Madison and Wall: Meta Read-Throughs For Advertising

Advertising Industry Insights From Meta’s 4Q22 Earnings Release

While investors understandably focused on the metrics which drive valuation of the business – namely the reduced expense and capital expenditures guidance as well as increased share repurchases – there were many elements of Meta’s earnings result which are important for advertising industry practitioners to focus on.

For starters, ad revenue growth was up by 2% in constant currency terms (the as-reported 4% decline is arguably not much of a barometer of the state of the industry, with foreign exchange changes having an outsized impact in the latter part of 2022).  Guidance for the first quarter of 2023 called for an expectation of -5% to +4% in constant currency terms, or just below flat at the mid-point.   For the fourth quarter of 2022, this likely reflects a slower rate of growth than the overall industry average.   While we’ll need numbers from Alphabet and Amazon (which report later on Thursday) before anyone can say so conclusively, digital advertising almost certainly grew at a much faster pace overall.  So far we know that Microsoft, while much smaller, grew its search and news advertising business by approximately 9% (excluding transactions) on a constant currency basis in net terms.  Among other sellers of digital advertising, Spotify grew its advertising business by 4% in constant currency terms, while Snap matched Meta with a 2% constant currency gain.  Snap’s outlook was, of course, more negative for the first quarter, but then again their outlook won’t be overly reflective of industry trends given the size of Alphabet, Amazon and Meta by comparison.

In terms of drivers of the results, I’ve long-noted that the skew of an advertising base can impact any one company’s growth rate disproportionately.  Meta does not provide specific details into these segments, but did note that online commerce declines slowed relative to the third quarter.  To the extent that online commerce-related advertising accounts for a significant share of the company’s revenue, e-commerce-specific weakness is likely responsible for many percentage points of underperformance that is unique to Meta vs. other sellers of digital advertising.

Neither Changes in Supply Nor Pricing Are Meaningful Drivers Of Demand.

Comments provided by the company’s management conveyed how they working to continue growing their advertising business, but their efforts contrasted with actual results conveyed how advertisers tend to think as well.  On its earnings call, Meta’s executives discussed their focus on driving supply of ad inventory and improving performance, as measured by the company’s tools which provide narrow – not necessarily comprehensive to a marketer – definitions of ROI (“return on investment”) or ROAS (“return on ad spend”).  At the same time they mentioned that “advertisers saw over 20% more conversions” than in the year before, and separately stated “the average price per ad decreased 22%.

Better performance and lower prices sounds like it should be more positive for the business. But why didn’t revenue go up by more on an underlying basis? As I have written previously,  advertisers who are large enough to manage spending across multiple media channels generally budget for media in relation to their overall business health (i.e. with a percentage of revenue model), and then allocate to media channels for what are often very subjective reasons, informed by notions of performance, but not exclusively.  Within a like-for-like media channel, relative performance and relative price matters, but as most walled garden inventory is different from other walled garden inventory, it’s not as easy to compare pricing and “performance” as it is in, say, television or radio.   While performance is always pleasing to see, it is rare that marketers define it the same way that media owners do. 

It remains safe to say that total industry growth likely drives the overall pool of available budgets, with partially objective and partially subjective factors driving spending into digital channels and more subjective factors driving spending into Meta in particular.

A New Sub-Segment of Advertising Growth?

However, it’s also true that an individual company can drive growth beyond what it otherwise should when it finds new segments of advertisers to sell to.   Facebook management stated that they believe click-to-message ads (primarily via WhatsApp and Messenger) are “bringing incremental demand onto our platform, with over half of click-to-message advertisers exclusively using click-to-messaging ads on our platform.”   At a run-rate the company describes as $10 billion (i.e. $2.5 billion in the quarter, following on a $9 billion run-rate, or $2.25 billion revenue base the prior quarter, implying perhaps $7 billion in actual revenue, or 6% of the company’s total, presuming meaningful growth it’s plausible that there was a couple of percentage points of growth which occurred because of this expanded pool of customers.

For similar reasons, I remain doubtful that changes to privacy laws or changes to business practices (i.e. any that follows from the recent ruling by the Irish Data Protection Commission) in response to new views on existing laws will have much of an effect on industry-level pools of spending. They will likely remain roughly the same regardless of how much data is available for targeting, although shifts between different media owners – away from those disproportionately dependent on verboten data and towards those whose businesses are based on more privacy-friendly data – will likely occur.

Updated 10-K Disclosures on Actual Users and Geographic Revenue Sources

In its 10-K the company provided some of the other regular disclosures I always look forward to reading.   Duplicate and false accounts combined continue to amount 16% of Facebook’s total reported global monthly active users (technically this is an improvement: in last year’s disclosure the company said “duplicate accounts may have represented approximately 11% of our worldwide MAUs…false accounts may have represented approximately 5% of our worldwide MAUs” whereas in the new disclosure the equivalent figures were 11% and 4-5%, respectively.   In addition, as before the company continues to estimates that 3% of its MAP (Monthly Active People) across all services are “violating” accounts which are intended to be used to violate terms of services, including bots and spam.”   In practical terms, this means that Facebook’s user base is closer to 2.5 billion than the as-reported figure of 3 billion.

Also in the 10-K, the largest markets for revenue outside of the US were updated.  In last year’s 10-K the company included “western Europe, China, Canada, Australia, Brazil, and Thailand.”   This year’s list includes “western Europe, China, Brazil, Canada, Australia and Japan” indicating that Japan is now bigger than Thailand and – if the list is in fact a rank-order in size - Brazil is now bigger than Canada.  Disclosures provided by the company indicate that Canada was responsible for $2.95 billion USD in revenue during 2022.  

As importantly, disclosures of revenues by regional billing addresses provide us with additional insights about underlying domestic growth and the important nature of cross-border advertising spending.  Recall that the figures Meta reports on its earnings calls and in its presentations generally refer to revenue apportioned to users, based on where the users are located.  But separate disclosures which show revenues apportioned to where the advertiser’s billing address is can indicate different trends.  This is relevant to Meta in particular because so much revenue is originated in China where the company has no users, but where the company generates many billions of dollars in revenue.   For the most recent quarter it appears that underlying billing-address driven revenue growth in North America was -4% vs. a -1% figure when apportioned on a user basis.   Other regional figures are harder to interpret given changes that are currency-driven.