Metaverse makers Reality Labs cost the company $3.3 billion
It’s been a tough week for tech stocks so far, and Facebook parent company Meta’s third quarter results didn’t help. Meta posted its second straight quarterly revenue decline, reporting revenue of $27.7 billion, compared to $29 billion for the same quarter last year. Quarterly profits plunged to $4.4 billion, from $9.2 billion for the same quarter a year ago. Meta also provided a weaker Q4 outlook than analysts anticipated, predicting a floor of $30 billion against analyst expectations of $32.2 billion. The news sent Meta stock spiraling downward in after-hours trading on Wednesday and again in pre-market trading on Thursday.
In a conference call with analysts after the announcement, Meta CEO Mark Zuckerberg emphasized the company’s efforts around Artificial Intelligence (AI) as a way to spur more meaningful customer engagement.
“One of the main transformations in our business right now is that social feeds are going from being driven primarily by the people and accounts you follow to increasingly also being driven by AI recommending content that you’ll find interesting from across Facebook or Instagram, even if you don’t follow those creators,” he explained.
Zuck: The metaverse promises ‘hundreds of billions of dollars, if not trillions’
Zuckerberg expects the amount of AI-driven content recommendations in Facebook and Instagram to rise from 15% to 30% by the end of next year. He also doubled down on his emphasis that the metaverse represented the future of his company.
“I feel even more strongly now that developing these platforms will unlock hundreds of billions of dollars, if not trillions, over time. This is obviously a very expensive undertaking over the next several years,” he said.
“[T]he Metaverse is a massive opportunity for a number of reasons. Most importantly, it enables deeper social experiences, where you feel a realistic sense of presence with other people, no matter where they are,” he said. “Whether you’re playing games or working for hours at a time or if you’re just jumping in for just a minute at a time to say hi to a friend or collaborate on a project quickly. By helping to develop these platforms, we’re going to have the freedom to build these experiences the way that we and the overall industry believe will be best rather than being limited by the constraints that competitors place on us and on our community and on small businesses.”
That contrasts sharply with an open letter penned by Altimeter Capital CEO Brad Gerstner, which hit the wire earlier this week. Gerstner owns 2 million shares of Meta, and he told the company to “get fit and focused,” urging Zuckerberg and company to sharply curtail metaverse expenses until it gets its house in order. He blamed the company’s poor price-to-earnings ratio in recent quarters on “lost [investor] confidence in the company, not just the bad mood of the market.”
Regarding the recently announced Quest Pro headset, Zuckerberg said, “It will be a high-end device focused on professional users and work with high-resolution color mixed reality. I’m really looking forward to getting this one out. This is just one milestone in the long-term path, but I think people are going to be pretty blown away by this.”
In the interim, though, Meta’s efforts to build a working metaverse continue to bleed money. Meta spent $3.3 billion on Reality Labs during the quarter. Reality Labs is the business group within Meta tasked with making the company’s metaverse vision a reality. That’s compared to $2.8 billion Meta spent on Reality Labs for the second quarter. Meta CFO Dave Wehner explained the delta as related to “growth in employee-related costs and R&D operating expenses,” partially offset by a reduction in loss reserves. Reality Labs’ Q2 revenue rose 48% to $452 million, primarily through sales of the company’s Quest 2 VR headset, which saw a $100 price increase during the quarter.
“We do anticipate that Reality Labs operating losses in 2023 will grow significantly year-over-year. Beyond 2023, we expect to pace Reality Labs investments such that we can achieve our goal of growing overall company operating income in the long run,” said Wehner.
Wehner blamed the slowdown in Facebook ad revenue on external macroeconomic pressures. “Advertising revenue growth slowed throughout the second quarter as advertiser demand softened. The deceleration has been broad-based across verticals, and we believe businesses are lowering their advertising spend in response to the increased economic uncertainty. Foreign currency headwinds also increased throughout the second quarter,” he said.
Sheryl Sandberg, Meta’s outgoing COO, underscored foreign exchange issues as particularly vexing for Meta during the quarter. The continued Russian war in Ukraine also factored, she said.
“Foreign exchange trends had a significant impact in Q2, in particular, the depreciation of the euro relative to the dollar. On a constant currency basis, we would have seen 3% revenue growth year over year. Similar to last quarter, we saw solid growth in APAC and other parts of the world outside of North America and Europe, where it’s been a more challenging environment. These continue to be turbulent times for the global economy,” she said.
Continued ad revenue fallout from Apple App Tracking Transparency
Wehner also laid the blame for Facebook’s dwindling ad revenue at Apple’s feet. Apple introduced “App Tracking Transparency” beginning with iOS 14.5’s release in April 2021, and that’s severely curtailed Facebook’s ability to produce effective targeted ad content. The iOS feature asks users if they will allow apps to track their activity. Before its implementation, Facebook had broader discretion to track consumer browsing histories and location data for targeted ads.
“While it wasn’t a factor contributing to the deceleration in Q2, we’re also continuing to face targeting and measurement headwinds such as Apple’s iOS changes, which we believe are contributing to the growth challenges across the digital advertising industry,” he said.
Meta’s call with analysts marks the last for Sheryl Sandberg, who stepped down as COO in August but remains on the company’s board of directors. It also marked the last call for Wehner as CFO; he’s becoming Meta’s new Chief of Strategy and will be replaced in his CFO role by Susan Li, the company’s long-time VP of finance.
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