Facebook Beats Earnings Expectations, But Warns of Significant Growth Slowdown

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  • Facebook surpassed analysts' estimates for earnings and revenue in its second-quarter earnings report.
  • CEO Mark Zuckerberg spent much of the company's earnings call discussing his vision for the metaverse: a digital world Facebook is investing billions of dollars to create.

Facebook shares fell as much as 5% in extended trading on Wednesday after the social media company called for revenue growth to slow in the quarters ahead, even as second-quarter results came in ahead of estimates.

Here's how the company did:

  • Earnings: $3.61 per share, adjusted, vs. $3.03 per share as expected by analysts, according to Refinitiv.
  • Revenue: $29.08 billion, vs. $27.89 billion as expected by analysts, according to Refinitiv.
  • Daily active users (DAUs): 1.91 billion, vs. 1.91 billion as expected by analysts, according to StreetAccount.
  • Monthly active users (MAUs): 2.90 billion, vs. 2.91 billion as expected by analysts, according to StreetAccount.
  • Average revenue per user (ARPU): $10.12, vs. $9.66 as expected by analysts, according to StreetAccount.

Facebook's revenue grew by 56% year over year in the second quarter, according to a statement. It's the fastest growth since 2016, accelerating from a 48% increase in the prior quarter. The company pointed to a 47% rise in average price per ad, along with a 6% increase in the number of ads it delivered.

Revenue from Facebook's Other segment, including consumer hardware such as Oculus virtual reality headsets, totaled $497 million, up 36% and less than the $685.5 million StreetAccount consensus estimate.

The company's free cash flow of $8.51 billion fell short of the $9.08 billion StreetAccount consensus.

With respect to guidance for the second half of the year, Facebook said it expects "year-over-year total revenue growth rates to decelerate significantly on a sequential basis as we lap periods of increasingly strong growth." That's effectively unchanged from Facebook's guidance three months earlier. Analysts polled by Refinitiv had expected $28.22 billion in revenue for the third quarter, which implies 31% growth.

Facebook said in the second quarter it had 3.51 billion monthly users across its family of apps, up from 3.45 billion in the first quarter. This metric is used to measure Facebook's total user base across its main app, Instagram, Messenger and WhatsApp.

In the U.S. and Canada, where Facebook generates more average revenue per user than in other regions, the company reported 195 million daily active users, the same as in the first quarter. In Europe the count declined sequentially to 307 million from 309 million in the first quarter.

During a conference call with analysts, CEO Mark Zuckerberg talked about the company's goal to help develop the metaverse, which he described as "a virtual environment where you can be present with people in digital spaces."

The comments came two days after Facebook announced the formation of a team that would work on the metaverse.

"In the coming years, I expect people will transition from seeing us primarily as a social-media company to seeing us as a metaverse company," Zuckerberg said. Advertising will probably be a meaningful part of the metaverse, and Facebook's goal won't be to sell devices at a high premium, he said. Zuckerberg's vision for the metaverse requires a sense of presence in a virtual world, which is why the company is investing heavily in its Oculus division to build the necessary hardware. Zuckerberg said he thinks Facebook will also be able to make money from the metaverse through the sale of digital goods and experiences.

Facebook said in Wednesday's statement that it still expects "increased ad targeting headwinds in 2021 from regulatory and platform changes, notably the recent iOS updates." Snap and Twitter have navigated the challenges of Apple's iOS 14.5 update, which gives people more control over apps that want to track them, without much trouble. Both companies did warn that the long-term impacts of iOS 14.5 remain to be seen, but so far, the early returns have been promising.

David Wehner, Facebook's finance chief, said the company expects a larger impact from iOS 14.5 in the third quarter than in the second quarter. The degree of opting in is in line with Facebook's expectations, Wehner said.

"We're not fully rolled out with those changes, but Q3 will have the impact more or less of those meaningfully rolled out," he said.

Facebook also had some run-ins with Washington during the quarter. A federal court dismissed an antitrust complaint from the Federal Trade Commission against the company, along with a separate case brought by 48 state attorneys general. The FTC has until Aug. 19 to change its complaint, and the group of states said Wednesday it will fight the court's decision.

However, Facebook came under the scrutiny of the Biden administration earlier this month when the White House scolded the social media company for not doing enough to combat misinformation on its services that discourage people from taking Covid-19 vaccines. At one point, President Joe Biden said "they're killing people" in regard to misinformation on Facebook.

Separately, Facebook's vice president of people, Lori Goler, said the company will require employees to be vaccinated before entering its U.S. offices.

As of Wednesday's close, Facebook shares were up 37% since the start of the year. The S&P 500 index has risen 17% over the same period.

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