Meta reported a year-over-year decline in revenue of 1%.
Revenue would have grown +3% year-over-year if not for foreign exchange movements.
Operating income for the quarter was $28.2 billion and the operating margin was 29%.
Exhibit A: Segments Results
Management Changes
Sherly Sandberg will be leaving her position as Chief Operating Officer, but she will continue to remain on the board.
David Wehner will be transitioning from his role as Chief Financial Officer to Chief Strategy Officer, and Susan Li will be transitioning to the role of CFO.
Two Major Technological Waves
There are two major technological waves that Meta is riding – the metaverse and AI.
Meta continues to expand its social metaverse platform called Horizon and its Avatars platform.
Later this year, Meta will launch a web version of Horizon that will be accessible on all platforms.
“Most importantly, [the metaverse] enables deeper social experiences, where you feel a realistic sense of presence with other people, no matter where they are. 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.”
- Mark Zuckerberg
Meta’s AI algorithm will be increasingly driven by recommending accounts and people that users don’t follow in social feeds as opposed to people and accounts that users follow.
Only 15% of the content recommended in users’ news feed consist of people, groups and accounts that users don’t follow, but this is expected to double by the end of 2023.
There was some public backlash on this, most notably from Kim Kardashian and Kylie Jenner, who posted, “Make Instagram Instagram again.”
After the earnings call and public backlash, the CEO of Instagram announced that they will walk back some of the changes.
Reels is growing. It made up 20% of the time that people spent on Instagram.
Three Near-Term Challenges
Challenge #1: Ads
Short-form video is growing and that presents a challenge because Meta’s Reels platform doesn’t monetize at the same rate as Feed and Stories does. Meta doesn’t mention TikTok, but it’s obvious that the growth from short-form video is a result of TikTok’s success.
The good news is that the monetization of ads for Reels is making better progress than management expected. They crossed the $1 billion annual revenue run rate for Reels ads. This is higher than Stories’ monetization was during its equivalent time period post-launch.
Challenge #2 Apple’s iOS Changes
Companies who advertise on Meta’s platforms (Facebook, Instagram) used to get lots of real-time feedback on their advertising funnels. For example, if someone clicked on a certain page or bought a product, advertisers would know instantly.
Apple’s iOS changes altered how user data was being shared between applications though. Facebook and Instagram don’t get access to a lot of the data they used to after these changes so companies who advertise on these platforms are having a lot of trouble understanding how effective their ads are performing. This is causing some of them to dial back their advertising budgets until Meta can fix this.
Here is what the CFO had to say on the impacts from the iOS changes:
“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.”
Meta is working on mitigating the headwinds and challenges from Apple’s iOS changes, but they believe that the weakening macro environment is offsetting any benefits that would have otherwise accrued from their changes.
Challenge #3: Macro Economy
Mark Zuckerberg says that Meta is entering an economic downturn that looks worse than it did a quarter ago and it will have an impact on the digital advertising business.
Meta will be slowing the pace of investments they are making toward future growth.
Meta will reduce its hiring and overall expense growth plan this year because of the challenging operating environment.
It expects 2022 total expenses to be in the range of $85 billion-$88 billion. This is a decrease from its prior outlook of $87 billion-$92 billion, which I see as a good thing.
Exhibit B: Expenses as a Percentage of Revenue
Guidance for 2022 cap ex (including principal payments on finance leases) is $30-$34 billion.
Currency was a headwind in all international regions.
Business Messaging
Business messaging is an area that Meta sees big potential in. Sheryl Sandberg said that 1 billion users are messaging with businesses each week across WhatsApp, Messenger and Instagram.
Click-to-messaging ads saw strong growth in Asia Pacific and Rest of World where year-over-year ad revenue growth was the strongest at 13% for Asia Pacific and 11% for Rest of World.
Exhibit C: Advertising Revenue (In Millions) by User Geography
Reality Labs
Reality Labs Q2 revenue increased by 48% to $452 million, mostly driven by strong Quest 2 sales.
Reality Labs’ operating loss was $2.8 billion in the second quarter. Expenses were $3.3 billion (+19%) which included higher employee-related costs and higher R&D expenses.
Disclosure: I own shares of Meta at the time of writing.