Meta Takes a Hit: Q3 Earnings Plummet as Ad Demand Ditches Online Space
In the three-month period ending in September, Meta, formerly known as Facebook (FB), reported a Q3 revenue of $27.7 billion, marking a 4% decrease from the previous year, and slightly above analyst predictions. Despite beating expectations, the tech giant faced its first quarterly revenue decline, reported in Q2.
Meta announced a Q3 net income of almost $4.4 billion, a steep decrease from the previous year's total and falling short of analyst expectations. CEO Mark Zuckerberg outlined plans for a more streamlined and efficient Meta in an official statement: "In 2023, we’ll focus on priorities and efficiency improvements, helping us navigate the current landscape and build a stronger company."
Meta stocks plunged by almost 17% following the earnings release, on Wednesday.
Cyclical economic turbulence has led to a significant reduction in online advertising demand, affecting tech giants like Google and Snap as well. Metas Q3 quarter saw a 18% decrease in average ad prices, as David Wehner, Meta's CFO, confirmed during a call with analysts.
The slump in ad demand has also affected Google and Snap. Slowing user growth in the face of heightened competition, particularly from TikTok, further marred Meta's performance. By the end of Q3, Meta reported 2.96 billion monthly active users on its core Facebook app, marking a 2% increase from the previous year, but a substantial decline from the double-digit growth rates of the past. The daily active user count also saw a 4% rise to 2.93 billion, marking a slight retreat from the double-digit increases seen in previous years.
During the call, Zuckerberg pointed out that Instagram now boasts more than 2 billion monthly active users, and WhatsApp boasts more than 2 billion daily active users.
Despite over-investing in the ambitious Metaverse project, Meta's Reality Labs subsidiary flagged a net loss of almost $3.7 billion in Q3, adding to the total loss of $9.4 billion since the year's beginning. The Reality Labs segment also reported a 50% year-over-year decrease in revenue in the same quarter.
Emphasizing the need for cost-cutting measures, Altimeter Capital, a major Meta shareholder, wrote a public letter last week, urging the company to reduce staffing levels, lower annual spending, and curtail annual budgets for the Metaverse to $5 billion.
Weiner, reporting during the call, mentioned that Meta is implementing significant changes to boost operational efficiency, targeting to complete 2023 with roughly the same number - or fewer - employees as the 87,314 reported in September (a 28% increase from the previous year). "We're reducing team sizes, trimming the size of others, and allocating new hires exclusively to our top priorities," Weiner indicated, also hinting at potential office space downsizing.
Zuckerberg underlined that Meta's primary investment areas for 2023 include AI discovery mechanisms, automated suggestions, recommendations for reels and other formats, advertising, and sales messaging. In addition, Meta has rolled out its most advanced virtual reality headset, Meta Quest Pro, in early October, highlighting its potential in the business sector.
Meta expects Q4 revenue to range between $30 to $32.5 billion, with a 3.5% decrease forecasted against the previous year's Q4.
Related Articles:
Insights:
- The shift to digital advertising is not uniform: Some advertisers remain hesitant to invest entirely in digital advertising due to the lack of industry standards and an inadequate targeting mechanism for streaming services.
- Economic and macroeconomic factors: High tariffs, geopolitical conflicts, and macroeconomic trends like inflation and interest rates impact advertiser spending and affect certain media types like broadcast radio advertising.
- Competition and user migration: Platforms like TikTok and Instagram pose severe competition to Snap and Meta, increasing the risk of user migration to competing platforms offering similar short-form video content.
- AI-driven search changes: The rise of AI-driven search alters consumer behavior, leading to a drop in organic search traffic, requiring advertisers to adjust their budgets to paid search and social search for continued visibility and engagement.
Meta's Response to the Challenge:
- Introducing new ad formats: Meta has introduced ad formats like image-based ads on its Threads platform, offering a promising avenue for brand engagement.
- Investing in AI and AR: Meta is investing in AI and AR technologies to enhance user experiences by offering more sophisticated ad targeting capabilities, improving ad performance, and potentially attracting higher ad spend.
- User Engagement Strategies: Meta is focusing on improving user experiences through features like the Simple Snapchat redesign and targeted measures to tackle concerns related to engagement levels, particularly in mature markets.
- Diversifying revenue streams: Meta is diversifying its revenue sources by growing its Snapchat+ subscription service, boding well for revenue diversification though it currently represents a minor portion of total revenue, compared to advertising.
By addressing these challenges through innovative ad formats, AI-driven enhancements, and diversified revenue streams, Meta aims to maintain its competitive edge and entice advertisers within a dynamic digital advertising market landscape.
