Note: The I/O Fund is covering Big Tech more closely than usual this earnings season given the narrow leadership of the market. The Magnificent 7 is holding the market up with 78% combined YTD returns. Therefore, these particular companies carry importance for all tech investors whether we own them or not. Also, we track capex as a proxy for AMD and Nvidia. You can read our past analysis on this here.here.
Meta Q3 earnings report beat the top-line and bottom-line estimates along with strong ad impressions growth and cash flows. Operating margin rose to the highest level since Q2 2021. However, the mid-point of the revenue guidance missed analysts’ consensus estimates.
Founder and CEO Mark Zuckerberg had earlier this year announced in the Q4 2022 earnings call that 2023 is the ‘Year of Efficiency.’ This was in continuation of the restructuring of teams and capex reduction initiatives undertaken in 2022. This had led to price action of 140% YTD, yet has also set the company up to report perfection as this price action is unusually strong. The bottom line has expanded, yet where the market is a touch nervous is due to comments from the CFO. Primarily, this comment caused the price action to reverse:
"We've reflected the latest trends and advertiser reaction that we've seen into our Q4 outlook, which again, we think, reflects the greater uncertainty and volatility in the landscape ahead.” And later, the CFO said: "Thanks, Doug. We obviously have not shared a 2024 revenue outlook yet. You asked about what are some of the significant puts and takes, and I'd maybe point back to what I said earlier about the Q4 outlook just to highlight what a volatile macro environment we believe we're in. I think that will obviously have a big impact on the advertising market next year, and it's something we'll be keeping a very close eye on. But ultimately, we're very subject to volatility in the macro landscape. […] We'll also be obviously lapping stronger periods, especially in — as you saw with this quarter's results. So all of those factors, I think, will play into the 2024 revenue outlook."
Revenue and EPS
- The company’s revenue grew by 23% YoY and 21% on constant currency basis to $34.15 billion.
- EPS rose 168% YoY to $4.39 and beat estimates by 19.1%.
Margins
- Operating income rose 143% YoY to $13.75 billion.
- Operating margin rose to the highest level since Q2 2021, reaching 40.26%. That compares to 29.35% in Q2 and 20.44% in Q3 last year. It was helped by 7% decline in costs and expenses.
- Net income rose 164% YoY to $11.58 billion. Net margin came at 33.9%, compared to 24.3% in Q2 and 15.9% in Q3 last year.
Cash Flows and Balance Sheet
- Operating cash flow was strong: +110.5% YoY to $20.4 billion; YTD OCF was up 43.8% YoY to $51.7 billion.
- Free cash flow also was strong: $13.64 billion for Q3 compared to $0.17 billion a year ago; YTD FCF was up 139.6% YoY to $31.5 billion. The cash flows also benefitted from deferral income taxes that was paid in Q4.
- The company has cash and marketable securities of $61.1 billion and debt of $18.4 billion. It repurchased $3.7 billion of shares in the recent quarter.
Key Metrics
- Family Daily Active People (DAP) continue to grow and was 3.14 billion on average for September 2023, up 7% YoY. Family Monthly Active People (MAP) was 3.96 billion as of September 30, 2023, up 7% YoY.
- Facebook Daily Active Users (DAUs) continue to grow and was up by 5% YoY to 2.09 billion. Monthly Active Users (MAUs) grew by 3% YoY to 3.05 billion.
- Ad impressions remained strong at 31% YoY growth and recorded a second straight quarter of over 30% growth. Average price per ad decreased by (6%) YoY.
Outlook
The management revenue guidance for the next quarter is $36.5 billion to $40 billion, representing a YoY growth of 18.9% at the midpoint. However, the mid-point missed the analysts’ consensus estimate of 20.95% YoY growth to $38.90 billion. This is why the CFO’s comments about relating Q4 to FY2024 had an outsized reaction — the CFO was basically saying more of the same could continue (what we quoted in the intro of this analysis), which translates to the potential for a miss on revenue in FY2024.
CFO Susan Li replied to an analyst question in the earnings call regarding the recent geopolitical tensions impact on the ad business. “Now in terms of how this translates into impact on the Q4 business, first of all, I should say that coming into Q4, we've been seeing continued strong advertiser demand in key segments, including online commerce and gaming. But having said that, we are also seeing more volatility at the start of the quarter. That's in part why we widened our guidance range to capture that uncertainty. And so for instance, while we don't have material direct revenue exposure to Israel and the Middle East, we have observed softer ad spend in the beginning of the fourth quarter, correlating with the start of the conflict, which is captured in our Q4 revenue outlook.”That's in part why we widened our guidance range to capture that uncertainty. And so for instance, while we don't have material direct revenue exposure to Israel and the Middle East, we have observed softer ad spend in the beginning of the fourth quarter, correlating with the start of the conflict, which is captured in our Q4 revenue outlook.”
The management lowered the 2023 total expenses guidance to the range of $87 billion to $89 billion from $88 billion to $91 billion. However, they expect higher 2024 total expenses in the range of $94 billion to $99 billion. The increase in expenses is due to higher depreciation expenses and higher costs to operate larger infrastructure. They also expect payroll expenses to rise as they look to add talent in priority business areas. Reality Labs operating losses are expected to increase YoY due to the ongoing product development efforts.
The management lowered the upper range of the 2023 capex. It is expected to be $27 billion to $29 billion from the earlier estimate of $27 billion to $30 billion, representing a YoY decline of (12.6%) at the mid-point. However, they expect higher capex for the next year in the range of $30 billion to $35 billion, representing a YoY growth of 16.1% at the mid-point. The CFO said in the earnings call, “With growth driven by investments in servers, including both non-AI and AI hardware, and in data centers as we ramp up construction on sites with the new data center architecture we announced late last year.”
Conclusion
The company’s earnings report was good, with the top-line and bottom-line beat, strong ad impressions growth, and cash flows. However, the revenue guidance disappointed, along with the management’s comments on the macro uncertainty that might impact the advertising market next year. If growth normalizes while costs go up, overall, Meta faces a tougher 2024 and was priced to perfection, up 140% YTD.
Royston Roche, Equity Analyst at the I/O Fund, contributed to this analysis.
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