Meta Platforms Q1 2023 Earnings Review

Digesting the Results of this Social Media Titan.

Brad Freeman

Apr 26, 2023

As always, we encourage you to share this piece far and wide.

Beat revenue estimates by 3.2% and beat its revenue guide by 4.8%.
Beat total daily active user (DAU) estimates by 1.7% and beat the other 3 engagement metrics by a similar margin.
Impressions grew by 26% YoY vs. expectations of 14% YoY growth. Price per impression fell by 17% YoY vs. expectations of it falling by 14% YoY.

DAU = Daily Active User; MAU = Monthly Active User

More Demand Context:

Foreign Exchange (FX) was a 300 bps growth headwind for Meta this quarter. It was expected to be just a 200 bps headwind. The company materially beat revenue expectations regardless of this.
The 17.3% 3-year revenue CAGR compares to 15.1% last Q and 16.2% 2 Qs ago.
Pricing pressures were partially due to macro-related ad weakness but also due to rapid impression growth in lower ARPU regions.

2. Margins

Beat EBIT estimates by 11.2%.
Family of Apps (FOA) EBIT margin of 39.6% beat 38.4% estimates by 120 bps.
Beat $1.97 EPS estimates by $0.23. Without restructuring charges which will not be present in the YoY comparable period for 2024, EPS beat estimates by $0.67.
Beat free cash flow (FCF) estimates by a whopping 77%.

NI = Net Income; OCF = Operating Cash Flow; FCF = Free Cash Flow

More Margin Context:

Profit metrics include $1.14 billion in restructuring charges taken from layoffs and real estate footprint cuts. Without this charge, EBIT margin would have been 29.2% and net income margin would have been 23.9%. Year of efficiency. And again, EPS would have beaten by $0.67 with earnings of $2.64.

FOA EBIT margin of 39.6% compares to 34% last quarter and 42% YoY.
Q4 2022 overall EBIT margin was 33% ex-restructuring charges.
R&D, S&M and G&A cost growth was all predominately driven by non-recurring restructuring charges.

3. Forward Guidance

Meta’s next quarter revenue guidance beat consensus estimates by 4.4%. FX is set to fall to a less than 100 bps headwind next quarter.
Meta also lowered its full year operating expense (OpEx) guide from $92 billion to $88 billion. This includes $4 billion in restructuring charges which will not recur in 2024.
It reiterated its CapEx guidance of $31.5 billion. It is not slowing down at all on building out the needed infrastructure to support its AI endeavors such as better content discovery.

Note that comps get much easier for Meta going forward. The dollar headwind is easing, it is lapping the impact of exiting Russia and will enjoy continued improvements in new content form monetization. This will happen while the ad market likely looks a bit brighter and it finishes lapping the pandemic demand pull-forward. The stars are aligning.

Meta will incur about $2-$4 billion in incremental restructuring charges this year.

4. Balance Sheet

Bought back $9.22 billion in stock vs. $6.9 billion last quarter with its newly added $40 billion in buyback capacity.
It has $37.4 billion in cash and equivalents and $9.9 billion in cheap long term debt. The balance sheet is objectively a company strength.
Headcount fell 1% YoY. This will continue to fall as March layoffs have not been reflected in the figure. After planned May layoffs, Meta’s hiring freeze will end and it will begin to add to headcount once more.
CFO Susan Li told investors that Meta will look to lower weighted cost of capital over time through opportunistic debt issuance.

5. Call & Release Highlights

Year of Efficiency:

Zuckerberg spoke on belt-tightening last year starting from a point of operational weakness. Now, Meta is making these changes from a point of strength as traffic and engagement metrics outperform expectations. To leadership, more efficiency is the only way the firm can invest as aggressively as it needs to in future growth. Healthy profits are needed to justify hefty costs in infrastructure build outs. Family of Apps health is a priority to support other, more speculative bets. This is what puts them in a position to “weather volatile macro while maintaining a longer term focus.”

Importantly, Zuckerberg “no longer thinks Meta is behind on AI infrastructure investments.”
Layoffs will continue into May which means headcount growth will not fully reflect these moves until Q3.

Reels:

2 billion reels are shared per day up 100% from 2 quarters ago.
The company is “gaining share in short form video.”
Reels and AI investments have led to a 24% rise in time spent on Instagram since inception.
Reels monetization efficiency is up 30% QoQ on Instagram and 40% QoQ on Facebook. Leadership reiterated that it will become revenue neutral by Q1 2024 at the latest. It won’t monetize as well as stories at that time on a per second rate, but it will raise engagement enough to remove the headwind.

Discovery and AI:

This is what’s driving CapEx investments, not the Metaverse.
AI investments in content recommendations and ranking have now led to 20% of all FOA content consumed from AI recommendations. It’s at 40% for Instagram alone.
Advantage+ Shopping revenue is up 7x in the last 6 months.
Meta will take an open-sourced approach to its more basic language learning models vs. a more closed approach from public cloud behemoths. Its model frees it to benefit from developers allocating build time to its open sourced tools to augment its overall offering. It open-sourced 3 visual models this quarter.
These investments were credited for driving all of Facebook’s engagement and usage outperformance.

Ad Performance:

It believes targeting and measurement investments continue to close the signal loss gap left from Apple’s privacy restrictions.
Strong conversion improvements paired with lower pricing powered materially better return on ad spend (ROAS) metrics.
Paid messaging revenue on WhatsApp grew 40% QoQ. Click to message products continue to rapidly grow.

Metaverse:

Quest game titles with $25 million or more in revenue rose 100% YoY.
More than 50% of Quest DAUs now spend more than an hour per day on the device.

6. My Take

This was a strong Meta quarter with a very upbeat forward guide. It continues to rationalize the cost base yet enjoy outperforming demand growth by a significant margin. Good combination. Engagement and user metrics for FOA again put the “Facebook is dying” narrative to bed. It continues to find sequential growth in users for Facebook in North America -- its most mature app in its most mature market.

It was great to hear that Reels monetization is on track and how Click to Message continues to thrive. That will inherently drive more on-site monetization to further address the privacy restrictions from Apple. I was also elated to hear how much time FOA and AI investments got from leadership on the call vs. The Metaverse. Zuckerberg talked about FOA health being a prerequisite for investing in speculative projects -- which was music to my ears. The cash cow is priority 1 as focus has thankfully shifted.

Growth should accelerate as comps and exogenous factors ease for Meta. This should happen in conjunction with an expense base that is far healthier than it has been in years.