Meta earnings drop by less than expected with boost from Reels

Meta investors got some good news in the social media company’s latest earnings report on Wednesday, which showed a smaller drop in revenues than analysts had expected.

Meta, which also owns Instagram and Whatsapp, reported $32bn in revenue for the fourth quarter, which drove a rise in its stock price in extended trading on Wednesday.

The world’s biggest social media company cut its cost outlook for 2023 by $5bn and announced a $40bn share buyback program.

Related: Job cuts and falling shares: how did it all go so wrong for the US tech sector?

Meta’s costs and expenses climbed by 22% in the fourth quarter compared with a year earlier. In part, this was as a result of “charges related to our restructuring efforts” according the the company’s release. Earlier it had also increased spending on the metaverse and on its short-form video content product Reels.

“2022 was a challenging year,” said Mark Zuckerberg. “But I think we ended up having made good progress on our main priorities and setting ourselves up to deliver better results this year, as long as we keep pushing on efficiency.”

It said its investments in AI-surfaced content and Reels, a short video competitor with TikTok, were starting to pay off.

“The progress we’re making on our AI discovery engine and Reels are major drivers of this,” said Mark Zuckerberg, Meta’s CEO, in a company statement. “Beyond this, our management theme for 2023 is the ‘Year of Efficiency’ and we’re focused on becoming a stronger and more nimble organization.”

Revenue fell 4% to $32.17bn from $33.67bn. Analysts were expecting $31.55bn.

Analysts had predicted the company would see a big drop in its fourth-quarter net income compared with the previous year due to shrinking ad revenue and higher costs.

With the better-than-expected results, Meta’s shares jumped almost 18% in after-hours trading.

“Tech investors are relieved to see that the slowdown across Meta’s key ad business was not as bad as feared,” wrote Jesse Cohen, senior analyst at Investing.com, after the call. “Investors are cheering Meta’s plans to return more capital to shareholders despite worries over rising costs related to its metaverse spending.”

Despite the positive outlook, Zuckerberg called for more belt-tightening in what signals another tough year ahead for the company’s employees.

In response to its revenue drop and the inflationary market pressures, Meta laid off 11,000 workers in November. It also reshuffled its management team. Zuckerberg has hinted to employees that more layoffs and management cuts may lie ahead in 2023.

Zuckerberg said the difficulties of 2022 had forced the company to look at how it could cut costs. In the end, he said, he and other managers were surprised that certain cuts, like reducing layers of management, actually ended up making the company better.

“So I think that there’s going to be some more that we can do to improve our productivity, speed and cost structure and by working on this over a sustained period,” he said “I think we’ll both build a stronger technology company and become more profitable.”

Zuckerberg veered away from emphasizing the company’s huge investments into creating the metaverse, which analysts say have caused major concerns for investors. Instead he touted the company’s investments into its new AI Discovery Engine, which he said would recommend content that people want to see.

“Facebook and Instagram are shifting from being organized solely around people and accounts you follow to increasingly showing more relevant content recommended by our AI systems,” he said. “We’re especially focused on short form video since Reels is growing so quickly.”

The research analyst Brent Thill of Jefferies said the results were still gloomy.

“Look, the expectations just were so low that ultimately it’s not like these are stellar numbers. They’re just better than expected,” he told Yahoo Finance.

“Remember, this is a company that last quarter, everyone was like ‘What on earth are you doing, Mr Zuckerberg? This is crazy,’” he said, adding that Zuckerberg had then pulled back the throttle on Metaverse spending. “So he’s clearly listening to Wall Street.”

“Meta rode the digital wave created by the lockdown and now it is trying to avoid the wipe out,” ​​ wrote Tom Johnson, global chief digital dfficer at WPP’s Mindshare Worldwide, just ahead of Meta’s earnings report Wednesday. “The last six months have seen the company adjusting to ensure that it has a smooth passage out of the hyper growth period for digital advertising caused by lockdown and now it must battle with the tough economic environment that consumers find themselves in around the world.”

It’s been a difficult year for Meta, which has faced heightened competition from TikTok, a tepid digital advertising market and questions over Mark Zuckerberg’s decision to focus the company on creating a new metaverse – a bet which may take years to pay off if it ever does.

And, in what some have criticized as an attempt to chase profits, Meta announced last week that it would allow Donald Trump to return to Facebook and Instagram soon, after banning him following the January 6 Capitol riots in 2021.

Related: TechScape: Why Donald Trump’s return to Facebook could mark a rocky new age for online discourse

Critics charged the move was an attempt to increase flagging user engagement on the sites and thus goose Meta’s profits.

“Mark Zuckerberg’s decision to reinstate Trump’s accounts is a prime example of putting profits above people’s safety,” said Derrick Johnson, the president of the NAACP, on Twitter. “It’s quite astonishing that one can spew hatred, fuel conspiracies, and incite a violent insurrection at our nation’s Capitol building, and Mark Zuckerberg still believes that is not enough to remove someone from his platforms.”

The company’s stock declined by more than 60% in 2022.

But Zuckerberg was upbeat in predicting better earnings for next year, in part due to cuts in employees and office space. He also touted forthcoming releases of a new virtual reality headset and new generative AI features that could let creators design avatars, images and videos using AI.

Despite a rough 2022, there have been several recent bright spots for the company. Meta’s new short video platform, Reels, which was designed to compete with Tiktok, is showing signs that it is catching on with users, as TikTok faces increasing regulatory pressures with some states banning its use on government-owned systems.

Meta also reportedly won court approval this week to proceed with its acquisition of the virtual reality startup, Within. The acquisition of the VR fitness company is expected to allow its technology to be integrated into Zuckerberg’s metaverse.

Despite its big drop last year, Meta’s stock has been climbing recently in 2023.

“Meta will need to figure itself out in 2023: is it a metaverse company or is it a short-form video company?” said Mike Proulx, an analyst at Forrester Research. “The problem is both business models are plagued with headwinds that basically handcuff Meta from delivering short-term business value.”

Reuters and the Associated Press contributed to this report