♾ Meta: Open Source AI
Engagement improves as the "year of efficiency" unfolds
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Meta Platforms (META), the artist formerly known as Facebook, reported its Q1 FY23 earnings report. In response, the stock soared 14% and has now surged over 162% since its November lows.
Founder-CEO Mark Zuckerberg discussed the potential competitive advantage of open-source AI models, which we'll examine further.
Today, we’ll cover the following:
Meta Q1 FY23.
Recent business highlights.
Key quotes from the earnings call.
What to watch looking forward.
Before we begin, I know the numerous acronyms and metrics associated with Meta's business can be confusing. As a helpful reminder, here's a quick rundown of the key metrics and their meanings.
Meta has two business segments:
Family of Apps (FoA): Facebook, Instagram, Messenger, and Whatsapp.
Reality Labs (RL): Virtual reality hardware and supporting software.
About 99% of Meta’s revenue comes from FoA and advertising.
Meta’s advertising revenue comes from two elements:
The number of users.
The average revenue per user.
Revenue increases when more users see more ads (or ads at a higher price).
It gets a bit technical if we look at the detailed metrics.
Facebook metrics include only Facebook and Messenger:
Daily active users (DAUs).
Monthly active users (MAUs).
Average revenue per user (ARPU).
Family metrics include users who visited at least one of the apps in the Family segment:
Daily active people (DAPs).
Monthly active people (MAPs).
Average revenue per person (ARPP).
Family metrics represent the company’s estimate of the number of unique people using at least one of the apps without double-counting.
Consider the two primary drivers of average revenue per user:
Ad impressions: The average number of ads seen by users.
Average price per ad: The cost an advertiser pays for an impression.
Recently, user engagement across Meta's family of apps has increased, leading to a rise in ad impressions. However, the average price paid by advertisers for an impression has declined. This is because ad prices are determined by an auction system, with supply and demand dictating the appropriate price.
Reels, a short-form video format, is primarily responsible for lower monetization. It's considered a "lower monetizing surface," due to a combination of factors, including reduced revenue per ad impression and a lower ad load.
Here are five contributing factors:
New feature development: As a relatively new feature, Reels is still in the process of refining its advertising products and strategies to optimize monetization.
User behavior: The content consumption pattern of Reels can make it difficult for ads to be as effective as they are in more mature parts of the platform (such as Feed and Stories), impacting monetization.
Ad format limitations: The short video format of Reels can limit the creative scope for advertisers, making it less attractive for certain types of campaigns.
Competition: Advertisers may allocate portions of their budgets to competing platforms like TikTok, which could impact the overall monetization of Reels.
Balancing ad load: Meta aims to maintain a positive user experience by carefully managing the number of ads shown in Reels, potentially limiting the monetization potential in the short term.
We’ll cover what CFO Susan Li had to say about these efforts.
Let’s dive in!
1. Meta Q1 FY23
Family DAP grew +5% Y/Y to 3.02 billion (+0.06B Q/Q).
Family MAP grew +5% Y/Y to 3.81 billion (+0.07B Q/Q).
Facebook DAUs grew +4% Y/Y to 2.04 billion (+0.04B Q/Q).
Facebook MAUs grew +2% Y/Y to 2.99 billion (+0.03B Q/Q).
Ad impressions grew +26% Y/Y (an acceleration from +23% Y/Y in Q4).
Average price per ad declined -17% Y/Y (vs. -22% Y/Y in Q4).
Here is a bird’s-eye view of the income statement.
Revenue grew +3% Y/Y to $28.6 billion ($1.0 billion beat), or +6% Y/Y fx neutral.
FoA revenue grew +4% Y/Y to $28.3 billion.
RL revenue declined -51% Y/Y to $0.3 billion.
Gross margin was 79% (flat Y/Y).
Operating margin was 25% (-5pp Y/Y, +5pp Q/Q).
FoA operating profit was $11.2 billion (38% margin, -4pp Y/Y).
RL operating loss was $4.0 billion (vs. a $4.3 billion loss in Q4 FY22).
EPS declined by -19% Y/Y to $2.20 ($0.23 beat).
Restructuring charges were $1.1 billion in Q1 FY23 (vs. $4.2 billion in Q4 FY22).
Operating cash flow was $14.0 billion (49% margin, -2pp Y/Y).
Free cash flow was $6.9 billion (24% margin, -6pp Y/Y).
Cash, cash equivalent, and marketable securities: $37.4 billion.
Long-term debt: $9.9 billion.
Q2 FY23 revenue is forecasted to be $29.5-$32 billion (about $1.3 billion ahead of consensus), or about +6% Y/Y in the mid-range.
Total expenses in FY23 are expected to be $86-$90 billion (vs. $89-95 billion previously) thanks to the restructuring and cost savings efforts.
So what to make of all this?