META: Cost-Saving measures will save billions and boost margins
Earlier this week, Meta's CEO, Mark Zuckerberg, announced the company's plan to lay off 13% of the existing staff, constituting approximately 11,000 people. The decision to drastically cut the head count reflects a significant shift in the company's strategy, which previously used to boast about its highly paid, skilled, and geographically-diverse workforce.
The decision to reduce costs comes in when the company faces a challenging macro-environment, and investors increasingly challenge Meta's investments in the metaverse. To offset some of the losses from the Reality Labs segment, the company also recently announced the initiation of a cost-saving plan as it reduced its guidance for operating expenses by 10%.
In addition to reducing the headcount, Meta also announced some further cost-saving measures, including reducing the company's real estate footprint, transferring employees to desk sharing, and slowing down infrastructure spending in the coming few months. The expected cost-saving from the reduction in the headcount and other fixed-cost reduction measures would be somewhere between $3-4 billion and would help the company bring the operating expenses for the year down to the lower end of the full-year 2023 guidance of $96 billion to $101 billion.
The company's operating margins have been falling consecutively for several previous quarters and fell to a two-year low of 20.4% in the third quarter. Although a reduction of 10% in operating expenses is quite significant and reflects a shift in the management's strategy, undertaking a more disciplined approach towards its spending and investments, the savings from the job cuts will have an impact of ~3-4% on the operating margins, which may not be enough to address the investor's concerns on the company.
Meta is expected to invest $13 billion in the Reality Labs division this year, dragging the operating margin down by about 11-12%. Hence, even with the layoffs, the losses in the Reality labs division will continue to grow significantly, causing further downward pressure on the operating margins in the near future.
Nevertheless, investors have positively reacted to $META's cost reduction plan, and there are signs that the stock price might have reached a bottom.
