Meta pours cash into servers and AI as ad revenue falls

Plus: Apple's iOS privacy changes 'weren't a factor' in Q2

Facebook's parent company Meta has spent $7.7 billion on capital expenditure in the last quarter, driven by investments in datacenter infrastructure and AI, as it recorded its first ever revenue decline thanks to falling advertising income.

The internet giant reported total revenue for Q2 2022 just completed was $28.8 billion, down by 1 percent compared with the same period last year.

On an earnings call discussing the results, chief financial officer Dave Wehner largely blamed the strong US dollar for this situation, claiming that if foreign exchange rates had remained the same as during Q2 last year, the company's total revenue would have been approximately $1.3 billion higher.

However, Wehner said that total expenses were up 22 percent year-on-year to $20.5 billion, with capital expenditure reaching $7.7 billion, up from $4.74 billion in the same quarter last year and $5.55 billion in Q1 of this year. This big step-up in expenditure was driven by investments in servers, data centers, and network infrastructure, including for Meta's AI infrastructure, Wehner explained.

One of those expenses is likely to be the Research Super Computer, or RSC, which Meta announced it was building at the start of the year. The company had ambitions for it to be the world's largest AI supercomputer once complete, comprising a cluster of 2,000 nodes with 4,000 AMD Epyc processors and 16,000 Nvidia A100 GPUs, which would make it the largest customer installation of DGX A100 systems once fully built and operational.

However, Meta was reported last month to have determined that it will need to increase its ranks of datacenter GPUs fivefold in order to compete against rivals such as video-based social media service TikTok.

Meanwhile, as we reported this morning, the FTC filed a lawsuit this week in an attempt to prevent Meta from acquiring VR firm Within, claiming the deal could harm competition and consumers.

Wehner said that Meta's advertising revenue growth had slowed during the second quarter, with advertiser demand weakening.

"We believe businesses are lowering their advertising spend in response to the increased economic uncertainty," he said.

Apple's iOS changes didn't hurt – at least not yet...

The company is continuing to face "targeting and measurement headwinds such as Apple's iOS changes," Wehner stated, but claimed that this "wasn't a factor contributing to the deceleration in Q2."

This somewhat contradicts Meta's own claim earlier this year, which was that the changes introduced by Apple to allow iPhone users to opt out of tracking by advertisers would likely cost the company up to $10 billion in lost revenue during 2022.

CEO Mark Zuckerberg said in his own remarks about the Q2 results that Meta was focused on making long-term investments that will position the company to be stronger coming out of the current downturn, including work on its discovery engine and Reels, new ads infrastructure and the metaverse.

"One of the main transformations in our business right now is that social feeds are going from being driven primarily by the people and accounts you follow to increasingly also being driven by AI recommending content that you'll find interesting from across Facebook or Instagram, even if you don't follow those creators," Zuckerberg explained.

"Advances in AI enable us to deliver better-personalized ads while using less data. So it powers automated messaging and creation tools to let businesses run better-performing campaigns," Zuckerberg said, adding that there was still a lot of work to do and a lot of the investment in this quarter is in AI compute capex to enable it all.

Meanwhile, Microsoft disclosed in its earnings call for the period ending June 30 (which was its fiscal Q4 2022) that it intends to cut costs by extending the useful life of some of its datacenter equipment by two years.

The Redmond outfit said that from the start of its fiscal year 2023, it will extend the useful life of server and network assets in its cloud infrastructure from four to six years, which will apply to future asset purchases as well.

This change will "favorably impact" its operating income to the tune of $3.7 billion for the full fiscal year and approximately $1.1 billion for the first quarter we are in now, Microsoft claimed.

Microsoft is following in the footsteps of Amazon and Google in taking this step; Amazon announced in February that it expected to save a billion dollars in a quarter by extending the life of its servers and networking kit by an extra year, while Google said it saved $2.6 billion during 2021 by extending the life of its cloud servers from three to four years (but still made an operating loss). ®