Meta marks the first decline in revenue and a 36 percent decline in profit

SAN FRANCISCO — For years, Facebook’s sales have grown without fail and have continued to grow, defying the laws of gravity even as the company has been battered by privacy and disinformation scandals.

Not anymore.

On Wednesday, Meta, the company formerly known as Facebook, announced a 1 percent drop in quarterly revenue from a year earlier. It was the first time the social media giant’s revenue has fallen since it went public a decade ago, as it faces heightened regulatory scrutiny and a turbulent economy as it tries to build a new frontier for digital communications.

Meta revenue for the second quarter was $28.82 billion, down from $29.07 billion a year earlier. Profits were $6.69 billion, down 36 percent from the previous year. Wall Street analysts expected $7.04 billion in profit on $28.9 billion in revenue, according to data compiled by FactSet.

The results compounded a tough day for Meta, which was also sued on Wednesday by the Federal Trade Commission over a deal to buy a virtual reality company called Inside. The lawsuit aimed directly at the ambitions of Mark Zuckerberg, founder and CEO of Meta, who spent billions of dollars to create an immersive world of social interaction in the “metaverse”, a mixture of virtual and augmented realities that would be bound by commerce and online relationships.

Meta’s revenue decline was particularly stark considering that in 2019, quarterly revenue growth was 28 percent. The company attributed its latest lackluster financial results to weak demand for digital advertising and broader economic uncertainty.

“It looks like we’ve entered a recession that will have a broad impact on the digital advertising business,” Zuckerberg said on an earnings call. “The situation looks worse than it was a quarter ago.”

Google, Twitter and Snap, which rely on online advertising, also said this month that they had seen a drop in advertising demand due to the global economic slowdown. Some companies pointed to the effects of the war in Ukraine and its destabilizing effect on the European advertising market, as well as the strength of the US dollar, which hurt companies when it comes to global sales.

It is unlikely that this pain will end soon. For the current quarter, Meta said it expects “a continuation of the weak advertising demand environment.” The company said e-commerce ads were waning as the “peak of the pandemic” passed and more people ventured outside, adding that difficult periods like this have historically been “cyclical.”

Zuckerberg, who has been limiting spending and slashing perks at his company, said he expects to “get more done with less.” But he indicated that he plans to continue investing in key areas that will prepare Meta for its next stage of growth.

Away from economic turmoil, Meta faces its own set of challenges. Last year, Apple made privacy changes that impeded the Meta’s ability to measure and serve its ads on Apple-made mobile devices. (Meta generates the vast majority of its ad revenue from smartphones.)

It’s also barrel staring at one of its strongest competitors at TikTok, the China-owned video app that has captured the attention of more than a billion people in just a few years. Zuckerberg has begun transforming his company’s products to mimic TikTok offerings, including making sweeping changes to Instagram and Facebook.

At the same time, Mr. Zuckerberg was spending a lot on his vision of metaverses. He told investors, technologists and others that the effort could take years to bear fruit and that the endeavor would be costly. Some investors doubt that the investments will pay off in the long run.

However, there were bright spots in the Meta earnings report. The company said “daily active people,” the term it used to describe users across its suite of apps — which includes Facebook, Instagram and WhatsApp — rose to 2.88 billion, up 4 percent from last year. This exceeded analyst expectations that the company was losing visitors. The Facebook app has also seen a growth in the number of users within the US, an area that some believe is saturated.

Zuckerberg said he was encouraged by other areas of the Meta business that are driving growth and engagement, such as producer Reels Video, an Instagram feature similar to TikTok video offerings. The company said that investments in AI recommendation algorithms have also prompted more people to use the service and for longer periods.

He said his goal is to eventually make more money from Reels, which is not as profitable for Instagram as other ad formats for the app. Part of the challenge has been moving forward with the “cannibalization” effect, as more people use Reels’ new product and move away from seeing more valuable ads displayed between the images and stories portions of the app. Mr Zuckerberg said he thinks it’s only a matter of time before Meta finds out how to make better money than Reels.

To get through a difficult period, the company said it plans to slow hiring in the second half of the year and cut costs. On Tuesday, the hardware division of Meta Reality Labs, which makes virtual reality headsets and other products, said it would increase the price of the VR headset, Quest 2, by $100.

Meta also said David Weiner, chief financial officer, will become director of strategy, a new position that also oversees corporate development. Susan Lee, who is vice president of finance at Meta, will become the chief financial officer.

In a post on his Facebook page, Mr. Zuckerberg said the change in Mr Weiner’s role would help address challenges, partnerships and internal regulation. “These areas would benefit from a more disciplined strategic process,” he said.

Sheryl Sandberg, COO of Meta, also appeared on the company’s earnings call on Wednesday, the last of her 14-year tenure. Ms. Sandberg, who plans to leave the company in the fall, has an optimistic tone while acknowledging the challenges facing Mita.

“There is no doubt that we are going through a period of transition, and we are doing so at a time of global economic uncertainty,” she said. “Meta is a company that has demonstrated extraordinary resilience. And we have proven time and time again that when we design products, they expand globally.”

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