Meta's Q3 Financial Results | Growth and the Future of AI & AR
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Meta's Q3 Earnings: AI Investments Shape the Future of Engagement and Monetization
Last week, Meta shared its Q3 earnings, revealing a familiar trend: while the results were strong, rising AI investments cast a shadow. With over 3.2 billion daily users across Meta’s apps, the company alongside Google and YouTube is in a prime position to bring AI into the mainstream. However, this shift could potentially disrupt the creator economy as we know it
So, how will this affect the future of Meta’s apps?
Did you know META is 222% up since our first analysis ?
Let’s break down the quarter and explore the latest updates
Today’s Highlights
- Overview of Meta Q3 FY24
- Recent business highlights
- Key quotes from the earnings call
- The potential decline of the creator economy
1. Meta Q3 FY24 Overview
Meta operates within two main segments
FoA: Family of Apps (Facebook, Instagram, Messenger, and WhatsApp)
RL: Reality Labs (virtual reality hardware and software)
Daily Active People in FoA grew by 5% year over year, reaching 3.29 billion. However, user growth has slowed, with Meta adding 20 million daily users in Q3 2024 down from 50 million earlier in 2024.
Meta’s reach now extends to over half of the global population aged 15 to 80, meaning future growth will hinge more on engagement and ad efficiency than adding new users.
Key Insights from Zuckerberg:
-Facebook: Positive engagement trends among Gen Z in the U.S.
-Instagram: Sustains “strong” growth globally.
-WhatsApp: Now surpasses 2 billion calls daily.
-Meta AI: 500 million monthly active users.
-Threads: 275 million monthly active users, up from 200 million in Q2, with notable growth in regions like the U.S., Taiwan, and Japan (currently not monetized and unlikely to drive significant revenue by 2025).
Advertising Performance:
- Ad impressions grew 7% year-over-year (compared to 10% in Q2).
- Average ad price increased by 11% year-over-year (10% in Q2).
- Average revenue per user grew by 12% year-over-year, reaching $12.29 (compared to Snap at $3.10 and Reddit at $3.58).
- Despite some critics suggesting potential inflation due to bot activity, ARPU growth points to real ad value; fake users can’t generate revenue.
Financials
- Revenue rose 19% year-over-year to $40.6 billion.
- FoA saw a 19% increase, reaching $40.3 billion.
- RL grew by 29% to $0.3 billion.
- Gross margin was 82% (-1pp Y/Y, +1pp Q/Q).
- Operating margin stood at 43% (+2pp Y/Y, +5pp Q/Q).
- FoA operating profit was $21.8 billion (54% margin, +2pp Y/Y).
- RL reported an operating loss of $4.4 billion (down slightly from $4.5 billion in Q2).
- EPS rose by 37% year-over-year to $6.03.
Cash Flow
- Operating cash flow was $24.7 billion (61% margin, +1pp Y/Y).
- Free cash flow was $15.5 billion (38% margin, -2pp Y/Y).
Balance Sheet
- Cash and marketable securities totaled $71 billion
- Long-term debt was $29 billion
Guidance:
- Q4 FY24 revenue is forecasted at $46.5 billion in the mid-range
- FY24 expenses estimated at $96-$98 billion (previously $96-$99 billion)
- FY24 Capex is expected to be $38-40 billion (previously $37-$40 billion)
Summary Analysis
Revenue growth was 20% in constant currency (compared to 23% in Q2), with ad revenue growth driven by increased ad prices. Strong demand for ads continued, largely due to higher ad performance, especially in online commerce, healthcare, and entertainment. Geographically, North America and Europe led growth at 21%, while Asia slowed from 28% to 15%.
Reality Labs’ revenue rose 29%, mainly from hardware sales, though the division continues to post significant losses. As shown in the visuals, FoA operating profit reached an all-time high, while RL’s losses remain around $4 billion quarterly.
Headcount increased by 9% year-over-year to 72,404, signaling a return to hiring, particularly in priority areas such as monetization, infrastructure, Reality Labs, and generative AI.
Stock buybacks amounted to nearly $9 billion in Q3, up from $6 billion in Q2, though lower than the $15 billion in Q1. Management’s confidence in Meta’s stock remains strong, with an additional $1.3 billion paid in dividends.
Capital expenditures climbed by 36% to $9.2 billion compared to $8.5 billion in Q2, with guidance staying on track. Management anticipates “significant acceleration in infrastructure expenses” for 2025, which will affect both the cost of revenue and R&D expenses.
Despite heavy AI spending, Meta remains highly profitable, generating nearly $52 billion in free cash flow over the past 12 months—just shy of Alphabet’s $56 billion over the same period.
Q4 FY24 revenue guidance points to deceleration, with mid-range growth forecasted at 16%.
Let’s examine Meta’s investments and market position further.
2. Recent Business Highlights
Meta Orion
Meta's Orion AR glasses mark an ambitious step towards a future beyond smartphones, showcasing the potential of augmented reality (AR):
-Prototype Status: Orion is a high-tech AR prototype, equipped with advanced features, but high production costs keep it out of reach for consumers.
-Advanced AR Display: Using Micro LED projectors and silicon carbide lenses, Orion offers a broad field of view with sharper visuals than most current AR devices.
-Interactive AI Integration: With Meta's generative AI, Orion enables users to interact with virtual elements, identify real-world objects, and create immediate solutions, such as recipes.
-Complex Hardware: Orion relies on a neural wristband for control and a wireless compute puck, creating a multi-part system.
-High Cost & Limited Production: With a price tag estimated at $10,000, Orion isn’t ready for mass production. Meta has produced around 1,000 units for demonstrations and internal testing.
- Future Vision: Meta aims to release a consumer-friendly AR device within a few years, working toward a slimmer, more affordable model that could rival smartphone prices.
Orion reflects Meta's goal to lead the next wave of computing, though significant technological and cost hurdles remain.
Timing and Competitive Landscape**: Zuckerberg’s reveal of Orion may aim to justify Reality Labs' annual $16-20 billion operating loss to shareholders and gather feedback. Meanwhile, Apple has initiated its “Atlas” project to explore the smart glasses market, indicating potential plans to shift focus from the high-end $3,500 Vision Pro VR headset.
How AI Is Already Impacting Meta
Beyond future-oriented projects like Orion, Meta’s AI advancements are actively enhancing its core business in two strategic areas: engagement and monetization.
-Engagement: Meta's recommendation engine uses AI to tailor feeds with highly relevant video content, keeping users engaged. AI-driven prediction systems further increase app usage by showing content that maximizes interaction.
-Monetization: AI boosts ad efficiency across the entire lifecycle—from creation to performance tracking. Generative AI assists with ad copy, images, and video, while advanced models analyze user behavior to serve targeted ads, improving conversion rates incrementally.
-Meta AI Studio: This platform allows developers to create, train, and deploy custom AI models within Meta’s ecosystem. By enabling personalized assistants, interactive AI, and AR applications, Meta seeks to drive new consumer apps and maximize ad potential across its platforms.
Market Share
Meta’s advertising revenue hit $39.9 billion in Q3, reaching 81% of Google’s search revenue, up from 76% last year. Meta’s ad revenue is expanding at the same rate as Amazon’s, despite Meta’s larger base, signaling regained market share and effective adaptation to the post-ATT environment.
3. Key Quotes from the Earnings Call
CEO Mark Zuckerberg
- On AI and the Family of Apps: “Improvements to our AI-driven feed and video recommendations have led to an 8% increase in time spent on Facebook and a 6% increase on Instagram this year alone. More than a million advertisers used our GenAI tools to create over 15 million ads last month, and we estimate businesses using Image Generation are seeing a 7% conversion lift.”
-On Llama 4: “We're training the Llama 4 models on a cluster larger than 100,000 H100s, more extensive than anything reported elsewhere.”
-On RayBan Meta Glasses: “Glasses are the ideal AI form factor as they let your AI see, hear, and communicate with you. Demand remains strong, with the new clear edition selling out quickly.”
-On Meta AI: “We’re on track for Meta AI to become the world’s most used AI assistant by year-end, with popular uses including information gathering, task assistance, and content exploration.”
CFO Susan Li
-On Recommendations: “Inspired by scaling laws observed in large language models, we’ve developed new ranking architectures for Facebook video that enhance relevance and increase watch time”
-On Capital Allocation: “We’re optimistic about our opportunities and believe that investing now in infrastructure and talent will accelerate progress and returns.”
4. The Potential Decline of the Creator Economy
Facebook and Instagram have evolved from social networks to content networks, benefiting creators with wide-reaching platforms. However, this era may be coming to a close.
-AI-Generated Content: Zuckerberg shared plans to introduce AI-generated and AI-summarized content on Facebook, Instagram, and potentially Threads, gradually shifting away from creator-generated content as the primary engagement driver.
-Impact on Creators: As AI learns to identify and generate engaging content, creators could struggle to compete, with algorithms delivering exactly what audiences want. Over time, creators may face a landscape where AI determines the most engaging posts, relegating them to the sidelines in a world increasingly powered by self-generating content.
-Why It Matters: Platforms like YouTube share 55% of ad revenue with creators, but Meta does not, meaning that an AI-driven shift isn’t primarily about cost-cutting. Instead, it allows for more integrated ad placements within algorithmic feeds, potentially boosting impressions and conversions.
Although AI generated feeds may sound dystopian, current high engagement accounts already use tactics to maximize engagement, meaning the shift to AI might go largely unnoticed by audiences.
Last week, Meta shared its Q3 earnings, revealing a familiar trend: while the results were strong, rising AI investments cast a shadow. With over 3.2 billion daily users across Meta’s apps, the company alongside Google and YouTube is in a prime position to bring AI into the mainstream. However, this shift could potentially disrupt the creator economy as we know it
So, how will this affect the future of Meta’s apps?
Did you know META is 222% up since our first analysis ?
Let’s break down the quarter and explore the latest updates
Today’s Highlights
- Overview of Meta Q3 FY24
- Recent business highlights
- Key quotes from the earnings call
- The potential decline of the creator economy
1. Meta Q3 FY24 Overview
Meta operates within two main segments
FoA: Family of Apps (Facebook, Instagram, Messenger, and WhatsApp)
RL: Reality Labs (virtual reality hardware and software)
Daily Active People in FoA grew by 5% year over year, reaching 3.29 billion. However, user growth has slowed, with Meta adding 20 million daily users in Q3 2024 down from 50 million earlier in 2024.
Meta’s reach now extends to over half of the global population aged 15 to 80, meaning future growth will hinge more on engagement and ad efficiency than adding new users.
Key Insights from Zuckerberg:
-Facebook: Positive engagement trends among Gen Z in the U.S.
-Instagram: Sustains “strong” growth globally.
-WhatsApp: Now surpasses 2 billion calls daily.
-Meta AI: 500 million monthly active users.
-Threads: 275 million monthly active users, up from 200 million in Q2, with notable growth in regions like the U.S., Taiwan, and Japan (currently not monetized and unlikely to drive significant revenue by 2025).
Advertising Performance:
- Ad impressions grew 7% year-over-year (compared to 10% in Q2).
- Average ad price increased by 11% year-over-year (10% in Q2).
- Average revenue per user grew by 12% year-over-year, reaching $12.29 (compared to Snap at $3.10 and Reddit at $3.58).
- Despite some critics suggesting potential inflation due to bot activity, ARPU growth points to real ad value; fake users can’t generate revenue.
Financials
- Revenue rose 19% year-over-year to $40.6 billion.
- FoA saw a 19% increase, reaching $40.3 billion.
- RL grew by 29% to $0.3 billion.
- Gross margin was 82% (-1pp Y/Y, +1pp Q/Q).
- Operating margin stood at 43% (+2pp Y/Y, +5pp Q/Q).
- FoA operating profit was $21.8 billion (54% margin, +2pp Y/Y).
- RL reported an operating loss of $4.4 billion (down slightly from $4.5 billion in Q2).
- EPS rose by 37% year-over-year to $6.03.
Cash Flow
- Operating cash flow was $24.7 billion (61% margin, +1pp Y/Y).
- Free cash flow was $15.5 billion (38% margin, -2pp Y/Y).
Balance Sheet
- Cash and marketable securities totaled $71 billion
- Long-term debt was $29 billion
Guidance:
- Q4 FY24 revenue is forecasted at $46.5 billion in the mid-range
- FY24 expenses estimated at $96-$98 billion (previously $96-$99 billion)
- FY24 Capex is expected to be $38-40 billion (previously $37-$40 billion)
Summary Analysis
Revenue growth was 20% in constant currency (compared to 23% in Q2), with ad revenue growth driven by increased ad prices. Strong demand for ads continued, largely due to higher ad performance, especially in online commerce, healthcare, and entertainment. Geographically, North America and Europe led growth at 21%, while Asia slowed from 28% to 15%.
Reality Labs’ revenue rose 29%, mainly from hardware sales, though the division continues to post significant losses. As shown in the visuals, FoA operating profit reached an all-time high, while RL’s losses remain around $4 billion quarterly.
Headcount increased by 9% year-over-year to 72,404, signaling a return to hiring, particularly in priority areas such as monetization, infrastructure, Reality Labs, and generative AI.
Stock buybacks amounted to nearly $9 billion in Q3, up from $6 billion in Q2, though lower than the $15 billion in Q1. Management’s confidence in Meta’s stock remains strong, with an additional $1.3 billion paid in dividends.
Capital expenditures climbed by 36% to $9.2 billion compared to $8.5 billion in Q2, with guidance staying on track. Management anticipates “significant acceleration in infrastructure expenses” for 2025, which will affect both the cost of revenue and R&D expenses.
Despite heavy AI spending, Meta remains highly profitable, generating nearly $52 billion in free cash flow over the past 12 months—just shy of Alphabet’s $56 billion over the same period.
Q4 FY24 revenue guidance points to deceleration, with mid-range growth forecasted at 16%.
Let’s examine Meta’s investments and market position further.
2. Recent Business Highlights
Meta Orion
Meta's Orion AR glasses mark an ambitious step towards a future beyond smartphones, showcasing the potential of augmented reality (AR):
-Prototype Status: Orion is a high-tech AR prototype, equipped with advanced features, but high production costs keep it out of reach for consumers.
-Advanced AR Display: Using Micro LED projectors and silicon carbide lenses, Orion offers a broad field of view with sharper visuals than most current AR devices.
-Interactive AI Integration: With Meta's generative AI, Orion enables users to interact with virtual elements, identify real-world objects, and create immediate solutions, such as recipes.
-Complex Hardware: Orion relies on a neural wristband for control and a wireless compute puck, creating a multi-part system.
-High Cost & Limited Production: With a price tag estimated at $10,000, Orion isn’t ready for mass production. Meta has produced around 1,000 units for demonstrations and internal testing.
- Future Vision: Meta aims to release a consumer-friendly AR device within a few years, working toward a slimmer, more affordable model that could rival smartphone prices.
Orion reflects Meta's goal to lead the next wave of computing, though significant technological and cost hurdles remain.
Timing and Competitive Landscape**: Zuckerberg’s reveal of Orion may aim to justify Reality Labs' annual $16-20 billion operating loss to shareholders and gather feedback. Meanwhile, Apple has initiated its “Atlas” project to explore the smart glasses market, indicating potential plans to shift focus from the high-end $3,500 Vision Pro VR headset.
How AI Is Already Impacting Meta
Beyond future-oriented projects like Orion, Meta’s AI advancements are actively enhancing its core business in two strategic areas: engagement and monetization.
-Engagement: Meta's recommendation engine uses AI to tailor feeds with highly relevant video content, keeping users engaged. AI-driven prediction systems further increase app usage by showing content that maximizes interaction.
-Monetization: AI boosts ad efficiency across the entire lifecycle—from creation to performance tracking. Generative AI assists with ad copy, images, and video, while advanced models analyze user behavior to serve targeted ads, improving conversion rates incrementally.
-Meta AI Studio: This platform allows developers to create, train, and deploy custom AI models within Meta’s ecosystem. By enabling personalized assistants, interactive AI, and AR applications, Meta seeks to drive new consumer apps and maximize ad potential across its platforms.
Market Share
Meta’s advertising revenue hit $39.9 billion in Q3, reaching 81% of Google’s search revenue, up from 76% last year. Meta’s ad revenue is expanding at the same rate as Amazon’s, despite Meta’s larger base, signaling regained market share and effective adaptation to the post-ATT environment.
3. Key Quotes from the Earnings Call
CEO Mark Zuckerberg
- On AI and the Family of Apps: “Improvements to our AI-driven feed and video recommendations have led to an 8% increase in time spent on Facebook and a 6% increase on Instagram this year alone. More than a million advertisers used our GenAI tools to create over 15 million ads last month, and we estimate businesses using Image Generation are seeing a 7% conversion lift.”
-On Llama 4: “We're training the Llama 4 models on a cluster larger than 100,000 H100s, more extensive than anything reported elsewhere.”
-On RayBan Meta Glasses: “Glasses are the ideal AI form factor as they let your AI see, hear, and communicate with you. Demand remains strong, with the new clear edition selling out quickly.”
-On Meta AI: “We’re on track for Meta AI to become the world’s most used AI assistant by year-end, with popular uses including information gathering, task assistance, and content exploration.”
CFO Susan Li
-On Recommendations: “Inspired by scaling laws observed in large language models, we’ve developed new ranking architectures for Facebook video that enhance relevance and increase watch time”
-On Capital Allocation: “We’re optimistic about our opportunities and believe that investing now in infrastructure and talent will accelerate progress and returns.”
4. The Potential Decline of the Creator Economy
Facebook and Instagram have evolved from social networks to content networks, benefiting creators with wide-reaching platforms. However, this era may be coming to a close.
-AI-Generated Content: Zuckerberg shared plans to introduce AI-generated and AI-summarized content on Facebook, Instagram, and potentially Threads, gradually shifting away from creator-generated content as the primary engagement driver.
-Impact on Creators: As AI learns to identify and generate engaging content, creators could struggle to compete, with algorithms delivering exactly what audiences want. Over time, creators may face a landscape where AI determines the most engaging posts, relegating them to the sidelines in a world increasingly powered by self-generating content.
-Why It Matters: Platforms like YouTube share 55% of ad revenue with creators, but Meta does not, meaning that an AI-driven shift isn’t primarily about cost-cutting. Instead, it allows for more integrated ad placements within algorithmic feeds, potentially boosting impressions and conversions.
Although AI generated feeds may sound dystopian, current high engagement accounts already use tactics to maximize engagement, meaning the shift to AI might go largely unnoticed by audiences.
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