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Meta Platforms Q2 Earnings Review
Exploring the results of this bellwether.
Bradley Freeman
July 27, 2022
Today's Piece is Powered by Quartr:
a. Meta Demand
Meta Guided to $29.0 billion in quarterly revenue and posted $28.8 billion, missing expectations by 0.7%.
Analysts Expected (per Bloomberg Terminal):
$28.9 billion in revenue. Meta missed by 0.4%.
$28.5 billion in ad revenue. Meta missed by 1.0%.
Ad impression growth of 9.6%. Meta posted 15% growth, sharply beating expectations.
Ad price growth of (9.7%). Meta posted (14%) growth sharply missing expectations.
“It was good to see a positive trajectory on our engagement trends this quarter from Reels and our investments in AI.”
Facebook’s user growth missed analyst expectations by under 1% in 3 of 4 categories. Interestingly, for Facebook DAUs, it posted a slight beat. Note that global user growth was impacted by ending its Russian operations.
More context on demand:
Revenue grew 3% YoY constant currency. Dollar strength shaved 400 basis points off of its growth.
This quarter marked Meta’s toughest YoY pandemic growth comp.
Headwinds ranging from IDFA to lapping stimulus/social distancing, to a content monetization shift to Reels to broader macro all continued to weigh on growth this quarter.
Ad revenue growth was strongest in APAC and weakest in Europe. The same can be said for ARPU.
b. Profitability
Analysts were looking for $2.55 in earnings per share (EPS). Meta earned $2.46, missing expectations by 3.6%.
OCF = operating cash flow; FCF = free cash flow; NI = net income
More Margin Context:
FCF margin is where Meta’s heavy CapEx impacts margins most noticeably.
Analysts were only expecting $3.55 billion in FCF while Meta’s $4.45 billion beat expectations by 25.4%. It’s controlling costs.
Meta's tax rate was 18% vs. 17% YoY -- a slight help to net income.
Quest 2 price increases allowed Meta to shrink its loss reserves which slightly aided margins this quarter.
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c. Guidance
For Q3 2022, analysts wanted $30.4 billion in revenue. Meta guided to $27.25 billion missing expectations by 10.4%. Worst part of the report, but also understandable.
Meta also told us that Reality Labs revenue will be lower next quarter vs. this quarter.
Meta 2022 Guidance:
d. Press Release Notes
CFO David Wehner is moving on from CFO to become Meta's first Chief Strategy Officer. Susan Li -- current VP of Finances -- will be the new CFO. I love internal promotions.
Foreign Currency will be a 6% revenue growth headwind for the third quarter. If the Dollar continues to cool off like it did following the Fed meeting today, that could ease.
Meta bought back $5.08 billion in stock during the quarter vs. $9.4 billion sequentially and has another $24 billion+ left on the current program.
Meta's balance sheet is the definition of pristine with $40.5 billion in highly liquid assets including cash... & no debt.
It's still hiring -- headcount grew 32% YoY to 83,553 -- but hiring has considerably slowed and will continue to slow this year.
e. Zuckerberg Conference Call Notes
On Facebook:
Zuckerberg spoke glowingly on engagement trends within legacy Facebook. Credit for this was awarded mainly to Reels proliferation.
On Macro:
"We've entered an economic downturn impacting digital ads. It's hard to predict how deep it will be, but I'd say the situation has worsened from a quarter ago... Previously challenging periods have been transformational for our company. We'll find a way to keep investing and come through this stronger and more disciplined."
The company has pulled back on and delayed investments even more aggressively than it had as of last quarter as Macro deteriorated further.
On Headcount:
"I expect to get more done with fewer resources."
On social discovery:
Facebook is spending aggressively on building out AI models to intelligently source relevant content for users outside of their core social circles. This is its TikTok response. Today, 15% of Facebook's content consumption is now recommended by AI from accounts a user doesn't follow. Meta sees that doubling by end of next year as its AI content models season. One of these AI improvements was credited for directly raising Reels engagement on Facebook by 15% -- alone. The company sees several more of these updates to make.
"We're still a social company helping people connect. This is not about public vs. social, but compounding a flywheel. For example, Reels makes up half of the discovery context re-shared to friends in messages."
On Reels:
Reels officially crossed a $1 billion revenue run rate this quarter more quickly that Stories was able to during that previous content transition.
Reels engagement across the Family of Apps accounted for 20% of total video engagement last quarter. That rose another 30% sequentially this quarter.
On Advertising:
IDFA was barely talked about during the call. It has lapped that change and the Q3 pain implied in the guide is via poor macro.
Advertising monetization improvements are happening "faster than expected."
Challenges remain intense in the term term, but Zuckerberg sees Meta's comparative return on ad spend (ROAS) advantage growing over the long term.
Reels doesn't yet monetize with Feed or Stories and Zuck reiterated that it will eventually. It's a long process.
Click to messaging ads is now a multi-billion dollar business with 40% of Meta's marketers using it.
On Metaverse:
"The Metaverse allows us to free ourselves from the constraints that others (Apple) place on us. I feel strongly that developing these platforms will unlock trillions over time. This is a very expensive undertaking, but as the Metaverse becomes more important, I'm confident we'll be glad we played an important role in building this."
"Project Cambria is coming out this year as a high end device for businesses. The experience is getting pretty awesome. I'm looking forward to getting this out and I think people will be blown away."
f. Sandberg Call Notes
Case Study -- Wild Alaskan Company added Reels to its campaign:
+36% ROAS.
-26% cost per new user.
Sandberg also briefly mentioned a click-to-messaging case study where an SMB increased conversions by 2.3X with 57% lower cost per lead. She's "convinced" that click to messaging is a success. Fun fact, the new Top Gun movie leaned heavily on this for promoting the film.
On the Big Picture as She Steps Down:
"No doubt we are transitioning during a time on global uncertainty. Despite this, I'm very confident over the long term. The digital ad market will grow and advertisers will go to the best ROAS where we'll show up favorably vs. other options. Time and time again we've demonstrated extraordinary resilience... I look forward to my front row seat serving on Meta's board in the years ahead."
g. Notes from CFO (Now Chief Strategy Officer) David Wehner
On Reels:
"Reels is additive to time spent while having somewhat of cannibalizing impact. But the net impact is certainly positive."
Family of Apps operating margin was 39% vs. 42% YoY
Wehner again called rest of 2022's anticipated weakness Macro-related. I repeat: Leadership did not blame competition and is not using IDFA as an excuse anymore as that change has been lapped. The ball is now seemingly in Meta's court to make the necessary investments to improve measurement and targeting.
h. My Take
This was a weak quarter for Meta -- and that was widely expected. It's encouraging to me to see the company controlling costs and shifting reasoning behind slower growth to broader macro issues. These macro issues are less structural in nature vs. IDFA and intensifying competition. They will revert at some point and that resolution wasn't as certain with the other two issues. Yes, we lapped the IDFA comparisons, but Meta still needs to offer effective ROAS in a post IDFA-World to succeed -- regardless of special comp items.
I was also happy -- but not surprised -- to get any Q3 guidance while Snapchat refused to provide it.
Reels is thriving, and it's only a matter of time until that becomes a material part of results. This company has so many revenue and profit levers to pull with Shopping, WhatsApp, Messenger and much more. I'm confident that it will get through this period with its vast cash position more gracefully that virtually all of my other holdings. Meta is hibernating, it's not dead. Q3 and Q4 2022 get slightly easier with continued improvement (I expect) thereafter.
Have a great night.