Meta reports Q2 operating loss of $2.8B for its metaverse division

Meta‘s second-quarter results showed us that Mark Zuckerberg’s vision of the metaverse is still very expensive. And its losses in its VR division hit $2.8 billion in the second quarter, even as its virtual reality hardware and software sales continue to grow.

Meta has started breaking out its results from its Reality Labs division, (former known as Facebook’s Oculus division) to give investors a sense of how much it is investing in the next version of the internet, or the metaverse, the universe of virtual worlds that are all interconnected, like in novels such as Snow Crash and Ready Player One.

The company signaled some bad news (at least for VR software companies) yesterday when it said it would raise the prices for its Meta Quest 2 VR headsets by $100 each on August 1. It is raising prices for peripheral products too.

Meta Reality Labs generated $452 million in revenue in the second quarter ended June 30, up from $305 million a year ago and $695 million in the first quarter. The loss in the quarter was $2.8 billion in Q2, compared with a loss of $2.4 billion a year earlier and $2.96 billion in the first quarter.

Overall net income was $6.69 billion on revenue of $28.8 billion in Q2, compared with net income of $10.4 billion on revenue of $29.1 billion a year earlier. Analysts expected net income of $7.03 billion on $28.9 billion. Meta’s daily active users were 1.97 billion, up 3% from a year ago. On a monthly basis, Meta’s platforms reach more than three billion people.

In terms of a forecast, Meta said it expects Reality Labs revenue to be lower in the third quarter compared to the second quarter. The price increase probably isn’t helping with that.

Zuckerberg has gone on the record saying there are “probably a bunch of people at the company who shouldn’t be here” in a signal that the losses in VR and a slowdown in the broader business are starting to hurt. The company has instituted hiring freezes amid lower ad revenues because of Apple’s crackdown on privacy. And TikTok has become very competitive against Meta in the short video market. On that front, Meta is fighting back with its Reels short videos.

“It was good to see positive trajectory on our engagement trends this quarter coming from products like Reels and our investments in AI,” said Zuckerberg, in a statement. “We’re putting increased energy and focus around our key company priorities that unlock both near and long-term opportunities for Meta and the people and businesses that use our services.”

Starting in August, Meta Quest 2 will cost $400 and $500 for the 128GB and 256GB versions respectively. And for a limited time, every new headset purchase will include an offer to download the popular VR rhythm game Beat Saber at no additional cost. Alongside these changes, Meta will also increase the prices for Meta Quest 2 accessories and refurbished units.

Headcount was 83,553, compared with 77,805 as of March 31. In an earnings call, Zuckerberg said on the call that the economic downturn and its potential impact on advertising seems worse than it did a quarter ago. And he said the goal is to steadily reduce headcount over the next year.

“This is a period that demands more intensity and I expect to get more done with fewer resources,” he said.

But the company said it is not backing off on its optimism around VR. Zuckerberg said the company is riding the technological waves of AI and the metaverse.

In other news, the Federal Trade Commission sued to block Meta’s proposed acquisition of VR firm Within, the maker of the subscription VR workout app Supernatural.

Colin Sebastian, an analyst at R.W. Baird, said in an email to GamesBeat that Zuckerberg is convinced the next era of computing will be VR and the metaverse, which for Meta represents a potential thread but also a huge opportunity.

“I don’t know how much it cost Apple to spec, design, build and launch the first iPhone and mobile operating system (iOS), but Steve Jobs had the vision and the resources to lead us into the mobile computing wave,” Sebastian said. “Mark’s certainly got the resources, but we don’t really know yet if he’s got the right vision or whether his bet will pay off in terms of commercial success. That said, we like companies that take risks, lean on the best engineering talent, and are conditioned to innovate.”

He noted it is how Google can continue to grow even though it’s already the largest media and advertising company in the world.

“Right now, during a macro downturn, it’s a difficult trade-off as investors prefer companies that are preserving margins and cash flow, rather than investing in speculative projects,” Sebastian said. “It’s worth a shot, given how high the stakes are, but we’d also like to see Reality Labs held accountable to the spend, meeting certain milestones, for example.”

Analyst Michael Pachter at Wedbush said in an email to GamesBeat, “They clearly think the metaverse is going to be huge and they clearly think they are going to dominate.  I agree with the former, but the latter is tough to predict, as they might be like AOL trying to dominate the Internet.  However, if they don’t invest, they have no chance of winning.”

Oculus’s mobile app has seen a little more than 20 million worldwide installs from the App Store and Google Play to date, according to measurement firm Sensor Tower.

The app saw the most installs ever in a single month when it hit approximately 2.8 million in December 2021. This contributed to the surge to record quarterly installs in Q4 2021 seen in the table below. Since that record quarter, the Oculus mobile app has seen quarter-over-quarter decline in adoption; however, it still surpasses its installs a year ago, Sensor Tower said.