Meta revenue slides for third straight quarter as Reels feels growing pains

• Meta Platforms saw revenue dip 4% year-on-year in the fourth quarter to $32.2 billion, the third straight quarter of declines for the social networking giant, according to an earnings statement. 
• The Facebook and Instagram owner said ad impressions were up 23% YoY over the period while the average price per ad fell 22%. Q4 contains the holiday window where marketers are typically more active, and executives said the season performed in line with expectations. 
• Facebook also reached 2 billion daily active users in Q4, which CEO Mark Zuckerberg attributed to advances in its artificial intelligence (AI) discovery engine and the short-form Reels format that competes with TikTok. Those will continue to be two focus areas as the company tries to correct course following a volatile 2022.   

Headwinds persisted for Meta in Q4, a period that saw the company enact a steep round of layoffs while ad revenue slid for the third straight quarter despite the holiday season. Creating a leaner, nimbler organization is now the guiding mandate at the embattled tech giant. CEO Zuckerberg on call with analysts said that 2023’s management theme will be the “year of efficiency,” with indications that more layoffs could be coming. 

Meta forecasts that total 2023 expenses will land in the $89 billion to $95 billion range, below previous outlooks. The promise of lower costs, coupled with announced share buybacks totaling $40 billion, helped boost Meta’s stock market performance in premarket trading, according to The Wall Street Journal. But the road ahead on the advertising front could be a bumpy one. 

Reels, a short-form video format emulating TikTok, remains a core focus area. Roughly 40% of Meta advertisers now use the offering across Meta’s apps, executives said, while users are expressing healthy demand. That creates near-term problems, as Reels aren’t as well-monetized as other areas of Meta’s business, meaning higher engagement can be a drag on revenue.

“Currently, the monetization efficiency of Reels is much less than feed, so the more that Reels grows, even though it adds engagement to the system overall, it takes some time away from feed and we actually lose money,” said Zuckerberg on the analyst call.

Meta doesn’t expect Reels to be in a revenue-neutral place until the end of 2023 or early next year. That’s a long timeline as rivals like TikTok draw more substantial brand budgets. YouTube, Snapchat and other social apps are similarly investing in copycat products, though revenue struggles persist across the category amid weak advertiser demand. 

In a broader sense, Meta is betting that AI can bolster its ad operations and help offset some of the blow delivered by changes to Apple’s iOS that make targeting and measuring mobile campaigns more of a challenge. Q4 saw advertisers generate 20% more conversions versus the year prior, which Zuckerberg attributed to AI advancements. That coupled with a lower cost per acquisition resulted in higher return on ad spend, a key metric for marketers.  

Beyond AI, Meta is pinning its long-term ambitions on the metaverse, a blend of physical and digital experiences. Investors have asked tougher questions about the experimental space focused on virtual reality, which has so far been a costly endeavor while mainstream appeal is unproven. Reality Labs, the Meta division in charge of developing its metaverse products, recorded a $4.3 billion operating loss in Q4.