Macro, Apple ATT, competition and many headwinds, management's short-term outlook is very conservative (Meta conference call)
The following is the minutes of the Meta Q2 earnings conference call, for the financial report interpretation please refer to "No "Google-style" Reversal, Meta's Decline Unconcealed".
Management Report
1. Improvement in user interactions on Facebook and Instagram. Last quarter, when we talked about Reels, it accounted for 20% of Instagram's watch time. This quarter, the watch time has increased by 30%, mainly driven by AI-intelligent content recommendation.
Facebook's Reels video viewing time has increased by 15%.
2. Slowing down short-term investment and focusing on long-term investment returns with timely adjustments.
We seem to have entered an economic recession, which has a wide impact on digital advertising. However, it is always difficult to predict how deep or how long these cyclical impacts will last. But what I want to say is that the situation is worse than a quarter ago.
Therefore, based on this environment, we will focus on long-term investments, including Reels, new advertising infrastructure, and the metaverse. We will strictly measure the return on investment of these investments and make timely adjustments.
During the last earnings conference call, we mentioned that we started some long-term investment projects to accelerate our business. We still believe that these projects are important, but given the recent revenue trends we have seen, we are slowing down these investment steps and postponing some expenses that should have appeared in the next year or two to a longer timeline.
3. Slowing down recruitment
We plan to reduce employee growth next year. Many teams will shrink in size and shift their focus to other areas. We have hired a lot of people since the beginning of this year. Employee growth in the second half of the year is still expected, but the growth rate will continue to decline.
We added more than 5,700 new employees in the second quarter, most of whom are in the technical functional departments. As of the end of this quarter, we have more than 83,500 full-time employees, a 32% increase over last year.
4. The current company's high-priority businesses: AI content recommendation, and the metaverse
One of the main business transformations for content intelligent recommendation is to shift the information flow of social platforms from primarily based on accounts that users follow to AI-recommended content-driven. Users can discover interesting content on fb or ins without following accounts.
However, the content of the accounts that users follow is still an important part of the user experience and our differentiated content advantage.
Reels is one of the short video forms, and we want to cover all content forms, including text, images, links, group content, etc.
5. Reels advertising revenue exceeds $1 billion per year, with a higher commercial realization efficiency than Stories at the same period when it was launched.
6. To mitigate the impact of Apple's iOS privacy changes, our approach is to make it easier for users to interact with businesses on our platform through commercial messages (Business Messages, currently 40% of our merchants use this function), or shops (Shops & Marketplace), ads (generally DR ads), to increase first-party enterprise accumulation of user tags. 7. Regarding the metaverse, keep an eye on the continued expansion of our milestone social virtual world platform, Horizon.
(1) Horizon web version will be launched by the end of this year, making the platform accessible to everyone, which will greatly increase the number of people on Horizon.
(2) We have just launched the store function on the Avtars platform, selling digital clothing.
(3) On the hardware side, Project Cambria (Quest 2 pro) will be launched this year. It will be a high-end device focused on professional users and supporting high-resolution color mixed reality.
Dolphin Analyst Q&A
Q: Regarding user interaction and user duration, you mentioned that Reels on Facebook and Instagram increased by 30% compared to last quarter. Can you tell us if the total user duration has increased?
A: Reels has indeed diverted user duration from other content on the platform, but overall, there is still a net increase.
Q: Regarding the size of the workforce, will the number of employees decrease in 2023?
A: There are no set targets for 2023 yet. We are slowing down recruitment and will provide more accurate guidance after setting goals and budgets.
Q: In the headwind, you did not mention TikTok. Have you seen advertisers' budgets shift to the TikTok platform in search of lower CPM?
A: We exist in a fiercely competitive advertising market, where advertisers have many opportunities to do marketing online or offline. Therefore, we need to invest to regain market share, so we must continue to advance product iterations.
Q: Due to the increased usage of Reels, will there be pressure on revenue in the third quarter compared to the second quarter? (Reels quotes lower, which lowers the overall platform's commercial realization level)
A: Because the user interaction flow is constantly shifting to Reels, it is a headwind for the total revenue of the company. But in the long run, it is still beneficial for growth. Overall, the pressure in the third quarter will mostly be macroeconomic pressure, and we have seen relatively extensive demand weakness in most vertical markets.
Q: When investing in VR/AR, how do you consider the impact on the proportion structure of the operating profit of the two segmented businesses? (That is, investing so much in loss-making VR will affect the overall operating profit margin, how do you consider it?)
A: We will focus our investments on key priority events. For us, Metaverse and Reality Labs are the top priorities at the moment, but we will also maintain rigorous measurements of return on investment.
Q: What will be the impact of macroeconomic factors in the third quarter? Originally, the third quarter was expected to pick up as the base effect of Apple's privacy policy faded away.
A: Indeed, the base effect of privacy adjustments will gradually disappear, but the more severe macroeconomic environment brings us even greater challenges. It is difficult to separate and analyze the impact and trends of the macroeconomy, but the overall digital advertising environment is also challenging. So, for now, we are mainly affected by the macroeconomic situation. Q: On the issue of Reels developing faster than Storied, what drives the quick monetization of Reels when you say that the product is harder to make money off of?
We've done an excellent job in building products that consumers love to use, and then building ad formats that match these products so that they can be seamlessly integrated into the consumer experience. So we learned how to do this from Stories, and I think an important reason why Reels ads are adopted faster is that we do a better job in this regard. We know we need to make it really easy for advertisers to create this content.
However, video has more challenges than images in that it's more difficult for small and medium-sized business owners to make videos, and we need to provide more tools, so we still have a lot of work to do.
Q: Previously, meta was the social circle and relationships of billions of people. What are the advantages in the future?
We are a serious technology company. We have invested a lot of money in infrastructure building. In terms of culture, we focus on moving and learning faster than others. I think these are sustainable advantages.
So I think the AI technology infrastructure we are building, I think it can compound and be better than anyone else in the industry, and it will be an advantage, and over time it will make the product better. In intense competition, if you don't move forward, you'll fall behind.
Q: How much does Reels monetization differ from Stories? How long will it take to catch up? A question of several quarters or several years. How fast did Stories catch up with News Feed in 2018?
A: Stories really started commercializing in 2018, and up until today, Stories is priced equally with News Feed in the same period.
So we think that Stories is still in a very early stage, so being able to achieve this level of annual revenue, even though the amount is not very high, is something we are still proud of.
Q: On the importance of mergers and acquisitions in advancing the metaverse, and the importance of mergers and acquisitions? The FTC just announced that it is blocking your acquisition of a seemingly small VR application, Witch? (Antitrust litigation)
A: Mergers and acquisitions are definitely a part of our strategy, and we will continue to focus on future acquisition opportunities. Regarding the FTC's desire to block our acquisition of Witch, I recommend that you refer to our official statement. However, we believe that Witch is beneficial to competition and expanding the VR ecosystem, attracting more new users to use and experience VR, so we are skeptical of the FTC's position.
Q: How does the current demand slump compare to past economic downturns? How long will it last, and how do you view the ongoing cycle?
A: There are many special factors in the cycle we are in now. On the one hand, during the pandemic last year, online advertising accelerated, and there was a disturbance effect from the high base number. On the other hand, more user behavior is returning to offline. In addition, more intense competition has caused the online economy to exhibit a trend of decline, which has resulted in cyclic impacts on our business.
In terms of predicting economic cycles and durations, I think it's better to leave it to economists to analyze. However, our third quarter guidance has already implied our expectation of a persistently difficult operating environment.
Q: Regarding Business Message, you mentioned that Business Message marketing is one of the fastest-growing methods and has generated billions of dollars in revenue. How has it been generating revenue in Europe and America?
A: Business message advertising is now experiencing high growth in multiple regions and countries. It helps us turn users from discovery to direct relationship with enterprises. This point is directly provided to advertisers by feedback, and it is not affected by Apple IDF, so the return on investment is higher.
For example, Roamhowl Creative, a small enterprise consulting company, used click-to-message advertising to generate potential customers. Then, compared these ads with regular ads that drive website conversions. Click-to-Messenger ads brought 2.3 times more relevant potential customers, reducing the cost per potential customer by 57%. And it is measurable, providing better attribution even if the return is the same.
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