Meta reported a strong Q1 with revenue nearly $1 billion ahead of consensus, while EPS grew 37% YoY versus expectations for less than 11% growth. Meta also boosted its capex outlook, signaling at least 73% YoY growth at midpoint after Q1 capex surged nearly 104% YoY.

The market is pleased with Meta’s results (today) yet it’s important to note that revenue growth has been decelerating, while key metrics are mixed with some decelerating on tough comps like ad impressions while ad pricing increased YoY by 4 points.

Overall, revenue growth of 16% is a strong report, yet this is down from 27% growth in the year ago quarter. Looking further out, Q2’s revenue guide only marginally topped estimates and pointed to a sequential deceleration to below 13% YoY. Notably, EPS growth is outpacing top line growth, which is fine by me.

All things equal, this is a strong report – yet the market will be weighing the future impact of tariffs on an advertising platform such as Meta. Therefore, the earnings report is unlikely to make a dent if tariffs persist.

Revenue Easily Tops Estimates, Q2 Guided to Decelerate QoQ

Meta handily beat the consensus estimate in Q1, reporting revenue growth of 16% YoY to $42.31 billion in revenue. Advertising revenue increased 16.2% YoY to $41.39 billion. However, this was Meta’s slowest growth rate since Q2 2023, although it comes against its peak 27% growth comp from last year.

For Q2, Meta guided for a wider range of $42.5 billion to $45.5 billion in revenue, representing YoY growth of 12.6% at midpoint, and only 0.5% ahead of consensus at $43.8 billion. This would mark a 3.4 point sequential deceleration and a nearly 10 point YoY deceleration. Meta added that the guidance also included a 1% YoY growth tailwind from FX.

Ad Pricing Grows YoY; Ad Impressions Soften YoY

Advertising key metrics also decelerated sequentially, supporting the guided revenue growth deceleration for Q2. Ad impressions increased just 5% YoY, slowing considerably from 2023’s peaks and facing a tougher comp at 20% YoY last Q1. Ad pricing increased 10% YoY, a 4 point acceleration from 6% a year ago.

The low impressions growth rate comes from broad-based geographic weakness:

US & Canada impressions growth was just 4%, down from 16% a year ago
Europe impressions growth was 5%, down from 12% a year ago.
APAC impressions growth was 9%, down from 28% a year ago.
Rest of World impressions growth was 1%, down from 17% a year ago.

US & Canada showed outstanding growth that carried rest of the regions. For next quarter, APAC will likely face some geopolitical ad spending risks from e-commerce clients despite returning to growth this past quarter.

US & Canada pricing increased 14% YoY, accelerating from 5% a year ago.
Europe pricing increased 9%, decelerating from 18% a year ago.
APAC pricing increased 3%, compared to a (3%) decline a year ago.
Rest of World pricing increased 17%, compared to 20% a year ago.

Meta’s Family of apps daily average people (DAP) increased 6% YoY to 3.43 billion, though average revenue per person (ARPP) recorded its slowest growth rate in at least six quarters at 10.4% YoY to $12.36.

Gross Margin Surpasses 82%, Operating Margin Dips Sequentially

Gross margin surpassed 82% in Q1, reaching its highest level since 2019 at 82.1%. Operating margin expanded 3.6 points YoY to 41.5%, though R&D expenses rose faster than revenue, increased 22% YoY to $12.15 billion, providing a slight headwind to margin upside.

It’s quite impressive that Meta can maintain operating margins >40% while still burning more than $4 billion/quarter on its Reality Labs division.

Meta also adjusted its operating expenses guide for the year, now seeing $113-118 billion in expenses, down $1 billion from its prior view for $114-119 billion. This slight decrease in operating expenses should provide a small tailwind to operating margin, assuming revenue growth does not decelerate dramatically.

Net margin also contracted sequentially as the high R&D weighed down the line. Net margin was 39.3% in Q1, expanding from 33.9% in the year ago quarter.

Sizable 23% EPS Beat in Q1

Meta reported a sizable earnings beat in Q1, with its $6.43 EPS beating the consensus estimate of $5.22 by over 23%. Q1 EPS grew 36.5% YoY, well ahead of the estimated 10.5% growth in the quarter.

Given the sheer size of the beat, YoY margin expansion and revenue guidance slightly above estimates for Q2, it’s likely that Q2 and FY25 EPS will be revised higher in the coming days. Q2’s EPS was expected to grow just 8.5% YoY to $5.60, while FY25 EPS was forecast to rise 3.7% YoY to $24.75 heading into Q1’s report. With the $1.22 beat, FY25’s estimate is likely to move back into the mid-to-high $25 range, or YoY growth in the high-single digits.

Operating Cash Flow Strong, FCF Impacted by Capex

Meta’s cash flow generation remained robust in Q1, with operating cash flow margin contracting only 1 point QoQ; however, free cash flow was impacted by Meta’s surging capex.

Operating cash flow was $24.03 billion in Q1, for a margin of 56.8%. OCF margin expanded nearly 4 points YoY.
Free cash flow was $10.33 billion in Q1, for a margin of 24.4%. This contracted 10 points YoY, from a 34.4% margin in Q1 2024, due to Meta’s surging capex.
Cash and marketable securities declined nearly 10% QoQ to $70.23 billion, as Meta spent $13.4 billion on share repurchases in the quarter.
Debt remained steady at $28.83 billion.

Capex Guide Boosted as Q1 Capex Surges 104% YoY

Capex was a key metric analysts were closely watching heading into Q1’s report, given that Meta was expected to see the highest YoY capex growth of Big Tech at 59% YoY, while fears of an AI spending slowdown have risen recently.

However, Meta squashed these fears, boosting its 2025 capex outlook as Q1 capex surged nearly 104% YoY to $13.69 billion. Meta now expects 2025 capex to accelerate 14 points to 73% YoY, raising its outlook to $64-72 billion, versus its prior view for $60-65 billion. At midpoint, this was a $5.5 billion increase.

Meta said the new outlook “reflects additional data center investments to support our artificial intelligence efforts as well as an increase in the expected cost of infrastructure hardware.”

Earnings Call Q&A:

United States Key Market for Meta AI:

Management was more open than usual in discussing their strategy around their standalone AI app. Primarily, they stated the near standalone app is aimed at United States users while the Meta AI integration with WhatsApp is popular with global users.

When pressed on how they plan to stand out given there are many AI apps, management stated something similar to our recent deep dive, which is that they plan to compete on personalization and context: “Right now, if the experience is unpersonalized, then you can kind of just go to different apps and get reasonably similar answers to different questions. But once an AI starts getting to know you and what you care about in context and can build up memory from the conversations that you've had with it over time, I think that will start to become somewhat more of a differentiator. So that's one thing that we think will matter.”

You can read more about Llama 4’s large context window here where it was stated: “Llama 4 Scout is cheap at $0.13 per million tokens according to Groq and can be deployed on a single H100 GPU, leveraging 16 experts. Scout can remember long threads and documents of up to 10 million tokens. This is the largest context window across LLMs available today.”

Management Shrugs off Impact from Tariffs

At the end of the call, Mark Mahaney attempted to push Meta’s management team to provide information on how the ad platform is being impacted by tariffs by specifically asking if auto was seeing softer ad spend at all. The CFO was careful to redirect, stating: “Mark, let me take your first question about other verticals. We generally saw healthy growth in most verticals in Q1. We did see some weakness in gaming and politics.”

Although subtle, I believe this answer was well-rehearsed and did not fully satisfy the important inquiry.

Earlier, the CFO stated this: “But our Q2 outlook reflects the trends we're seeing so far in April, which have generally been healthy. So it's very early. Hard to know how things will play out over the quarter and certainly harder to know that for the rest of the year.”

AI Coding Agents Will Reduce R&D Spend

The Mag 7 has taken a breather over the past few months and is largely lagging the broad market YTD. Some of this is because of massive capex spend, as the market is unsure of where the ROI will come from. However, I suspect Big Tech is already seeing massive productivity gains internally, which is why the bottom line continues to expand. As we saw tonight, EPS growth is outpacing revenue growth. This can be achieved by using AI to replace engineers, marketing and HR departments, for example. The first companies to replace humans with AI will naturally be the Mag 7 as they are far ahead in the AI race compared to enterprise companies.

There were hints on the call as to when the impact will be seen: “So I'd say it's basically still on track for something around a mid-level engineer kind of starting to become possible sometime this year, scaling into next year. So I'd expect that by the middle to end of next year, AI coding agents are going to be doing a substantial part of AI research and development. So we're focused on that.”

Conclusion:

Meta is supposedly no longer in the year of efficiency and is now in the year of AI, according to management. However, the efficiency is remarkable yet again this quarter. Although the company is decelerating from high growth in the past, the company has a big year ahead with ad improvements resulting in higher ad pricing, Meta AI standalone app recently launched (to be monetized next year), and its Llama 4 models, which are open source yet driving important productivity gains internally. Undoubtedly, the company has a lot of data for personalization and a highly engaged audience, marking two competitive advantages over other AI chatbots.

The company can certainly be affected by tariffs, which is something all investors must weigh. Management offered no help in that regard, but one can safely assume the longer we see elevated tariffs, the lower consumer spending will be, and in turn, the lower ad spending will be. We will monitor this as we go along.

Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.

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