When you examine Meta's reports in depth, you can notice some significant strengths, which were also reflected in the jump in the stock. At the same time, the significant challenges facing it, in particular concerns regarding its core business, are also blatantly clear. Calcalist dived into the reports of the technology company that came back to life this year and is traded on Nasdaq at a value of around $800 billion.
As far as the number of users of Meta's applications (Facebook, Instagram, Messenger, WhatsApp) are concerned, the records continue to be broken even in the second quarter of 2023. The number of daily active users reached a record of 3.07 billion, and the number of monthly active users reached a record of 3.88 billion. The growth in the number of active users is critical to Meta's business, 98.4% of its revenue comes from advertising. The more active users there are, the more potential buyers you can sell to with the help of advertisements.
In the second quarter of 2023, there was a 34% jump in the number of ads displayed on Meta's platforms, but the average price per ad dropped by 16%. Both the jump in the number of ads, and the drop in their average price, are due to the fact that the strongest growth in Meta's advertising revenue comes from countries defined as the "Rest of World", countries where the price Meta can charge for the advertisements on its platforms is significantly lower than the price it can charge in North America or Europe.
2. Beating the predictions
Meta's results in the second quarter beat the forecasts of investors, as well as the expectations of the company's own management. Investors expected revenues of $31 billion, when in practice Meta recorded revenues of $32 billion. Investors expected a profit of $2.92 per share, when in practice Meta presented a profit of $2.98 per share. All this occurred despite the fact that in the second quarter of this year, Meta suffered both unusual legal expenses of $1.9 billion, and restructuring costs of $780 million. Compared to the corresponding quarter last year, Meta shows a 12% increase in operating profit, a 16% jump in net profit, and a 21% jump in earnings per share. When a company beats both investors' expectations and management's forecasts, and shows an improvement in profit and profitability compared to the corresponding quarter, it makes sense that its stock reacts with a jump.
3. Heavy loss for Reality Labs
Meta has two activity sectors: Family of Apps and Reality Labs. Family of Apps represents the activity of Facebook, Instagram, WhatsApp and Messenger, while the Reality Labs sector concentrates the activity in the field of the metaverse. The contribution of the Reality Labs segment to Meta's revenues is negligible and amounts to less than 1%. In contrast, the impact of the Reality Labs segment on Meta's profit is enormous. In the second quarter of 2023, the operating loss of Reality Labs amounted to $3.7 billion, and it shaved off 28% of the operating profit of the Family of Apps. Meta's operating profit with Reality Labs amounted to $9.4 billion. Meta's operating profit without Reality Labs reached $13.1 billion.
The accumulated losses of Reality Labs are almost beyond belief and they have already crossed the $40 billion mark. Meta hopes that in the future Reality Labs will become profitable. However, this future will not come soon.
4. Significant excess liquidity
Meta's liquidity amounts to $53.5 billion, and is made up of cash and marketable securities. Meta's financial debt amounts to $18.4 billion, and it all comes from the company's bonds. The issue of bonds is quite new at Meta. In August 2022 (less than a year ago) Meta raised a debt of $10 billion in the first bond issue in its history, and in May of this year (during the second quarter of 2023) Meta completed another debt raising, this time of $8.5 billion, in a second bond issue. In total, in the two rounds of debt raising, Meta issued 9 series' of bonds, which bear interest ranging from 3.5% to 5.75%, and will be repaid in the years 2027-2063.
In the conference call to investors, which took place immediately after the publication of the reports for the second quarter, Meta's CFO, Susan Li, implied that the company is expected to raise additional debt when she said: "We have been raising debt, we did earlier this year, just as we’re evolving our capital structure going forward, and that’s something that we’ll continue to do on a measured pace,” said Li. "We generate a lot of capital that we’re always looking to allocate across the organic opportunities that we have, and then of course, shareholder returns."
5. Free cash flow increases
Meta's free cash flow in the second quarter of 2023 amounted to $11 billion. It was 60% higher than the company's free cash flow in the previous quarter, and 150% higher than its free cash flow in the corresponding quarter in 2022. The improvement in Meta's free cash flow comes thanks to the combination of a sharp increase in the flow from current operations, and a decrease in the company's investments in property and equipment.
Meta lowered its investment forecast for 2023 by 10%. This is due both to cost savings, and to delays in projects and equipment supplies, which result in the postponement of investments. At Meta, capital investments are expected to increase in 2024, an increase that will be caused by investments in data centers and servers, especially for the purpose of supporting Meta's activities in the field of artificial intelligence (AI).
6. Number of employees is reduced
As of June 30, 2023, Meta employed 71,469 employees, and by the end of September 2023 it will say goodbye to another 5,000 employees with its number of employees expected to reach 67,000. During the last four quarters, Meta fired a little more than 20,000 workers, and its employee count shrank by 24%. This means that one out of every four workers was fired. The big waves of layoffs at Meta have ended, and for the rest of the year, the company wants to create stability for the employees, meaning, of course, for those employees who survived the company's aggressive efficiency plan.
In the coming months, Meta's management will begin planning the budget for 2024, when the focus will be on continuing "lean" management as much as possible. This means that in practice there will be budgets for recruiting new personnel, only that they will be limited. The salary party of the years 2020 and 2021 is over and the employers really would not like to see it come back. Neither would the shareholders - because in the end they are the ones who pay for it.
7. Fewer shares, more profit per share
During the second quarter of 2023 Meta purchased its own shares in an amount totaling $793 million. Compared to historical data, this is an extremely low amount. In the corresponding quarter (Q2 2022), Meta purchased its own shares at a sum of $5 billion, and in the previous quarter (Q1 2023) it spent $9 billion on purchasing its own shares, 11 times the amount from the last quarter.
Beyond the increase in profit per share, the self-purchase of the shares has an additional contribution. Like all other technology companies, Meta also rewards its employees through options. When the employees convert their options into company shares, the number of shares increases, which dilutes the holding rate of the existing shareholders. Through its own purchase of shares, Meta manages to prevent the dilution of shareholders.
8. The present belongs to AI
Meta rides on two technological waves: artificial intelligence (AI) in the near term, and the Metaverse in the longer term. The uses that Meta makes of AI can be divided into three areas. First, the fastest growing category of content on Facebook's feed is featured content from accounts that users don't know. The content recommendation is based on AI technology. The ability to attract users to the phone or computer increases screen time, and allows for an increase in Meta's advertising revenue. Second, AI technology is behind various advertising tools Meta offers to its advertisers. Like the tool that allows advertisers to use AI to predict the performance of ads and optimize them, or the tool that generates automatic processing of texts, background creation and image processing by AI. Thirdly, Meta also uses AI for internal needs, in order to improve productivity and efficiency. Artificial intelligence helps software engineers write more lines of code in less time. Doing more in less time enables cost savings, and cost savings means more profits for the company.
9. The challenge: expand user engagement
In the last year, Meta's focus was on efficiency, with an emphasis on reducing the number of employees and slowing down investments. These efforts yielded the long-awaited fruits. Profits increased, the flow of orders increased, and in response the stock rose. Meta's management will continue to strive for lean management in the future as well, but its ability to cut fats is limited.
In the coming year, Meta will return to investing in the metaverse field, and this is expected to increase the losses of Reality Labs. The management's challenge will be to avoid substantial damage to profits and cash flows coming from the Family of Apps. The key to this lies in Meta's ability to maintain and expand user engagement and improve and optimize advertisers' monetization.
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