This morning (October 27 Beijing time) Meta released its third quarter financial report for 2022. After the burst of Snap and Google, the market also worried about Meta's performance. The final report card was released, and like Google, Meta also collapsed on profit . The reason why caused a 18% loss after the market was not due to the failure of profits in the quarter, the more important thing is that the market expressed strong dissatisfaction with Meta's spending expansion plan next year.
Before, investment banks had conservative expectations of Meta's cost and expenses. Two days ago, the company's shareholders publicly urged Xiao Zha to lay off employees as soon as possible. The market should have had more optimistic expectations for the optimization of operating expenses. If you look at the possible investment direction of incremental expenditure, Dolphin Jun believes that in addition to the metaverse recognized by Xiao Zha, may be the focus of dealing with competition in the next year, especially to improve Reels' competitiveness . The second may be to continue to work hard to optimize technology to alleviate the impact of Apple IDFA policy.
But no matter what, the expectation that this profit will continue to be eroded is not something the market is happy to see.
Return to this financial report, the core points are summarized as follows:
1. The overall revenue is in line with expectations, VR is too collapsed, and the guidance for the next quarter is slightly weak. 's total revenue in the third quarter was still normal, at the center of the guiding range, down 4.5% year-on-year, slightly exceeding the consensus expectations, but it is similar to the expectations of core investment banks. Among them, the advertising performance was slightly unexpected. After the two peers broke out, the market was originally worried about Meta, but the actual situation was not very bad. However, VR, which was invested heavily, was a bit too sluggish, down -49% year-on-year in the third quarter, far lower than market expectations. The new Quest Pro, which has just been released in , is priced too expensive and is not expected to contribute much to the fourth quarter revenue growth.
The management's revenue guidance for the next quarter is in the range of 30 billion to 32.5 billion , slightly weaker than the market's consensus estimate of 32.3 billion, but since experiencing the huge expectation difference in the previous quarter, this guidance can be barely accepted.
2. Traffic has expanded steadily but advertiser demand continues to weaken. In addition to Europe, the number of active users in other regions is still steadily increasing, with Meta's global monthly active users reaching 3.7 billion under the entire ecosystem. At the same time, Meta is further releasing advertising inventory to resist the accelerated decline in advertising unit prices by showing users more ads. The decline in advertising unit price of
is not only related to the downward trend of macroeconomic , but also closely related to the competitiveness of the platform itself. In addition, Reels' monetization ability is still weak, which has also lowered the overall level.
3. The layoffs have not yet seen any results, high expenses weaken profits, and expenditure expansion will exceed market expectations next year. Although I heard about Meta's freeze in recruitment and layoffs early on, the total number of employees has been increasing since the third quarter, nearly 4,000 more than in the previous quarter. In this case, the costs cannot be optimized. No wonder the shareholders urged Zuckerberg to lay off 20% of their employees two days ago. Under the pressure of revenue, the high growth in operating expenses have caused the operating profit margin in the third quarter to weaken by nearly 9pct month-on-month.
management proposed that the overall number of employees will no longer increase in 2023, but the operating expenditure budget for next year's 96 billion to 101 billion will still significantly exceed market expectations (~90 billion), that is, the original cost and expense optimization expectations are basically disappointed. company said that it expects the loss of VR business to increase significantly in 2023, but it still needs to accelerate investment to achieve long-term operating profit targets as soon as possible. 's continued investment in the cloud universe business of the "Gold-Swallowing Beast" is also the main reason for the market to be dissatisfied with the sharp drop after the market.
4. The company spent US$6.55 billion on the current repurchase, and the repurchase amount was 17.78 billion. As of the end of the third quarter, the company's cash assets ( cash and cash equivalents , restricted cash, and tradable securities) totaled 41.8 billion yuan, and the current free cash flow was only 173 million yuan, compared with 9.5 billion yuan and 4.5 billion yuan in the same period last year and the previous quarter respectively. The reason for the sharp deterioration of cash flow is that in addition to the decrease in profits, capital expenditures used to purchase properties and equipment are also rising sharply.
5. Comparison of actual and expectations of key indicators
Long Bridge Dolphin Viewpoint
Since this year, when macro and competitive pressures have caused Meta's revenue to collapse one after another, the market's expectations for Meta are only to shrink spending to keep profits and survive the economic downward cycle. Since the second quarter, Meta has been rumored to be undergoing large-scale layoffs and office closures in some regions, which has enabled the market to maintain high expectations for Meta's cost and expense optimization next year.
But the management's idea does not seem to be like this. Although it ensures that the size of employees will not expand, it is still committed to continuously increasing investment in VR business. Xiaozha's meta-universe dream, investment cycle can be 5-10 years. Such "enterprise investment" will be considered as increasing the imagination of valuation and giving icing on the cake when the economy is up; in the period of economic downturn, it will be considered as damaging the interests of shareholders and giving double punishment.
Two days ago, the CEO of Meta's shareholder Altimeter Capital, finally couldn't help but publicly urge Zuckerberg not to think too much and quickly lay off employees. I wonder if the management will consider re-adjusting the original investment expenditure plan in the future. But at least before it clearly stated that the market will turn its attitude towards Meta.
In addition to this, Dolphin Jun is even more worried that what makes Meta choose to increase investment against the wind, in addition to Xiao Zha's longing for Yuan Universe , does it also include the investment budget required to deal with competition (such as short videos) on social platforms? If this is the case with , then the management's emphasis on competitive threats continues to increase, and investors are also wary of the heating up of industry competition. After all, this is the basic market of Meta. If the foundation is loose, there will be only collapse. suggests paying attention to the current competition status and the progress of short video Reels during the call.
Changqiao Dolphin Jun will then share the conference minutes with the dolphin user group through the Changqiao App. Interested users are welcome to add the WeChat account "dolphinR123" to join the Changqiao Dolphin Investment Research Group and get the conference minutes as soon as possible.
This financial report is detailed and interpreted
1. Traffic expands beyond expectations, and monetization efficiency continues to weaken
In the third quarter, all Meta's platform users returned to growth month-on-month. Compared with last year, except for the reason why Russian services were suspended in Europe, it still declined year-on-year. All other regions continued to expand slightly, and the overall ecological performance exceeded market expectations.
As of the end of the third quarter, the monthly active users of Meta's entire ecosystem reached 3.71 billion, of which Facebook was 2.957 billion. User stickiness (DAU/MAU) has continued to rise and recover since the first decline in daily active users in the fourth quarter of last year.
From the perspective of single-user advertising revenue (ARPU), the European and American regions that mainly make money continue to decline under economic pressure, especially in Europe where the macros are worse. The pressure on in the Asia-Pacific region has also increased sharply, and the absolute value is too low, which does not have much support for the total revenue. also directly affects Meta's revenue, and profitability continues to weaken due to relatively fixed operating costs and personnel expenditures in the short term and is difficult to quickly optimize.
2. Advertising: Guidelines are lower than expected, Reels' commercialization is difficult to solve short-term pressure
In the third quarter, Meta's advertising revenue was US$27.2 billion, a year-on-year decline of 3.7%. After excluding the impact of foreign exchange changes, the growth rate is around 2%. In addition to exchange rate , macroeconomics, competition, Apple IDFA and the high base of the same period last year are the main factors that drag down growth. However, revenue for the quarter is within the company's guidance, slightly higher than the market's consensus expectations.
points to the region, the impact of war in Europe is worse on the macro side, and advertising revenue is accelerating. The core North American region has eased after its first decline in the previous quarter, but the horizontal comparison is still weaker than the top peers. This part of the revenue has no exchange rate impact, so it is more related to Meta's own product competitiveness and the corresponding customer marketing contraction (Meta has a large number of SMB small and medium-sized merchant advertisers, and SMB is more sensitive to economic downturn and is faster in reducing spending ).
Meta's traffic in North America is still expanding, but judging from the continued decline in quotations, we can still perceive the tightening of advertisers' demand and the competitive threat to Meta itself. Dolphin Jun calculated the change rate of advertising unit price in various regions of Meta. In this quarter, all regions were accelerating their decline, especially in emerging market areas, which also showed a trend of rapid and weak advertiser demand. Another key impact of
is that Reels itself is not commercialized, which lowers the impact of the average quotation level . Following the management's user interaction after the Reels time accounted for 20% of the duration of Ins in the last quarter, you can pay attention to the minutes of the call later.
But whether it is macro or competition, the pressure on Meta needs to resist the decline in revenue, it needs to release more advertising inventory to link pressure. The advertising display volume of in the third quarter increased by 7% year-on-year. According to Dolphin Jun's calculations, the number of ads displayed by a single user increased by 15% year-on-year.
For the second half of the year, since nearly 98% of Meta's revenue comes from advertising, the outlook for advertising revenue can be compared with the company's guidance on changes in total revenue.
total revenue guidance for the fourth quarter was in the range of 30 billion to 32.5 billion, corresponding to the change of 3.5% to 10.8%, although the guidance center was lower than market expectations.
This time the guidance is not good. Starting from the fourth quarter of , the high cardinality effect of Apple IDFA privacy policy will gradually weaken. However, the growth rate range implicitly contained in the guidance is basically consistent with the third quarter, which has a high cardinal effect, so it can only be said that the actual growth in the fourth quarter is worse than in the third quarter. However, with the experience of a burst of explosions that was significantly lower than expected in the previous quarter, I can barely accept this time.
At the same time, such conservative guidance data also indicates that Reels' commercialization is not large in the third quarter, and it is difficult to help total revenue offset some resistance.
3. VR/AR: The economy is downward, and consumption is fading, and price increases are stressed. In the third quarter, the VR/AR business achieved revenue of halved to 285 million. According to estimates, Dolphin Jun expects that the sales of Quest2 in the quarter will be only about 1 million units. In the comments on the financial report of the last quarter, Dolphin expressed concern that in the stage of declining consumer demand and lack of new milestone VR content, hardware price increase will definitely affect the sales of the front-end.
Since Oculus is still the absolute leader in the VR headset market, its sluggishness represents the overall market downturn. According to the latest forecast data of IDCh (2022.10.5), it is expected that the global sales of VR headsets in 2022 will be 10.8 million units, which is lower than the forecast of 12 million in August last year, and is lower than last year's sales.
October Although Oculus released a new product as scheduled, the Quest pro launched was priced at US$1,499, which is really expensive in the current environment. The expected sales volume is average, and it is mainly based on consumers and corporate users who have tried their best in technology.
Recently, Zuckerberg mentioned in a public discussion with Microsoft CEO Nadella that will release a Quest 3 of $300 or $400 next year. In this performance brief, it also mentioned that the cost increase in 2023 includes the hardware cost of the new Quest launched later.
Dolphin Jun believes that in the stage of popularizing emerging hardware, prices that are more suitable for mass consumption can quickly drive penetration when the richness of content is insufficient. More user penetration will in turn stimulate the development motivation of the content party.
4. Real big thunder: Profits continue to weaken beyond expectations, and the expenditure guidance for next year did not converge
In the third quarter, the company's operating profit was only 5.66 billion yuan, a sharp decline of 46% year-on-year, and the profit quality also decreased significantly. The profit margin fell from 29% in the second quarter to 20%, lower than market expectations (~22%).
The management's outlook for expenditure in 2023 is the main criticism of the market . Although the company mentioned that the employee size will remain in its current state by the end of 2023, it will internally adjust and concentrate resources on growth projects. But what the market wants to see is a reduction in employee size, which will bring about optimization of overall operating expenses.
For the past two years, Meta has been recruiting people frantically, and mainly employs people who work at Reality Labs with high salaries.However, the investment period of VR business is still very long, and the economic recession has further extended the timing of monetization explosion. In the short and medium term, the return rate of VR business is too low and the return cycle becomes longer, but Meta management still needs to continue to expand investment, which is what makes investors most dissatisfied.
The company expects total operating expenditure to be in the range of 96 billion to 101 billion in 2023, while most investment banks originally expected it to be 90 billion. In addition to one-time short-term expenditures such as office integration, the main incremental sources of operating expenses are three expenses, and employee salaries are still the big ones. The increase in expenditure on cost items is mainly due to the increase in Reels traffic investment demand for infrastructure such as servers and data centers, as well as the cost of new Oculus products that drive the growth of total cost. Under the pressure of revenue, the above-mentioned cost growth will bring the risk of continued weakening of gross profit margin.
This article is derived from Changqiao Dolphin Investment Research
