Meta's earnings report discloses Muse usage data; Zuckerberg says commercialization will be pushed forward earlier

In Muse's first week online, Meta already had to ask payment company Stripe to raise its credit limit: users' enthusiasm for having AI shop on their behalf exceeded expectations. About six weeks later, more than 10 million people in the US and Canada had completed Muse setup, shopping had become the most popular use, and the average purchase amount exceeded $200.

Users are willing to spend money, and Zuckerberg is certainly pleased. But the money goes to merchants, while the AI running errands for users consumes Meta's computing power. On the latest earnings call, Zuckerberg said Muse will move toward monetization earlier than any of the company's previous new products.

Meta is still very good at making money, but the pressure is real. Third-quarter revenue hit a new high of $64.601 billion, but profit was affected by nearly $10 billion in litigation settlement costs. Infrastructure investment continued to rise, and free cash flow turned negative at $2.120 billion.

To support future expansion, Meta announced plans to add a class of non-voting shares, giving the company another option for future financing, acquisitions and talent retention while preserving Zuckerberg's control of the company.

Next, Muse will expand to more devices. It will come to smart glasses in November, and the dedicated device Charm is scheduled to ship in December. Zuckerberg hopes users can find their AI anytime, and that more of them will be willing to keep paying.

The advertising business is still making money, and Muse urgently needs to prove that, beyond spending users' money, it can also make money for Meta.

Revenue hits a record high, but Zuckerberg still needs to find money

Looking at profitability alone, Meta had a strong quarter.

Meta's fiscal 2026 third-quarter revenue (quarter ended September 30) reached $64.601 billion, up 26% year over year, a record high for a single quarter and above the upper end of the company's previous guidance of $64 billion.

The advertising business remains robust.

Ad impressions across Meta's apps rose 10% year over year, and the average ad price rose 14%. More ads were sold to advertisers, and advertisers were willing to pay higher prices.

For Meta, which is investing heavily in AI, these results at least show that the core business supporting the company's expansion is still strong.

Meta founder and CEO Zuckerberg was also satisfied. In the earnings statement, he said the company's investments are paying off and the core business is performing strongly.

However, a closer look reveals a rather conspicuous expense: $9.89 billion in litigation settlement costs, almost as much as Meta's net profit of $9.86 billion for the quarter.

This stems from a lawsuit filed in 2023 over teenagers' social media addiction. Several US states accused Meta of knowing that some product designs would harm children and teenagers while still using features such as infinite scrolling and frequent notifications to keep them on the platforms as long as possible.

In August this year, Meta reached a settlement with the relevant parties. In addition to payment, it must also revise rules for underage users, including time limits and nighttime use restrictions. The settlement will be paid in installments under the agreement and was not fully paid out in the third quarter.

After the nearly $10 billion expense was recorded, Meta's third-quarter operating profit fell 37% year over year. Excluding this expense, operating profit still grew about 11%.

The signal from cash flow is what should worry Zuckerberg more.

In the third quarter, Meta generated $32.786 billion in cash from operating activities, but capital expenditures and principal payments on finance leases reached $34.906 billion, turning free cash flow negative at $2.120 billion.

The company is still generating cash, but its operating income for the quarter is no longer enough to cover these investments.

And investment will continue. Meta raised the lower end of its full-year capital expenditure guidance by $5 billion to $135 billion–$145 billion. Money earned from the advertising business needs to support data centers, servers and a growing number of new products, and the company is also preparing other sources of funding for future expansion.

This time Zuckerberg created a new financing tool without diluting his voting control.

The company plans to create a class of non-voting Class C common stock, to be distributed as a stock dividend. Each share of Class A common stock or Class B super-voting stock will receive one share of Class C stock, equivalent to a 2-for-1 split. The charter amendment to create the new share class is proposed to take effect on January 19, 2027, with the specific distribution date to be determined later.

The stock dividend itself will not bring Meta new cash, but in the future it can provide another tool for financing, acquiring companies and granting stock compensation to employees. For Meta, which needs to constantly buy computing power and compete for top talent, this flexibility is useful. Because the new shares carry no voting rights, Zuckerberg can also retain control of the company.

About a month and a half after Muse launched, more than 10 million people in the US and Canada had completed setup. About a quarter of them use it on any given day.

These are the first usage figures Zuckerberg presented on the call, and they are closer to the product's actual situation than download numbers.

The most popular use is shopping.

Meta CFO Susan Li disclosed that more than a quarter of Muse weekly active users use the shopping feature. Zuckerberg said the average purchase amount exceeds $200, including travel spending. In the first week online, transaction volume exceeded expectations, and Meta had to ask payment company Stripe to raise its credit limit.

So here is the question—these actions can save users time, but they also require Meta to provide computing power.

On the call, Evercore ISI analyst Mark Mahaney put the question directly to Zuckerberg: Meta's past new products usually started by expanding users and usage before gradually commercializing. Muse's costs are clearly higher—shouldn't this one move faster?

Zuckerberg said Muse will push commercialization earlier than Meta's previous new products. His reason: both the costs and the business opportunity are large enough that, to keep growing the product, the company must make progress on revenue.

Muse had paid plans from launch. The basic version is free, with higher-usage subscriptions at $20 and $100 per month.

Merchant entry points are also being filled in. At the September Connect conference, Meta announced shopping connections with Walmart, Best Buy, Sephora and others, as well as payment methods such as Shop Pay and PayPal.

Of course, merchants may also not welcome it in. Amazon has already blocked Muse from shopping on customers' behalf, saying Meta did not obtain authorization in advance and raising security concerns about how it handles customer credentials and accesses account data.

That means for Meta to charge for transactions, besides making users feel it works well, it must also negotiate cooperation with companies that control goods and payment entry points. Challenges remain.

Barclays analyst Ross Sandler pressed on per-user costs on the call, and Susan Li said there were no specific figures she could share at present.

Hardware is still highly anticipated

The market reaction after the earnings release was positive.

After the results were published, Reuters reported that Meta's shares rose more than 4% in after-hours trading.

Meta's fourth-quarter revenue guidance is $73 billion to $76 billion, with a midpoint of $74.5 billion, above market expectations. Advertising growth and next-quarter revenue expectations are both supporting the appeal of this earnings report.

In the coming quarter, Meta will have new moves, with hardware among the most anticipated.

On October 23, the Meta Adventurer smart glasses, starting at $249, will go on sale, further lowering the purchase threshold. Among products already on the market, Ray-Ban Meta Audio, starting at $349, shipped on October 13, while the third-generation Ray-Ban Meta, starting at $449, launched in September.

By the end of the year, Meta plans to offer more than 100 styles and configurations of AI glasses.

These glasses will soon share another function. Zuckerberg said on the call that Muse will connect to Meta smart glasses starting in November. Users can talk to their Agent through the glasses and have it act based on the products, flyers or long shopping lists in front of them, reducing the steps of pulling out a phone and typing commands.

There is also a small device prepared specifically for Muse, called Charm. About the size of an AirPods charging case, it has an approximately 2-inch touchscreen and 5G connectivity, can be attached to a keychain, and is used to communicate with Muse. According to the plan Meta disclosed at the Connect conference, this device will ship in the December holiday season; no price had been announced at that time.

Hardware is being rolled out so densely that the purpose goes beyond selling a few more pairs of glasses.

Zuckerberg explained on the call that when the company prices devices, it does not pursue high hardware margins and hopes to build a larger software and AI business on these devices. Glasses and Charm make Muse easier to invoke at any time, and Meta expects this usage to ultimately bring more subscriptions.

However, after devices are sold, the more frequently users invoke the Agent, the larger the backend computing bill may be. Expanding coverage and lowering service costs need to advance at the same time.

Model updates carry part of that task. When Muse Wonder was released on October 12, Meta said the new capabilities would first roll out to Muse subscribers, and later Wonder would be used to develop dedicated models covering more users. On the call, Zuckerberg further mentioned that the company is preparing smaller, more efficient models with intelligence close to Muse Wonder.

Management's goal is to improve computing cost efficiency by more than 10 times over the next year.

Whether users are willing to keep handing over more information is also the next test. Muse handles email, calendars and shopping tasks, requiring fairly deep entry into personal life. Meta plans to launch Muse Confidential VM within the year, promising to encrypt data and conversations with keys held only by users, so that Meta itself cannot view the content.

This shift also extends to Reality Labs. This division, responsible for virtual reality, augmented reality and related devices, is expected to lose $18 billion to $19 billion this year. Meta hopes to narrow the loss to about $15 billion next year and shift more resources to AI.

Susan Li expects the new AI business to begin contributing incremental revenue starting in 2027, but did not give a specific amount.

From glasses to dedicated devices, from subscriptions to transaction fees, under limited market patience, whether Muse's cost reduction and revenue growth can reach a sweet balance point in time is Meta's biggest challenge ahead.