Meta Platforms Inc has issued a gloomy forecast after recording its first-ever quarterly drop in revenue, with recession fears and competitive pressures weighing on its digital advertisement sales.
Shares of the Menlo Park, California-based company were down about 4.6 percent in extended trading.
The company said on Wednesday it expects third-quarter revenue to come in at $26bn to $28.5bn, which would make it a second year-over-year drop in a row. Analysts were expecting $30.52bn, according to IBES data from Refinitiv.
Total revenue, which consists almost entirely of ad sales, fell 1 percent to $28.8bn in the second quarter ended June 30, from $29.1bn last year. The figure slightly missed Wall Street’s projections of $28.9bn, according to Refinitiv.
The company, which operates the world’s largest social media platform, reported mixed results for user growth.
Monthly active users on flagship social network Facebook came in slightly under analyst expectations at 2.93 billion in the second quarter, an increase of 1 percent year-over-year, while daily active users handily beat estimates at 1.97 billion.
Like many global companies, Meta is facing some revenue pressure from the strong US dollar, as sales in foreign currencies amount to less in dollar terms. Meta said it expected a 6 percent revenue growth headwind in the third quarter, based on current exchange rates.
“We seem to have entered an economic downturn that will have a broad impact on the digital advertising business,” Chief Executive Officer Mark Zuckerberg said on the earnings call. “The situation seems worse than it did a quarter ago.”
Still, the Meta results also suggest that fortunes in online advertisement sales may be diverging between search and social media players, with the latter affected more severely as ad buyers reel in spending.
Alphabet Inc, the world’s largest digital advertisement platform, reported a rise in quarterly revenue on Tuesday, with sales from its biggest moneymaker – Google search – topping investor expectations.
Snap Inc and Twitter both missed sales expectations last week and warned of an advertisement market slowdown in coming quarters, sparking a broad sell-off across the sector.
On top of economic pressures, Meta’s core business is also experiencing unique strain as it competes with short-video app TikTok for users’ time and adjusts its advertisement business to privacy controls rolled out by Apple Inc last year.
The company is simultaneously carrying out several expensive overhauls as a result, revamping its core apps and boosting its ad targeting with AI, while also investing heavily in a longer-term bet on “metaverse” hardware and software.
Meta executives told investors they were making progress in replacing advertisement dollars lost as a result of the Apple changes but said it was being offset by the economic slowdown.
They added that Reels, a short video product Meta is increasingly inserting into users’ feeds to compete with TikTok, was now generating more than $1bn annually in revenue.
However, Reels cannibalises more profitable content that users could otherwise see and will continue to be a headwind on profits through 2022 before eventually boosting income, executives told analysts on Wednesday.
“They are being greatly affected by everything,” Bokeh Capital Partners’ Kim Forrest said, referring to the economic slowdown as well as competition from TikTok and Apple.
“Meta has a problem because they’re chasing TikTok and if the Kardashians are talking about how they don’t like Instagram … Meta should really pay attention to that.”
On Monday, two of Instagram’s biggest users, Kim Kardashian and Kylie Jenner, both shared a meme imploring the company to abandon its shift to TikTok-style content suggestions and “make Instagram Instagram again”.
Zuckerberg did not appear to be swayed, however.
About 15 percent of content on Facebook and Instagram is currently recommended by AI from accounts users do not actively follow, and that percentage will double by the end of 2023, he told investors on the call.
Metaverse, still theoretical
For now, at least, the metaverse part of Meta’s business remains largely theoretical. In the second quarter, Meta reported $218m in non-ad revenue, which includes payments fees and sales of devices like its Quest virtual reality headsets, down from $497m last year.
Its Reality Labs unit, which is responsible for developing metaverse-oriented technology like the VR headsets, reported sales of $452m, down from $695m in the first quarter.
Although Meta has recently slowed investments as cost pressures increased, executives reassured investors it was still on track to release a mixed-reality headset called Project Cambria later this year, focused on professionals.
Meta broke out the Reality Labs segment in its results for the first time earlier this year, when it revealed the unit had lost $10.2bn in 2021.
Its second-quarter operating profit margin fell to 29 percent from 43 percent as costs rose sharply and revenue dipped.
In November, Chief Financial Officer David Wehner will become Meta’s first chief strategy officer. Susan Li, Meta’s current vice president of finance, will become CFO.