Facebook said it will start publishing the financial results of its augmented and virtual reality labs as a separate unit, where it is investing billions in its ambitions to build the 'metaverse' and as it reported that its main advertising business faces "significant uncertainty".
Facebook, which reported third-quarter profit up 17 percent, warned that Apple's new privacy changes would weigh on its digital business in the current quarter.
The social media company reported quarterly revenue below market expectations, which Chief Operating Officer Sheryl Sandberg told analysts was due to the iOS changes.
David Wehner, Facebook's chief financial officer, said the company expected its investment in its hardware division, Facebook Reality Labs, to reduce overall operating profit in 2021 by approximately US$10 billion.
The financial commitment to this hardware-focused unit which will work on Facebook's 'metaverse' ambitions, comes as the company is swamped by coverage of documents leaked by former Facebook employee and whistleblower Frances Haugen which she said showed the company chose profit over user safety.
CEO Mark Zuckerberg started Monday's analyst call by issuing a defense against criticisms stemming from the documents, which he said painted a "false picture of our company".
The CEO has said Facebook in the coming years will be seen not as a social media firm but as a company focused on the metaverse. The buzzy term refers broadly to a shared virtual environment which can be accessed by people using different devices.
Facebook, which has invested heavily in virtual reality (VR) and augmented reality (AR), including buying companies like Oculus, this year created a product team to work on the metaverse.
This month, it said it plans to hire 10,000 employees in Europe over the next five years to work on this initiative.
"This is not an investment that is going to be profitable for us any time in the near future," Zuckerberg told analysts. "But we basically believe that the metaverse is going to be the successor to the mobile internet."
Wehner said that starting in the fourth quarter of 2021, it would break out Facebook Reality Labs as a separate reporting segment from Facebook's family of apps.
Shares of the company were up about one percent in after-hours trade. Facebook, whose shares have gained about 20 percent so far this year, is about US$85 billion away from regaining a spot on the US$1 trillion club and joining new entrant Tesla.
The world's largest social media network is under scrutiny from global lawmakers and regulators, including from the Federal Trade Commission which has filed an antitrust lawsuit alleging anticompetitive practices.
The whistleblower documents, first reported by the Wall Street Journal, have intensified scrutiny of the company. They include internal research and reports about Instagram's effects on the mental health of teens and about whether Facebook's platforms stoke divisions, as well as its handling of activity around the January 6 Capitol riot and inconsistencies in the company's content moderation for users around the globe.
For the third quarter, Facebook reported monthly active users of 2.91 billion, up six percent from a year ago but short of analysts' estimates.
On the call, executives emphasised the company's focus on attracting young adults, including through its short video feature 'Reels'.
"We are retooling our teams to make serving young adults their North Star rather than optimising for the larger number of older people," said Zuckerberg, a shift he said would take "years, not months, to fully execute".
The leaked documents show Facebook's ongoing concerns about its appeal to younger users, as rivals like TikTok have enjoyed popularity with teens. They also show the company's difficulties in dealing with users who create multiple accounts on its platform.
Facebook said it expects fourth-quarter revenue to be in a range of US$31.5 billion to US$34 billion. Analysts had forecast US$34.84 billion in revenue, or a 24.1 percent jump, according to IBES data from Refinitiv.
Its third-quarter revenue too faced the brunt of Apple's privacy rules that made it harder for brands to target and measure their ads on Facebook.
Sandberg, the COO, said Facebook expects it will solve "more than half" of the problems that led to the under-reporting by the end of this year.
"The changes to Apple privacy settings have not hurt Facebook in a major way, at least not yet," said Haris Anwar, an analyst at Investing.com.
"Though revenue and user numbers have taken a slight hit over the past quarter, the company’s earning power is still intact."
The company's total revenue, which primarily consists of ad sales, rose to US$29.01 billion in the third quarter from US$21.47 billion a year earlier, missing analysts' estimates of US$29.57 billion.
Sandberg said Facebook's advertisers were also affected by the global supply-chain disruptions and labor shortages, which hurt advertising demand across a range of sectors and regions.
Facebook said it repurchased US$14.37 billion in stock during the third quarter and announced an additional US$50 billion in share buybacks.
WHAT IS THE METAVERSE?
Metaverse is a broad term. It generally refers to shared virtual world environments which people can access via the internet.
The term can refer to digital spaces which are made more lifelike by the use of virtual reality (VR) or augmented reality (AR).
Some people also use the word metaverse to describe gaming worlds, in which users have a character that can walk around and interact with other players.
There is also a specific type of metaverse which uses blockchain technology. In these, users can buy virtual land and other digital assets using cryptocurrencies.
Many science fiction books and films are set in fully-fledged metaverses - alternative digital worlds which are indistinguishable from the real physical world. But this is still the stuff of fiction. Currently, most virtual spaces look more like the inside of a video game than real life.
WHY IS IT TAKING OFF?
Fans of the metaverse see it as the next stage in the development of the internet.
At the moment, people interact with each other online by going to websites such as social media platforms or using messaging applications.
The idea of the metaverse is that it will create new online spaces in which people's interactions can be more multi-dimensional, where users are able to immerse themselves in digital content rather than simply viewing it.
The accelerated interest in the metaverse can be seen as a result of the COVID-19 pandemic. As more people have started working and going to school remotely, there has been increased demand for ways to make online interaction more lifelike.
WHO IS GETTING INVOLVED?
The idea of the metaverse is attracting a lot of interest from investors and companies who are keen to be part of the next big thing.
Facebook CEO Mark Zuckerberg said in July that the company will try to transition from being a social media company to a metaverse company in the next five years or so.
The term is popular in Silicon Valley, with Microsoft also having mentioned converging the digital and physical worlds.
The popular children's game Roblox, which had its New York Stock Exchange debut in March, describes itself as a metaverse company. Epic Games' Fortnite is also considered to be part of the metaverse.
Musicians can do virtual concerts within these platforms. For example, in September millions of people watched the singer Ariana Grande virtually perform in Fortnite, Epic Games said.
The world's biggest fashion companies have also experimented with making virtual clothing, which people's avatars can wear in metaverse environments.