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Author: Zhang Yifan.

What direction will AI ferment in? This may be the biggest question that investors are asking now.

As of this morning,$Alphabet-A (GOOGL.US)$/$Alphabet-C (GOOG.US)$,$Meta Platforms (META.US)$,$Microsoft (MSFT.US)$All have released their Q2 financial reports. In terms of revenue and profits, all three companies have achieved double growth thanks to AI drive. However, from the phone conferences, investors want to know if the money spent on AI can really be earned back.

Therefore, investors on the conference call took turns asking about the capital expenditures of each giant. Why was it raised this season? Will it be raised next quarter? How did the annual capital expenditure guidance change? How much increase is the head?

The essence of these questions is actually asking how long it will take for the various giants' business models in AI to really take off, and investors still need to be patient. Actually, the company is not sure about the former, but from the expression of the investors, it is clear that everyone is far less patient with the "burning money" model and waiting for business to emerge than in the first quarter.

Meta now gives investors confidence by dividing AI investment into two categories: core AI and generative AI, to measure the return on investment (ROI). The former may have a higher early-stage ROI, as it aims to improve the performance of typical businesses such as ad recommendations. The latter is still in its early stages, but management is optimistic about the long-term opportunities based on its powerful product portfolio (such as Meta AI Assistant, AI Studio, open-source LLM model Llama, and potential metaverse applications).

However, for companies like Nvidia, which are involved in these actions of 'burning money,' this is definitely a good thing, and performance expectations are more solid. Indeed, after the shipment guidance was raised higher than expected, the stock price rose more than 12% overnight.$Advanced Micro Devices (AMD.US)$after its shipping guidance was raised higher than expected,$NVIDIA (NVDA.US)$the stock price surged more than 12% overnight.

From the perspective of each company's capital expenditures, due to the construction of AI infrastructure, Google, Meta, and Microsoft's capital expenditures have increased year-on-year and quarter-on-quarter this quarter. In terms of guidance, Meta and Microsoft both stated that their capital expenditures for the 2025 fiscal year will be higher than those for the 2024 fiscal year. Google appears relatively conservative, stating that capital expenditures for the next two quarters will be roughly the same as or higher than Q1 ($12 billion). For Meta, because it has significantly raised the upper limit of capital expenditures in the first quarter, it has only raised the lower limit of capital expenditures this quarter, and stated that it will not raise the upper limit of expenditures for the year.

Overall, the momentum of AI remains unabated, and each company maintains a high level of capital expenditures and has adjusted expenditure guidance to different degrees.

- Google: Capital expenditures for Q2 2024 were $13 billion (up 10% QoQ and 91.3% YoY), and the company expects capital expenditures for each quarter of the year to remain approximately the same or higher than Q1 capital expenditures ($12 billion).

- Meta: Capital expenditures for Q2 2024 were $8.47 billion (up 26% QoQ and 33.3% YoY). The company revised its full-year capital expenditure guidance from the previous range of $35 billion to $40 billion to between $37 billion and $40 billion and expects significant growth in capital expenditures in 2025.

- Microsoft: Capital expenditures for Q2 2024 were $19 billion (up 35.7% QoQ and 78% YoY, in line with expectations of $15 billion). The company expects capital expenditures for the 2025 fiscal year to be higher than those for the 2024 fiscal year.

Hard AI has previously analyzed the second-quarter financial reports of Google and Microsoft. Now let's take a look at Meta's performance in the second quarter.

Overall, Meta's 2024Q2 revenue and profit exceeded expectations. On the one hand, it was driven by AI, and on the other hand, the company optimized costs (such as departmental restructuring and personnel optimization).

In terms of revenue, ad revenue from the Asia-Pacific region still grew strongly this quarter, up 28%, but the growth rate was lower than the 41% in the first quarter. The company explained that this was because it is currently in the adjustment stage of the strong demand growth of Chinese advertisers. Similarly, Google was also affected this quarter, and ad revenue growth slowed. Management explained that this was because the base was too high last year due to the start of investment by Asia-Pacific e-commerce.

Regarding capital expenditures, the company stated that excessive investment and missed opportunities are risks. But compared with excessive investment, the company said it is more reluctant to face the risks of missing opportunities, and has raised its capital expenditure guidance for this year from between $35 billion and $40 billion to between $37 billion and $40 billion, while it expects a substantial increase in capital expenditures next year.

Specifically,

1. Revenue and profit exceeded expectations: Total revenue was $39.071 billion (up 22% YoY, in line with expectations of $38.3 billion), and net income was $13.465 billion (up 73% YoY, in line with expectations of $12.3 billion).

2. Increase in ad displays and average ad prices: The number of ad displays and the average price per ad both increased by 10% this quarter;

3. Continuous growth of user scale: In this quarter, Family of Apps reached a daily active audience of 3.27 billion (up 6.5% YoY). Among them, WhatsApp's monthly active users in the United States have now exceeded 100 million (about 30% of the total U.S. population), and Threads is about to reach 200 million monthly active users (up from 150 million in the previous quarter);

4. Developing Llama 4: The company said that the computing power required to train Llama 4 may be nearly 10 times that of Llama 3, and future models will continue to surpass this level. For large companies like Meta, excessive investment and missed opportunities are risks. But the company said that compared with excessive investment, the company is more reluctant to face the risk of missed opportunities.

Most of the advertising revenue comes from consumer contribution, followed by games and entertainment: the company disclosed that the biggest contributor to the year-on-year growth of advertising revenue is the online business vertical, followed by games and entertainment and media. Advertising revenue from the Asia-Pacific region has grown the strongest, at 28%, which is lower than the 41% in the first quarter, mainly due to the current adjustment period for strong demand growth of Chinese advertisers.

To support the development of AI, the company stated that it will continue to increase capital expenditure. It has raised its capital expenditure guidance for this year from 35-40 billion US dollars to 37-40 billion US dollars, and expects a significant increase in capital expenditure next year.

Financial situation of Meta in Q2 2024:

Overall, both revenue and profit exceeded expectations. Especially net income, it exceeded the consensus expectations and increased by 73% year-on-year.

1) Total revenue was $39.071 billion (up 22% year-on-year, consensus expectation of $38.3 billion);

2) Operating profit was $14.847 billion (up 58% year-on-year, consensus expectation of $14.59 billion), corresponding to an operating profit margin of 38% (up 9pcts year-on-year).

3) Net income was $13.465 billion (up 73% year-on-year, consensus expectation of $12.3 billion), free cash flow was $10.898 billion, and diluted earnings per share were $5.16 (up 73% year-on-year);

Q3 2024 guidance: Total revenue will be between $38.5 billion and $41 billion.

In terms of capital expenditure, it is expected that the company will spend between $37 billion and $40 billion on capital expenditure for the whole 2024, updating the previous range of $35 billion to $40 billion. Capital expenditure is expected to significantly increase in 2025, as we invest in supporting our AI research and product development work.

In terms of dividends and repurchases, the company repurchased $6.32 billion of Class A common stock and distributed $1.27 billion in dividends during the quarter.

Business unit revenue of Meta in Q2 2024:

The family of apps had a revenue of $38.718 billion, up 22% year-on-year; Reality Labs had a revenue of $0.353 billion, up 28% year-on-year.

1) Reasons for the growth of revenue in the family of apps

- Increase in user base attracts more advertisers: The daily active users of the family of apps reached 3.27 billion this quarter (up 6.5% year-on-year). WhatsApp has now exceeded 100 million monthly active users in the United States (about 30% of the total US population), and Threads will soon have 200 million monthly active users (compared to 150 million in the previous quarter);

- Increase in the number of ad impressions and average ad price: The number of ad impressions and the average price per ad both increased by 10% this quarter;

- Accurate ad push empowered by AI: The business platform has accessed Llama 3.1, which was released by Meta in the second quarter, and the performance of the ad recommendation system has been further improved;

From the perspective of advertising revenue contributions, the online business vertical is the biggest contributor to the year-on-year growth, followed by games and entertainment and media. Geographically, advertising revenue from the Asia-Pacific region has grown the strongest, at 28%, which is lower than the 41% in the first quarter, mainly due to the current adjustment period for strong demand growth of Chinese advertisers.

2) Reasons for the growth of Reality Labs revenue

- Revenue: The revenue of Reality Labs was $0.353 billion, up 28% year-on-year, primarily due to the increase in sales of Quest.

- Expenses: The expenses of Reality Labs was $4.8 billion, up 21% year-on-year, primarily due to the increase in personnel costs and inventory costs.

Despite strong sales of Quest 3, Reality Labs department still has significant operational losses. Meta stated that although the company restructured and reduced costs for Reality Labs in the second quarter, it will continue to increase investment in Reality Labs, and expects operating losses to continue to increase in the coming years.

3.27 billion daily active users in this quarter, +6.5% year-on-year. WhatsApp's monthly active users in the USA have now exceeded 0.1 billion (about 30% of the total population of the USA), and Threads will also reach 0.2 billion monthly active users (compared to 0.15 billion in the previous quarter).

1. Family of Apps has a considerable increase in the number of users. This quarter, the daily active users reached 3.27 billion (+6.5% YoY). Among them, WhatsApp's monthly active users in the USA have exceeded 0.1 billion (about 30% of the total population of the USA), and Threads is about to reach 0.2 billion monthly active users (compared to 0.15 billion in the previous quarter).

2. Developing Llama 4: The company says that the computing power required to train Llama 4 may be nearly ten times that required to train Llama 3, and that future models will continue to exceed this level. For large companies such as Meta, both excessive investment and missed opportunities are risks. But the company says it is more unwilling to face the risk of missed opportunities than excessive investment.

3. Reality Labs performed better than expected: The company said that this quarter, the sales of Ray-Ban Meta glasses and Quest 3 were better than expected, and revenue increased by 28% YoY. However, the losses continue, the operating profit is still negative, and departmental expenses increased by 21% YoY, mainly due to personnel-related expenses and inventory costs of Reality Labs.

4. Capital spending increased, leading to an increase in cost of goods sold: This quarter, capital spending was $8.47 billion, an increase of 33.4% YoY, leading to a 23% increase in cost of goods sold. The company said it will continue to expand capital spending to support the development of AI. It raised its full-year 2024 capital spending guidance from $35 billion to $40 billion to $37 billion to $40 billion, while expecting a significant increase in capital spending next year.

5. Most of the advertising revenue comes from consumer, followed by games and entertainment: The company revealed that in advertising revenue, online business verticals are the largest contributor to YoY growth, followed by games and entertainment, and media. Advertising revenue from the Asia-Pacific region grew the strongest, at 28%, which is lower than the 41% growth in the first quarter mainly because it is currently in a period of adjustment after the strong growth of Chinese advertisers demand (Google has also been affected this quarter, with YouTube's growth rate falling from 21% in Q1 to 13% in Q2. The management explained that the high base last year was due to the initial investment in Asia-Pacific e-commerce.)

6. Increase in the number of ad impressions: the number of ad impressions and the average price per ad both increased by 10% this quarter. The increase in impressions was mainly due to the Asia-Pacific region and other parts of the world, while the increase in pricing was mainly due to the increase in demand from advertisers and partly due to the improvement of advertising effectiveness (empowered by AI).

7. Meta AI has achieved billions of queries: Since the launch of Meta AI, the number of queries has accumulated into billions. Currently, Meta AI supports more than 20 countries and 8 languages.

8. 24Q3 guidance: Total revenue will be between $38.5 billion and $41 billion.

Fourth, 2024Q2 Meta Performance Analysis

1. The revenue and net income are higher than market expectations, especially the net income, which increased by 73% YoY.

- Operating Revenue: $39.071 billion (+22% YoY, VA consensus estimate: $38.3 billion);

- Net Income: $13.465 billion (+73% YoY, VA consensus estimate: $12.3 billion);

Reasons for revenue growth ---

1) Growth in advertising revenue: Advertising revenue growth was mainly due to the increase in the number of ad impressions and the average price per ad.

2) Increase in advertiser demand: Advertiser demand for ads has increased, partly due to the improvement of ad effectiveness.

3) Growth of WhatsApp Business Platform: The growth of business message revenue on the WhatsApp Business Platform also drove the growth of total revenue.

4) Strong sales of Quest 3: Although Meta Reality Labs is still in a loss situation, the strong sales of Quest 3 also drove the growth of total revenue.

Reasons for net income growth ---

Revenue growth: Strong revenue growth is the main driver of profit growth.

Cost control: By restructuring departments and optimizing staff, the company's marketing and sales costs decreased by 14%, and management expenses decreased by 12%.

Efficiency improvement brought by AI strategy: The implementation of the AI strategy has also improved Meta's operational efficiency, such as optimizing advertising delivery, which has also contributed to profit growth.

Operating margin

The increase in operating margin is mainly due to the company:

- Reduce marketing and sales costs: Marketing and sales costs decreased by 14%, mainly due to restructuring and personnel streamlining.

- Reduce management expenses: Management expenses decreased by 12%, mainly due to the reduction of legal-related expenses.

- Control costs of Reality Labs: Reality Labs department expenditure increased by 21%, but Meta is working hard to control costs, such as improving operational efficiency and inventory management.

Growth of advertising revenue in various regions

- The fastest growth in advertising revenue is in the Asia-Pacific region, reaching 28%, but the growth rate is lower than the 41% in the previous quarter, mainly due to the slowing of growth this quarter after the strong demand of Chinese advertisers in the previous quarter.

- The growth rate of advertising revenue in Europe is 26%, higher than the 17% in North America.

- The highest growth rates in advertising revenue in other regions and Europe, reaching 33% and 26% respectively.

Capital expenditures: Capital expenditures for the quarter were $8.47 billion, a year-on-year increase of 33.4%.

Helping AI, Capex guidance continues to be raised: The company raised its Capex guidance for this year from $35 billion to $40 billion to $37 to $40 billion, and expects a significant increase in capital expenditures next year.

For large companies like Meta, both excessive investment and missed opportunities are risks. But compared to excessive investment, the company said it is more unwilling to face the risk of missing opportunities.

- Capital expenditures for the quarter: Capital expenditures for the quarter were $8.47 billion, mainly used for investment in servers, data centers, and network infrastructure.

- Expected capital expenditures for the year: Meta expects capital expenditures for the full year 2024 to be between $37 billion and $40 billion, higher than the previous estimate of $35 billion to $40 billion.

- Future capital expenditure plans: Meta said it plans to continue to increase capital expenditures in 2025 to support its AI research and product development.

Editor / jayden