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Facebook’s Latest Financial Report: VR/AR Business Profit Space Is Limited

New York, NY / TickerInsider / August 11, 2021 / Recently, facebook (NASDAQ:FB) released its second quarter earnings report as of June 30, and all the data were very bright. However, after the release of the results, its after-hours share price fell more than 3%, contrary to expectations.

And this is mainly because it has some problems in business development and user growth.

Facebook’s new earnings report: gloom behind the bright results

The results show that Facebook’s total revenue for the second quarter was US$29.08 billion, up 56% year-on-year; net profit was US$10.39 billion, up 101% year-on-year. Specifically from a business perspective, the main two business revenues have increased.

Revenue from the advertising business increased by 56% year-on-year to US$28.58 billion. On the one hand, the average price per ad rose by 47% year-on-year; on the other hand, the number of ads placed on the platform increased by 6%. The increase in ad prices and the increase in platform advertising volume were both affected by the epidemic, and as the epidemic recovers, facebook (NASDAQ:FB) expects total revenue growth to slow in the second half of the year.

In addition, Apple has recently updated its privacy policy for the IOS operating system, making it more difficult for apps to track users and limiting access to valuable data for ad targeting, which could seriously impact Facebook’s ability to target ads and thus its ability to generate revenue from its ad business.

As you can see, there are significant headwinds for Facebook’s advertising business. Its payments and other businesses have also experienced adverse events, although revenues have increased.

Facebook’s payments and other business revenue is mainly derived from VR/AR hardware such as Oculus and Portal, and revenue in the second quarter rose 36% year-on-year to $500 million, accounting for 1.7% of total revenue.

Despite the small size of the revenue, Facebook has shown a great deal of attention to this business. For example, according to the Information, Facebook hired about 59,000 employees at the beginning of 2021, with nearly 10,000 working in its VR/AR business unit, accounting for 17 percent of its workforce. And Zuckerberg said in an internal corporate answer session that internal employees would be fully reimbursed for the purchase of Oculus Quest 2 (VR glasses), which speaks volumes about its commitment to promoting VR/AR business.

However, the Oculus Quest has not been well received in the market. Many media outlets have reported that the Oculus Quest 2 can cause skin irritation, and the US Consumer Product Safety Commission has received 5,716 reports of skin irritation and about 45 letters of request from consumers who need medical attention for the Oculus Quest 2.

In response, Facebook has recently announced a voluntary recall of all Quest 2 and Quest 2 Fit Pack foam interfaces and the suspension of Oculus Quest 2 sales worldwide. It will also update the memory version of the product, increase the starting storage version to 128GB, and use a silicone mask mounted on top of the original foam mask as a spacer to address the issue of skin irritation. According to dealers, the new Oculus Quest 2 will go back on sale on August 24 for $299 for the 128GB version (replacing the 64GB version, which is priced the same) and $399 for the 256GB version.

The price concessions it has made since its re-launch show its commitment to acquiring users, which is in line with what Zuckerberg said in his external response. Zuckerberg said that their main goal is the digital economy brought about by virtual reality, and that their business model will not be based on selling high-end devices or other similar products, but that their mission is to serve as many users as possible, expose more people to Facebook’s products and services, and then expand the scale of the enterprise’s digital economy.

It can be inferred that, even if the VR/AR business continues to grow, the future earnings growth that Facebook can bring is relatively limited, and its revenue is mainly dependent on the advertising business. The development of the advertising business is largely dependent on the number of users on the platform, and unfortunately, Facebook’s user growth is already in question.

The occurrence and resolution of the problem of marginal user growth

At the end of the reporting period, Facebook had 2.9 billion monthly active users, an increase of 7% year-on-year.

In addition to lower-than-expected user growth, Facebook’s second-quarter results were not recognised by the capital markets for two other reasons.

One is that Facebook’s user growth is mainly from the Middle East and African countries, while in the highest advertising rates in the market – the United States and Canada, Facebook’s user growth is slowing down. The second quarter was the fifth quarter of zero growth for Facebook’s daily users in the US, according to the results.

Secondly, younger users are more likely to use apps such as Instagram and WhatsApp than Facebook, a social media platform that is already 17 years old, and the age of Facebook’s main user base is growing. According to Somos Digital, more than half of Facebook’s users are over 25 years old.

Taken together, the current geographic and age decentralisation of Facebook’s user base makes it unattractive to investors. In response, Facebook has taken two initiatives that are worth noting.

First, earlier this month Facebook announced a $1 billion subsidy plan to pay at least $1 billion by 2022 to creators who contribute content to Facebook and Instagram. The main reason for Facebook to implement this plan is to respond to the market trend of shifting users’ attention to short videos and to attract quality content creators so as to compete with platforms such as TikTok and win users.

In addition, in the short-form video business, Facebook is also using real-money tools and advertising to help creators make more money from the videos they create, thus increasing the stickiness between creators and the platform.

Secondly, in the second quarter Facebook announced that it would be partnering with Spotify for its “Boombox” initiative. This program allows users to listen to Spotify’s music without leaving the Facebook interface, and also allows users to share music reviews and other information with their own music on their Facebook accounts, thus effectively extending the length of their stay on the platform.

It can be seen that Facebook is doing its best to solve the problems that have arisen in the growth of users, but it remains to be seen how effective this will be.

Positive response, but still challenging

The future of user growth is uncertain, and Facebook’s advertising business is not too optimistic.

According to its executives’ interpretation of the second quarter results, it can be seen that, in the advertising business, Facebook is improving advertising efficiency through research into machine learning and artificial intelligence, the introduction of a series of solutions such as aggregated event management, to deal with the adverse impact of Apple’s privacy policy changes on the advertising business.

However, it is important to note that Facebook will struggle to combat this trend and continue to rely on user data to ensure conversion rates for its advertising business, as increased protection of user data is now a key concern for both web users and device manufacturers. For example, Facebook is facing a range of regulatory and legal issues, from data privacy regulation to antitrust litigation.

In addition, research into machine learning and artificial intelligence will also put some pressure on Facebook’s costs, making its existing cost increases continue to increase, putting pressure on earnings.

The financial report shows that Facebook Q2 total costs of $ 16.71 billion, an increase of 31% year-on-year. Among them, the cost of revenue rose 41.0% year-on-year to $5.40 billion, research and development spending rose 36.6% year-on-year to $6.10 billion, marketing spending rose 14.8% year-on-year to $3.26 billion, and general and administrative spending rose 6.3% year-on-year to $1.96 billion, with all expenses growing.

When the epidemic passes and Facebook’s advertising revenue shrinks, its revenue growth will be somewhat problematic.

In addition to the internal problems mentioned above, external competitors are also a major headache for Facebook. For example, TikTok, which is gaining momentum in the global market, and Snap, which was the first to launch augmented reality glasses in the US, are both strong rivals to Facebook for users.

With internal and external pressure, Facebook has a long way to go.

SOURCE: https://tickerinsider.com/industry-insight/facebooks-latest-financial-report-vr-ar-business-profit-space-is-limited/