The conference call for Meta's third quarter earnings begins with the operator introducing the speakers and explaining the format of the call. The Director of Investor Relations then reminds listeners of the possibility of forward-looking statements and the use of both GAAP and non-GAAP financial measures. The CEO, Mark Zuckerberg, then takes over and discusses the success of the quarter, with an estimated 3.9 billion people using at least one of their apps.

At the annual Connect conference, the company announced the launch of Quest 3, the first mainstream mixed reality device, and the next generation of Ray-Ban Meta smart glasses with built-in Meta AI. The focus was on AI innovation and the launch of new consumer AI experiences, including Meta AI assistant, AI Studio platform, Emu image creation model, and business and creator AIs. These experiences will transform the way people use the company's services and will be the focus for the next year.

The company is happy with its results this year and plans to continue focusing on operating efficiently. AI will be the biggest investment area in 2024, but they will deprioritize non-AI projects and shift people towards working with AI. There is a hiring backlog and the company expects to grow headcount at a slower rate, but the actual rate next year may temporarily be faster due to this backlog. Reels has been successful and has driven a 40% increase in time spent on Instagram. It has also reached a monetization milestone and is now net neutral to overall company ad revenue. Going forward, the company will continue to focus on Reels and grow it as part of their overall portfolio of video services.

AI is a major focus for Facebook and is driving improvements in product and business performance. They are working on generative AI and building foundation models like Llama 2, as well as sophisticated recommendation AI systems for feeds, Reels, ads, and integrity. These tools have already shown significant impact, with a 7% increase in time spent on Facebook and a 6% increase on Instagram. AI is also driving results for advertisers through tools like Advantage+ shopping campaigns and creative optimization. Business messaging is also growing rapidly, with over 600 million conversations between people and businesses every day. In India, more than 60% of people on WhatsApp message a business account each week and revenue from click to message ads has doubled year-over-year. This presents a major opportunity for new business AI tools that will enable easy communication for commerce and support.

The cost of labor in many parts of the world is too expensive for businesses to use text-based communication, but business AIs can help bring down this cost and expand commerce and messaging into larger economies. The Threads app has reached 100 million monthly actives and is focused on growing its community. The company's long-term focuses include AI and the metaverse, with the recent launch of Quest 3, a mixed reality device.

The paragraph discusses the success of the new Ray-Ban Meta smart glasses and the positive reviews they have received. The glasses have been upgraded with improved features and the addition of Meta AI, making them the ideal form factor for an AI device. The company is also making progress on software for the metaverse and has reached important milestones with avatars. The CEO believes that the integration of the physical and digital worlds will be a key focus for the industry in the coming decades and is excited about the future roadmap. The quarter has been successful and the company is pleased with their progress on efficiency.

In the third quarter, the company saw a 23% increase in total revenue and a 7% decrease in total expenses. This was due to higher infrastructure costs and lower content costs, as well as lower marketing and legal-related expenses. The company also saw a 40% operating margin and a 17% tax rate. Net income was $11.6 billion, and capital expenditures were $6.8 billion, primarily for investments in servers, data centers, and network infrastructure. The company's headcount decreased by 7% due to previously announced layoffs.

In the third quarter, Facebook had a free cash flow of $13.6 billion, thanks to a deferral of income taxes. They also repurchased $3.7 billion of their stock and ended the quarter with $61.1 billion in cash and $18.4 billion in debt. The Family of Apps segment saw continued growth, with an estimated 3.14 billion daily users and 3.96 billion monthly users in September. Facebook had 2.09 billion daily active users, representing 68% of monthly active users. The segment's revenue was $33.9 billion, with ad revenue at $33.6 billion, a 24% increase year-over-year. Online commerce, CPG, and gaming were the top contributors to ad revenue growth, with strong spending from Chinese advertisers reaching customers in other markets. Ad revenue growth was strongest in Rest of World and Europe, followed by Asia Pacific and North America. Ad impressions increased by 31%, while the average price per ad decreased by 6%, mainly due to strong impression growth and lower monetizing surfaces and regions.

In the third quarter, Facebook saw strong revenue growth in their Family of Apps, driven by improvements in ad targeting and measurement. The majority of their investments are directed towards this area. In contrast, their Reality Labs segment saw a decrease in revenue due to lower sales of Quest 2. Overall engagement on Facebook and Instagram remains strong, with Reels and video content driving incremental engagement. The company is also working on developing new experiences for their community.

The company's investments in AI have allowed them to launch consumer Gen AI experiences, and they are focused on improving monetization through four areas: Reels, on-platform ad experiences, connecting marketing data, and leveraging AI. Reels is now neutral to overall revenue and will not be quantified in the future, but the company will continue to improve it for potential revenue growth in 2024. The company's overall focus is on growing revenue and engagement across all video and product lines within Instagram and Facebook.

The company is seeing strong growth in Click-to-Message ads, specifically with Click-to-WhatsApp ads. They are working on incorporating AI to improve efficiency in messaging with customers and are also exploring the potential of paid messaging. They have also expanded commerce integrations and are making it easier for advertisers to connect their marketing data through their Conversions API. AI is being used to improve performance in their ads systems and products.

The company is seeing strong success with its Advantage+ Shopping solution and is investing in other products to help advertisers optimize their campaigns. They have a hiring freeze in place and plan to resume hiring in 2024, with a focus on AI, infrastructure, Reality Labs, and compliance. They expect to end next year with higher reported headcount but will grow at a slower rate after that. They also anticipate an increase in infrastructure-related expenses next year due to an expanded infrastructure.

The company is closely monitoring regulatory changes in the EU and US that could impact their business. They are contesting a proposed modification to their existing consent order from the FTC. The company expects fourth quarter 2023 revenue to be between $36.5 billion to $40 billion, with a 2% foreign currency tailwind. Expenses for 2023 are expected to be in the range of $87 billion to $89 billion, including restructuring costs. Reality Labs operating losses are expected to increase in 2023. A preliminary outlook for 2024 expenses, CapEx, and tax rate is also provided, with total expenses expected to be between $94 billion to $99 billion due to increased infrastructure-related costs and higher operating costs.

In the paragraph, the speaker discusses their expectations for growth in payroll expenses and operating losses in 2024 due to hiring and investments in AR/VR. They also mention their updated outlook for capital expenditures and tax rates for 2023 and 2024. The speaker emphasizes that these are preliminary estimates and expresses excitement for future investments that have the potential to transform their business. The call is then opened for questions.

Mark Zuckerberg discusses the strategic opportunity for Meta from the growing adoption of open source AI models and how it can benefit their products and reduce costs. He also mentions how open sourcing parts of their infrastructure can attract top talent to work at their company. Additionally, he talks about the potential for open source models to increase efficiency and reduce costs in their CapEx expenses.

The speaker discusses the benefits of building a leading product in the industry and how their company is able to balance improving quality and economics while still enabling them to recruit top talent. They also mention the operating costs of their Reality Labs division and how they expect their work to benefit the Family of Apps, particularly in the areas of avatars and hardware for creating unique content.

The company believes there is value in operating their Family of Apps on a new computing platform, such as glasses that enable users to have their Meta AI assistant with them at all times. However, the current operating losses in the Reality Labs segment are due to the work directly related to this technology. The company expects shared benefits to their apps in the future. During the Q&A, an analyst asked about regional performance and the deployment of data center architecture.

The company saw an acceleration in ad revenue across all regions, with North America experiencing a 7 point increase due to demand from Chinese advertisers. The EU region saw a 21 point increase, with broad-based acceleration and currency tailwinds. Asia Pacific saw a 9 point increase, with stronger demand and a switch to currency tailwinds. The Rest of World region saw a 20 point increase, with stronger pricing and the same currency dynamic. The new data center architecture may result in cost efficiency and planning flexibility in the coming years.

The paragraph discusses the rollout of first-generation AI tools for ad creative and their impact on advertisers. The speaker mentions several tools that have been incorporated into ads manager and Advantage+ solutions, such as text variations, image expansion, and background generation. These tools aim to help advertisers reach their target audience more effectively and save time in repurposing creative assets. The speaker also addresses the potential impact of geopolitical events on Meta's ad business.

In the upcoming quarter, the company has introduced new features to improve advertising performance and drive sales, especially during the holiday season. They are closely monitoring the impact of geopolitical events on their business, and while they have not seen direct revenue exposure to the Middle East conflict, they have observed softer ad spend at the start of the quarter. This has led them to widen their guidance range to account for uncertainty and they are continuing to monitor the situation.

The company is pleased with their business fundamentals and execution, despite the uncertain and volatile advertising landscape. They have seen promising engagement trends and are focused on driving ad performance improvements. They also launched AI-driven products, such as Meta AI assistant and AI Studio, which they believe will improve engagement and monetization. The company expects revenue to grow faster than expenses in the future, but it is too early to make any specific predictions.

The speaker believes that businesses will benefit from using AI to support their customers and drive commerce. They predict that there will be a variety of AI options, and that people will use messaging apps to communicate with both humans and AIs. This will increase engagement and create new opportunities for monetization. Additionally, AIs will have profiles on social media and will be able to interact with each other, creating a new form of entertainment. The speaker is excited about this and believes it will help with business messaging and monetization. They also mention the potential for AIs to help businesses in countries with higher labor costs by responding to messages from customers.

The speaker believes that the rollout of business AIs will greatly benefit the messaging business, but there is still a lot of work to be done. They have not yet shared a revenue outlook for 2024, but they are keeping a close eye on the volatile macro environment. They have invested a lot in their ads performance and are continuously improving their features and infrastructure. The expense growth for 2024 will depend on the uncertain revenue outlook and will likely be tied to infrastructure expenses.

In paragraph 24, the speaker discusses expected increases in depreciation expenses and operating costs due to recent capital investments. They also anticipate payroll growth, primarily in technical roles, and an increase in operating losses for Reality Labs. They mention the need to balance ambitious investments with earning the ability to invest through delivering operating income growth. In a separate question, the speaker is asked about the potential for a subscription offering in Europe and how Facebook views subscription usage.

Susan Li, responding to a question from Justin, provided updates on Meta Verified and the evolution of the model in Europe. She mentioned that they plan to switch to a consent model for processing personal data for ads in the EU, EEA, and Switzerland. They are currently engaging with regulatory authorities on this and will provide updates when available. She also mentioned that Meta Verified has been rolled out for creators globally and is being tested for businesses in select countries. They plan to expand it to businesses on WhatsApp in the future. Regarding Chinese advertisers, Li did not provide specific details but acknowledged that they have talked about them in the past and their potential impact on growth in the coming year.

The company saw increased spending from Chinese advertisers in Q3, which was driven by strong investments from larger clients and overall growth across all advertiser regions. This growth trend has been consistent in the past, despite periods of volatility due to factors such as higher shipping costs and regulations. The company acknowledges the potential for future volatility, given the unpredictable macro factors at play. In terms of future growth, the company is not sharing specific expectations for Quest 3, including revenue and unit sales. They also do not disclose the contribution of political spend in 2020 and how it may impact growth in 2024.

The company is excited to have Quest 3 in the market, especially during the holiday shopping season. They have received positive reviews and are looking forward to introducing more people to mixed reality experiences. Political spend has seen positive growth except for the small vertical of politics. The AI agent theme is a big initiative for the company, but it is difficult to predict its success as it is unlike anything that has been done before. The cost of serving responses, such as stickers and images, is more expensive than their core business, but they are exploring ways to bring the cost down.

The Meta AI technology being developed by Facebook has the potential to transform how people use the company's various apps. This includes generating and editing content, messaging with AI, and changing advertising methods. The full extent of its impact is not yet known, but it is predicted to greatly enhance user experience and simplify tasks for businesses.

The company is excited about the potential for testing different versions of creative content, including images and eventually video and text, with the help of recommendation AI. They also believe that delivering AI through smart glasses could be a game-changing use case for this technology. The CEO reflects on the excitement and creativity that comes with working in the technology industry and acknowledges the difficulty in predicting specific metrics for this technology, but is confident in its potential and believes it is worth investing in. While efficiency and cost are important, the company's focus is currently on achieving product-market fit. The CEO acknowledges the significant CapEx costs for the company, which impacts its economic model.

The speaker discusses the importance of improving efficiency in order to train bigger models and serve more people. In the near term, efficiency wins will result in better products for more people, but in the long term, they will also drive the economic model. The company is currently focused on improving efficiency in hardware and compute, but they are still in the early stages of this process.

This summary was generated with AI and may contain some inaccuracies.