Jessica Heygate
Jul 28, 2022

Meta reports first-ever quarterly revenue decline, warns of continued advertising weakness

Facebook parent posted a 36% drop in income in Q2 as its ad business was hit by economic turbulence and lagging uptake of Instagram Reels ads.

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Unsplash

Meta has posted its first quarterly revenue loss since it went public as its advertising business was hit hard by softened demand.

The parent company of Facebook, Instagram and Whatsapp reported revenue of $28.8 billion in the second quarter, down by 1% from the year prior. The results were worse than analyst expectations of 4% revenue growth and represent a continued slowdown from Meta’s whopping 56% growth rate in Q2 2021.

The social media giant’s revenue was boosted by a spike in e-commerce adoption last year that has now leveled out, leading to tricky year-on-year comparisons.

But Meta’s revenue is also being dragged by weakened ad demand due to swirling macroeconomic challenges, its reduced ability to target and measure ads amid privacy changes and monetization challenges with newer ad formats such as Reels.

Advertising revenue fell 1.5% to $28.2 billion in the quarter ended June 30. Despite ad impressions across Meta’s apps increasing by 15% year-on-year, the average price per ad decreased by 14%.

As revenue dipped and costs and expenses grew by 22%, Meta’s net income fell 36% to $6.7 billion.

Meta’s chief financial officer Dave Wehner, who is taking on a new role as chief strategy officer, told investors on Wednesday (July 27) that the ad deceleration was “broad based across verticals” as businesses lower their ad spend in response to increased economic uncertainty. 

Rising inflation and a looming recession are pressuring marketers “to make sure their ad budgets are spent in the smartest way possible,” chief operating officer Sheryl Sandberg said. “We're focused on helping them [marketers] run efficient marketing campaigns to get the best possible return on investment.”

Meta continues to struggle with Apple’s app tracking crackdown, which has impacted its ability to target and measure users. It said earlier this year that it expected the changes to cost it $10 billion in lost ad revenue in 2022.

The company is adapting its ad products to deliver personalisation using less data and cited the fast growth of its click-to-messaging ads, which it said have been adopted by 40% of its advertisers, as proof this is bearing fruit.

But revenue could fall further in Q3 — Meta’s expects revenue to be in the range of $26-28.5 billion, which Wehner said in a statement “reflects a continuation of the weak advertising demand environment we experienced throughout the second quarter.”

Reels ‘cannibalising’ revenue

Meta, along with the entire social media landscape, is dealing with growing competition from TikTok. In the rush to bolster its rival short-form video product, Instagram Reels, executives admitted on Wednesday that the product is cannibalising the rest of its business.

“Reels doesn't yet monetise at the same rate as Feed or Stories, so in the near term, the faster that Reels grows, the more revenue that actually displaces from higher-monetising surfaces,” Meta CEO Mark Zuckerberg said.

Ads were introduced to Reels in June last year and have now crossed $1 billion in annualised revenue, Zuckerberg said. But they are expected to continue to stifle revenue growth throughout 2022. 

Sandberg attributed the monetisation challenges to the fact Reels are more expensive to produce than static ads. It is developing tools that make Reels easy for advertisers to create, such as animating images.

Time spent engaging on Reels among users increased by 30% in the quarter, the company said. “Reels is additive to time spent but it does have a cannabilitic impact as well,” noted Wehner.

Meta rolled out a major redesign across Facebook and Instagram last week which more closely mirrors TikTok’s feed experience. The new “discovery engine” prioritises artificial intelligence-led content suggestions over posts from friends and family. Instagram users are not happy about the new design — more than 200,000 people have signed a petition asking the social media app to return to its old feed.

Facebook marginally grew its daily active users by 8 million quarter-on-quarter to 1.97 billion, but its monthly active users fell by 2 million, to 2.93 billion, as of June 30, which Zuckerberg attributed to “internet blocks related to the war in Ukraine.”

‘Many teams are going to shrink’

While Meta’s headcount grew by 32% in Q2 to 83,553, Zuckerberg told investors he plans to “steadily reduce headcount growth over the next year.”

“Many teams are going to shrink so that we can shift energy to other areas inside the company,” he said.

“This is a period that demands more intensity, and I expect us to get more done with fewer resources,” he added. “I think we're going to come through this period as a stronger and more disciplined organisation.”

Alphabet CEO Sundar Pichai sent a similar message earlier this month as he outlined plans to “sharpen focus” and “work with greater urgency.”

A cohort of tech giants including Alphabet, Apple, Microsoft, Netflix, Snap, Spotify, Tesla, TikTok and Twitter have implemented hiring freezes and made staff cuts recently in anticipation of a global recession.

The earnings call was the last for Sandberg, who announced her departure from Meta in June after 14 years with the company.

As Wehner takes on the CSO role, Meta is promoting Susan Li, VP of finance, to CFO.

 

Source:
Campaign US

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