Meta reports another drop in revenue, in a rough week for tech companies

It's gotten tougher for Big Tech.

Facebook and Instagram's parent company Meta said revenue fell 4% in the three months from July through September compared to a year earlier, from $29 billion to $27.7 billion. The announcement caused shares to plunge on Wednesday.

The company said the losses reflected uncertainty in the broader economy as companies pull back on digital advertising and struggle with inflation.

Meta's financial struggles follow a trend among similar companies. Alphabet, which reported earnings Tuesday, said revenue from Google advertising was $54.5 billion, down from $56.3 billion the prior quarter. YouTube, which also sits under Alphabet, saw a drop in ad revenue to $7.1 billion, down from $7.3 billion.

"It's tough times out there," said Scott Kessler, an analyst at investment research company Third Bridge.

"Digital advertising is challenged at this point," said Kessler. "That's because of the economy combined with the changes that Apple made."

Last fall, Apple introduced a new privacy rule in the App Store. It now requires apps to ask users for permission before tracking their data. That has made it harder for companies like Meta to target people with personalized digital ads across their platforms.

Kessler estimates that Meta generates about two-thirds of revenue from small businesses — a kind of advertising known as performance advertising.

"That is designed to capitalize on people essentially looking for or being served ads for certain types of products and services." (For example, Facebook and Instagram users doing a lot of holiday shopping might start getting ads from companies on those platforms.)

Meta's losses are compounded by the fact that the company is pouring money into CEO Mark Zuckerberg's vision of creating an all-encompassing virtual reality world known as the metaverse. On a conference call with investors Wednesday, Zuckerberg said investments in the metaverse and artificial intelligence would continue.

"It would be a mistake for us to not focus on these areas which I think will be fundamentally important to the future," said Zuckerberg. "I think that our work here is going to be of historic importance and create the foundation for an entirely new way that we will interact with each other."

Despite the financial challenges, Zuckerberg said daily users of Meta's services, which also include WhatsApp, grew by 4% from a year earlier and now top 2.93 billion worldwide.

After reporting its first-ever decline in revenue three months ago, Zuckerberg said the company would slow hiring. That did not happen in this most recent quarter; Meta actually grew by nearly 4,000 employees, to a total of more than 87,000 as of Sept. 30.

But Zuckerberg signaled on Wednesday that layoffs would come.

While some hiring will happen in "high priority areas," most other teams will stay flat or shrink over the next year, he said.

"At least on some level, they've started the process of taking a more conservative approach to growth with an economic backdrop that at best is uncertain and at worst is recessionary," said Kessler.

Investors are still getting nervous.

On Monday, long-term Meta shareholder Brad Gerstner sent an open letter to Zuckerberg and Meta's board of directors "strongly encouraging Meta to streamline and focus its path forward."

Gerstner also recommended the company reduce its headcount by cutting 20% of its staff.

"Meta needs to re-build confidence with investors, employees and the tech community in order to attract, inspire, and retain the best people in the world," the letter said.

While Meta's financial health can reflect a downturn in the digital advertising industry, Kessler said it's not reflective of the wider tech industry or demand for technology services as a whole.

For example, Microsoft reported $50.1 billion in revenue from the fiscal quarter beginning in July and ending in September this year, up from $45.1 billion the same quarter last year.