Meta Platforms:Quarterly Results/2023 Q3

Return to: Sheet:Meta Platforms | Earnings Season:2023 Q3 | Meta Platforms:Quarterly Results/2023 Q2

Things to watch

• Comments on the digital advertising market, especially following Israel-Gaza war.
• Ad-free version in Europe.
• Reels monetization.
• AI opportunity.
• Q4 revenue guidance.
• 2024 outlook.
• Reality Labs losses

Results

• Revenue grew 23% y/y to $34.15 billion, above analysts estimate of $33.4 billion (+20.6%), and above management midpoint guidance ($32 billion-$34.5 billion).
• EPS was $4.39, beating expectations for $ 3.57 while operating margin rose to 40% from 20% in Q3 2022.
• Facebook DAUs rose 5% y/y to 2.09 billion, topping expectations for 2.07 billion, Facebook MAUs rose 3% to 3.05 billion, in-line with estimates, Family daily active people (DAP) rose 7% to 3.14 billion, exceeding expectations for 3.09 billion and Family monthly active people (MAP) rose 7% to 3.96 billion versus 3.88 billion expected.
• Meta is guiding revenue of $36.5-40 billion in Q4 2023 (expectations: $38.7 billion), is lowering full-year 2023 total expenses and capex to $87-89 billion from $88-91 billion and $27-29 billion from  $27-30 billion, respectively.
• Meta is also guiding full year 2024 total expenses to be in the range of $94-99 billion (expectations: < $100 billion).

• Ad impressions rose 31%, above 29.6% estimate while average price per ad fell 6% versus 9% estimate.

Management guidance and analysts estimate

Management guidance

Below is the management guidance for third-quarter and full year 2023 given during second-quarter earnings;

• Number of shares outstanding at the end of Q1 2023: 2.568 billion.
• Management expects FX tailwind of about 3% year-over-year revenue in Q3.
• 2023 total expenses includes around $4 billion of restructuring costs associated with severance and other personnel costs and facilities consolidation charges.
• Management expects Reality Labs operating losses to increase year-over-year in 2023.

Key Items	Q3 2023						2023
	Lower-point	Y/Y Growth	Mid-Point	Y/Y Growth	Upper-point	Y/Y Growth	Lower-point	Y/Y Growth	Mid-Point	Y/Y Growth	Upper-point	Y/Y Growth
Revenue	$32 billion	15.5%	$33.25 billion	20.0%	$34.5 billion	24.5%
Total expenses							$88 billion	0.4%	$89.5 billion	2.1%	$91 billion	3.8%
Capex							$27 billion	-15.7%	$28.5 billion	-11.0%	$30 billion	-6.4%

• For 2024; management expects higher infrastructure-related costs, growth in payroll expenses, and Reality Labs operating losses to increase meaningfully year-over-year.

Analyst estimates

Proactive

• According to Proactive, market watchers have set the following estimates for Meta Platforms third-quarter earnings;

Key Items	Q3 2023 estimate	Y/Y Growth	2024 estimate
Revenue	$ 33.4 billion	20.6%
EPS	$ 3.57	117.7%
Daily active users	2.07 billion	3.8%
Monthly active users	3.05 billion	2.1%
Ad revenue	$ $32.37 billion	18.8%
Total expense guidance			$ 100 billion
Capex guidance			$ 35 billion	21%

Seeking Alpha

Key Items	Q3 2023 estimate	Y/Y Growth	UP revisions in the last three months	Down revisions in the last three months
Revenue	$ 33.43 billion	20.6%	36	0
EPS	$ 3.60	119.5%	23	1

Visible Alpha

Key Items	Q3 2023 estimate	Y/Y Growth	Q4 2023 estimate	Y/Y Growth
Revenue	$ 33.5 billion	20.9%	$ 38.7 billion	20.2%
Family of Apps operating income	$ 15.5 billion	66.7%	$ 19.2 billion	79.4%

Analyst Opinions

User engagement

• Jefferies (Oct.19) expects Meta to report high engagement due to its AI advancements, saying that third-party data indicates total time spent on Instagram grew 37% year-over-year in September. “We believe investors will react positively to commentary on deepening Reels engagement, improvements to measurement, strong Click to Messaging ad growth and the China advertiser tailwind,” Jefferies analysts wrote.

• According to a Morgan Stanley (Oct.17) survey of 2,000 Americans, 79% of Instagram users now use Reels, up from 74% in May, and 36% are using Reels daily, up from 34%. Similarly, 69% of Facebook users now use Reels, up from 65% in May, and 30% use Reels daily, up from 27%. Morgan Stanley analysts said the growth in Reels engagement could push earnings to $20 per share in 2024. They added that their conversations with advertisers point to an incremental ad scaling for Reels.
• Citi analysts said Reels ad loads improved during the quarter (Sep.22). “With Reels ad loads reaching 19% QTD vs. 17% in 2Q per our proprietary tracking, coupled with newer ad units, greater advertiser demand, and what we believe is an improving online advertising environment, we believe Meta is taking share of the broader online advertising market.” “Our tracking suggests ad loads expanded to 18% in July, 19% in August, and ~20% in September and given our view that the leading SFV platform ad load is closer to mid-20%, we believe there remains upside as engagement grows and Reels’ Lo-Fi ad environment attracts more advertisers.”

Q3 results and future outlook

• Jefferies (Oct.19) thinks that if management reports revenue growth below 20% in the third-quarter or give guidance for fourth-quarter that doesn't reflect acceleration, investors would react negatively. “Expectations are high with Street calling for Meta to grow revenue about 20% year-over-year in the third quarter which would be the fastest growth since 3Q 2021,” they wrote.

• Jefferies (Oct.19) also thinks that if Meta give total expense guidance for 2024 that exceeds $100 billion (their projection), it may lead to a downside in the stock. “Given Meta's historical cadence of growing operating expenses at or below the initial guidance, investors would likely be positive on any guide below $100 billion," they wrote.

• Jefferies (Oct.19) also thinks that capex guidance for 2024 that exceeds $35 billion could also cause a downside. “We model 21% growth to $35 billion in fiscal 2024 and would view guidance above our model as a potential negative for the stock.”

• Aided by Reels, Click to Message and core ads business, Meta could generate earnings of up to $20 per share by 2024, Morgan Stanley said (Sep.7). Analyst Brian Nowak projects that Reels monetization could grow to 44% in 2024 from 28% at the moment. He said click to message accounts for about $12 billion of total ad revenue and growing by 36% year-over-year.
• Wells Fargo projects modest revenue acceleration into Q4. It also expects Meta's total expenses in 2024 to be blelow $95 billion (Oct.10).
• JP Morgan (Oct.4) increased their 2024 total expenses projection. "The biggest change in our model is increasing 2024 total expenses to $97.5B (from $93.4B previously), and we expect Meta to guide to a range of $96B-$102B. Our 2024 capex remains $38B, and we expect Meta to guide to a range of at least $35B-$40B," they wrote.

Potential new subcription model for EU users

• Bofa (Oct.4) thinks €156/year (~$163) subscription option is a high price and expect most users to stick with the free version. They also expect the regulators to pushback on the proposal. However, the analysts said if the proposal go through, Meta will benefit since the paid version will monetize better.

AI Chatbots

• Truist is positive on Meta’s AI-powered experiences showed at Meta Connect 2023 (Oct.2).
• Barclays projects that AI tools , including chatbots could boost Meta’s core ad revenue by $16B but could also increase its cost of goods sold by at least $10B (Oct.5). “This unique approach might actually resonate with the non-tech-savvy consumers that are on WhatsApp and Instagram every day, and help overcome the barrier that some of the previous AI agent services face in terms of utility,” Barclays said regarding Meta’s AI Agents. “We’d also note that using celebrities faces and fine-tuned expressions was a smart way humanize and differentiate the AI agents from the crowded field.”

• UBS projects that chatbot could add more than $20 billion to Meta’s revenue (Aug.7).

Advertising business

• Citing Magna report, Wedbush Securities analyst Dan Ives expects a positive Q3 ad market (Oct.22). "Growth should continue to accelerate in 3Q and 4Q and we highlight Magna’s Fall 2023 Update which raised the firm’s outlook for 2023 U.S. digital advertising growth to 9.6% from 7.9% Y/Y," Ives wrote. "Rising ad prices and the lapping of price pressure last year and in [the first-half of 2023] should be a tailwind for Meta and the social channel in the coming quarters," Ives explained further. Ives also cited Skai digital market report, which points to improving ad market in second half. "Retail media is already showing signs of accelerating spending growth, while both paid search and paid social look like they are hitting the end of recent deceleration trends. This all bodes well for a strong H2 for digital marketing spend as economic conditions improve," said Chris Costello, Senior Director of Marketing Research at Skai.

• Bofa and Deutsche Bank noted that the ad market is improving for Meta (Oct.20).

• JP Morgan (Oct.4) expects Meta Platforms advertising business to continue to outperform, "with AI investments paying off and Reels approaching revenue neutral/accretive."

• Morgan Stanley said excluding Reels and click to message, Meta’s other ad business is still “choppy” due in part to Apple’s privacy change, engagement trends and a host of other issues, but expects “more durable” core revenue growth in future as a result of more innovations(Sep.7).

Valuation

• JP Morgan said (Oct.4) Meta's valuation is still compelling with shares trading at 15x their updated 2025E GAAP EPS of $20.29.

Consensus rating

Meta has a consensus rating of buy, according to Refinitiv data.

Big Competitor Earnings Expectations and Results

Alphabet

Results

• Alphabet Q3 2023 revenue rose 11% y/y to $76.69 billion.
• Google advertising revenue grew 9.5% y/y to $59.65 billion, YouTube ads growing 12.5% y/y to $7.95 billion.
• Google cloud revenue rose 22.5% y/y to $8.41 billion.

Analysts estimate

Key Items	Q3 2023	Y/Y
Revenue	$75.97 billion	10%
Google advertising revenue	$ 58.94 billion	8.2%
You Tube advertising revenue	$7.81 billion	10.5%
Google cloud revenue	$ 8.62 billion	25.5%

SNAP

• Snap's revenue rose 5% y/y to $1.19 billion, beating analysts estimate of $ 1.11 billion (-1.8% y/y).
• Its EPS was $0.02 versus - $0.04 estimate.
• Snap global daily active users rose 12% to 406 million, in-line with 405.79 million estimate ( +11.8% y/y).
• Snap said its AI-powered chatbot, My AI, launched in February 2023, now has over 200 million people (who have sent more than 20 billion messages).
• Snap said it's seeing an impact from Israel-Gaza war on its advertising revenue. "We observed pauses in spending from a large number of primarily brand-oriented advertising campaigns immediately following the onset of the war in the Middle East, and this has been a headwind to revenue quarter-to-date. While some of these campaigns have now resumed, and the impact on our revenue has partially diminished, we continue to observe new pauses and the risk that these pauses could persist or increase in magnitude remains."
• Its average revenue per user was $2.93 vs. $2.74 expected.

Small Competitor Earnings Expectations and Results

S4 Capital H2 and full year expectations

• While announcing H1 results on September 18 for the period ended June 30, S4 Capital lowered its annual forecast, citing that clients are cautious with media investment in the second half.
• Its CFO, Mary Basterfield said they witnessed slower-than-expected trading in the summer months, including August and September.
• S4 capital said it now expects its 2023 like-for-like net revenue to fall year-over-year, as opposed to growth rate of 2% to 4% guided in July (lowered from 6% to 10%) and operational Ebitda margin of 12% to 13.5%, down from July's 14.5% to 15.5% (lowered from 15% to 16%).
• Martin Sorrel said it's a "mixed picture" across clients and regions, and highlighted three things influencing the market; 1. "One, tech clients have been more hesitant on spending," he said.

2. "Second, packaged goods companies have been increasing prices in line with inflation or above and they fix their ad budgets on net revenues."

3. "The third is that regional and local clients have been quite soft, that's the big difference we've seen between last year's first half and this year's."

• Its H1 2023 net revenue grew 18.7% y/y to £ 445.5 million while like-for-like net revenue grew 5.1% y/y.

Omnicom Group Q3 2023 earnings expectations and results

• Omnicom Group reported third-quarter revenue and earnings that beat estimates.
• Omnicom Group is an American company that provides global advertising, marketing and corporate communications to over 5,000 clients in more than 70 countries.

Key Items	Actual	Estimate	Y/Y Growth
Revenue	$3.6 billion	$3.59 billion	3.9%
EPS	$1.86	$1.85	5.1%
Advertising & media revenue	+6.1% y/y	+5.5% y/y