Meta Platforms, Inc. Q3 2025 earnings call

Thank you. Good afternoon and welcome to Meta's Third Quarter 2025 Earnings Conference Call. Joining me today are Mark Zuckerberg, CEO, and Susan Li, CFO. Our remarks today will include forward-looking statements, which are based on assumptions as of today. Actual results may differ materially as a result of various factors, including those set forth in today's earnings press release and in our quarterly report on Form 10-Q filed with the SEC. We undertake no obligation to update any forward-looking statement. During this call, we will present both GAAP and certain non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. The earnings press release and an accompanying investor presentation are available on our website at investor.appmeta.com. I would now like to turn the call over to Mark.

All right. Thanks, Ken. Thanks, everyone, for joining today. We had another strong quarter with 3.5 billion people using at least one of our apps every day. Instagram hit a major milestone with 3 billion monthly actives, and we're seeing good momentum across our other apps as well, including Threads, which recently passed 150 million daily actives and remains on track to become the leader in its category. I am very focused on establishing Meta as the leading frontier AI lab, building personal superintelligence for everyone, and delivering the app experiences and computing devices that will improve the lives of billions of people around the world. Our approach of advancing open-source AI means that when Meta innovates, everyone benefits. Meta's Superintelligence Lab is off to a strong start. I think that we've already built the lab with the highest talent density in the industry.

We're heads down developing our next generation of models and products, and I'm looking forward to sharing more on that front over the coming months. We're also building what we expect to be an industry-leading amount of compute. Now, there's a range of timelines for when people think that we're going to get superintelligence. Some people think that we'll get there in a few years. Others think it will be five, seven years, or longer. I think that it's the right strategy to aggressively front-load building capacity so that way we're prepared for the most optimistic cases. That way, if superintelligence arrives sooner, we will be ideally positioned for a generational paradigm shift and many large opportunities.

If it takes longer, then we'll use the extra compute to accelerate our core business, which continues to be able to profitably use much more compute than we've been able to throw at it. We're seeing very high demand for additional compute, both internally and externally. In the worst case, we would just slow building new infrastructure for some period while we grow into what we build. The upside is extremely high for both our existing apps and new products and businesses that are becoming possible to build. Across Facebook, Instagram, and Threads, our AI recommendation systems are delivering higher quality and more relevant content, which led to 5% more time spent on Facebook in Q3 and 10% on Threads. Video is a particular bright spot, with video time spent on Instagram up more than 30% since last year.

As video continues to grow across our apps, Reels now has an annual run rate of over $50 billion. Improvements in our recommendation systems will also become even more leveraged as the volume of AI-created content grows. Social media has gone through two eras so far. The first was when all content was from friends, family, and accounts that you followed directly. The second was when we added all of the creator content. Now, as AI makes it easier to create and remix content, we're going to add yet another huge corpus of content on top of those. Recommendation systems that understand all this content more deeply and can show you the right content to help you achieve your goals are going to be increasingly valuable. Our ads business continues to perform very well, largely due to improvements in our AI ranking systems as well.

This quarter, we saw meaningful advances from unifying different models into simpler, more general models, which drive both better performance and efficiency. Now, the annual run rate going through our completely end-to-end AI-powered ad tools has passed $60 billion. One way that I think about our company overall is that there are three giant transformers that run Facebook, Instagram, and ads recommendations. We have a very strong pipeline of lots of ways to improve these models by incorporating new AI advances and capabilities. At the same time, we are also working on combining these three major AI systems into a single unified AI system that will effectively run our family of apps and business, using increasing intelligence to improve the trillions of recommendations that we'll make for people every day. I'm also very excited about the new products that we're going to be able to build.

More than a billion monthly actives already use Meta AI, and we see usage increase as we improve our underlying models. I'm very excited to get a frontier model into Meta AI, and I think that the opportunity there is very large. The same goes for our business AI. Every day, people have more than 1 billion active threads with business accounts across our messaging platforms, ranging from product questions to customer support. Our business AIs will enable tens of millions of businesses to scale these conversations and improve their sales at low cost. The better our models get, the better this is going to work for all businesses. This quarter, we also launched Vibes, which is the next generation of our AI creation tools and content experiences. Retention is looking good so far, and its usage keeps growing quickly week over week.

I'm looking forward to ramping up the growth of Vibes over the coming months. More broadly, I think that Vibes is an example of a new content type enabled by AI, and I think that there are more opportunities to build many more novel types of content ahead as well. As our new models become ready, I'm looking forward to starting to show everyone some of the new kinds of products that we're working on. At Connect, we announced our 2025 line of AI glasses, and the response so far has been great. The new Ray-Ban Meta Smart Glasses and Oakley Meta Vanguards are both selling well, as people love the improved battery life, camera resolution, new AI capabilities, and the great design. There is our new Meta Ray-Ban display glasses, our first glasses with a high-resolution display and the Meta Neural Band to interact with them.

They sold out in almost every store within 48 hours, with demo slots fully booked through the end of next month. We are going to have to invest in increasing manufacturing and selling more of those. This is an area where we are clearly leading and have a huge opportunity ahead. Taking a step back, if we deliver even a fraction of the opportunity ahead for our existing apps and the new experiences that are possible, then I think that the next few years will be the most exciting period in our history. We've got a lot to do, but we're making real progress, delivering strong business results, building the talent density and infrastructure needed for the next era, and leading the way on AI devices that will define the next computing platform.

I'm proud of how our teams are rising to the challenge, and I'm grateful for their dedication, hard work, and creativity. As always, thank you all for being a part of this journey with us. Now, here's Susan.

Thanks, Mark, and good afternoon, everyone. Let's begin with our segment results. All comparisons are on a year-over-year basis unless otherwise noted. Our community across the family of apps continues to grow, and we estimate more than 3.5 billion people used at least one of our family of apps on a daily basis in September. Q3 total family of apps revenue was $50.8 billion, up 26% year-over-year. Q3 family of apps ad revenue was $50.1 billion, up 26%, or 25% on a constant currency basis. In Q3, the total number of ad impressions served across our services increased 14%. Impression growth was healthy across all regions, driven by engagement and user growth, particularly on video services. The average price per ad increased 10% year-over-year, benefiting from increased advertiser demand, largely driven by improved ad performance.

This was partially offset by impression growth, particularly from lower monetizing regions and services. Family of apps other revenue was $690 million, up 59%, driven by WhatsApp paid messaging revenue growth, as well as Meta verified subscriptions. Within our reality lab segment, Q3 revenue was $470 million, up 74% year-over-year. The significant year-over-year growth in Q3 was partly due to retail partners stocking up on Quest headsets ahead of the holiday season. We did not have a similar benefit in the third quarter of last year since our Quest 3S headset launched in the fourth quarter of 2024. Aside from this, strong AI glasses revenue also contributed to revenue growth in Q3. Moving now to our consolidated results. Q3 total revenue was $51.2 billion, up 26% or 25% on a constant currency basis. Q3 total expenses were $30.7 billion, up 32% compared to last year.

Year-over-year expense growth accelerated 20 percentage points from Q2, due primarily to three factors. First, legal-related expense growth was higher than in Q2 due to charges we recorded in the third quarter, as well as us lapping a period of accrual reversals in the third quarter a year ago. Second, employee compensation growth accelerated, driven by technical hires, particularly AI talent. Finally, growth in infrastructure costs accelerated due to increased infrastructure operating costs associated with our expanded data center fleet, depreciation on our incremental CapEx spend, and third-party cloud spend. We ended Q3 with over 78,400 employees, up 8% year-over-year, driven by hiring in priority areas of monetization, infrastructure, Reality Labs, Meta Superintelligence Labs, as well as regulation and compliance. Third quarter operating income was $20.5 billion, representing a 40% operating margin.

Q3 interest and other income was $1.1 billion, driven primarily by unrealized gains on our marketable equity securities. Our tax rate for the quarter was 87%, which was unfavorably impacted by a one-time non-cash reduction in deferred tax assets that we no longer anticipate using under new U.S. tax law. Our tax rate would have been 14% excluding this charge. Although the transition to the new U.S. tax law resulted in an accounting charge in the third quarter, we continue to expect we will recognize significant cash tax savings for the remainder of the current year and future years under the new law, and this quarter's charge reflects the total expected impact from the transition to the new U.S. tax law. Net income was $2.7 billion, or $1.05 per share. Excluding the one-time tax charge, our net income and EPS would have been $18.6 billion and $7.25 per share, respectively.

Capital expenditures, including principal payments on finance leases, were $19.4 billion, driven by investments in servers, data centers, and network infrastructure. Free cash flow was $10.6 billion. We repurchased $3.2 billion of our Class A common stock and paid $1.3 billion in dividends to shareholders. We ended the quarter with $44.4 billion in cash and marketable securities and $28.8 billion in debt. Turning now to the business outlook, there are two primary factors that drive our revenue performance: our ability to deliver engaging experiences for our community and our effectiveness at monetizing that engagement over time. On the first, daily actives continue to grow year-over-year across Facebook, Instagram, and WhatsApp. We're continuing to see improvements to our products and recommendations drive incremental engagement, with year-over-year growth in global time spent accelerating on both Facebook and Instagram in Q3.

In the U.S., overall time spent on Facebook and Instagram grew double digits year-over-year, driven by continued video strength as well as healthy growth in non-video time on Facebook. The engagement gains continue to be driven by product work and ongoing improvements to our recommendation systems as we optimize our model architectures, implement advanced modeling techniques, and integrate more signals about people's interests. We also continue to focus on increasing the freshness of recommended content. On Facebook, our systems are now surfacing twice as many Reels published that day than at the start of the year. Looking to 2026, we expect to advance our recommendation systems across several dimensions. On Instagram, one focus is evolving our systems to surface content across a broader set of topics that cater to the diverse interests of each person.

This follows a similar approach we've implemented on Facebook that has driven good results. We also expect to make significant progress on our longer-term ranking innovations in 2026. We're seeing promising new results from our research efforts to create foundational ranking models and expect the new model innovations we're developing as part of this will enable us to significantly scale up the amount of data and compute we use to train our recommendation models in 2026, yielding more relevant recommendations. Another large focus next year is leveraging LLMs to improve content understanding. We expect this is going to enable our systems to more precisely label the keywords and topics within videos and posts, which will allow our systems to both develop deeper intuition about a person's interests and retrieve the content that matches them. Finally, we're making good progress with Meta AI and Threads.

The number of people using Meta AI across our family of apps continues to grow, and we're increasingly leveraging first-party content into Meta AI results, with the majority of Meta AI's responses to Facebook deep dive queries in the U.S. now showing related Reels. We're also seeing a lot of traction with media generation. People have created over 20 billion images using our products, and since launching Vibes within Meta AI in September, we've seen media generation in the app increase more than tenfold. On Threads, we see strong growth in both daily actives and the depth of engagement as we continue to improve recommendations. The ranking optimizations we made in Q3 alone drove a 10% increase in time spent on Threads. We also continue to ship new features, including launching direct messaging in Q3, so anyone on Threads can now message one another within the app.

Now to the second driver of our revenue performance: increasing monetization efficiency. The first part of this work is optimizing the level of ads within organic engagement. We continue to refine ad supply across each of our major services within Facebook and Instagram to better deliver ads at the time and place they are most relevant to people. Longer term, we have exciting ad supply opportunities on both Threads and WhatsApp status. Ads are now running globally in feed on Threads, and we're following our typical monetization playbook of optimizing the ads formats and performance before we ramp supply. Within WhatsApp status, we're continuing to gradually introduce ads and expect to complete the rollout next year. The second part of increasing monetization efficiency is improving marketing performance.

Advancing our ad systems remains a critical aspect of this work, and we are driving performance gains through ongoing improvements in our larger-scale ads ranking models. For example, we continue to broaden the adoption of Lattice, our unified model architecture. In Q3, we rolled out Lattice to app ads, which drove a nearly 3% gain in conversions for that objective. Since introducing Lattice back in 2023, along with other backend improvements, we have now cut the number of ads ranking and recommendation models by approximately 100, as we consolidated smaller and more specialized models into larger ones that use the Lattice architecture to generalize learnings across surfaces and objectives. We continue to observe performance improvements as we combine models and expect to drive additional gains as we consolidate another 200 models over the coming years into a smaller number of highly capable models.

In addition to advancing our foundational ads models, we're innovating on our runtime models we use downstream of them for ads inference. For example, we began piloting a new runtime ads ranking model in Q3 that leverages more compute and data than our prior models to select more relevant ads. In testing, we've seen this new model drive a more than 2% lift in conversions on Instagram. We also significantly improved performance of Andromeda in Q3 by combining models across retrieval and early-stage ranking into a single model, driving a 14% increase in ads quality on Facebook services. Within our ads products, we're seeing continued momentum with Advantage+. In Q3, we completed the rollout of our streamlined campaign creation flow for Advantage+ lead campaigns.

Now advertisers running sales app or lead campaigns have end-to-end automation turned on from the beginning, allowing our systems to look across our platform to optimize performance by automatically choosing criteria like who to show the ads to and where to show them. The annual run rate of revenue running through our end-to-end automated solutions has now reached $60 billion following the implementation of the new streamlined creation flow, as we continue to see more advertisers leverage the performance benefits of our solutions. Within our Advantage+ Creative Suite, the number of advertisers using at least one of our video generation features was up 20% versus the prior quarter, as adoption of image animation and video expansion continues to scale. We've also added more generative AI features to make it easier for advertisers to optimize their ad creatives and drive increased performance.