Meta Earnings Review

Exploring the results of this social media giant.

1. Demand

Meta beat sell side revenue estimates by 1.9% & beat its guidance by 2.7%. Its 16.6% 3-year revenue compounded annual growth rate (CAGR) compares to 19.6% Q/Q and 17.3% 2 quarters ago.

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

User growth beat across the board. Total daily active users (DAUs) beat estimates by 1.7%, total monthly active users (MAUs) beat estimates by 2.1%, Facebook DAUs beat estimates by 0.9% and Facebook MAUs beat estimates by 0.1%.

Ad impression growth of 31% Y/Y beat 29.6% Y/Y growth estimates. -6% Y/Y price per impression growth beat -7% Y/Y estimates. More on this later.

2. Margins

Meta beat EBIT estimates by 21%, beat $3.62 GAAP earnings per share (EPS) estimates by $0.77 and beat free cash flow (FCF) estimates by 83%.

FOA = Family of Apps

3. Balance Sheet

• $60 billion in cash & equivalents.

• $18.3 billion in debt (all long term).

• Share count fell 4% Y/Y via continued aggressive buybacks. It has $37.2 billion left in buyback capacity.

4. Guidance

Meta’s Q1 2024 revenue estimate missed by 1.7%.

It lowered its 2023 operating expense (OpEx) guidance from $88.5 billion to $88 billion. It also lowered its 2023 capital expenditure (CapEx) guidance from $28.5 billion to $28 billion.

Its full year 2024 OpEx guide was 5.0% below consensus, while its CapEx guide was 5.3% below consensus. This should lead to upward 2024 profit revisions over the coming days. 2024 OpEx growth is expected to be around 9.7% Y/Y with CapEx growth expected to be around 16.1% Y/Y. Meta expects depreciation expense growth to accelerate in 2024 via higher CapEx in 2022 and 2023. It sees CapEx also ramping in 2024 to support data center and server investments for the large AI opportunity. As a reminder, it shifted to a new data center footprint which will make CapEx more efficient and project scaling more flexible over time. It will be a noticeable help to CapEx intensity in the coming years.

The company sees payroll growth resuming and thinks Reality Labs losses will grow in 2024 vs. 2023 as expected. It expects operating expenses overall to be boosted by the company maintaining a larger infrastructure footprint.

5. Call & Release Highlights

The Year of Efficiency:

This quarter reflects all previous Meta layoffs for the first time. Operating expenses (OpEx) fell 7% Y/Y as headcount fell by 24% Y/Y. Meta enjoyed Q/Q & Y/Y operating leverage in all operating cost buckets. As an aside, the absence of hefty legal charges helped power G&A (general & administrative) leverage.

All of this helped Meta’s EPS rise by well over 100% Y/Y and at a 2 year CAGR of 17%. Finally, year to date, CapEx is also down from $22.8 billion to $20.2 billion Y/Y.

The learnings from 2023’s year of efficiency will continue into 2024. It will cling to these cost optimization levers to ensure it has the flexibility to invest in its longer term initiatives. Considering it set a 2 year EBIT margin record this quarter, it has found a good balance. Headcount growth will slowly resume next year, but it will also hold back on new hires while reallocating existing talent to its higher priority initiatives.

Connect Conference & Metaverse:

Zuckerberg reviewed many of the announcements at its Connect conference last month. He dove into the new Quest 3, the next iteration of its smartglasses, the Meta AI assistant and its newest “EMU” GenAI model for image creation. He teased progress in its Business AI tool which is in beta testing. This could lead to direct monetization opportunities down the road. To avoid redundancy, a full review of that event can be found here.

Unsurprisingly, Facebook Reality Labs (FRL) continues to be in deep cash burn mode with -$3.7 billion in quarterly EBIT. This will remain the case in 2024 and 2025. While this is frustrating, Meta is walking and chewing gum by incurring these costs while also delivering strong leverage. This endeavor is also how Meta aims to control the next computing platform beyond smartphones. Apple has shown a lack of willingness to offer open data sharing. That’s no secret; Apple has earned the right to make these decisions with its dominant ecosystem. FRL is Meta trying to lessen reliance on Apple just like its work on AI-based ad targeting has accomplished.

AI:

LLAMA 2, Meta’s foundational open source model for commercial & research use cases, saw 30 million downloads in September. It continues to rapidly gain traction and become what Meta sees as the leading open source GenAI model.

A big piece of this work on models is how it impacts app engagement. GenAI allows Meta to connect consumer data dots more effectively to know exactly what a person wants to see. That, in turn, allows it to surface more relevant content to boost time spent on its apps. AI content discovery work has already boosted Facebook and Instagram time spent by 7% and 6% respectively. That’s why Meta doesn’t need to directly monetize these models for the associated costs to make financial sense. All it needs to do is create better content matching by utilizing the technology. That’s the beauty of being an ads-based business.

There remains much more work to do to improve ad spend returns, on-site conversions, monetization levels and marketing data utilization. With as healthy as the ads business already is, this work will merely make things better.

For data usage specifically, Meta is upgrading the Conversions API. As a reminder, the API paves the way for data sharing across Meta’s properties while extending into offline conversion data as well. It’s a centralized location for tracking campaign efficacy, data leveraging and customer segmentation. Conversions API now offers support for Google Cloud (and AWS). Meta will soon add this to its messaging ad products.

Even if Meta doesn’t need to directly monetize its GenAI investments, it likely will eventually. CFO Susan Li told us the pace of adding GenAI to its products is accelerating. If you recall last quarter, Zuck also told us that GenAI subscriptions for businesses would likely be a future reality. Hello up-selling.

AI is also being infused into other advertising products like Advantage + as that tool crosses $10 billion in annual revenue. GenAI is helping Advantage + to sharpen automation and return potential even more. Meta is working to expand commerce integrations for products like Advantage + to make merchant store creation and marketing more intuitive. Lattice (campaign performance prediction) is another exciting area where GenAI is greatly improving product utility.

Messaging:

Click to message and other business messaging tools continue to rapidly grow for Meta. 60% of WhatsApp users in India now message businesses weekly through these products. That’s where message-based ads is the most mature. The traction offers evidence of this opportunity being highly relevant and lucrative elsewhere as these formats mature globally. Click to message advertising revenue in India specifically is up over 100% Y/Y.

This not only represents a compelling growth vector but insulation from competitive threats. Why? It means more on-site monetization and even less impact from Apple cross app data sharing restrictions. Meta AI and messaging will work hand in hand over time. The AI algorithm will allow business customers to automate more sales and customer support functions and will allow them to make scaling more economically feasible. Most businesses cannot afford large teams to manually handle this task. Meta’s messaging automation work is meant to alleviate this common growth bottleneck. More with less.

Reels:

As a reminder, Reels proliferating has been a revenue headwind for Meta. Its other app formats monetize more frequently and successfully. It has been working hard to close this gap and thought it could by the end of 2023. Well? That gap has been closed a quarter early. Reels is now revenue neutral and will be a growth tailwind in 2024. Reels has also driven a 40% overall boost to Instagram engagement since the product debuted.

Macro & Advertising:

Meta saw 10%+ Y/Y growth in all regions for advertising as well as an acceleration in each region. North America enjoyed 16.5% Y/Y growth, Europe 34.2% Y/Y growth and Asia Pacific 19.8% Y/Y growth. Chinese advertisers targeting consumers around the globe were a key factor for this outperformance. The decline in price per impression this quarter was driven by an impression mix shift to lower monetization regions. This is not Reels-related anymore as, again, it’s revenue neutral ahead of schedule. Encouragingly, online commerce was called out as the category standout for advertising demand. That bodes very well for companies relying on discretionary e-commerce spending for growth. A pleasant surprise.

The geopolitical chaos breaking out across the globe is in Meta’s Q4 revenue guidance. It widened the range of its low and high points to capture this added uncertainty.

Important Notes:

• Just like Google and other mega cap tech names, Meta deferred taxes to Q4 which helped profit margins this quarter. 

• Threads is nearing 100 million MAUs. It’s leaning into growth and product spend here.

6. My Take

This was a very strong quarter for Meta. Cost optimization is not holding back demand in the slightest. Explosive profit growth is the result. The 2024 expense guidance is encouraging, the early impacts from AI investments are encouraging, the Reels monetization path is encouraging, business messaging progress is encouraging. Everything about this report was encouraging.

Mr. Market is currently throwing one of his frequent fits. I have no idea how the stock will react to these strong numbers. I just know that the numbers were strong. Great quarter.

This is my largest position, which makes me picky in how large of a dip I need to justify adding. If it gets anywhere near the 200 day moving average of $266 per share, I’d be tempted to nibble. For now, I will sit on my hands and do nothing.