Meta loses $3.7B in Q3 in metaverse-focused Reality Labs division

Meta reported that it lost $3.7 billion in the third quarter in its metaverse-focused Reality Labs division.

In its quarterly analyst call, Susan Li, chief financial officer at Meta, said the company had about $210 million in revenue in the quarter, down 26% due to lower Meta Quest 2 sales in advance of the October launch of the Meta Quest 3 virtual reality headset. Expenses were $4 billion, or flat year over year.

In a bit of non-news, Meta said that it expects to continue to lose money in its Reality Labs division, according to the company’s report on its third quarter. Out of the last 21 months, Reality Labs has lost about $24 billion.

“Finally, for Reality Labs, we expect operating losses to increase meaningfully year-over-year due to our ongoing product development efforts in augmented reality/virtual reality and our investments to further scale our ecosystem,” Meta said in the report for the third quarter ended September 30.

Overall, Zuckerberg said it was a good quarter with the highest operating margin in two years. The quarter benefited from lower Reality Labs operating expenses.

The company reported $34.1 billion in revenue for the third quarter ended September 30, up 23% from $27.7 billion a year ago. Net income was $11.6 billion, up 164% from $4.4 billion a year ago.

Family daily active people was 3.14 billion on average for September, up 7% from a year ago. Monthly active users were 3.05 billion, up 3% for Facebook.

Online advertising and gaming were strong in part due to growth in China. One of the biggest investments the company is making is in business AI.

Zuckerberg said the company would shift resources toward AI away from non-AI resources in the company. He also said the company has a “hiring backlog,” meaning it has to replace people or add positions that were needed but weren’t filled earlier because of a hiring freeze. It’s not clear whether that impacts much of the Reality Labs expenses, which focus on the metaverse, virtual reality and smart glasses.

Meta has about 66,000 employees now, down 7% from the second quarter and 24% from a year ago.

“Generative AI will increasingly be important going forward,” Zuckerberg said.

He noted there were more than 30 million Llama large language model downloads last month. AI-driven feed recommendations continue to grow, with 7% increase in time spent on Facebook as a result. Threads is three months old and it has 100 million monthly active users and Zuckerberg said, “From what we can tell, people love it so far. If we keep at this a few more years, we have a good chance of achieving our vision there.”

He said the Quest 3 is the most powerful headset yet, with a form factor that is 40% thinner than Quest 2. He noted it is a true mixed-reality device so you can see physical objects around you and overlay games and other animations on top of the real world.

And he noted the company launched its second generation of Ray-Ban Meta smartglasses. You can use Meta AI, as it will be built into the smartglasses so you can ask verbal questions and get answers through the speakers in the side frames. He said conversational AI could be a killer app on those smartglasses, and he noted eventually AR on smartglasses would be coming.

“It’s not that far off,” he said.

For software for the metaverse, he said Horizon has never been faster, and it is being tested for phones and PCs so it works across devices.

One of the most interesting questions for the coming decade is how the company brings this together into a world with a good experience overall, he said. Li said Reels is likely to deliver a modest increase to revenue going forward, and it is net neutral to the company’s overall ad picture earlier than expected when it comes to monetization. Video services are now more than half of the time spent on Instagram and Facebook. The company expects Q4 revenue to be $36 billion to $40 billion.

Next year, the company expects higher infrastructure costs in 2024. It expects higher operating costs from that, and growth in payroll expenses as it hires more people to deal with the “hiring underrun.” And operating losses in Reality Labs will increase meaningfully due to AR/VR product expenses and other R&D.

As for geopolitical turmoil, Li said her hearts were with those affected by violence in the Middle East and the company realizes its services are used during emergencies. The company doesn’t have direct exposure to the Middle East war, but it has seen softer ad spending in recent days.

“This is something we are continuing to monitor,” Li said.