By Katie Paul and Chavi Mehta

(Reuters) – Facebook Inc soundly beat quarterly revenue estimates on Wednesday after heavy holiday advertising by e-commerce retailers, but it warned Apple’s impending privacy changes could hurt revenue by interfering with ad targeting.

The world’s biggest social media company said it expected to face “significant ad targeting headwinds in 2021.” Facebook forecast that Apple’s update of its iPhone operating system to iOS 14 could start biting into revenues as early as the end of the first quarter.

Shares were flat after hours following an initial drop.

The fourth-quarter results validated the company’s focus on making it easier for retailers to sell products to Facebook users, who frequently were stuck at home last year during the COVID-19 pandemic.

For example, Facebook launched Facebook Pay and Facebook Shops which enable consumers to click on ads and make purchases without leaving the company’s apps, which also include Instagram and WhatsApp.

The company said the pandemic-driven surge in online commerce and shift in consumer demand to products over services buoyed revenue growth, which has been cooling steadily as its business matures.

Total revenue, which consists almost entirely of advertising sales, rose 33% to $28.07 billion in the fourth quarter ended Dec. 31 from $21.08 billion a year earlier.

Analysts on average estimated quarterly revenue of $26.44 billion, according to IBES data from Refinitiv.

Net income came in at $11.22 billion, or $3.88 per share, compared with $7.35 billion, or $2.56 per share, a year earlier.

Monthly active users rose 12% to 2.80 billion, above the 2.75 billion expected by analysts.

REDUCING POLITICAL CONTENT

While financially strong, Facebook has faced criticism about misinformation and calls for violence on its platforms tied to the U.S. presidential election, including the storming of the Capitol on Jan. 6.

Facebook Chief Executive Mark Zuckerberg told investors in a call that he wanted to “turn down the temperature” of political conversations because “people don’t want politics and fighting to take over their experience on our services.”

An election-related moratorium on political-group recommendations to U.S. users will become permanent and political content in the network’s newsfeed will drop. These changes will not hurt Facebook’s financial outlook, he said.

Zuckerberg also took aim at Apple Inc, which he said Facebook executives increasingly view as the company’s biggest competitor, even though the iPhone maker earns only a small fraction of its income from digital advertising.

Apple’s business “depends more and more on gaining share in apps and services,” said Zuckerberg, giving it “every incentive to use (its) dominant platform position to interfere with how our apps and other apps work.”

Facebook has feuded with Apple for months over the iPhone maker’s plan to limit app developers’ collection of user data from other apps. Facebook uses the data to improve ad targeting.

The social network, which is facing U.S. antitrust lawsuits from both the Federal Trade Commission and dozens of states, accuses Apple of behaving anticompetitively.

Analysts said Facebook is less likely to suffer from Apple’s privacy updates than other ad-supported companies that have less access to their own first-party data.

“In the end, I don’t think Facebook will be impacted as much as others as Facebook can provide workarounds for ad targeting,” said analyst Jonathan Kees of Summit Insights Group.

(Reporting by Chavi Mehta in Bengaluru and Katie Paul in Palo Alto; Additional reporting by Munsif Vengattil and Elizabeth Culliford; Editing by Sriraj Kalluvila and Cynthia Osterman)

---