Meta’s revival picks up in Q2 as revenue grows 11%

Meta picked up speed in the second quarter as revenue increased 11% to $32 billion and profit jumped 16% to $7.8 billion — results that exceeded expectations and sent the company’s shares up 7% in after-hours trading.

Like its rival Google, the tech giant appears to be over the tumult of 2022 that dragged Meta into three successive quarters of decline, recovering with a 3% year-on-year growth rate in the first quarter.

Meta once again attributed growth to investments it has made in artificial intelligence, with products like Advantage+ automated ad placements luring in more advertisers.

It said it has seen strong adoption of Advantage+ campaigns among ecommerce and retail verticals while it is gaining traction among consumer packaged goods (CPG) and direct-to-consumer brands.

Chief financial officer Susan Li told investors on Wednesday that commerce was the largest contributor to Meta’s ad growth in the quarter, with strong spend recorded from advertisers in China reaching customers in other markets.

Ad revenue growth was strongest in Meta’s “rest of world” region at 16%, followed by Europe at 14%, North America at 11% and Asia Pacific at 10%, respectively. 

Elsewhere, Meta said it continued to make progress monetising Reels — which has been a revenue headwind since last year. Li said more than three quarters of Meta’s advertisers now place ads on Reels, though she expects the format to continue monetising at a slower rate than its Stories or Feed ads “for the foreseeable future” since users “scroll more slowly through video content.”

AI was also credited with improving Meta’s user engagement levels. CEO Mark Zuckerberg said AI-recommended content from accounts that users don't follow has driven a 7% increase in overall time spent on Facebook and is the fastest-growing category of content on the news feed. 

User growth across Meta’s apps also exceeded analyst expectations, with daily active users growing 7% to 3.1 billion, and monthly users lifting 6% to 3.9 billion.

Threads

Beyond its Q2 results, Meta’s new conversational app Threads, which rolled out earlier this month, was top of mind for investors.

While the app was an overnight success — surpassing 100 million users within one week — investors queried whether Threads could maintain engagement. Intelligence firms have predicted that time spent on the app has more than halved while daily active users are down by about 70% since it launched.

Zuckerberg said Threads adoption “dramatically” surpassed the company’s predictions and that it is also “seeing more people coming back daily” than expected.

“We thought this was going to be a project that we just had a small team working on for a while, but it really blew up and created a big opportunity immediately,” he said.

Meta executives were surprised partly because several attempts to launch standalone apps have failed in the past, Zuckerberg said.

Threads’ limited functionality and lack of unique features are believed to be major factors in its falling engagement. Zuckerberg recognised that “there's still a lot of basic functionality to build.”

“Once we feel like we're in a very good place on that then I'm highly confident that we're going to be able to pour enough gasoline on this to help it grow,” he said.

He said Meta will “worry about monetisation” once Threads reaches “hundreds of millions” of users — “assuming we can get there.”

“That's not a foregone conclusion yet — even though I think we're off to a great start,” he added.

Escalating metaverse losses 

Losses related to Meta’s metaverse vision continue to rack up. The Reality Labs division, responsible for its AR and VR technology, posted a loss of $3.7 billion in Q2, while the revenue it generated fell by 39% to $276 million, which it attributed to lower sales of its Quest 2 headset.

It is due to release its Quest 3 mixed reality headset in the fall.

Meta said it expects Reality Labs operating losses to increase year-over-year in 2023 — a forecast that worried investors.

Zuckerberg acknowledged the concerns but said the company will continue to “deliver good business results in the near-term while investing ambitiously in the long-term.”

“I kind of get that a lot of investors might want to see us spending less here in the near term. My view is that we are leading in these areas, I believe that they're going to be big over time,” he said.

The company was also hit with a hike in costs in Q2 related to a restructuring exercise it kicked off towards the end of 2022 that has seen some 21,000 employees laid off and office space reduced.

Meta’s total costs and expenses were $22.6 billion in the second quarter — 10% higher than a year ago.

It previously expected severance-related costs to be $1 billion in 2023, but is now forecasting a $4 billion hit related to its restructuring efforts.

As a consequence, it increased its cost outlook range for the year to between $88 to $91 billion, up from the $86 to $90 billion it had forecast in April.

Marketing and sales expenses fell 12% to $3.2 billion as part of Zuckerberg’s “year of efficiency.”

Beyond rising costs, another uncertainty on the horizon for Meta is the impact that new regulatory actions will have on its ability to serve personalised ads, share data between its apps and rollout Threads across Europe.

“We continue to see increasing legal and regulatory headwinds in the EU and the US that could significantly impact our business and our financial results,” Li said.