Q3 Revenue Reaches $64.6B... Boosted by Growth in Ad Impressions and Pricing
Following $55B in Corporate Bond Issuances, Non-Voting Class C Shares to Be Introduced Next Year
Meta Platforms posted a stronger-than-expected quarterly revenue increase, fueled by robust growth in its advertising business. However, heavy capital expenditures pushed its free cash flow into a deficit. Having raised massive funds through corporate bonds over the past two years, Meta has now decided to introduce non-voting shares, further broadening its financing toolkit to secure the capital needed for its expanding artificial intelligence operations.
Meta announced on Thursday (local time) that its third-quarter revenue rose 26% year-on-year to $64.6 billion, beating the consensus estimate of $63.34 billion compiled by FactSet.
The top-line growth was driven by increases in both ad volume and pricing. Ad impressions across major services such as Facebook and Instagram grew 10% from a year earlier, while the average price per ad rose 14%. Advertising revenue came in at approximately $63.1 billion, accounting for the vast majority of total sales.
Meta attributed the advertising revenue growth to AI-driven recommendations and improved user engagement. Outside of advertising, the company highlighted early milestones for its new AI services. During the earnings call, CEO Mark Zuckerberg stated that accounts for 'Muse,' an AI agent service available in the U.S. and Canada, have surpassed 10 million.
Legal settlement costs weighed heavily on earnings. Third-quarter operating profit plunged 37% year-on-year to $12.988 billion. The company booked a $9.89 billion charge stemming from a settlement with U.S. state and local attorneys general resolving investigations into youth mental health and social media. Excluding this charge, Meta stated that its operating profit would have been approximately $22.88 billion, with diluted earnings per share (EPS) rising from the reported $3.83 to $7.40.
Net income increased to $9.86 billion, up from $2.709 billion in the same period last year. This comparison was flattered by a low base effect from a $15.93 billion one-time non-cash tax expense incurred in the third quarter of last year, meaning the increase in net income should not be entirely interpreted as an improvement in core profitability.
Additional legal headwinds remain. According to Reuters, a New Mexico state court ordered Meta to pay $25 billion in civil penalties in a consumer deception case involving user privacy. Meta plans to appeal the ruling. The case is separate from the settlement with state attorneys general that triggered the expense charge this quarter.
Meta guided fourth-quarter revenue to be between $73 billion and $76 billion. The midpoint of $74.5 billion exceeds the LSEG consensus estimate of $73.73 billion. Following the earnings release, Meta shares rose more than 4% in after-hours trading.
Even as revenue continued to grow, capital expenditures outpaced cash generated from operations. Third-quarter cash flow from operations stood at $32.79 billion, while capital expenditures—including principal repayments on finance leases—totaled $34.91 billion. As a result, free cash flow swung to a deficit of $2.12 billion, compared with a surplus of $784 million in the previous quarter.
Meta also raised its investment outlook. The company lifted the lower end of its full-year capital expenditure forecast from $130 billion to $135 billion, while maintaining the upper end at $145 billion, signaling its commitment to unyielding investments in semiconductors and data centers required for the AI race.
Meta has already tapped the corporate bond market to fund its investments. According to U.S. Securities and Exchange Commission (SEC) filings, the company issued $30 billion in corporate bonds in November last year and another $25 billion in May this year, totaling $55 billion across the two offerings. The bonds issued in May carry maturities ranging from 2031 to 2066 across six tranches, with coupon rates between 4.55% and 6.45%.
The introduction of non-voting Class C common stock adds an equity-based financing route to the company's existing debt borrowings. Meta plans to use the Class C shares for capital raising, employee compensation, and mergers and acquisitions. Because the shares carry no voting rights, Zuckerberg can secure the capital needed for business expansion while maintaining his voting control over the company.
Board approval and written shareholder consent for the creation of the Class C shares have been secured. The related amendment to the corporate charter is scheduled to take effect on January 19 next year, after which holders of existing Class A and Class B shares will receive one Class C share as a dividend for every share held. The company expects the stock dividend to have an effect on the Class A share price similar to a 2-for-1 stock split. The record date and payment date for the dividend will be determined at a later date.
The initial distribution of Class C shares to existing shareholders as a dividend will not inject new cash into the company. Raising capital through Class C shares in the future will not trigger the interest and principal repayment obligations associated with corporate bonds. However, issuing new shares to external investors or employees could dilute the ownership stakes of existing shareholders.
