Meta posts first-ever revenue drop as inflation throttles ad sales

Meta Platforms Inc (META.O) released a grim outlook after recording its first-ever quarterly drop in revenue on Wednesday amid a looming global recession and competitive pressure on digital ad sales, Reuters reported.

Shares of California-based Menlo Park tumbled about 3.4% in extended trading.

total revenue, which consists almost entirely of ad sales, fell 1% to $28.8 billion in the second quarter ended June 30 from $29.1 billion last year. That figure falls slightly short of Wall Street’s $28.9 billion forecast, according to Refinitiv.

The company reported mixed user growth results.

Flagship social network Facebook’s monthly active users in the second quarter slightly beat analysts’ expectations at 2.93 billion, up 1% from last year, while daily active users handily beat estimates of 1.97 billion.

Like many global companies, Meta is facing some revenue pressure from a strong dollar as foreign currency sales are lower in dollar terms. Meta said it expects revenue growth of 6% in the third quarter, based on current exchange rates.

However, the meta results are also coming in as the state of online ad sales appears to be at odds between search and social media players, with the latter being hit more severely as ad buyers struggle to keep up with spending.

Alphabet Inc (GOOGL.O), the world’s largest digital advertising platform, reported quarterly revenue growth on Tuesday, with sales of its biggest source of revenue, Google search, beating investors’ expectations. read more

Snap Inc (SNAP.N) and Twitter (TWTR.N) fell short of last week’s sales expectations and warned of a slowdown in the ad market in the coming quarters, triggering massive sell-offs across the sector. read more

The results shed light on the unique strain facing Meta’s core social media business as it competes for user time with short video app TikTok and adapts its advertising business to the privacy controls rolled out by Apple Inc (AAPL.O) last year.

Meta said Reels, the short video product it is increasingly inserting into users’ feeds to compete with TikTok, is now generating more than $1 billion in revenue per year.

“They are heavily affected by everything and I would probably give it a third, a third and a third,” Kim Forrest of Bokeh Capital Partners said, referring to the economy, the global ad market slowdown, and 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 really needs to take notice.”

According to CEO Mark Zuckerberg, about 15% of content on Facebook and Instagram is recommended by artificial intelligence, and this percentage will double by the end of 2023.

The world’s largest social media company is simultaneously pursuing several costly overhauls to keep its core business profitable, as well as investing in a long-term bet on “metaverse” hardware and software.

For now, at least, the metaverse part of the business remains largely theoretical. In the second quarter, Meta reported $218 million in non-advertising revenue, including sales of devices such as Quest VR headsets, up from $497 million last year.

Its Reality Labs division, which is primarily responsible for developing metaverse-focused technologies such as virtual reality headsets, reported $452 million in sales, up from $695 million in the first quarter.

Later this year, Meta will release a mixed reality headset called Project Cambria aimed at professionals.

Meta first outperformed the segment in its results earlier this year when Reality Labs was revealed to have lost $10.2 billion in 2021.

Meta’s second-quarter operating profit margin fell from 43% to 29% as costs soared and revenue fell.

In November, CFO David Wehner will become Meta’s first Chief Strategy Officer. Susan Lee, Meta’s current vice president of finance, will become chief financial officer.

The company said it expects third-quarter revenue of between $26 billion and $28.5 billion. Analysts were expecting $30.52 billion, according to Refinitiv’s IBES data.