Facebook announced Q3 earnings last night, posting revenue of $29.01BN against analyst expectations of $29.57BN as polled by Refinitiv, for a revenue miss of nearly $600MM. Reported EPS of $3.22 beat expectations of $3.19, and reported MAU of 2.91BN missed expectations of 2.93BN.
Apple’s App Tracking Transparency (ATT) privacy policy took center stage on the call, being blamed for creating significant advertising measurement and targeting frictions that adversely impacted revenue. Of the frictions created by ATT, Sheryl Sandberg, Facebook’s COO, noted in the earnings call:
We’ve been open about the fact that there were headwinds coming – and we’ve experienced that in Q3. The biggest is the impact of Apple’s iOS14 changes, which have created headwinds for others in the industry as well, major challenges for small businesses, and advantaged Apple’s own advertising business. We started to see that impact in Q2, but adoption on the consumer side ramped up by late June, so it hit critical mass in Q3. As a result, we’ve encountered two challenges. One is that the accuracy of our ads targeting decreased, which increased the cost of driving outcomes for our advertisers. And the other is that measuring those outcomes became more difficult.
And later, in the follow-up call with analysts, David Wehner, Facebook’s CFO, stated (emphasis mine):
Yes. I mean, I think we have, I think, been out in front of saying that we expected this to be disruptive for the industry and it clearly has been. It’s been difficult to forecast exactly how advertisers would react to the rollout. I would say we’ve seen the impact probably be a little bit more disruptive than we anticipated. I think just the retooling of all of the – all of the targeting and measurement to basically work for aggregated events is just it’s difficult especially for smaller advertisers with smaller budgets. So I think it’s certainly been – it’s certainly been challenging. Obviously the areas that are hardest impacted are those with offline objectives. So the two I’d probably call out there, online commerce and gaming.
Also on the analyst call, Susan Li, Facebook’s VP of Finance, observed:
Yes, I think echoing what Dave mentioned earlier, we had a range of expected impact from the ATT changes and ultimately what we’ve seen is in that range but it’s really on the higher end of what we had expected, and I think the underreporting of web conversions has really been a bigger issue than we expected, but it’s something that we’re very focused on helping to mitigate through better modeling techniques.
In summary: ATT presented significant challenges, those challenges disproportionately were experienced by the gaming and ecommerce categories, and the magnitude of the challenges materialized on the higher end of the range expected by Facebook.
Facebook announced a number of important and consequential initiatives for the company on the call. Notably:
- Facebook will conduct $50BN in stock buybacks;
- Facebook will break reporting out between Facebook’s family of apps and its Reality Labs division going forward;
- The $10BN that Facebook invested into VR and AR in 2021 will likely grow yearly for the “next several years.”
Each of these revelations is meaningful and deserves thoughtful treatment, but the scope of this article is a quantification of the cumulative revenue impact that ATT imposed onto Facebook in Q3 and will have on the company in Q4. While the company’s stock price initially rose after earnings, it is now down 5% from this morning’s open.
At $29.01BN, Facebook’s revenue actually shrank on a quarter-over-quarter basis from Q2 versus growth of 15% for the same quarter last year, although Q2 revenues were abnormally high relative to Q1 revenues as I detail in this article. Wehner guided Q4 revenue to a range of between $31.5 to $34BN, which would represent quarter-over-quarter growth from Q3 of between 9 and 17%, versus 31% growth for the same quarter last year.
Back in January, I wrote a piece called Facebook may take 7% revenue hit from Apple privacy changes in which I tried to assess the damage that ATT would inflict on Facebook’s advertising revenue. In the piece, I provided Best Case, Base Case, and Worst Case estimates predicated on levels of lost efficiency (I provide more detail on what I mean by that in the piece). The chart below, from the piece, walks through the logic of the impact, producing the quarterly impairment numbers at the bottom.
One thing to note: I wrote this piece before ATT’s rollout was officially delayed and then subsequently slow-rolled, so the quarters each need to shift forward (eg. Q2 2021 above really corresponds to Q3 2021).
Assuming that Facebook’s Q4 revenue lands at the top of its guidance range at $34BN, it appears that the real impact of ATT on Facebook’s revenue also falls at the higher end of my projected range from the chart above: roughly 15% for Q3 2021 (versus my estimate in the Worst Case of 13.59%) and 12% for Q4 2021 (versus my estimate in the Worst Case of 11%). The absolute dollar impact of ATT in the case above, across Q3 and Q4, would be $8.3BN.
There are some assumptions inherent in these numbers, namely:
- That Q2 2021 revenue would have been at the same level had ATT not been introduced;
- That Q4 growth from Q3 in 2020 (30.75%) was not related to COVID and could be achieved again from Q3 to Q4 2021.
That latter assumption is probably a stretch, but even if the Q3 to Q4 2019 growth rate of 19.4% is used as the benchmark, Facebook’s Q4 guidance is still off by $600MM, or 2% (closer to the Best Case estimate from my analysis from January).
My sense is that a “natural” growth rate between 19% and 31% — of, say, 25% from Q3 2021 to Q4 2021 — is a more appropriate assumption for the alternative reality in which ATT was never launched. Facebook’s guidance against that baseline of 25% assumed growth would be a 7% decrease caused by ATT, slightly above my Base Case estimate of 6%.
I have made the data and simple model used to derive these values available here.
