Meta Q3 2023 earnings: 24% advertising revenue growth, 7% engagement increase

Meta released its Q3 2023 earnings results yesterday:

• Advertising revenue increased by nearly 24% on a year-over-year basis, to $33.6BN;
• ARPU increased in every reporting region. ARPU growth was considerable across the board: 19% globally, 14% in US + Canada, 34% in Europe, 16% in APAC, and 31% in the Rest of World reporting region;
• Operating margin rose to 40%, doubling from 20% on a year-over-year basis;
• Impressions served across the company’s Family of Apps increased by 31% on a year-over-year basis;
• Notably, the average price per ad decreased by 6% year-over-year, which is the smallest decrease that Meta has seen since Q4 2021.

While 24% growth in advertising revenue is of course impressive, it is measured against a fairly easy comparison quarter, Q3 2022, which was near the company’s nadir in terms of revenue declines following the rollout of ATT. It was also the quarter in which Mark Zuckerberg infamously stated in the earnings call that, “those who are patient and invest with us will end up being rewarded.”

The two charts that I believe best explain the quarter, and serve as helpful artifacts of the strategy that Meta pursued to achieve its turnaround, are the ARPU growth chart (above) and the Ad Inventory vs. Ad Prices chart (below). With ARPU, Meta saw impressive growth in every reporting region, but especially Europe, where ARPU increased by 34% on a year-over-year basis.

And with impression economics, Meta saw its decrease in average revenue per impression decline to -6%, which is the lowest level of decline since that number began declining in Q1 2022. Note that Apple’s App Tracking Transparency (ATT) privacy policy reached a majority scale of iOS devices in Q3 (July) 2021, which represents the beginning of revenue growth declines for the company in the wake of ATT. And declines to average ad prices have been decreasing since Q4 2022, which served as Meta’s worst quarter for revenue growth since ATT was rolled out.

I’ve written extensively about Meta’s wholesale transformation in the aftermath of ATT. Some of the most substantive background on this concept can be found in these pieces:

• Unpacking Meta’s pivot to an open graph and short-form video;
• Google’s PMax, Meta’s Advantage+, and the logic of total advertising automation;
• The App Tracking Transparency recession;
• FB Shops to require native check-out: Meta’s Content Fortress strategy takes root.

In my analysis of Meta’s earnings last quarter, I introduced the above diagram, which captures my broad thesis about Meta’s turnaround in two points:

1. The product transformation to short-form video (Reels), propagated across an open graph, is a means of increasing user engagement and, therefore, ad exposure volumes;
2. The advertising infrastructure transformation to “AI” tools (Advantage+) is a means of increasing efficiency in advertiser operations, eliminating waste and guiding advertising performance to optimal campaign parameters and audience targets as quickly as possible.

Meta has employed an ancillary tactic, as well:

• Capturing more conversions within its own platform through on-site tools (FB Shops, Click-to-Message) such that the data related to those conversions can be held with first-party privileges and therefore used in ads targeting, in a Content Fortress design strategy.

In my original piece about Meta’s transformation to short-form video products that operate across an open graph, I proposed the four options available to any ad platform for increasing advertising revenue:

The tactics enumerated above cover all of these with the exception of increasing ad load (which Meta has also done).

These initiatives seem to be producing a positive commercial impact. Notably, Meta doubled its operating margin to 40% in Q3 2023 against 20% in Q3 2022, recognizing $11.5BN in net income for the quarter (versus $4.4BN in Q3 2022). While Meta’s stock initially jumped on its print, it ended after-hours trading down on tentative sentiment from Meta’s CFO related to advertising demand uncertainty in Q4 related to geopolitical tumult.

In his prepared statement for the earnings call, Mark Zuckerberg revealed two important data points about Reels, the company’s short-form video product:

• Reels has driven a more than 40% increase in time spent on Instagram since launch;
• Reels is now “net neutral to overall company ad revenue” (I don’t take this to mean that Reels is at monetization parity with other formats, given the use of the word ‘revenue’, but rather that Reels’ lower level of monetization is compensated for by the higher level of engagement that it induces, producing revenue neutrality relative to other formats that don’t directly impact engagement).

Zuckerberg also noted in his prepared marks that its Advantage+ advertising tool has reached a $10BN run rate, and that more than half of Meta’s advertisers are using Advantage+ creative tools to optimize their campaign creative (note that these are not, primarily, Generative AI tools). Finally, Zuckerberg revealed that Threads has reached “just under” 100MM MAU.

Regarding the company’s Content Fortress strategy, Meta’s CFO, Susan Li, commented on the expansion of Meta’s “on-site experiences” in her prepared remarks (emphasis mine):

We’re seeing sustained momentum with Click-to-Message ads. Click-toWhatsApp ad revenue continues to grow very quickly in particular and is already at a multi-billion dollar annual run-rate. We’re progressing on our work to enable further down the funnel conversions, and longer-term, we’re excited about the potential of AI to help businesses message with customers more efficiently at scale … We’re also excited about the potential for paid messaging, which serves as a nice complement to click-to-messaging ads by helping businesses develop ongoing relationships with customers once they’re in a messaging thread. Outside of business messaging – we’re seeing good early traction with Shops ads and in the third quarter we announced expanded commerce integrations with third party services to make it easier for businesses to set up a Facebook or Instagram Shop and run Shops ads.

Some interesting excerpts from the call are shared below (all emphasis mine).

On Meta’s initiatives with Generative AI for ad creative:

So your first question was around gen AI tools, especially for advertisers, and you’ll see that we have been increasingly testing these in our AI Sandbox. And then as they become more mature, we incorporate them into our Ads Manager directly. We’ve incorporated them into some of our Advantage+ solutions. A few that I would highlight that we’re rolling out this quarter are text variations, so
generating multiple versions of ad text based on an advertiser’s original copy that helps highlight the selling points of their products and services, giving them multiple text options to better reach their audience. Another one is image expansion, which helps adjust creative assets to fit different aspect ratios across multiple services like Feed or Reels. That allows advertisers to spend less time themselves trying to repurpose their creative assets in these different formats. Another one is background generation, creating multiple backgrounds to complement the advertiser’s product images, allowing advertisers to tailor their creative assets for different audiences. And we’re making this available actually through Advantage+ catalog ads. And so we really feel like we’ve introduced quite a lot of new ads products and features.

On the company’s plans to adapt to regulatory challenges of its operating model in the EU (background on this topic can be found here, here, here, and here):

So as we announced in August, we intend to evolve our legal basis for processing personal data for ads to a consent model in the EU, the EEA in Switzerland, given the recent regulatory developments in those regions. We don’t have any further details to share on the exact implementation at this time.

On the impact to revenue from Chinese advertisers (eg. Temu):

So spend from Chinese advertisers further accelerated for us in Q3. We have benefited from strong investments from a few of our larger clients. We’ve also seen generally broader-based strength from other China advertisers, and we believe factors such as lower shipping costs and easing regulations on the gaming industry have served as tailwinds here. But I think there has been a broader story of improved growth across all advertiser regions in Q3, and even excluding China, advertisers’ revenue growth has accelerated nicely.