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 in the same quarter last year.
Elon Musk, the billionaire poised to acquire Twitter later this week, strolled into the company’s headquarters Wednesday carrying a porcelain sink and tweeting “Entering Twitter HQ – let that sink in!”
Musk’s $44 billion deal to take Twitter private faces a Friday deadline, although the video he posted offered no evidence that the acquisition is complete. Twitter and Musk representatives had no comment on that question, although Twitter did confirm that Musk’s video tweet was real. Musk also changed his Twitter profile to refer to himself as “Chief Twit” and his location to Twitter’s San Francisco headquarters.
The splashy video — a vintage Musk production — also pulled the spotlight back to the world’s richest man and his on-again, off-again pursuit of the social platform.
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The Friday deadline to consummate the deal was ordered by the Delaware Chancery Court in early October. It is the latest step in an epic battle during which Musk signed a deal to acquire Twitter, then tried to back out of it, leading Twitter to sue the Tesla CEO to force him to conclude the deal. If the two sides don’t meet the Friday deadline, the next step could be a November trial.
Robert Anderson, a law professor at Pepperdine University, said he fully expects the deal to close by Friday’s deadline but didn’t see much substance to Musk’s video. “I don’t see anything unusual about it, other than that he brought a sink,” he said.
Musk had been expected to visit Twitter this week and is expected to return again Friday if the deal is finalized, according to an internal memo cited in a report by Bloomberg News.
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His apparent enthusiasm about visiting Twitter headquarters stood in sharp contrast to one of his earlier suggestions that the building should be turned into a “homeless shelter” because, he said, so few employees actually worked there.
The Washington Post reported last week that Musk told prospective investors that he plans to cut three-quarters of Twitter’s 7,500 workers when he becomes the owner of the company. The newspaper cited documents and unnamed sources familiar with the deliberation. Several hours after posting his sink video, Musk tweeted that he was meeting “a lot of cool people at Twitter today!” He gave no details.
One of Musk’s biggest obstacles to closing the deal was keeping in place the financing pledged roughly six months ago.
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A group of banks, including Morgan Stanley and Bank of America, signed on earlier this year to loan $12.5 billion of the money Musk needed to buy Twitter and take it private. Solid contracts with Musk bound the banks to the financing, although changes in the economy and debt markets since April have likely made the terms less attractive. Musk even said his investment group would be buying Twitter for more than it’s worth.
Less clear is what’s happening with the billions of dollars pledged to Musk by investors who would get ownership stakes in Twitter. Musk’s original slate of equity partners included an array of partners ranging from the billionaire’s tech world friends with like-minded ideas about Twitter’s future, such as Oracle co-founder Larry Ellison, to funds controlled by Middle Eastern royalty.
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The more equity investors kick in for the deal, the less Musk has to pay on his own. Most of his wealth is tied up in shares of Tesla, the electric car company that he runs. Since April, he has sold more than $15 billion worth of Tesla stock, presumably to pay his share. More sales could be coming.
Musk, 51, has shared few concrete details about his plans for the social media platform. While he’s touted free speech and derided spam bots since agreeing to buy the company in April, what he actually wants to do about either remains a mystery.
Technology analysts have speculated that Musk wants to use Twitter to help create an “everything app” similar to China’s WeChat service, which allows users to do video chats, message, stream video, scan bar codes, and make payments.
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Musk’s flirtation with buying Twitter appeared to begin in late March. That’s when Twitter said he contacted members of its board — including co-founder Jack Dorsey — and told them he was buying up shares and was interested in either joining the board, taking Twitter private, or starting a competitor.
Then, on April 4, he revealed in a regulatory filing that he had become the company’s largest shareholder after acquiring a 9% stake worth about $3 billion.
At first, Twitter offered Musk a seat on its board. But six days later, CEO Parag Agrawal tweeted that Musk would not be joining the board after all. His bid to buy the company quickly followed.
Inside Twitter, Musk’s offer was met with confusion and falling morale, especially after Musk publicly criticized one of Twitter’s top lawyers involved in content-moderation decisions.
In July, Musk abruptly reversed course, announcing that he was abandoning his bid to buy Twitter. His stated reason: Twitter hadn’t been straightforward about its problem with fake accounts he dubbed “spam bots.” Twitter sued, and two weeks before a 5-day trial was scheduled to begin, Musk changed his mind again, saying that he wanted to complete the deal after all.