“We don’t build services to make money”

One of the most striking things about Facebook’s early years as a public company was the freshness of the efficiency shown in its earnings reports.

Quarter after quarter, year after year, revenue and net income have grown and recovered at a steady pace. The company has expertly turned to mobile, riding the wave of smartphone adoption and replacing desktops with mobile ad revenue at a controlled pace.

This story is part of what makes the renowned company’s third-quarter earnings report so surprising.

Facebook (now called Meta) has had poor earnings reports before – in its July 2018 second-quarter earnings report, it warned of decelerating revenue growth and tighter margins. Investors knocked 24% off the stock in one day. Similarly, bleak forecasts and missed expectations caused sharp one-day dips earlier this year in February (Q4 2021) and July (Q2 2022).

But until this year, the company has more or less got its spending under control. Revenues have generally tracked operating profit growth.

For example, in this troubling mid-2018 earnings report, annualized quarterly revenue growth of 42% translated into operating profit growth of 33%.

For the full year 2021, revenue growth of 37% translated into operating profit growth of 43%.

Things started to change in the fourth quarter of that year, when revenue growth of 20% over the year-ago quarter translated into a 1% drop in operating profit. The trend has worsened with each progressive quarter, culminating in disastrous results for the latest period. Revenue fell 4%, a decline the company knew was coming and warned last quarter. This translated into a shocking 46% drop in operating profit.

Expenses continue to swell — they’re up 19% from a year ago — even as Facebook knows revenue is down.

The reason is an existential bet on the future of the company. CEO Mark Zuckerberg said the company is willing to spend $10 billion a year to bring the metaverse to life, investing in virtual reality headsets that will take people there and in the Horizon Worlds virtual universe that they can explore once you arrive. They will also inspire developers to create their own worlds.

Shareholders are beginning to question that spending, with Altimeter Capital’s Brad Gerstner recommending the company cut spending to $5 billion a year while cutting its workforce by 20%.

There is no reason to expect Zuckerberg to take his advice. The CEO has high voting shares that make a hostile takeover impossible. He would have filled the board with loyalists and expelled anyone who questioned him. And its longtime number two, Sheryl Sandberg, who helped build Facebook into an ad sales juggernaut and hugely efficient business machine, left earlier this year.

A decade ago, as Facebook prepared to go public, Zuckerberg wrote a letter to investors explaining his vision for the company. Back then, it was all about helping people make connections. The specifics have changed a bit over the years, sometimes incorporating private one-on-one communication through apps like Messenger and WhatsApp, and more recently morphing into immersive 3D interaction through the metaverse.

But the most important part of the letter is when Zuckerberg warned investors that Facebook wasn’t in it to make money. He was there to change the world, and making money was one way to do that:

…Facebook was not originally created to be a business. We’ve always cared primarily about our social mission, the services we build, and the people who use them. It’s a different approach for an open society, so I want to explain why I think it works.

I started by writing the first version of Facebook myself because it was something I wanted to exist. Since then, most of the ideas and code that have come into Facebook have come from the great people we brought into our team.

Most great people care primarily about building and being part of great things, but they also want to make money. Throughout the process of building a team – and also building a developer community, ad marketplace, and investor base – I developed a deep understanding of how building of a solid company with a strong economic engine and strong growth can be the best way to align many people to solve important problems.

Simply put: we don’t create services to make money; we make money to build better services.

And we think that’s a good way to build something. These days, I think more and more people want to use the services of companies that believe in something beyond just maximizing profits.

By focusing on our mission and creating great services, we believe we will create the most value for our shareholders and partners over the long term, which will allow us to continue to attract the best people and create more services. quality. We don’t wake up in the morning with the primary goal of making money, but we understand that the best way to accomplish our mission is to build a strong and valuable business.

Facebook is still generating tons of cash — its operating margin remains at a healthy 20%, it posted net income of $4.4 billion in the quarter and net cash from operations. operating amounted to $9.6 billion. Those numbers are worse than they looked a year ago, but they’re more than enough to fund Zuckerberg’s next 10-year vision.

On the earnings call, he said: “I think those who are patient and invest with us are going to be rewarded.”

Investors who disagree with this view should exit. Many have already – Facebook shares had lost about two-thirds of their value for the year before Wednesday’s earnings report. That’s down almost 20% after hours.

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