Meta's AI-Driven Resurgence: Record Revenue and Strategic Shifts

Meta $39.1B revenue driven by key AI system changes

Meta revenue reached $39.1 billion in the second quarter of 2024 (Q2FY24), up by 22% on a year-on-year basis, with ads forming the majority of this revenue at $38.32 billion. Within the ad revenue base, the online commerce vertical contributed the most to Meta's year-on-year growth, followed by gaming entertainment, and media. Meta's Chief Financial Officer Susan Li explained that the incremental revenue growth in the ads business, both in 2024 and 2025, will be a function of Meta's investments in its core AI work. This is the use of AI in content ranking and ads. Li further said that revenue growth was driven by increased monetization efficiency. There are two parts of monetization efficiency: The company sees monetizing opportunities in lower monetization surfaces (user touch points) like videos, including within Facebook, as user engagement shifts to shorter videos over time. Meta argues that this creates more ad insertion opportunities. Meta says that its recommendation systems are getting better at determining which ads to show and when. "This is enabling us to drive revenue growth and conversions without increasing the number of ads or in some cases even reducing ad load", Li explained during the company's earnings call. Li mentioned that Meta is improving ad delivery by "adopting more sophisticated modelling techniques made possible by AI advancements." This includes Meta Lattice ad ranking architecture. This architecture can predict an ad's performance across various datasets and optimization goals that numerous smaller, siloed models previously supported. Similarly, other Meta tools like Advantage+ allow advertisers to automate their campaigns. This quarter, the company introduced Flexible Format to Advantage+ Shopping, which allows advertisers to upload multiple images and videos in a single ad that Meta can select from and automatically determine which format to serve, to yield the best performance. Li mentions that AI will continue to play a growing role in how businesses engage with customers. Meta CEO Mark Zuckerberg also added that AI-based improvements in the company's recommendation systems will make advertising experiences more effective, improving Meta's overall business results. On a user geography basis, the strongest ad revenue growth came from the Rest of the World and Europe at 33% and 26% respectively. The Asia Pacific ad revenue grew by 20% and North American ad revenue grew by 17%. On an advertiser geography basis (location of advertisers paying for the ads), the total revenue growth is the strongest in Asia Pacific at 28%. However, this growth was lower than the previous quarter (Q1FY24), with China-based advertisers no longer expressing the same advertising demands as last quarter. Price for advertisements also grew in Q2 because of increased advertiser demand, "in part due to improved ad performance." The increase in impressions from lower monetizing regions and surfaces partially offset the impact of price growth. Meta had a capital expenditure (Capex) of $8.47 billion. The company expects capital expenses for the entire year to be in the range of $37-40 billion, slightly higher than its previous estimates of $35-40 billion. "We currently expect significant capex growth in 2025 as we invest to support our AI research and our product development efforts," Li mentioned. Infrastructure capacity building appears to be a major area of focus for Meta especially as it trains Llama 4, which will likely require 10 times more computing capacity than what Meta used to train Llama 3. "It's hard to predict how this will trend multiple generations out into the future, but at this point, I'd rather risk building capacity before it is needed, rather than too late, given the long lead times for spinning up new infra projects," Zuckerberg said explaining the company's rationale behind AI infrastructure development. Li added that Meta is making expenses on AI infrastructure with "fungibility" (replacability) in find. "The infrastructure that we build for gen AI training can also be used for gen AI inference. We can also use it for ranking and recommendations by making certain modifications like adding general compute and storage," she said. For context, AI inference is the process that a trained model uses to draw conclusions from brand-new data. Li also mentioned that Meta is building data centers in various phases which allows it to carry out demand-based expansion. Li segregated capital expenditure on AI into two parts: Within core AI expenditure, Meta has taken a return on investment (ROI) based approach. "We're still seeing strong returns as improvements to both engagement and ad performance have translated into revenue gains, and it makes sense for us to continue investing here," Li added. With generative AI, monetization is yet to happen. The company expects no meaningful revenue from its gen AI projects (like MetaAI) in FY24. Zuckerberg commented that it will be years before any monetization takes place. "But we do expect that they're going to open up new revenue opportunities over time that will enable us to generate a solid return off of our investment while we're also open-sourcing subsequent generations of Llama," Li said, adding to Zuckerberg's comments. Further, Li mentioned that GenAI will offer the company opportunities in four core areas: improving the ads business, growing business messaging, opportunities around Meta AI, and growing core engagement. India emerged as the largest market for Meta AI (the company's generative AI chatbot) usage as of Q2, 2024. This coincides with the fact that Meta sees promising retention and engagement for Meta AI on WhatsApp. This week, Meta also launched an AI studio that allows people to create AIs to interact across Meta apps. Zuckerberg explained that this will be useful for creators who want to increase engagement with their communities. "They're going to be able to use AI Studio to create AI agents that can channel them to chat with their community, answer people's questions, create content, and more," he added. Meta wants to grow engagement with Meta AI and then focus on monetization over time, Zuckerberg further mentioned. He explained that the company wants to add a lot more in Meta AI like commerce. "You can just go vertical by vertical and build out specific functionality to make it useful in all these different areas are eventually, I think, what we're going to need to do," he said. Meta mentioned that it has been seeking more engagement from young adults in the US and Canada, with users particularly engaging with products like Groups and Marketplace. To this, an investment firm representative asked about Meta's efforts to improve monetization of Facebook Marketplace. Li replied that the Facebook marketplace is one prong of the company's commerce strategy. "The broader part of the commerce strategy is about making it easier for businesses to advertise their products, for buyers to find and purchase relevant items on our platform," she added, explaining that the company has been making investments in Shop ads. Li mentioned that revenue from shop ads has also been growing at a strong year-on-year pace. "We're seeing Shops ads drive incremental performance for advertisers," she explained. An investment firm representative asked the company whether it will continue to increase the ad load (number of ads displayed) on reels, as mentioned during the previous quarter's call. He also inquired how the company intends to balance the improved performance of Reels ads (which might reduce the need for more ads) with the increased inventory that short-form video provides. For context, inventory here means that people consume reels in large quantities and they are short, which gives Meta more opportunity to place ads. To this, Meta's VP of Finance Chad Heaton responded that the company increased Reels ad load significantly last year and doesn't have an opportunity to do increase ads at the same rate. "We're focusing on optimizing the level of ads just by launching and testing new experiences for ads to deliver in Reels," he explained giving the example of Meta placing ads closer together in Reels when it had more relevant ads to show.

Meta back on Wall Street's good side as Zuckerberg emphasizes AI impact on ad revenues

What a difference three months makes. Last time Meta announced quarterly earnings, CEO Mark Zuckerberg attracted the ire of Wall Street by warning that the firm's AI investment outlay was a long game, candor that resulted in the company's share price taking a heavy spanking. Flash forward to this week and he wasn't making the same 'mistake' again as he played up the positive impact of AI on the company's advertising business. For Q2, total Meta revenues were up 22% year-on-year to $39.07 billion. Ad revenues were also up 22% to $38.33 billion. Total net income was up 73% to $13.47 billion. In comments to analysts following the results announcement, Zuckerberg focused on how AI was helping to improve the firm's advertising offerings: It used to be that advertisers came to us with a specific audience they wanted to reach, like a certain age group, geography, or interests. Eventually, we got to the point where our ad systems could better predict who would be interested than the advertisers could themselves. But today, advertisers still need to develop creative themselves. And in the coming years, AI will be able to generate creative for advertisers as well. And we'll also be able to personalize it as people see it. Over the long term, advertisers will basically just be able to tell us a business objective and a budget, and we're going to go do the rest for them. We're going to get there incrementally over time, but I think this is going to be a very big deal. Moving on to some of the brand new experiences that AI enables, last quarter we started broadly rolling out our assistant Meta AI, and it is on track to achieve our goal of becoming the most used AI assistant by the end of the year. Business AIs are a critical part of this, he added: Over time, I think that just like every business has a website, a social media presence, and an email address, in the future I think that every business is also going to have an AI agent that their customers can interact with. And our goal is to make it easy for every small business, eventually every business, to pull all of their content and catalog into an AI agent that drives sales and saves them money. When this is working at scale, I think that this is going to dramatically accelerate our business messaging revenue. Not everything in the Meta garden is rosy, of course - Reality Labs operating loss for the quarter came in at $4.5 billion this time around. But Zuckerberg is still pitching the Metaverse vision, arguing here that AI has pulled forward timeline thinking: A few years ago, I would have predicted that holographic AR would be possible before Smart AI, but now it looks like those technologies will actually be ready in the opposite order. We're well positioned for that because of the Reality Labs investments that we've already made. Ray-Ban Meta Glasses continue to be a bigger hit sooner than we expected, thanks in part to AI. Demand is still outpacing our ability to build them, but I'm hopeful that we'll be able to meet that demand soon. But for Zuckerberg, while there was a reference made to his warning around monetization of a quarter ago, the bottom line was determinedly more upbeat and framed to please Wall Street ears: I do think that part of what's so fundamental about AI is, it is going to end up affecting almost every product that we have in some way. It will improve the existing ones and will make a whole lot of new ones possible. So it is why there are all the jokes about how all the tech CEOs get on these earnings calls and just talk about AI the whole time. It is because it is actually super exciting, and it is going to change all these different things over multiple time horizons. And with one bound, he was free! The good side of Wall Street's short term mindset is that 'sins' can be quickly forgotten if the right platitudes are throw its way. It was left to CFO Susan Li to add a reminder of what Zuckerberg had said previously when she insisted that the firm's approach to CapEx allocation remains unaltered: We're investing meaningfully in infrastructure to support our core AI work in content ranking and ads, as well as our generative AI and advanced research efforts. Our ongoing investment in core AI capacity is informed by the strong returns we've seen and expect to deliver in the future, as we advance the relevance of recommended content and ads on our platform. While we expect the returns from generative AI to come in over a longer period of time, we're mapping these investments against the significant monetization opportunities that we expect to be unlocked across customized ad creative, business messaging, a leading AI assistant and organic content generation. As we scale generative AI training capacity to advance our foundation models, we'll continue to build our infrastructure in a way that provides us with flexibility in how we use it over time. She added that spend will go up next year: We are also employing a strategy of staging our data center sites, at various phases of development, which allows us to flex up to meet more demand and less lead time if needed while limiting how much spend we are committing to in the outer years. So while we do expect that we are going to grow CapEx significantly in 2025, we feel like we have a good framework in place in terms of thinking about where the opportunities are and making sure that we have the flexibility to deploy it, as makes the most sense. This is a theme we will be returning to with increasing frequency, I suspect.