Meta Platforms Inc. issued a bleak forecast after reporting its first-ever quarterly revenue drop on Wednesday, blaming recession fears and competitive pressures on digital ad sales.
In extended trading, shares of the Menlo Park, California-based company were down about 4.6 percent.
The company expects third-quarter revenue to fall between $26 billion and $28.5 billion, marking the second year-over-year drop in a row. According to Refinitiv IBES data, analysts expected $30.52 billion.
Total revenue, which is almost entirely comprised of ad sales, fell 1% to $28.8 billion in the second quarter ended June 30, from $29.1 billion the previous year. According to Refinitiv, the figure fell just short of Wall Street’s forecast of $28.9 billion.
The company, which runs the world’s largest social media platform, reported mixed user growth results.
Monthly active users on Facebook’s flagship social network fell slightly short of analyst expectations in the second quarter, totaling 2.93 billion, an increase of 1% year over year, while daily active users easily exceeded expectations, totaling 1.97 billion.
The strong dollar is putting some pressure on Meta’s revenue, as sales in foreign currencies are worth less in dollar terms. Based on current exchange rates, Meta anticipates a 6% revenue growth headwind in the third quarter.
Nonetheless, the Meta results suggest that fortunes in online ad sales may be diverging between search and social media players, with the latter suffering the most as ad buyers cut back on their spending.
On Tuesday, Alphabet Inc, the world’s largest digital ad platform, reported an increase in quarterly revenue, with sales from its biggest moneymaker – Google search – exceeding investor expectations.
Snap Inc and Twitter both missed sales targets last week and warned of an ad market slowdown in the coming quarters, sparking a broad sell-off in the sector.
In addition to economic pressures, Meta’s core business is under unique strain as it competes for users’ time with short video app TikTok and adjusts its ad business to privacy controls rolled out by Apple Inc last year.
As a result, the company is undertaking several expensive overhauls at the same time, 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.
Executives at Meta told investors that they were making progress in replacing ad dollars lost due to Apple changes, but that this was being offset by the economic slowdown.
They also stated that Reels, a short video product that Meta is increasingly inserting into users’ feeds to compete with TikTok, was now generating more than $1 billion in revenue annually.
However, executives told analysts on Wednesday that Reels cannibalizes more profitable content that users could otherwise see and will continue to be a headwind on profits through 2022 before eventually boosting income.
“They are being greatly affected by everything,” said Kim Forrest of Bokeh Capital Partners, 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 saying how much they dislike Instagram… Meta should really pay attention to that.”
Kim Kardashian and Kylie Jenner, two of Instagram’s most popular users, both shared a meme on Monday imploring the company to abandon its shift to TikTok-style content suggestions and “make Instagram Instagram again.”
CEO Mark Zuckerberg, on the other hand, did not appear to be swayed.
Currently, about 15% of content on Facebook and Instagram is recommended by AI from accounts that users do not actively follow, and that percentage is expected to double by the end of 2023, he told investors on the call.
For the time being, the metaverse component of Meta’s business remains largely theoretical. Meta reported $218 million in non-ad revenue in the second quarter, which includes payment fees and sales of devices such as its Quest virtual reality headsets, down from $497 million the previous year.
Its Reality Labs division, which is in charge of developing metaverse-oriented technology such as VR headsets, reported $452 million in sales, down from $695 million in the first quarter.
Although Meta has recently slowed investments due to increased cost pressures, executives reassured investors that the company was still on track to release a mixed-reality headset called Project Cambria later this year aimed at professionals.
Meta disclosed the Reality Labs segment in its results for the first time earlier this year, revealing a $10.2 billion loss in 2021.
Its operating profit margin fell from 43 percent to 29 percent in the second quarter as costs rose sharply and revenue fell.
Chief Financial Officer David Wehner will become Meta’s first chief strategy officer in November. Meta’s current vice president of finance, Susan Li, will take over as CFO.
