The Facebook parent reported record third-quarter sales, but a near-$10bn charge tied to a legal settlement over teen mental health cut its operating income by 37%.
Meta’s shares rose more than 4% in after-hours trading on Wednesday, to $726 from a close of $697.52, after the company reported a 26% rise in quarterly revenue. Third-quarter sales reached $64.6bn, up from $51.2bn a year earlier. Meta also announced a new class of publicly traded, non-voting shares, which could help finance its heavy investment in artificial intelligence while preserving Mark Zuckerberg’s control. The new structure is due to take effect on 19 January 2027.
The results
Advertising revenue rose 26% to $63.1bn. Ad impressions across Meta’s apps, which include Facebook and Instagram, were up 10% year on year, and the average price per ad rose 14%. “Our investments are paying off, the core business is strong, and we’re seeing velocity across the board,” Mr Zuckerberg said in a statement.
Net income was $9.86bn, or $3.83 per diluted share, against $2.71bn, or $1.05 per share, a year earlier. Operating income fell 37% to $12.99bn despite the higher sales. Meta booked a $9.89bn charge linked to an August agreement with 52 state attorneys general, which resolves litigation about teen mental health and social media. The settlement provides for payments of up to about $18.59bn. Excluding the charge, Meta said operating profit would have been $22.88bn and diluted earnings per share $7.40. A much lower income tax provision of $3.14bn, down from $18.95bn a year earlier, also helped the bottom line.
According to the research notes, drawn from Meta’s earnings release, Meta’s family of apps had 3.64bn daily active people in September, up 3%. That counts people using at least one of its apps, not each app separately. The notes also say employee numbers fell 15% to 66,775, an implied fall of about 11,800 on a year earlier. The release does not say how much of that was redundancies.
The new share class
Meta’s board approved the creation of non-voting Class C shares, which will be publicly traded. Shareholders will receive one Class C share for every Class A or Class B share they own, on a distribution date still to be set. Meta said this is expected to have the effect of a two-for-one stock split on the market price of its Class A shares, which trade on Nasdaq, without changing shareholders’ voting power.
A regulatory filing described in the research notes adds conditions for Mr Zuckerberg’s own holding. The notes say he can freely sell 20% of his initial Class C allocation, with the remaining 80% restricted. A further 2.5% can be released for each qualifying quarter he stays in a senior leadership role, over as many as 32 quarters, or eight years. They also say the Founder Alignment Agreement, signed on 20 October, commits him to remaining resident in California, or another jurisdiction where Meta has its headquarters, for eight years, subject to exceptions. The Financial Times, cited in the notes, links the agreement to his leadership and flexibility to sell shares without giving up voting control. The notes add that further Class C distributions could be triggered by successive doublings of a reference share price and a shareholder return of at least 10% a year. They are conditional and not guaranteed. I have not checked these details against the filing.
AI spending and cash flow
Capital expenditure, including principal payments on finance leases, totalled $34.91bn in the quarter. Meta now expects full-year capital expenditure of $135bn to $145bn, narrowing its earlier forecast of $130bn to $145bn. The spending pushed free cash flow to an outflow of $2.12bn, against a $10.63bn inflow a year earlier. The research notes say Meta still held $82.45bn in cash and marketable securities at the end of September and generated $32.79bn in operating cash flow during the quarter. Negative free cash flow therefore reflects investment, not a shortage of cash or a loss.
Meta said its AI investments are already adding to advertising revenue through better recommendations, stronger engagement and more efficient monetisation. “We hit major milestones this quarter toward delivering personal superintelligence for everyone — including launching Muse and Muse Wonder, our first frontier model,” Mr Zuckerberg said. The Associated Press reports, according to the notes, that its Muse assistant has passed 10m users in the US and Canada since its August launch. It has also drawn privacy scrutiny.
The company plans to move investment away from Reality Labs, its virtual- and augmented-reality division, and towards AI. According to the notes, Reality Labs recorded revenue of $443m and an operating loss of about $4.13bn in the quarter. Meta expects annual losses of $18bn to $19bn in 2026, falling to around $15bn in 2027.
The outlook
The notes say Meta forecasts fourth-quarter revenue of $73bn to $76bn, with an estimated one-percentage-point drag from currency movements on year-on-year growth. It expects strong revenue growth throughout 2027 but has not given a numerical forecast. It acknowledges that some advanced AI investments will take longer to pay back than improvements to its advertising business, and expects further legal proceedings over young users in the coming months.
