Meta Platforms (FB), formerly named Facebook, reported mixed first-quarter results after the closing bell Wednesday. However, while revenue missed, key engagement metrics came in better than expected and that's why the stock rallied nearly 20% after-hours. However, it still has a long way to go to get back in the green for 2022. That post-market jump to around $207 per share would still be a year-to-date decline of more than 38%. During the conference call, management provided highly encouraging commentary on expenses, monetization and longer-term profit potential. They expect revenue growth to reaccelerate over time, certainly reassuring to hear because investors were worried about this company's growth.

While Q4 2021 decline in daily active users (DAU) was minimal, it was the first reported decline in the company’s history and this caused investors to conclude wrongly that Meta Platforms’ best days were behind it (hence the ~25% gap down post-earnings on 3 Feb 2022). The just-reported first-quarter results show that it is wrong to bet against Mark Zuckerberg and co.

In addition to positive updates on engagement, the conference call was everything an investor could have hoped for. Management said all the right things. On challenges, they acknowledged the ad-targeting headwind posed by Apple’s privacy updates, the monetization headwind from increased engagement with Reels that monetize at a lower rate than other forms of advertising. However, management acknowledged they need to adapt to the operating environment: "Investment plans will be appropriately calibrated to the operating environment." This commentary materialized in a reduction to expense guidance.

Furthermore, Zuckerberg said he’s confident that Meta Platforms can return the Family of Apps segment to “better revenue growth rates over time and sustain high operating margins”. As for Reality Labs, Zuckerberg reiterated it will require large investments for the goal of the metaverse to be realized because it’s “something that’s never been built before and it’s a new paradigm for computing and social connection.” To fund these investments, he said he’s set a goal to “generate sufficient operating income growth from Family of Apps to fund the growth of investment in Reality Labs, while still growing our overall profitability.”

Following last quarter’s DAUs decline at Meta and this quarter’s subscriber decline at Netflix, investors were on edge coming into this report from Meta. While not picture perfect, it was exactly what Meta Platforms needed to improve investor sentiment and make clear that they have a plan in place to address the current headwinds, maintain strong profitability and keep growing revenue over the long-term. However, in the near-term, the upcoming quarter was guided for relatively flat growth at the midpoint.

Companywide Q1 results

On the top line, revenue of $27.91 billion — up 7% year over year — missed expectations of $28.29 billion. However, on the bottom line, diluted earnings of $2.72 per share — while down 18% year over year — exceeded estimates of $2.51. Additionally, operating income of $8.52 billion — while down 25% year over year — outpaced expectations of $8.45 billion.

Within the Family of Apps unit — which includes Facebook, Instagram, Messenger, WhatsApp and other services — advertising revenue of $26.998 billion came up short versus expectations of $27.47 billion while other services revenue came in at $215 million. As for Reality Labs — which includes augmented and virtual reality related consumer hardware, software and content — revenue came in at $695 million, ahead of expectations of $667 million.

As for profitability, Family of Apps operating income came in at $11.48 billion, missing expectations of $12.39 billion while Reality Labs reported an operating loss of $2.96 billion, smaller than the $3.43 billion loss the Street was anticipating.

Finally, Meta repurchased $9.39 billion worth of shares in the quarter and ended the quarter with $43.9 billion in cash, cash equivalents and marketable securities on the balance sheet.

First-quarter engagements

Taking a look at Facebook specific engagement metrics:

• Facebook Daily Active Users (DAUs): 1.96 billion vs. 1.949 billion expected

• Facebook Monthly Active Users (MAUs): 2.94 billion vs. 2.96 billion expected

• Facebook DAUs/MAUs: 67%, an uptick up from the 66% level we have seen since 2Q 2020

• Facebook Global Average Revenue per User (ARPU): $9.54 vs. expectations of $9.34 per user

As for Family engagement metrics, which more broadly represent engagement across Facebook, Instagram, Messenger, and/or WhatsApp, the results were as follows:

• Family Daily Active People (DAP): 2.87 billion, up 5.5% year over year

• Family Monthly Active People (MAP): 3.64 billion, up a similar 5.5% year over year

• Family DAP/MAP: 79%, largely in line with the rate we’ve seen over the past two years

• Family Global Average Revenue per Person (ARPP): $7.72

Notably, management commented on the release that ad impressions across the Family of Apps were up 15% year over year, though the average price per ad was down 8% year over year. 

Reels commentary

It is no secret at this point that Reels monetizes at a lower rate than the rest of the business. We heard similar commentary from Alphabet management Tuesday night in regards to Google’s YouTube Shorts versus traditional YouTube advertising. On Wednesday night’s call, Meta management reaffirmed that just as they were able to improve Stories monetization in the past, they will be able to do it with Reels this time. As you may recall, Stories was also a monetization headwind when it first came to the platform, taking up engagement time and monetizing at a lower rate than Feed. This is encouraging for investors for two reasons. One, it shows the company's ability to adapt to the ever-changing and challenging environment (follow trend). Second, it shows a great track record of their ability to execute.

• First, COO Sheryl Sandberg called out “great consumer engagement on Reels,” which is step one and arguably the most important in terms of providing solid returns to advertisers.

• Second, Sandberg noted they are doing all they can to help advertisers create better ads for the short-from video format.

• Third, Sandberg said that “at the end of the day, advertisers are chasing ROI, they’re going to go where they get a return on their investment. And while [Reels] still monetizes at a lower rate versus Feed and Stories, advertisers who are using it are seeing really promising results.”

Guidance

Meta Platforms expects total revenue in Q2 2022 to be $28 billion - $30 billion, short versus estimates of about $30.94 billion. Included in this outlook are ongoing monetization headwinds as noted above, as well as the impact from Russia’s war in Ukraine. On the call, Zuckerberg said the company has been blocked in Russia and decided to stop accepting ads from Russian advertisers globally — direct drags compounded by the broader impact that the war is having on businesses globally. 

Additionally, serving to offset the lighter than expected revenue guide, management reduced full-year expense expectations to $87 billion to $92 billion from the $90 billion to $95 billion range. Capital expenditures guidance was left unchanged at $29 billion to $34 billion, above the $30.83 billion consensus at the midpoint.

Bottom line

While quarterly revenue missed expectations and adjusted per-share earnings beat, operating income was strong. That’s important because it serves to ease investors’ concerns regarding engagement. Daily active users (DAUs) in Q1 bounced back to an all-time high, following a slight decline in the prior quarter, which at the time of its release in February slammed the stock 26% in its worst day ever.

Another bright spot from this quarter was the reduction of operating expenses. Remember, one worry some investors had about Meta was that company was too focused on developing the Metaverse (something that is uncertain and of the far future), while forgetting about the businesses that are making money right now like Facebook and Instagram. From what we've just heard, management has shown to us they have great adaptability and flexibility.

Last but not least, the quarter proved one thing: don't bet against Mark Zuckerberg.