Meta’s revenue surges 26% to $64.6 billion, but billions in settlements and skyrocketing AI spending turn screws on profit, free cash flow

Meta had a good revenue quarter and a messy everything else quarter. Sales climbed 26% year over year to $64.6 billion in the third quarter, beating the $63.3 billion Wall Street was looking for. Shares rose more than 5% after hours on Wednesday as investors zeroed in on growth and the company’s new AI products.

The trouble shows up lower down the income statement. Operating income fell to $13 billion from $20.5 billion in the second quarter, with Meta blaming a $10 billion settlement tied to youth safety litigation. The company said that deal will mean about $18 billion paid to states over the next decade, depending on cooperation from TikTok and YouTube. Without the charge, Meta said operating income would have been $22.9 billion and earnings $7.40 a share instead of $3.83.

Net income came in at $9.9 billion, or $3.83 a share, up from $2.7 billion, or $1.05 a share, a year earlier. Meta also guided fourth-quarter revenue to $73 billion to $76 billion, slightly above the $73.75 billion analyst estimate. So the top line is still humming. The bottom line is taking hits from every direction.

Then there’s the AI bill. Capital expenditures hit $34.9 billion in the quarter, up from $31 billion in the prior quarter and $19.4 billion a year ago. Meta nudged its full-year capex forecast to $135 billion to $145 billion, from $130 billion to $145 billion, while saying it will keep shifting money away from Reality Labs to fund AI infrastructure and services.

Free cash flow was negative $2.1 billion, down from $784 million in the second quarter and $10.6 billion a year ago. That’s the real number to watch. Meta can talk about velocity all it wants, but the cash burn and the legal fallout are doing a very efficient job of spoiling the party.