Meta sales jump 26%, but legal bills and AI spending cut profit

Meta made more money from sales than Wall Street expected last quarter, yet it came out with far less to show for it. Revenue rose 26% to $64.6 billion. But a large legal settlement and a huge bill for AI equipment cut into profit and left the company with negative free cash flow.

What changed

Analysts had expected $63.3 billion in third-quarter revenue. Meta also forecast $73 billion to $76 billion for the final quarter of the year, against the $73.75 billion analysts expected.

Operating income, which is profit from running the business, was $13 billion, down 37% from $20.5 billion. The main cause was a $10 billion charge for a settlement with a group of state attorneys general over youth safety. Without that charge, Meta says operating income would have been $22.9 billion.

Where the money went

Meta is spending at a record pace on AI. Capital expenditures, meaning money spent on things like data centers and computer equipment, hit $34.9 billion in the quarter. A year ago it was $19.4 billion. Meta now expects $135 billion to $145 billion for the full year.

Free cash flow is the cash left after paying for operations and big investments. It was negative $2.1 billion, compared with positive $10.6 billion a year ago.

• The youth safety settlement means about $18 billion paid to states over the next decade, depending on cooperation from TikTok and YouTube.
• A New Mexico judge ordered Meta to pay $25 billion in penalties tied to the Cambridge Analytica privacy scandal. Meta plans to appeal.
• Meta will shift money away from its money-losing virtual reality unit, Reality Labs, and create a new nonvoting Class C stock to help fund AI, employee stock pay and acquisitions.

Why investors stayed calm

Meta shares rose as much as 5% in after-hours trading. Investors seemed focused on early interest in Muse, Meta's new AI assistant, released a little over a month ago. Zuckerberg said more than 10 million people in the U.S. and Canada have set it up.

Muse is expensive to run, so it has not launched worldwide. Zuckerberg said Meta will try to earn money from it sooner than usual. He pointed to shopping as a natural fit and said each American user of Meta's apps is worth several hundred dollars a year.

What is not known yet

Meta has not said how Muse will make money or when. Zuckerberg himself said it is important to get the math to work out, and that the company still needs to improve how efficiently it uses computing power. The outcome of Meta's appeal in New Mexico is also open.

For readers, the lesson is simple. A company can grow quickly and still feel squeezed when legal costs and big bets arrive at the same time.