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There's a little-noticed red flag in Facebook and Google's latest financial reports, and it highlights a worrying weakness among their customers (FB, GOOG)

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  • Facebook and Google have soaring bad debt expenses in their quarterly earnings.
  • They're pots of money set aside to account for customers that the companies don't think will be able to pay them.
  • For Facebook, that figure skyrocketed 50-fold last quarter, from $4 million to $200 million.
  • The data points are a strong indicator of the rough shape the economy is in: Small businesses are struggling to pay their advertising bills.
  • And if it continues, the trend could be worrying for Facebook and Google's bottom lines.
There's a red flag tucked away in Facebook and Google's quarterly earnings that speaks to the terrible shape the economy is in right now.
This week, the two Silicon Valley giants released their first-quarter financial results. The data offered analysts and the general public its first real look at how the pandemic is impacting the companies — and both fared better than expected, sending their respective stocks soaring.
But hidden among both companies' 10-Q filings is a line item that offers a stark insight into how small businesses are being brutalized by the ongoing crisis — and bodes ill for the tech firms' results if the economic situation continues to worsen.
For Facebook, that's "bad debt expense." It's an amount of money that Facebook records as an expense under the assumption that some of its customers won't be able to pay for the ads they run. "We perform ongoing credit evaluations of our customers and generally do not require collateral," the company wrote in its 10-Q filing. "We maintain an allowance for estimated credit losses."
In the first quarter of 2019, it was a relatively puny $4 million.
In the first quarter of 2020, it ballooned almost 50-fold — to $197 million.
"The collectibility assessment has become increasingly uncertain during the current economic environment caused by COVID-19 pandemic," Facebook wrote in the filing,
Google saw a similar, though less extreme, spike in its allowance "for credit losses for expected uncollectible accounts receivable."
In the last quarter of 2019, this was $275 million.
In the first quarter of 2020, it more than doubled, to $717 million.
What these figures mean in practice is that the economy is in increasingly awful shape. If companies aren't paying their advertising bills, it's a strong sign they're struggling to stay afloat — or going bust outright.
As the crisis continues, these quarterly disclosures from Facebook and Google may serve as vital datapoints into how businesses are faring, especially the small businesses that both represent some of the companies' key customers.
It's also an actively dangerous sign for Facebook and Google. The two internet companies are expecting to miss out in hundreds of millions of dollars that they're owed.
The numbers are small relative to the total revenue each company generates — $161 billion last year for Google and $71 billion for Facebook. And both companies are still billions of dollars in profit; viewed as safe bets by Wall Street. But if more and more businesses that Google and Facebook rely on are struggling to pay them what they're owed, it could eventually become a problem.
If the pandemic and its economic disruptions continue, these "bad debts" will be worth keeping an eye on.
Do you work at Facebook or Google? Contact Business Insider reporter Rob Price via encrypted messaging app Signal (+1 650-636-6268), encrypted email (robaeprice@protonmail.com), standard email (rprice@businessinsider.com), Telegram/Wickr/WeChat (robaeprice), or Twitter DM (@robaeprice). We can keep sources anonymous. Use a non-work device to reach out. PR pitches by standard email only, please.
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* This article was originally published here Press Release Distribution

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