Three Key Questions About Meta Platforms’ (NASDAQ: META) Earnings in July 2023

Meta Platforms (NASDAQ: META) released Q2 2023 earnings after the close on July 26, 2023. Based on updates from the company’s earnings release and call, here are our three key questions.

Key Takeaways

• Reality Labs’ losses will increase year over year in 2023 and meaningfully in 2024.
• Sales guidance for Q3 exceeded expectations and suggests that 2023 analyst estimates may need to be revised up.
• Facebook International’s significantly lower ARPU level vs. U.S. ARPU presents an opportunity for further monetization.

1. How will Meta’s focus on efficiency impact Reality Labs?

Q2 operating profit: In Q2, Meta delivered $9.4 billion in operating profit, in line with Visible Alpha consensus expectations of $9.5 billion. The Q2 OpEx of $21.6 billion was in line with the $21.7 billion expected by analysts.

Revised 2023 OpEx guidance: Meta guided to $88-91 billion in total expenses, an increase from the previous guidance of $86-90 billion, but still below the range of $89-95 billion announced after Q4. The initial 2023 guidance given early in the year was $94-100 billion, highlighting how much this number has been moving around.

The consensus estimate for OpEx was $88 billion prior to the release, in line with the guidance levels and estimated OpEx levels of $45 billion for H2. Meta expects payroll expenses to increase as the workforce moves toward more higher-cost technical roles to support its AI investments.

Increased losses at Reality Labs: The company expects Reality Labs’ operating losses to increase meaningfully year over year in 2024 as the company focuses on its product development efforts in augmented reality / virtual reality. Prior to the release, analysts expected -$15.2 billion in losses from Reality Labs, up 11% year over year from 2022 levels of -$13.7 billion. However, the most conservative analyst forecasted -$17.5 billion, a 28% increase in losses year over year for 2023. In 2024, analysts are not in agreement about the level of losses from Reality Labs going forward. While the consensus estimate is -$17.8 billion, analyst forecasts for Reality Labs show a significant range from -$14 billion to -$22 billion in losses for 2024.

Reality Labs is a meaningful drag on the company’s total operating profit margin with little visibility into when this drag will improve. However, expectations have continued to increase. After Q1, analysts expected $33 billion in 2023 operating profit, but prior to the Q2 release analysts projected $39 billion and a margin of 31%, driven by revisions to sales and OpEx during Q2. Given the new guidance and easy Q3 year-over-year comps, the revisions are likely to continue in H2 and may provide some momentum to fundamentals.

As of the time of the Q2 release, Meta’s operating profit margin is still off previous 2019 levels of 34%, compared to the 31% expected for 2023. Visible Alpha consensus is now projecting Meta’s margin to return to 34% in 2024. However, the company may choose to keep margins flat at 31% in 2024 as it increases expenses at Reality Labs.

2. How will ad sentiment shake out for the EU, APAC and the U.S.?

In Q2, total revenue came in at $32 billion, ahead of the $31 billion expected, driven by solid ad revenue growth. Ad revenues outperformed for all international segments, beating analyst estimates. International performance was ahead of expectations at $17.5 billion (vs. $16.8 expected) in Q2, with ROW leading. The U.S. and Canada performance was in line with expectations at $14.4 billion (vs. $14.3 billion expected) in Q2.

Ad revenue growth outlook: The company guided Q3 revenues to be $32-34.5 billion, ahead of the $31 billion expected by analysts, driven by a 3% FX tailwind. Sales guidance for Q3 exceeded expectations and suggests that 2023 estimates may need to be revised up. It is worth noting that Q3 2022 was particularly weak, making the comp easy.

In 2023, META’s ad revenues are projected to show only a 5% increase year over year to $126 billion, excluding FX. However, with FX impact, ad revenue is expected to grow to $129 billion, up 10% year over year. These numbers are likely to be revised upward, given the company’s new Q3 revenue guidance. Consensus is maintaining positive ad revenue growth for all geographies for the remainder of 2023 and for 2024.

3. Where will CapEx start to have an impact?

While the company plans to focus its investments on AI and the metaverse, Meta lowered its CapEx guidance to $27-30 billion from $30-33 billion due to cost savings and project delays in 2023, down significantly now from Q4 levels of $34-37 billion. This CapEx will likely shift and grow in 2024, as the company plans to further invest in infrastructure for AI and monetization.

CapEx ranges: For 2023, the CapEx estimates range has narrowed from $29.4-34.2 billion to $30.2-32.8 billion, implying increased agreement among analysts. However, for 2024, there is debate among analysts. The divergence in expected CapEx remains significant – from $25-37 billion.

Monetization: Facebook users overseas may be a positive going forward. Facebook ARPU for the U.S. and Canada was up quarter over quarter and year over year to $53.53 in Q2, while international markets remain well below that level, diluting the worldwide ARPU to $10.63.

In addition, Threads has had a strong start, but CEO Mark Zuckerberg noted that the company is not currently focused on monetization, but that there has been progress monetizing Reels. Can these investments in AI and monetization help drive higher Facebook ARPU outside the U.S. going forward?

CapEx as a percentage of sales: Back in the spring at the Morgan Stanley TMT conference, Meta noted that their CapEx/sales ratio would be coming down. Based on the lower CapEx and higher revenue trajectory, the trend is likely to continue in 2023. CEO Mark Zuckerberg called out Meta’s upcoming Connect conference planned in late September. He said that the company will highlight more details on the new product innovations, which may provide some direction of travel for 2024.

Based on Visible Alpha consensus forecasts earlier in the year, 2023 CapEx as a percentage of sales was expected to be 25.8% and is now projected to be 22%. With revenue forecasts remaining upbeat and a debate about CapEx levels, there is a significant range of estimates among analysts that make up the Visible Alpha consensus for 2024. Consensus forecasts indicate this ratio ticking back up to 23% for 2024. It will be interesting to see how and at what level this ratio bottoms out, but based on Visible Alpha consensus data, it looks like 2023’s ratio levels may be the trough.

References:

https://investor.fb.com/investor-events/event-details/2023/Morgan-Stanley-2023-Technology-Media–Telecom-Conference/default.aspx

https://investor.fb.com/investor-news/press-release-details/2023/Meta-Reports-Fourth-Quarter-and-Full-Year-2022-Results/default.aspx