SILICON VALLEY — Meta, the operator of Facebook and Instagram, raised the lower end of its annual capital spending forecast, signaling its commitment to artificial intelligence investment. The move follows a surge in demand for Muse, its AI agent, which has restored the company's confidence in its AI business after it fell behind Anthropic, OpenAI and Google in the race. Free cash flow turned negative and net income missed expectations, but the company plans to fund its AI push through a stock issuance.
Meta said in a filing on the 21st that third-quarter revenue from July through September rose 26% from a year earlier to $64.6 billion, beating the $63.4 billion consensus estimate compiled by the London Stock Exchange Group.
Quarterly net income jumped 264% to $9.86 billion but came in at about half the $17.2 billion analysts had expected. Earnings per share were $3.83, below the market estimate of $5.75. Meta said the shortfall reflected $9.9 billion in costs booked for a settlement of social media lawsuits.
Behind the revenue gain is the rapid uptake of Muse, which launched on Sept. 8. Meta linked the agent to its social networking services, including Facebook, Instagram and Threads, opening an era of mass-market personal AI agents. Released first in North America, Muse passed 10 million users within 40 days of launch, and that traffic is feeding into advertising and shopping payments. "About 25% of users who have installed the Muse application are using the app daily, and shopping is the most popular use case," Chief Executive Mark Zuckerberg said on a conference call.
Meta is pouring money into data centers, the infrastructure needed to develop and run AI. The company said it had raised the bottom of its annual capital spending range by $5 billion to between $135 billion and $145 billion, indicating it is spending more than expected. As a result, Meta's third-quarter free cash flow came to negative $2.12 billion, its first deficit in the roughly 14 years since the company went public in May 2012. Free cash flow refers to cash remaining after expenses are paid. The figure was $784 million in the previous quarter and $10.63 billion a year earlier.
Despite the deterioration in cash flow, Meta said it would press ahead with aggressive AI investment. Data center capacity is tight enough that Muse remains limited to North America and costs are heavy, but the company believes cost efficiencies will allow a significant improvement in profitability next year. Meta is seeking to transform itself into an AI company and move away from a business model that draws 97% of revenue from social media advertising.
"Running Muse requires substantial computing, but we expect to improve cost efficiency more than tenfold next year," Zuckerberg said. "That should let us secure profitability as revenue scales up." He said he expects revenue per user from Muse to exceed that of the company's existing app family, at a few hundred dollars a year, and forecast that losses at the Reality Labs unit, which includes smart glasses, would narrow sharply next year as AI performance improves. Truist Securities estimated that Muse could generate an additional $28.5 billion in revenue by 2030.
Meta said it would issue non-voting common shares in January to raise funds for AI investment. The company will distribute one new share for each share held by existing shareholders, effectively a two-for-one stock split. "The goal is to fund growth and support our ability to maintain our leading position," Meta said.