Hello everyone, I'm Dolphin-kun!
Meta released its fourth-quarter 2023 earnings report this morning (February 2, Beijing time). Even with high expectations, Meta still delivered a good report card, with current revenue earnings exceeding consensus expectations due to strong advertising.
If compared to the already more optimistic buyer expectations, the surprise of this report card is mainly in the revenue guidance for the first quarter of 2024 - the company expects a 20% to 27% increase, while the buyer expectation is close to the lower end of the guidance.
In terms of the expenditure guidance that made Dolphin a little worried, the management only raised the upper limit of the capital expenditure guidance slightly this time, and the overall situation is still controllable. The current capital expenditure in the fourth quarter was also lower than expected, and the full-year 28 billion fell within the company's guidance range, without the "unexpected" surge that Google did.
With strong revenues and controlled spending, profits in the next quarter are naturally still very impressive. And the bigger surprise is that Meta also gave shareholders a New Year's gift package: the first dividend ($0.).5 shares), plus a new record high of 50 billion repurchases!
A year ago, Meta was still a disobedient "problem student", but now it is abnormal, not only the performance is competitive, but also generously returns to shareholders through the first dividend + an increase of 50 billion repurchases, and instantly returns to the good student that shareholders want to see the most. The management worked so hard, and the market immediately responded positively, pulling 15% after hours.
Key takeaways from the financial report:
1.New Year's gift package: repurchase power, the first dividend
The most surprising thing about this financial report, in addition to the strong performance, is the New Year's gift package generously given by Meta to shareholders, the record high 50 billion repurchase plan, and the first dividend, 0$5 shares!
In 2023, 20 billion US dollars will be spent on repurchases, and the amount of the previous round of repurchase plans is still 31 billion that has not been used, but today Meta will immediately increase its weight by 50 billion! Think about the darkest moment a year ago, Meta shareholders really went to heaven and earth, and happiness came too suddenly!
2.The advertising guidelines are strong
This time, the market, especially the buyer's funds, have high expectations for the performance of advertising stocks, but yesterday's small Google failure also caused the market to worry about Meta. However, Meta is very competitive, although the current performance is slightly lower than the buyer's expectations, but the guidance for the first quarter of this year is a hard beat.
The total revenue guidance for the first quarter was in the range of 34.5 billion to 37 billion, a year-on-year increase of 20%-29%, BBG consensus expected to be 33.6 billion, and the buyer's expectation was only the lower edge of the guidance, which was also 34.5 billion. According to Meta's usual relatively low-key guidance style in previous years, it can basically be stamped to exceed expectations in the next quarter.
As in the third quarter, in addition to the US consumption frenzy in its own shopping season, Instagram Reels and Temu are likely to be the main force of growth.
3.VR straightens up the waist
As expected by Dolphin Jun last quarter, thanks to the launch of new Quest 3 products in the shopping season, the VR AR business finally rebounded significantly in the fourth quarter, with a year-on-year increase of 47% in revenue, and a record high in single-quarter revenue. Because of the failure of the Quest Pro, VR that has been sluggish for a year can finally make that little zha save some face, otherwise the sensational move to change the name may be repeatedly laughed at.
Dolphin Jun believes that starting this year, due to Apple's joining, VR may be a little different, especially on the content application side, there will be more developers eager to try, which is very beneficial to the development of the entire ecosystem. However, if you want to really grow on scale, you may need to look after next year (from the perspective of the application development cycle + the low-cost second generation of Apple's visionpro).
Reality Labs is still in the midst of a "huge loss", and the company has also been vaccinated early, guiding that the loss will continue to expand this year. However, because the management has clearly given the guidance range of the company's overall operating expenditure and capital expenditure, which has not been significantly improved compared with the previous quarter's expectations, coupled with such a strong revenue guidance, Meta's advertising business is back on track, so the market will also increase its tolerance for the loss of VR, which can be ignored for the time being.
4.Traffic is still expanding
From the perspective of the volume-price relationship of advertising, the driving force of advertising in the fourth quarter is still the increase in impressions, with a year-on-year increase of 21%. Among them, the traffic of the whole ecology has naturally increased by 64% and Facebook grew by 34%。While growth was higher on platforms other than FB (Instagram was the main force), FB growth also accelerated slightly sequentially.
In the fourth quarter, the unit price of advertising reversed the downward trend and increased by 2%, which is related to the strong macro and Meta's own competitiveness.
Although Dolphin Jun said before that the period of good economy is also a strong period of advertising unit price, on the contrary, when the economy is bad, advertising growth depends more on the increase in impressions. But because Meta has joined REELS, short ** ads can naturally bring explosive impressions. At the same time, the year-on-year decline in unit price does not mean that the economy is weak, but that the ROI of REELS is still being optimized, which is caused by the relatively low **.
5.The downsizing is over, but advertising margins are still improving
Meta's gross margin and operating margin increased significantly year-on-year in the fourth quarter, mainly due to layoffs (down 22% year-on-year in Q4) and data center cost optimization. Among them, the compression of the cost side significantly exceeded market expectations. In particular, after the layoffs and the reduction of office resources, the sales and administrative expenses have been greatly optimized.
The number of employees has returned to a net increase of 1,132 in the fourth quarter, and the company expects to add employees this year, but it will still focus on innovative businesses, such as AI.
The expenses in the fourth quarter also included some redundancy compensation and restructuring costs for the integration of property equipment, totaling 11500 million, which affects the operating profit margin of the current period by about 3pct. However, even if the impact of this restructuring expense is not excluded, the operating profit margin of APP services (advertising) alone continued to increase by more than 2 points month-on-month, reaching 54%, which is almost the highest level in history. However, the overall profit margin was flat sequentially due to the increase in the loss of VR.
6.Spending guidance has been revised slightly higher, but it remains manageable overall
For total operating costs and expenses in 2024, Meta maintained its guidance for the previous quarter (940-99 billion), and the upper limit of the guidance was lower than the consensus estimate of 106.2 billion. In terms of capital expenditure, Meta slightly raised the upper limit of its guidance, from a range of 30 billion to 35 billion to 30 billion to 37 billion.
The increase in CAPEX is still due to the need to increase investment in some innovative businesses such as AI, but compared with Google's unexpected surge in CAPEX yesterday, Meta's CAPEX is still controllable as a whole. It seems that they have learned enough and maintained a high level of discipline in spending.
Dolphin-kun viewpoint
As the logic and expectations clarified in the comments and summaries of Dolphin's last quarterly financial report "Meta and China Overseas's "Love and Hate": TikTok Kicks the Gym, Temu Sends Treasure", in advertising stocks, due to the slowdown in TikTok competition, the reduction of the impact of IDFA, the large-scale realization of REELS has contributed to the net increase and the dividend of the e-commerce melee, Meta is expected to continue to reap alpha gains in 2024, but the only thing that needs to be concerned about the impact of the slowdown in China's e-commerce delivery.
At the after-hours meeting, Xiao Zha said that 10% of this year's revenue comes from Chinese advertisers. Needless to say, Temu must be the big head, and this year alone may need to pay attention to the possibility of Temu's marketing in the United States turning from outside to inside, and investing in Meta marginally.
However, even if there is such a possibility, Dolphin Jun believes that Meta's growth this year is expected to be able to lead the industry. On the one hand, as a global No. 1 traffic platform, Temu can still benefit relatively from the process of user penetration in non-American regions this year. On the other hand, the influence of IDFA on social platforms, coupled with the efforts of REELS and the earliest large-scale use of AI tools to improve advertising efficiency, can help Meta 2024 be smoother than its peers.
Here's a closer look
First, the advertising guidelines are strong
Meta's revenue in the fourth quarter was 40.1 billion, a year-on-year increase of 25%, and the recovery continued to accelerate under a low base. The main thing that exceeded expectations was still the advertising business, which accounted for 98%, and VR revenue was also good because of the launch of the new Quest 3, hitting a new high in a single quarter.
For 1Q24 expectations: total revenue is expected to be in the range of 34.537 billion, corresponding to a year-on-year increase of 20% 29%, which is much higher than the consensus expectation of 33.6 billion, and better than the more optimistic buyer's expectation of 34.5 billion. According to Meta's usual relatively low-key guidance style, it is certain that the next quarter will perform well.
1. Advertising volume and price rise: traffic growth, and unit price under macro + competitive advantage returns to growth
Or from the perspective of the relationship between the volume and price of advertising, the driving factors, and the follow-up continuity:
1) The number of advertising impressions continued to grow by 21% at a high rate, in addition to the expansion of user scale and the improvement of user stickiness (the monthly active activity of the whole ecosystem increased by 6.).4%, daily active increased by 78%, DAP MAP increased to 802% is an all-time high), and the average number of impressions per user has also increased significantly by 17%.
From the perspective of the exclusion method, in the case that Meta's current advertising monetization on several platforms is relatively mature (the follow-up performance of Threads is inferior, and the development potential is weakened), there can still be excess advertising inventory, and the only thing that can greatly increase user stickiness is short**reels. On the one hand, short ** increases user stickiness, and on the other hand, REELS has a lot of inventory, and filling can bring increments.
User data from Facebook (monthly active +3..)4%, which is lower than the 6% growth of the whole ecological monthly active activity4%) and third-party statistics, the expansion of users in the ecosystem still mainly comes from Instagram, so the enhanced version of Reels+IG is the main contributor to the increase in traffic.
Speaking of REELS, we have to mention the competition of TikTok. However, judging from third-party data, the growth of TikTok US users has slowed down significantly this year, and the monthly active users have tightened by 1700 million is difficult to mention, which is still far from the more than 200 million of national apps, such as FB and YouTube.
However, this will also bring a problem, the user circle, especially the age group, is not fully covered, which will affect the ROI of advertising, which in turn makes it difficult for advertisers to migrate their main advertising budget from the original platform to TikTok.
When TikTok has no new traffic, for advertisers, measuring advertising ROI is the key to determining budget allocation, so Dolphin Jun believes that TikTok's competition for Meta may continue to slow down marginally in 2024, and for Meta, the worst period of competition has passed.
(2) The unit price of advertising increased by 2% year-on-year, reversing the downward trend, reflecting the combined effect of the macro environment and the competitiveness of the platform.
We said before that the unit price of advertising is related to whether the economy is in an upward cycle and whether the competitive advantage of the platform is improved, but this is in the case of the steady state of traffic on the Meta platform.
Starting from the second quarter of this year, there will be more official commercialization of REELS compared to last year. The ** of REELS itself is much lower than that of Facebook and Instagram, so when REELS's revenue contribution is raised, it will naturally lower the average advertising unit price. Therefore, combined with the two driving factors behind the change in volume and price, it is clear that it can be concluded:The commercialization of REELS is progressing well, and its contribution to total revenue is increasing.
On the other hand, the reversal of advertising unit prices from decline to positive growth also indicates the strength of U.S. consumption in the fourth quarter.
2. VR straightens up the waist pole
As Xiaozha's beloved Reality Labs, after a year of collapse, the revenue finally relied on Quest 3 to save face, with a revenue of more than 1 billion in the fourth quarter, a record high in a single quarter.
The success of Quest 3 and the rout of Quest Pro also confirm Dolphin's previous view that it is difficult to stimulate the developer ecosystem by taking the high-end product route when the hardware is still flawed and content development is still in its infancy. Of course, Apple is an alternative, and because of its own brand halo and mature system ecology, it is easier to respond.
Combined with IDC data and revenue backwards, Dolphin Jun expects the overall sales of Oculus to exceed 2.5 million units in the fourth quarter, much higher than the 1.8 million. (All are estimates of Dolphin Jun, for trend reference only).
Although Meta ended the season strongly, it was still a very bleak year in the industry, which also affected the subsequent growth.
1) According to IDC data, the overall sales volume of VR AR in the whole industry in 2023 will be 8.1 million units, a year-on-year decrease of 53%, with VR down nearly 10%. As of the third quarter of 2023, Meta's share is still hovering around 50%, but because of the hot sale of Quest 3, Dolphin Jun expects Meta's share to reach more than 70% in the fourth quarter.
2) However, in December, IDC lowered its forecast for VR AR headset shipments in 2027, from 30.3 million units expected in September to 28.6 million units.
Second, investment has returned to growth, but the overall situation is controllable
Meta has reduced costs and increased efficiency for a year, and by the end of 2023, it will also come to an end. In 2023, Meta will reduce nearly 20,000 employees in total, but it has returned to a net increase of 1,132 people in a single quarter in the fourth quarter.
Restructuring expenses for layoffs and data center adjustments reached $3.5 billion for the full year, impacting margins by about 2.5 billion6%, and 4.6 billion in 2022. Meta spent 8 billion to learn a lesson, and in the long run, it is worthwhile to help the company improve the strategic ability and governance level of management.
1. The gross profit margin has basically returned to the normal level, but there is no lack of room for improvement in the medium and long term
As expected by Dolphin Jun last quarter, Meta's gross profit margin increased significantly by 7 points year-on-year to 81%, which has basically recovered compared with before the predicament. In the short term, with the investment in AI, it is expected that it may be a bit difficult to improve again.
However, Dolphin Jun believes that this is only the end of a temporary recovery, and in the medium and long term, when going through the mismatch cycle of AI input and output, considering that AI can continue to optimize advertising ROI, while helping the company reduce internal costs, as well as reducing losses in the RL part, there is still room for improvement in gross profit margin.
2. The downsizing is over, and R&D expenses return to growth
Meta's operating margin was flat sequentially at 408% and there is no reason to continue the optimization:
On the one hand, the investment in AI indicates the need for corresponding R&D team expansion, and R&D expenses in the fourth quarter returned to a year-on-year increase of 76%, and the total number of employees also returned to a net increase of 1,132 people.
On the other hand, expenses for business restructuring such as layoffs and data center adjustments also increased significantly in the fourth quarter compared to the previous quarter (Q4 1.1 billion vs Q3 400 million), which slowed the trend of margin improvement sequentially. Dolphin Jun estimates that after excluding this impact, the operating profit margin will still increase by 1-2 points month-on-month.
According to the two major business segments of advertising and metaverse, the loss of the metaverse is still in high losses, and the management expects that the operating loss of Reality Labs will continue to increase this year and next year.
However, combined with Meta's guidance on capital expenditure (300 37 billion) and total expenditure (94 billion 99 billion) in 2024, as well as the main investment direction (AI), it is expected that the loss of Reality Labs will not grow too exaggerated, and the overall situation is controllable. The advertising business is relatively strong at the moment, so the market may turn a blind eye to the losses within the controllable range of the VR business.
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