need clarification on the matter. The Winkler Group has contacted Facebook and asked it to reconcile the contradiction. We will update investors with new information as we receive it.

New language included in Facebook’s latest 10-K hints that it may have a new off-balance sheet arrangement that previously did not exist or was not disclosed. In the 2019 10-K, Facebook stated the following:

“We did not have any off-balance sheet arrangements as of December 31, 2019.”

In the 2020 10-K, Facebook adds language suggesting something more:

“As of December 31, 2020, we did not have any off-balance sheet arrangements that are reasonably likely to have a material current or future effect on our financial condition, results of operations, liquidity, capital expenditures, or capital resources.”

Only material off-balance sheet arrangements must be disclosed. However, if such an arrangement exists we can safely assume it’s unrelated to liquidity, financing, or hedging. However, if such an arrangement is related to R&D— it might eventually prove material— in which case Facebook is likely attempting to shield it from competitors.

DuDil has contacted Facebook and asked for details of any off-balance sheet arrangements and the assumptions used in determining materiality. We will update investors with new information as we receive it.

It also appears that Facebook may be seeking strategic partners beyond acquisitions. In the 2019 10-K, Facebook warned investors of the negative impact acquisitions might have on equity investors:
“We plan to continue to make acquisitions, which could harm our financial condition or results of operations and may adversely affect the price of our common stock.”

In the 2020 10-K, Facebook added language indicating it may be seeking partnerships beyond acquisitions:

“We plan to continue to make acquisitions and pursue other strategic transactions, which could harm our financial condition or results of operations and may adversely affect the price of our common stock.”

Later in the filing, Facebook identifies the types of transactions it has in mind:

“...and from time to time may enter into other strategic transactions such as investments and joint ventures.”

Facebook already has stakes in other companies. It leaves investors to wonder about the strategic rationale for potential joint ventures as Facebook spars with Apple and Google over the ability to target users with advertisements across devices and channels.