Meta Earnings Review

Working through the strong results of this mega cap tech name.

“We continue to see strong engagement and have the most exciting roadmap I’ve seen in a while with llama 2, Threads, Reels, AI products in the pipeline and Quest 3 this fall.” – CEO Mark Zuckerberg

1. Demand

• Beat revenue estimates by 3% & beat guidance by 4.1%.

• Slightly beat user growth estimates for Facebook & its Family of Apps (FOA)

• FOA revenue beat estimates by 3.8%.

• Beat ad impression growth estimates of 17.8% Y/Y with growth of 34% Y/Y.

• Missed price per impression growth estimates of -11.2% Y/Y with growth of -16% Y/Y.

  

  FOA = Family of Apps; ARPP = Average Revenue per Person

  

  DAU = daily active user; MAU = monthly active user

  

Demand Context:

• 19.6% 3-yr revenue compounded annual growth rate (CAGR) vs. 17.3% Q/Q & 15.1% 2 quarters ago.

• Meta has 3.88 billion MAUs of at least one of its apps and 3.07 billion DAUs. Still, company critics still will readily tell you “nobody uses the apps.” It’s hard to say if they’re immensely biased against Meta, don’t care about the objective data… or both.

2. Margins

• Beat EBIT estimates by 1%.

• Beat $2.91 GAAP EPS estimates by $.07.

  • EPS growth of 21% Y/Y beat 18.5% growth estimates.

• Beat FCF estimates by 78%. More later.

Margin context:

• Restructuring charges lowered EBIT margin by 2% this quarter and EPS by $0.25 for the quarter.

• Overall costs rose 10% Y/Y to $22.61 billion. Without restructuring and legal charges, operating costs Y/Y would have fallen by 2.4%.

  • By segment, 82% of Meta’s operating expense (OpEx) was directed to the Family of Apps (FOA). FOA OpEx rose 8% Y/Y with the one time charges and Reality Labs OpEx rose 23% Y/Y with the one time charges.

• Net income was helped by Meta’s share price rising so quickly. This meant higher income tax deductions and a lower effective tax rate which will last through 2023.

• Meta differed some cash tax payments to Q4 of this year just like Alphabet did. This helped FCF growth.

3. Guidance

For Q3 2023, Meta’s revenue estimate was a robust 6.8% ahead of consensus. Revenue includes a 300 bps FX TAILWIND (which analysts had modeled into their estimates that Meta easily eclipsed).

For the full year, Meta raised its OpEx guide by 1.7% due to legal charges and lowered its capital expenditure (CapEx) guide by 9.5%. The reduction in CapEx was partially due to spend rationalization but mainly due to delays on data center projects and pushing some CapEx out to 2024. For this reason, CapEx will grow Y/Y in 2024 at a rate faster than in 2023 (as expected by the sell side) due to AI investments.

It offered a bit more color on 2024 cost guidance as well. Higher infrastructure spend and more depreciation (due to all of the CapEx since 2020) will mean more depreciation expense. This will drive Y/Y OpEx growth in 2024 while Meta resumes hiring at a very slow pace. Finally, Reality Labs losses will continue to rise in 2024. It will pull the learnings from 2023’s year of efficiency into 2024, but will also continue to invest in high priority areas as its growth accelerates. Expect cost growth going forward, but nothing like we saw heading into 2022.

4. Balance Sheet

• $53.4B in cash & equivalents.

• $18.4B in long term debt.

• $898 million in buybacks vs. $5.2 billion Y/Y.

• Headcount fell 14% Y/Y. As of today, most of its planned layoffs are done with facility consolidation and data center restructuring ongoing.

  • 5,000 of the 10,000 workers impacted by layoffs were still on payroll for Q2. They won’t be in Q3.

Recall that last quarter, leadership told us it would opportunistically look to raise debt to lower its overall cost of capital. That’s still the plan.

5. Call & Release Highlights

Europe:

Leadership spoke on the European Commission’s “adoption of a final adequacy decision.” It’s excited about this development as it allows the company to continue offering personalized and targeted ads in the EU. Still, it also spoke on rising regulatory pressures in Europe and North America as a potential risk.

Threads:

Threads continues to greatly surpass expectations on DAUs following its historic debut. Zuckerberg expressed shock at how much traction the app has built. Like with everything else Meta does, it will focus on perfecting the app and scaling users before it shifts attention to monetizing.

The app was built by a very small team in just a few months. To leadership, this is a direct sign of its year of efficiency bearing fruit. They’re getting more nimble and more productive with less bureaucratic bloat.

AI:

AI investments are bearing fruit across ranking, recommendation, engagement and monetization. For some examples, non-follower recommended content is now Facebook’s fastest growing source of time spent and alone juiced that metric by 7% this quarter. Reels is also obviously a massive piece of this investment focus. With Apple’s cross-app data sharing restrictions, Meta needed to do more with its first party data and harvesting insights within its apps to better target. Well? It’s doing just that. Fast forward to today and Reels is at a $10 billion revenue run rate vs. $3 billion less than a year ago while advertiser returns continue to rise. 75% of Meta’s advertisers are now using Reels as a channel.

Meta’s AI-based ad products like Lattice (better performance predicting) and Advantage + (tools to automate, manage and perfect campaign efficacy) are now used by over 80% of its total advertiser base.

Zuckerberg teased new AI-powered products set to be announced at its investor event in September. Stay tuned.

Examples of where AI will help Meta:

• Helping advertisers build campaigns with less data and content inputs.

• Internally automating tasks like code writing.

• AI agents and chat bots like within its Paid Messaging tool on WhatsApp. These agents will help that service scale without the labor intensive costs that had previously coincided.

More on Llama 2 and its Large Language Models (LLMs):

• Open sourcing of the software is expected to lead to more secure & safer applications being built via the added scrutiny that innately comes with open source software.

• The response Meta got from Llama 1 led to it fast tracking its development of Llama 2.

• For the largest Llama 2 open source license users, Meta built a term into the user agreement requiring “business arrangements” to be struck. This is due to the reality that Microsoft, Amazon and Google will be re-selling the services built with Llama 2. Meta thinks it deserves a piece of that revenue which could turn into a compelling monetization lever to pull over the long term.

• Open Sourcing is also expected to make Meta a low cost model provider. Why? It’s inviting the world of 3rd party developers to build on top of Llama 2. Some of that building will invariably entail making its compute infrastructure and servers more efficient. It gets to take advantage of all this work.

Business Messaging:

Paid messaging users on WhatsApp rose 2x Y/Y while the app rolls out channels to more easily track updates from influencers and businesses. As previously announced, WhatsApp Business users also reached 200 million while click to message ad revenue on the app rose 80% Y/Y. When adding to this progress new partnerships with Uber and MercadoLibre, monetization is both very early and finally starting to take off.

Ad demand:

Chinese economic reopening was a tailwind for ad demand this quarter. Chinese advertisers leaned in to marketing their products to customers across the globe. Across all geographies, ad revenue rose by 10% or more. This strength impacted Meta’s upbeat Q3 guidance.

The decline in price per impression was driven by rapid growth in lower ARPP regions and Reels ramping. The Reels revenue headwind is set to turn neutral early next year.

Quest:

Zuckerberg subtly threw some shade at Apple in two ways. First, he reiterated his belief (multiple times) that Meta is leading in XR hardware. He said the recent announcements of competing hardware (so Apple) give him more confidence in this opinion. Secondly, he criticized Apple’s App Tracking Transparency (ATT) policy which eliminated open cross-app data sharing. This single-handedly destroyed immense signal and value within ad-tech. Meta was best equipped to endure, but others like Snap and countless smaller companies (especially in journalism) have struggled mightily in this new world. Meta wants to have a large share of the next hardware form factor (after smartphones) to ensure this doesn’t happen again.

Leadership offered empathy on investor discomfort with rising reality labs losses but remained adamant that the spend is well-placed. We support this decision as we still believe in XR hardware gaining ubiquity over time. To do so, that hardware will need to look like a pair of glasses rather than clunky ski googles. The sector is years of iterating away from that happening, but Meta’s investments today give it a great chance of being a dominant player if it finally does.

6. Take

This was a wonderful quarter and needed to be after Alphabet’s solid results yesterday. Costs have been effectively right-sized while its growth opportunities become more compelling and more realistic. That’s a perfect combination for rapid profit compounding in the coming years. Whether it’s click to message on WhatsApp, Reels, new ad tools or Llama 2 revenue sharing contracts, there are many exciting things happening at this company from a product and financial perspective. The year of efficiency has delivered a needed reset… Meta is all the way back.