Strong advertising, cost reduction is effective, but Meta's warning of a huge loss in the metaverse! Meta's stock soared after hours and then fell | Earnings Report Insights

After Google, another digital advertising giant, Meta, has also confirmed the strong growth momentum in advertising. Its sales revenue and profits in the third quarter exceeded expectations, and cost reduction measures continued to be effective.

Commentators say that Meta, which was hit hard by the downturn in the advertising industry last year, is now recovering. After laying off thousands of people and cutting a batch of projects from November last year to this year, Meta has become more focused on advertising and algorithms, and is using artificial intelligence (AI) technology to strengthen its core business of advertising. Meta is betting that AI-recommended content will keep users on Facebook and other social media platforms.

However, Meta issued a warning when announcing its performance guidance, stating that next year, the company's investment in the metaverse business will significantly increase losses compared to this year.

After the financial report was released, Meta, which fell by about 4.2%, quickly stopped falling and turned to rise after hours, with a post-market increase of up to 5.5%. The increase has since continued to narrow, and the stock fell after about two hours of trading, with a decline of more than 3% at one point.

Revenue growth rate doubled MoM, EPS profit increased by 168%, operating profit rate doubled YoY

After the US stock market closed on Wednesday, October 25th, Meta announced that as of September 30th, the third quarter of this year, the company's revenue and earnings per share (EPS) were higher than expected, and the growth rate accelerated significantly compared to the second quarter:

Third quarter revenue was $34.15 billion, a YoY increase of 23%, twice the growth rate of 11% in the second quarter, close to the top end of the company's guidance range of $32 billion to $34.5 billion, and analysts expected a growth rate of 20.9% to $33.51 billion.

Diluted EPS for the third quarter was $4.39, a YoY increase of 168%, and analysts expected a growth rate of 121% to $3.63, compared to a YoY increase of 21% in the second quarter.

The operating profit margin for the third quarter was 40%, double that of a year ago, higher than the analyst's expected 33.9%, and higher than the 29% in the second quarter.

Advertising revenue exceeded expectations with a YoY growth rate of 24% and doubled MoM

The day before Meta released its financial report, Google's parent company, Alphabet, announced that its total advertising revenue in the third quarter exceeded expectations, with a growth rate of 9.5% to $59.65 billion, of which Google's search and other advertising revenue increased by more than 11% YoY to $44.03 billion. Google's earnings report will allow Wall Street to comprehensively examine the health of the third-quarter digital advertising market. Some analysts believe that the situation for digital advertising in the second half of the year remains optimistic, with the growth rate continuing to accelerate.

This week's earnings report showed that Meta, which is also a leader in the digital advertising industry, continued to see double-digit growth in advertising revenue in the third quarter, with the growth rate doubling compared to the second quarter.

Meta's advertising revenue in the third quarter was $33.64 billion, a year-on-year increase of 24%, about 2% higher than analysts' expectations of $32.94 billion, and an 11.9% increase compared to the second quarter.

Social media app revenue grows by 24%, metaverse revenue falls by 26% more than expected, but losses are lower than expected

Looking at the business segments, Meta's two major businesses had mixed results. Including Facebook, Instagram, Messenger, WhatsApp, and other services, Meta's "Family of Apps" revenue in the second quarter exceeded expectations, with a growth rate of over 20% and profits far exceeding expectations, increasing by nearly 90%.

Including AR (augmented reality) and VR (virtual reality) related hardware, software, and content, revenue from Meta's metaverse-related business "Reality Labs" fell more than 20% more than expected. However, the losses in this business were not as large as expected.

• The revenue of the "Family of Apps" in the third quarter was $33.94 billion, a year-on-year increase of 24%. Analysts expected $33.08 billion, an 11.8% increase compared to the second quarter. The operating profit of the "Family of Apps" in the second quarter was $17.49 billion, a year-on-year increase of 87%, nearly 15% higher than analysts' expectations of $15.23 billion.
• The revenue of Reality Labs in the third quarter was $210 million, a year-on-year decrease of 26%, lower than analysts' expectations of $313.4 million, and a 38.9% decrease compared to the second quarter. The operating loss of Reality Labs in the third quarter was $3.74 billion, the same as the second quarter, a 1.9% increase compared to a year ago, and about 5% lower than analysts' expectations of a loss of $3.94 billion. The loss in the second quarter increased by 33.3% compared to the same period last year.

Facebook's daily and monthly active users continue to reach new highs

The number of active users for both the Family of Apps and Facebook continued to grow year-on-year in the third quarter.

As of the end of the third quarter, the daily active users (DAU) of the Family of Apps was 3.14 billion, a 7% increase compared to the same period last year. In the same quarter, Facebook's DAU was 2.09 billion, a 5% increase compared to the same period last year, setting a new record for single-quarter highs for two consecutive quarters. Looking at different regions, Facebook's DAU in the US and Canada maintained a MoM growth momentum in the first three quarters of this year.

As of the end of the third quarter, the monthly active users (MAU) of the app family reached 3.96 billion, a YoY growth of 7%. In the same quarter, Facebook's MAU reached 3.05 billion, a YoY growth of 3%, also hitting a new historical high. In the second quarter, the MAU exceeded 3 billion for the first time.

Cost guidance for this year reduced by $2 billion, next year's expenses may increase by over 10%, partly due to increased losses in the metaverse business

In terms of performance guidance, Meta expects its fourth-quarter revenue to be between $36.5 billion and $40 billion, which is higher than Wall Street's expectation of $38.76 billion.

During last year's fourth-quarter earnings conference call, Meta CEO Mark Zuckerberg, who had been bullish on the metaverse, stated that the management theme for this year is "improving efficiency." The company will focus on transforming into a stronger and more flexible organization, "proactively cutting projects that are not performing or may no longer be critical," and strive to improve decision-making efficiency.

Cost reduction has effectively supported Meta's good performance this year. Meta has reduced its full-year cost guidance for this year from the previously announced $88 billion to $91 billion to $87 billion to $89 billion, a reduction of $2 billion. This is the second time this year that the annual cost guidance has been revised downward after the first-quarter report.

Meta stated that this year's cost guidance includes approximately $3.5 billion in facility integration costs, severance costs, and other personnel-related restructuring costs. The company estimated the scale of these restructuring costs to be around $4 billion when it announced its second-quarter report.

At the same time, Meta expects its cost guidance for next year to be between $94 billion and $99 billion, representing an increase of approximately 8% to 11% compared to this year's expected expenses.

Meta stated that the forecast for next year's expenses is based on three factors: first, infrastructure-related costs are expected to increase next year, and larger-scale infrastructure will also bring higher operating costs; second, the corresponding employee costs to support these facilities will also increase, and the talent composition will continue to shift towards higher labor cost technical positions; third, due to the continued development of mixed reality (XR)/virtual reality (VR) related products and investment in further expanding the scale of the related ecosystem, the losses of the metaverse business's reality lab next year will significantly increase compared to this year.

Capital expenditure guidance for this year reduced by $1 billion at the high end, next year's expenditure may increase by 20%, partly due to AI server investment.

In April and July of this year, when Meta released its first and second quarter reports, it lowered its full-year capital expenditure guidance range for two consecutive times, reducing it by $4 billion and $3 billion respectively.

In this announcement, Meta has lowered the upper end of its capital expenditure guidance for this year by $1 billion, adjusting it from $27 billion to $30 billion to $27 billion to $29 billion. Meta expects its capital expenditure guidance for next year to be $30 billion to $35 billion, which is equivalent to a growth of approximately 11% to 21% compared to this year.

Meta stated that the growth in capital expenditure next year will come from investments in AI and non-AI hardware servers, as well as investments in data centers. At the end of last year, Meta announced an increase in the construction of new data center architectures.

Zuckerberg is proud of the company's efforts in driving AI and XR fields

Since ChatGPT ignited the AI frenzy, Meta has been striving to catch up with other tech giants such as Microsoft and Google this year. After Meta released the open-source Llama 2 model in July, news about Meta training the Llama 3 model in August and September, with plans to achieve the performance level of GPT 4, and still provide it for free, has been circulating.

At the end of last month's annual developer conference, Meta announced that all of its social media apps will be equipped with AI chatbots, which means that Meta's 3 billion users will have a similar experience to the ChatGPT service.

At the end of last month's annual developer conference, Meta also released the next-generation headset Quest 3 and Ray-Ban smart glasses. Quest 3 marks Meta's transition from virtual reality (VR) to mixed reality (XR), with a starting price of $499, a 67% increase from the previous generation Quest 2.

While announcing the third-quarter earnings report, Zuckerberg expressed his pride in the efforts made by the company's team in promoting AI and XR fields through the launch of Quest 3, smart glasses, and AI studios.