Facebook shares rise as investors focus on earnings beat and buyback over revenue miss and outlook

Facebook shares rose in extended trading on Monday after the company reported better-than-expected third-quarter earnings while revenue missed estimates. Read more...

Facebook shares rose more than 1% in extended trading on Monday after the company reported better-than-expected third-quarter earnings even as revenue missed analysts’ estimates.

Facebook also said it’s increasing its share buyback program by $50 billion.

Here are the results.

  • Earnings: $3.22 vs $3.19 per share expected by analysts, according to Refinitiv.
  • Revenue: $29.01 billion vs $29.57 billion expected by analysts, according to Refinitiv.
  • Daily active users (DAUs): 1.93 billion vs. 1.93 billion expected by analysts, according to StreetAccount.
  • Monthly active users (MAUs): 2.91 billion vs. 2.93 billion expected by analysts, according to StreetAccount.
  • Average revenue per user (ARPU): $10.00 vs $10.15 expected by analysts, according to StreetAccount.

Facebook will make significant changes in the next year to make its full-screen video Reels feature a more central focus of Facebook and Instagram in an effort to better appeal to users between the age of 18 and 20, CEO Mark Zuckerberg said in a call with analysts.

“Over the last decade as the audience that uses our apps has expanded so much and we focus on serving everyone, our services have gotten dialed to be the best for the most people who use them rather than specifically for young adults,” Zuckerberg said.

Zuckerberg said Facebook will retool its focus on young users rather than optimizing for the larger number of older people.

“This shift will take years, not months, to fully execute, and I think that’s the right approach to building our community,” Zuckerberg said.

Reels, which Facebook copied from TikTok, will be as fundamental of a format shift for Facebook as the adoption of News Feed and Stories were, Zuckerberg said.

“Reels has the potential to be something of that scale,” he said.

This pivot comes after internal company documents released by former Facebook employee Frances Haugen showed that the number of teenage users of the Facebook app in the U.S. has declined by 13% since 2019, with a projected drop of 45% over the next two years. The number of users between the ages of 20 and 30 was expected to decline by 4% during that time frame, according to the internal documents.

The company announced its plans to break out Facebook Reality Labs into its own reporting segment starting in the fourth quarter. That unit focuses on hardware, augmented reality and virtual reality products. The other revenue segment will come from its family of apps, which include Facebook, Instagram, Messenger, WhatsApp and other services.

Facebook expects its investment in the hardware and VR segment to reduce operating profit in 2021 by approximately $10 billion.

In July, Facebook announced the formation of a team that would work on the metaverse, digital worlds in which multiple people can interact within a 3D environment. Two months later, the company said it would elevate Andrew “Boz” Bosworth, who is currently the head of Facebook’s hardware division, to the role of chief technology officer in 2022.

Facebook’s revenue increased 35% from a year earlier, while net income rose 17% to $9.2 billion, from $7.8 billion a year prior.

The company said it expects fourth-quarter revenue of $31.5 billion to $34 billion. Analysts were projecting sales of $34.8 billion. Facebook said the forecast “reflects the significant uncertainty we face in the fourth quarter in light of continued headwinds from Apple’s iOS 14 changes, and macroeconomic and COVID-related factors.”

Apple introduced privacy changes earlier this year, adding prompts that allow users to keep from being targeted with ads on apps. Snap shares plunged 27% on its earnings report last week after the company blamed the iOS changes for a disruption to its business.

CFO Dave Wehner said that the iOS changes were the “largest headwind” in the quarter, and that if not for that, “we would have expected sequential growth from Q2 to Q3.”

The iOS changes impacted Facebook’s ability to target ads to users, and as a result, “we don’t see the same level of conversion data coming through,” Facebook COO Sheryl Sandberg said. Facebook will rebuild its targeting and optimization systems to work with less data, but this will take multiple years, Sandberg said. 

Sandberg told analysts that the company experienced slowing e-commerce growth as more places open up and people return to making purchases in person.

“Businesses are still making the shift online, but e-commerce is no longer growing at the pace it was at the height of the pandemic,” Sandberg said.

Sandberg also noted that advertising spend has been impacted by the global supply chain issues and labor shortages. This has been the case in every region and across all verticals, Sandberg said. Despite those challenges as well as the challenges presented by Apple’s iOS changes, Sandberg said the company remains confident about the future.

“We believe we’re still the best platform for advertisers to reach people where they are and get measurable outcomes,” she said.

Revenue from Facebook’s “other” segment, including consumer hardware such as Oculus virtual reality headsets, totaled $734 million, up 195% and more than the $477 million StreetAccount consensus estimate.

The company’s free cash flow of $9.55 billion fell short of the $9.9 billion StreetAccount consensus.

Facebook said in the third quarter it had 3.58 billion monthly users across its family of apps, up from 3.51 billion in the second 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 196 million daily active users, up from 195 million in the second quarter. In Europe, the number rose to 308 million from 307 million in the second quarter.

While investors continue digging into the numbers, all the recent attention on Facebook stems from a series of reports, initially from The Wall Street Journal, regarding internal research released by former employee Haugen.

Haugen initially shared some of the documents she acquired during her time at Facebook with the Journal, and she then appeared in front of a Senate panel earlier this month to testify about her experiences at the company. Since then, Haugen has released the documents to several more news outlets, leading to additional news articles.

The reports show that Facebook is aware of many of the harms its apps and services cause but either doesn’t rectify the issues or struggles to address them. More documents are expected to be shared daily over the coming weeks.

Since Haugen began leaking documents and testifying, another whistleblower has submitted an affidavit with allegations about Facebook’s behavior, and previous whistleblower Sophie Zhang has again spoken up against the company.

In a call with analysts, Zuckerberg also vehemently refuted the claims and critiques in news reports stemming from whistleblower Frances Haugen’s trove of internal company documents.

“The reality is social media is not the main driver of these issues and probably can’t fix them by itself either,” Zuckerberg said. “We should want every other company in our industry to make the investments and achieve the results that we have.”

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