Meta Platforms:Quarterly Results/2023 Q2

See also: Meta Platforms:Quarterly Results/2023 Q1 | Meta Platforms:Quarterly Results/2023 Q3 | Meta Platforms | Meta Platforms:Quarterly Results | Earnings Season:2023 Q2 | Meta Platform News | InvestmentWiki Meta Platforms Expectations

Forum: Q2 2023 Meta Platforms Earnings

Things to be checked

• Ad sales in Q2 2023.
• Revenue: Did it beat management/analysts guidance?
• Guidance for the next quarter below or above analysts estimate?
• Earnings per share(EPS): Did it beat management/analysts guidance?
• Daily/monthly active users.
• Capital expenses: Is operating expenses for 2023 still in play?
• Reality Labs losses.
• Performance of its Advantages+ AI. Is it compensating for the losses incurred due to Apple's policy change?
• Improvement in Reels
• Zuckerbergs comments on TikTok.
• Performance of Meta Verified.
• Comments on Threads.

Results

Here is a summary of Q2 2023 earnings results.

• Revenue grew by 11% y/y to $31.999 billion, above analysts estimate of $31.08 billion and in-line with management upper guidance of $32 billion.
• EPS was $2.98, above analysts estimate of $2.91.
• Operating margin was 29%, below analysts estimate of 30.4%.
• Facebook daily active users(DAUs) was 2.06 billion versus 2.03 billion estimate.
• Monthly active users(MAUs) was 3.03 billion versus 3 billion expected.
• Average revenue per user(ARPU) was $10.63 versus $10.22 expected.
• Reality labs operating losses was -$3.739 billion, above analysts estimate of $3.68 billion. Meta expects these losses to increase meaningfully y/y due to ongoing product developments in AR/VR.
• Q3 revenue guidance: $32 billion-$34 billion versus $31.3 billion estimate.
• FY2023 total expense guidance: Range raised to $88-91 billion from $86-90 billion due to legal-related expenses in Q2 and $4 billion restructuring costs.
• FY2023 capital expenditures guidance: Range lowered to $27-30 billion from $30-33 billion due to cost savings, particularly on non-AI servers and shifts in investments to 2024.

Earnings Call Summary

Here is a summary of the earnings call;

Revenue, Capex, Outlook

The reasons for revenue acceleration in Q2 are(Q&A);

• Lapping of a weak quarter due to Ukraine war and suspension of surfaces in Russia.
• Increase supply and improvements of ad performance, including improved Reels monetization.
• Lower FX headwinds in the quarter.

They expect capex in 2024 to be higher in 2023 due to increase in investments for data centres and servers as well as on non-AI workloads(Q&A).

Expect Q3 revenue to grow by 20% y/y at the midpoint because Q3 2022 declined by 4.5% y/y and have seen demand stabilize this year. Also, they expect a 3% fx tailwind compared to a 1% fx headwind in Q3 2022(Q&A).

In Q4, they expect FX tailwind to be much more than they are expecting in Q3. Also, there will be lapping of a weak quarter in Q4(Q&A).

Year of Efficiency

• Zuckerberg said he will continue running the company as lean as possible even though financials have improved(MR).
• They will continue hiring in key areas though budgetted headcount growth is low(MR).
• Many teams laid off people in order to hire new skills and that will spill over to 2024(MR).
• Don't have correct budget figure for AI capex(until 2024) since they don't know how their AI products will grow(MR).

AI Products

• Contents from accounts which you don't follow, which are recommended by its AI, is now the fastest growing content category in Facebook Feeds(MR).
• AI recommended content have driven a 7% increase in overall time spent on the platform since their launch(MR).
• Reels plays have exceeded 200 billion per day in Facebook and Instagram(MR).
• Reels annual revenue run-rate crossed $10 billion, up from $3 billion last fall(MR).
• Three-quarter of Meta Platforms advertisers now use Reels ads(MR).
• Almost all Meta Platforms advertisers are using at least one of its AI-driven products(MR).
• Meta launched Meta Lattice, an architecture that learns to predict an ad's performance using different data sets and optimization goals(MR).
• Meta also introduced AI Sandbox, a testing play ground for AI tools such as automatic text variation, background generation and image outcropping(MR).
• Even though earlier, paid messaging is showing great adoption as the number of businesses using it doubled year-over-year(MR).
• Zuckerberg said there are three basic features that they plan on building with generative AI and they include AI Agents, AI products to make advertising seamless and features to improve their internal efficiencies(Q&A).
• They continue to expect Reels monetization to develop more slowly than Feed and Stories into the foreseable future because users scroll more slowly on Reels(MR).
• Open sourcing their Llama 2 model will likely result in more innovations, more security and safety features, more efficiency and skilled talent(Q&A).
• Partnered with Microsoft (regarding Llama) because they have a public cloud offering, which they don't plan on building(Q&A).
• Their partnership with Microsoft and more companies in future will generate more revenue for Meta though not much in the near term(Q&A).
• CFO Susan Li said that Llama is not going to result in a seperate topline enterprise revenue(Q&A)
• Zuckerberg said the scale of adoption of Llama spurred them to develop Llama 2(Q&A).

Advertising

• Online commerce vertical contributed the largest y/y growth to revenue due to strong spend by Chinese advertisers trying to reach new markets. It was followed by entertainment and media and CPG(MR).
• Ad impressions increased by 34% while price per ad declined by 16% (MR).
• Growth in impressions was mostly in lower monetizing surfaces and regions(MR).
• Daily Click-to-Whatsapp ads revenue grew 80% y/y(MR).
• Have gotten positive feedback from Advantage+ users(Q&A).

Regulatory Environment

• The new EU-US trans-atlantic data transfer agreement was good news to them(MR).
• They continue to see increasing legal and regulatory headwinds in the EU and the US that could impact its financial results(MR).

Reality Labs

• Quest 3 to come up this fall at connect event(MR).
• Quest 3 will have 2x graphics and will be 40% thinner(MR).
• They will continue investing in Reality Labs because they believe they will continue to be leaders in the space(Q&A).

Threads

• Zuckerberg said they are seeing more people coming back than he had expected(MR).
• They are now focused on retention and improving the basic features and once that is done, they will grow the community to scale they think is possible and start monetizing it(MR).
• Zuckerberg said Threads was built by a small team on a tight budget(MR).

Management Guidance and Analysts Expectations

Management Guidance

Number of shares outstanding at the end of Q1 2023: 2.587 billion.

Key Items	Lower-point	Y/Y growth	Mid-point	Y/Y growth	Upper-Point	Y/Y growth
Q2 2023 Revenue	$29.5 billion	2.35%	$30.75 billion	6.69%	$32 billion	11.03%
2023 Total Expenses	$86 billion	-1.89%	$88 billion	0.39%	$90 billion	2.67%
2023 Capital Expenditure	$30 billion	-6.4%	$31.5 billion	-1.7%	$33 bilion	3.0%

• The company expects Reality Labs operating losses to increase year-over-year in 2023.
• Management forecasts foreign exchange headwind in Q2 to be less than 1% to year-over-year total revenue growth.
• Forecasts restructuring costs of $3-$5 billion related to facilities consolidation charges and severance and other personnel costs.

Analyst Expectations

Bloomberg

Key Items	Estimate	Y/Y growth
Q2 2023 Revenue	$31.08 billion	7.74%
Q2 EPS	$2.91	18.5%
Q2 Adjusted Net income	$7.459 billion	-4.77%
Advertising Revenue	$30.43 billion	8.1%
Family of Apps Revenue	$30.55 billion	7.7%
Reality Labs Operating Losses	$3.68 billion	31.1%
Facebook Daily Active Users	2.03 billion	3%
Operating Margin	30.4%

• Operating margin is expected to be 30.4% versus 29% in Q2 2022 and 25% in Q1 2023.

Seeking Alpha

Key Items	Estimate	Y/Y growth	Up Revisions	Down Revisions
Q2 2023 Revenue	$31.02 billion	7.64%	37	0
Q2 EPS	$2.88	17.20%	20	2

Forex.com

Key Items	Estimate	Y/Y growth
Reality Labs operating Loss	-$3.7 billion	+32%

Cost savings projections from headcount reduction.

• Argus Research Senior Securities Analyst Joseph Bonner: "This is a 24% cut. So it's a big cost cutting measure to save about $8 billion on their 2023 expense projections."
• Morgan Stanley analyst Brian Nowak: "We estimate that a 10% reduction in the 2Q:22 ~$18.5 billion run rate operating expenses (excluding depreciation and amortization) would imply ~$5 billion of annual operating expense savings in 2023. We arrive at this by reducing the 3Q operating expense base by $1.8 billion then assume 4Q:22/'23 opex grows in line with our current sequential opex forecast." Nowak noted that Opex savings of $3B to $8B adds up to an incremental 43 cents to $1.99 a share in 2023 earnings.
• JP Morgan analyst, Doug Anmuth believes the 10,000 headcount reduction last year could result in $8 billion annual cost savings. “We view the headcount reduction favorably in light of Meta’s slowing revenue growth and significant hiring increases over the last several quarters. Based on 2022 expenses per employee estimates, the headcount reduction could theoretically remove around $8 billion of costs on an annualized basis,” said Anmuth.
• Stone Foxe Capital, Seeking Alpha: "Just cutting 11,000 employees at an average cost of $150k would cut $1.65 billion in wage and benefits alone. Meta can probably reduce costs by another $5 billion annually by slashing those employee counts."

Analysts Commentaries

Analyst stance on the stock

https://www.ig.com/uk/news-and-trade-ideas/nasdaq-100--metas-share-price-and-q2-earnings-results-preview-230720?utm_source=twitter&utm_medium=organic_social&region=uk&product=multiple_markets&utm_marketing_tactic=awareness&utm_creative_format=text_link&utm_content=news

Analysts comments

Youssef Squali, Truist Securities

• Raised Meta price target to $340 from $265 and maintained buy rating.
• He cites continued recovery in ad spending in Q2 and expectations for continued acceleration in the second half as reasons for the tweaked estimates.
• He added that management's focus on operating efficiency should boost margins despite investments in AI and Machine Learning.
• Squalli also pointed to resilience in engagement.

John Blackledge, TD Cowen

• Raised Meta Platforms price target to $345 from $220.
• "TD Cowen Proprietary 2Q23 Social Survey Data through June '23 shows modest [year-over-year] engagement improvement at Instagram and Core Facebook," he wrote. "Respondents once again indicated rising usage of IG Reels, suggesting that Reels could be a driver of incremental time spent on Instagram."
• He noted that his digital ad check for Q2 was positive for Meta.
• He noted that there is a potential for further monetization of Reels through image based overlay ads that launched on Instagram at the end of June.
• Blackledge sees Q2 revenue and earnings beating Wall Street estimates.
• He raised his forecaset revenue and earnings forecast for the next 5 years by 8% and 7%, respectively.
• On monetization of Threads, he said, "We do not have any potential Threads rev. in our current Meta forecast, but if the service attracts further users and engagement, we expect Meta to start to monetize the app."
• Blackledge was bearish on Meta in Q1 2023.

Stephen Ju, Credit Suisse

• Raised Meta Platforms price target to $361.00 from $277.00 and maintained outperform rating.
• He also raised FY23 and FY24 adjusted EPS to $18.40 and $20.97, respectively, from $18.28 and $19.26.
• The GAAP EPS estimates for FY23 and FY24 now stands at $11.79 and $14.67 from the previous $11.63 and $13.31.
• Ju forecasts 2024 revenue growth of $12.7 billion.
• Ju noted that there is acceleration in growth of ad budget.
• He forecasts FX-neutral advertising revenue growth of 12.7% in Q2, with acceleration expected in Q3.
• Like in previous quarters, Advantage+ continues to offset signal loss.

Andrew Boone, JMP Securities

• Raised Meta Platforms price target to $350 from $300 and maintained outperform rating.
• His estimate is based on strong engagement trends, growing ad performance driven by AI, and stabilizing advertisinfg environment.
• He believes the company is in initial stages of benefiting from multiple product catalysts such as Reels, AI and cost discipline.

Goldman Sachs

• Raised Meta Platforms price target to $335 from $300 and maintained buy rating.
• They cited signs of improvement in the digital advertising market.
• Regarding the performance of digital advertising in each industry, they noted, "There continues to be a large bifurcation in performance by ad vertical dependent upon the macro environment and consumer demand (incl. for goods vs. services). We continue to see sustained strength within travel, local and omnichannel retail. In addition, the more interest rate-sensitive verticals (including. autos, housing, & financial services), while still under pressure on an absolute level, have proven to be relatively more resilient vs. our expectations in Q2. According to data from Pathmatics, US ad impression growth across Facebook and Instagram continues to be strongest within the retail, travel & CPG categories vs. continued pressure (on an absolute basis) within financial services (a continuation of trends seen in the first quarter of 2023 and the fourth quarter of 2022."

Morgan Stanley

• Raised Meta price target to $350 from $300 citing that the company could integrate AI tools to its applications, resulting in more revenue.
• "We fully expect META to integrate new large language models into its applications to drive new capabilities for users and advertisers, but changing behavior and material success are less certain, and online advertising doesn't have to be zero-sum," they said.

Ronald Josey,Citi

Maintained buy rating on Meta Platforms and raised price target to $360 from $315 while pointing out that;

• Though Instagram’s app downloads were around 12% below that of TikTok this quarter, its monthly active users rose 6% year over year versus a 4% gain in TikTok’s users.
• Growth in time spend per active users of Instagram has outpaced TikTok for a 7th consecutive month.
• Reels ad-load has hit 17% quarter-to-date and 18% this month.
• He believes advertising market is now “stable-to-improving”.
• Josey believes advertising revenue will grow by 14% year over year in 2024 and Reels will account for around $10.5 billion in ad revenue.

Piper Sandler

• On June 14, Piper Sandler analysts raised Meta Platforms price target to $310 from $270 and gave it an overweight rating.
• "We are now more confident in META's re-acceleration and raise 2H23 revenue & out-year estimates," they wrote. "Our Ad Metrics data suggests pricing is weaker, but spend is holding up. Our view: we think META is ramping Reels inventory faster than anticipated."
• "META is just now beginning to re-gain market share after ~2 years of declines. We think AI investments, new product growth (Reels), TikTok issues, and ad-tech investments set the stock up well for 2H23 & into '24. We raise 2H23E revenue by ~$480MM and '24E by ~$1.9BN," they added.

Seeking Alpha

1. "The problem for any current or prospective Meta shareholder is that, while the business appears to be in the early stages of a turnaround, its shares look to have fully completed their recovery," said SA author Jamie Galvin.
2. "It would take a stellar Q2 2023 earnings report to reward shareholders, but with the rollout of a new high-margin revenue stream in Meta Verified, a stellar report is not out of the question," Jamie Galvin.

Insights

William Blair Q2 2023 survey

• Digital ad market is still soft, but the macro is not as volatile, leading to a slow rebound in digital ad spend, the survey report noted.
• The tone was generally more positive for performance of digital advertising spend, especially for social budgets, the report added.
• 57% of respondents said their second quarter budgets had increased sequentially.
• Majority(57%) of the respondents said macroeconomic environment improved in the second quarter compared to the first quarter. "Of this 57%, 76% indicated that the improving macroeconomic environment drove an increase in budgets in the second quarter."
• The report noted that the "vast majority of budgets across social, search, and video were either on plan or up relative to expectations. For budgets that were up, the average increase in budgets was roughly 7% (compared with an average decrease in budgets of roughly 9%)."
• The report surveyed 30 digital ad buyers in order to establish the near-term spending trends.
• It also surveyed three digital advertising industry participants that spend a total of $1 billion in digital advertising.

Revealbot CPM insights

• Facebook average CPM has been declining month over month during the quarter.
• Instagram average CPM has also been declining month over month during the quarter.

Month	Facebook			Instagram
	CPM	M/M Growth	Y/Y Growth	CPM	M/M Growth	Y/Y Growth
April	$10.35	-11%	-19%	$9.05	-11%	-15%
May	$8.99	-15%	-26%	$8.52	-6%	-25%
June	$8.77	-2%	-31%	$8.55	0%	-25%
July	$8.72	0%	-29%	$8.17	-4%	-26%

Gupta Insights

• Gupta data compiled by Goldman Sachs points to an imrovement in CPMs in Q2, with Q3 looking more romising.

TipRanks facebook.com website traffic

• facebook.com website traffic grew 20% year-over-year to 12.01 billion.
• facebook.com website traffic decined 7.67% quarter-over-quarter.

Competitor Results and Analysts Expectations

Snap

Results

• Snap revenue came in $1.07 billion(-4% y/y) versus $1.05 billion estimate.
• Global Daily Active Users(DAUs) came in 397 million versus 394.9 million expected.
• Snap is guiding for third quarter revenue of between $1.07 billion and $1.13 billion versus analysts estimate of $1.13 billion.

Management Guidance

Management did not provide guidance for the second quarter.

Analysts Estimates

Key Items	Estimate	Y/Y Growth
Revenue	$1.05 billion	-5.7%
EPS	-$0.04	-100%

Pinterest

Management Guidance

• "Our current expectation is that Q2 revenue will grow roughly in-line with the growth we saw in Q4 2022 and Q1 2023. We expect our Q2 non-GAAP operating expenses to grow low teens on a percentage basis quarter-over-quarter," the management said in the press release.
• Its revenue grew 5% year-over-year to $603 million in Q1 2023.
• Regarding monthly active user trends, its CFO Todd Morgenfeld said, "Q2 is our seasonally softest quarter as people tend to travel and spend more time outside starting in June. This is particularly pronounced for us as we measure monthly active users on a 30-day look back from the last day in June."
• CFO Todd noted that they still don't have visibility into an acceleration in ads demand.
• Still expect a small impact in Q2 from foreign currecy headwind.
• When asked to describe the current state of the ad market last month, CEO Bill Ready said, "Well, I mean, what I would say is, like, I think it's hard to predict the macro. I think the ad market still has spots. There are bright spots in the ad market, I think there are other parts of the ad market that are challenged. So there's, sort of, still puts and takes across those."

Analysts Estimates

Key Items	Estimate	Y/Y Growth
Revenue	$695.68 million	4.47%
EPS	$0.12	9.09%

• Mark Mahaney, Evercore analyst, upgraded Pinterest to outperform with a price target of $41 on July 18, 2023. Mahaney said that Pinterest is at an "inflection point" as digital advertising spending stabilizes.
• Analyst Justin Patterson of Keybanc also raised Pinterest price target from $32 to $35 as he sees improvements in the digital advertising market.

Alphabet

Results

• Google ad revenue was $58.14 billion(+3.3% y/y) versus $57.45 billion(+2.06% y/y) estimate.
• YouTube advertising revenue grew by 4.43% to $7.665 billion, above analyst’s estimate of $7.43 billion(or 1.22% y/y growth).
• Revenue grew by 7% y/y to $74.6 billion, also above analyst’s estimate of $72.82 billion.
• "And in YouTube, we saw ongoing signs of stabilization in advertiser spending," Ruth Porat ,Chief Financial Officer said.

Management Guidance

• Expects less foreign exchange headwinds in Q2 on current spot rates.
• CFO Ruth Porat noted that the "first quarter reflected ongoing headwinds due to a challenging economic environment and the outlook remains uncertain."

Analysts Estimates

Key Items	Low	Y/Y	Medium	Y/Y	High	Y/Y
Revenue	70.69	1.44%	72.82	4.5%	74.33	6.6%
EPS			$1.34	9.1%