Meta’s Reality Labs Faces a Tough Q3 with $3.7B in Losses

Meta's Reality Labs Faces a Tough Q3 with $3.7B in Losses

Meta’s third quarter revealed significant financial blows, particularly within its metaverse-focused Reality Labs division.

Despite earning $34.1 billion in total revenue, according to their third-quarter 2023 results, a growth of 23% from the prior year, the Reality Labs sector plummeted with a loss of $3.7 billion. This downturn is attributed to dwindling sales of Meta’s Quest 2, with consumers holding off purchases in anticipation of the recently launched Quest 3 virtual reality headset.

A glimpse at Meta’s financial performance

Even with the setback in Reality Labs, the third quarter wasn’t entirely bleak for Meta. The tech giant boasted a net income of $11.6 billion, soaring 164% from the previous year’s $4.4 billion. Online advertising and gaming, bolstered by growth in China, served as strong contributors. Furthermore, the overall quarter profited from reduced operating expenses in the Reality Labs division, resulting in Meta’s highest operating margin in two years.

Monthly active users of the platform increased by 3% for Facebook, reaching 3.05 billion. Additionally, family daily active users averaged 3.14 billion for September, reflecting 7% year-over-year growth.

AI’s rising dominance

Mark Zuckerberg, Meta’s CEO, articulated a strategic pivot towards artificial intelligence (AI) in his remarks. He emphasized the significance of generative AI and mentioned an impressive 30 million downloads of the Llama large language model in the previous month alone. With AI-driven feed recommendations, the time users spend on Facebook has seen a 7% spike.

Zuckerberg’s vision for the future also highlighted the power and potential of the Meta Quest 3 headset. Touted as a mixed-reality device, Quest 3 promises to merge the virtual and physical realms, offering users an immersive experience like never before.

Ray-Ban and Meta’s AI-powered vision

Another notable venture is the launch of the second generation of Ray-Ban Meta smart glasses. Integrated with Meta AI, users can interact verbally, ask questions, and receive audio responses through the device’s built-in speakers. Zuckerberg envisions the convergence of augmented reality (AR) and these smart glasses in the not-so-distant future.

With Horizon software undergoing tests to ensure cross-device functionality, the metaverse’s potential seems boundless. Zuckerberg emphasizes the challenge of blending these advanced technologies into a seamless, holistic user experience. Moreover, Susan Li, the CFO, hinted at Reels providing modest revenue growth, a shift that has occurred sooner than anticipated. With video services consuming more than half of users’ time on Instagram and Facebook, the company predicts Q4 revenue ranging between $36 billion and $40 billion.

Shareholders’ concerns and future recommendations

Altimeter, a long-term shareholder of Meta, voiced concerns in an open letter addressed to Zuckerberg. Citing the need for Meta to regain its momentum and refocus its strategies, the letter suggests a three-fold plan: slashing headcount expenses by 20%, reducing annual capex from $30B to $25B, and capping the metaverse/Reality Labs investment at $5B annually.

Brad Gerstner, the letter’s author, emphasized the urgency for the tech giant to shed the excess and channel its resources effectively to achieve the envisioned future of AI.

In the geopolitical lens

Amid the financial reviews and strategic discussions, geopolitical unrest, especially in the Middle East, remains a significant concern. While Meta’s direct exposure to the conflict is limited, fluctuations in ad spending due to the turmoil have been observed. The company remains vigilant, continuously monitoring the evolving situation.

With a blend of triumphs and challenges, Meta’s journey reflects the dynamic landscape of the tech industry. As it continues to forge ahead, the balance between innovation and fiscal responsibility remains crucial.

Image credits: Shutterstock, CC images, Midjourney, Unsplash.