After the U.S. stock market closed on July 29, Meta released its second-quarter 2026 financial report. The revenue was $60.8 billion, a 28% year-over-year increase, several billion higher than the market consensus. In the same document, the net profit was $15.8 billion, a 14% year-over-year decrease, with earnings per share of $6.18, approximately 14% lower than the sell-side consensus expectation. The stock price dropped by 8% to 10% in after-hours trading, with different numbers reported at different times.

Most reports focused on the operating profit margin, which decreased from 43% in the same period last year to 31%. This decline is indeed uncommon, but it is not the most significant number in this financial report. The key figure is in the cash flow statement in the penultimate line: free cash flow of $7.84 billion.

For a company with quarterly revenue of $60.8 billion, the free cash generated in this quarter is not even enough to buy two days' worth of servers.

What Level is $7.84 Billion?

The bar in the chart that is almost touching the horizontal axis represents this quarter. The free cash flow was $7.84 billion, compared to $123.86 billion in the previous quarter and $85.49 billion in the same quarter last year, marking a 93.7% quarter-over-quarter decline.

It is important to clarify that this is not Meta's lowest quarter in history. Referring to the SEC's XBRL data, in the third quarter of 2022, the free cash flow was only $1.54 billion, and in the second quarter of 2020, it was $5.13 billion. To be precise, $7.84 billion is the lowest value in 15 quarters since the third quarter of 2022.

It is evident how this figure was suppressed. The operating cash flow for this quarter was $31.862 billion, still growing, but the capital expenditure for the quarter was $31.078 billion, an 82.7% year-over-year increase. This quarter marked Meta's first-ever capital spending exceeding $300 billion, accounting for 51.1% of revenue, compared to 35.8% a year ago.

The cash earned and the cash spent almost balanced each other out, leaving only $7.84 billion.

How Much of This 12-Percentage-Point Drop in Profit Margin is One-time?

About half.

The financial report press release clearly listed two one-time items. One is a $2.4 billion legal provision, classified under general and administrative expenses, resulting in a 110.6% year-over-year increase in this line item. The other is a $1.18 billion severance charge related to the May layoffs. These two items total $3.58 billion, which, based on this quarter's revenue, roughly dragged the profit margin down by 5.9 percentage points.

Chief Financial Officer Susan Lee provided the corresponding caliber in the earnings call script, stating that after excluding these two items, second-quarter operating profit increased by 9% year-on-year.

The remaining half was not one-off. Research and development expenses were $21.656 billion, a 67.3% year-on-year increase, spending $8.714 billion more than the same period last year, the largest source of expense surge. Depreciation and amortization were $6.356 billion, up 46.4% year-on-year, increasing from 9.1% to 10.5% of revenue. Stock-based compensation was $7.658 billion, a 58.4% year-on-year increase. Susan Lee attributed the expense growth to four items: employee compensation, infrastructure costs, legal-related costs, and "third-party AI token costs."

The last item is a first-time mention in this report. Meta is buying reasoning externally.

There is also a detail that is easily misunderstood. The financial report disclosed an employee count of 75,472, down 1% year-on-year, but the press release simultaneously stated that this figure still includes approximately 8,000 employees affected by the May layoffs, most of whom will not be removed from the headcount until the end of the third quarter. The costs of the layoffs have already hit this quarter's income statement, but the effects of the layoffs have not yet been factored in.

Where Is the Pressure Coming From?

Not from Reality Labs.

Reality Labs reported revenue of $431 million this quarter, with an operating loss of $4.619 billion, compared to a $4.530 billion loss in the same period last year, only a 2% increase in losses. This division has been the target of the profit margin narrative for the past two years, and this time it remained relatively stable.

What really dropped was the core business. Family of Apps' operating profit was $23.394 billion, a 6.3% year-on-year decrease, corresponding to a segment profit margin drop from 53.0% in the same period last year to 38.8%. The consolidated caliber dropped by 12 percentage points, while the core business layer dropped by 14 percentage points.

The ads themselves were not an issue. Ad revenue was $59.363 billion, a 27% year-on-year increase, with ad impressions up 14%, and average ad prices up 12%. Susan Lee provided a specific set of product figures in the script, stating that the ad ranking model update increased Facebook's ad clicks by 8.3% and conversion rates by 15.7%. The annualized revenue run rate of Advantage+, an automated delivery tool, exceeded $75 billion.

Monetization efficiency is improving, while profit margins are decreasing, and sandwiched in between is the cost of computation.

Where Did the Money Come From?

This quarter's stock buyback: $0. Year-to-date buyback: $0. The numbers for the same period last year were $10.167 billion and $22.921 billion, respectively. Meta has stopped the buybacks.

On the same cash flow statement, net debt issuance was $24.91 billion, compared to $0 for the same period last year. This corresponds to a $25 billion six-tranche senior unsecured note issued on May 4, with the longest tranche maturing in 2066 and a coupon of 6.45%. Bloomberg's headline on April 30 for this issuance read, "Meta Initiates Up to $25 Billion Bond Sale After Surge in AI Capital Expenditure."

Putting these two together, the end-of-period net cash position decreased from $22.848 billion at the end of 2025 to $6.596 billion, a 71% half-year shrinkage. Long-term debt increased from $58.744 billion to $83.664 billion.

There is another item on the balance sheet that is unexplained. Restricted cash included in "Other Assets" increased from $1.662 billion in the same period last year to $13.107 billion, a 7.9x rise. The purpose has not been disclosed by the company, and the 10-Q for this quarter has not been submitted yet, so we have to wait for that filing.

Meta No Longer Using Its Own Money to Build Data Centers

On the day before the financial report was released, July 28, Meta announced a strategic joint venture with the world's largest asset manager, BlackRock, to build a 1-gigawatt data center in El Paso, Texas. According to the official press release, the total development cost is approximately $14 billion, with BlackRock-related funds holding 80% and Meta holding 20%. Meta has signed a lease for the entire campus, with an initial term of 4 years and 4 renewal options, extending up to 20 years, and providing residual value guarantees.

In the prepared remarks for the earnings call, Mark Zuckerberg attributed this to a new concept, saying, "As part of Meta Compute, we announced a new strategic joint venture with BlackRock yesterday."

This is not the first time. The Hyperion project in Louisiana in October 2025 followed a similar structure, as reported by industry media such as the Global Data Center Hub. The project issued approximately $27.294 billion in bonds, with funds managed by Blue Owl holding 80% and Meta holding 20%, again with Meta leasing back the facility and providing residual value guarantees. These exact terms have yet to be individually confirmed through official Meta filings.

The structure's effect is that the data center is built to order, the computing power is used as needed, but the project company is not included in Meta's consolidated financial statements, and Meta pays rent instead of capital expenditure. Susan Lee made it clear in the draft, stating that the strength of the balance sheet allows the company to "attract capital from the broader market to supplement the cash flow generated by the business."

Following this logic and looking at the full-year 2026 capital expenditure guidance of $130 billion to $145 billion, $50.918 billion has already been spent in the first half of the year. This range only accounts for a portion included in the consolidated financial statements.

An Unanswered Question

Regarding the 2027 capital expenditure, Susan Lee only mentioned in the draft, "Our current plan is to maximize capacity in 2026 and 2027." During the Q&A session, she explicitly refused to provide figures, stating, "We are not providing specific outlook for 2027 capital expenditures at this time as infrastructure planning remains highly dynamic."

During the same week, Google's CFO Annette Ashkenazi mentioned that spending in 2027 would "increase significantly." Microsoft only stated "year-over-year growth." None of the three companies provided specific numbers.

According to Fortune's report on July 26, Brad Warden, Senior Portfolio Manager at Nomura Asset Management, commented on these companies, stating, "They now look very cheap, but looking ahead at the potential disruption, they are presumed guilty."

Meta's revenue growth rate this quarter is 28%, and part of the money it has to pay for this growth is already excluded from its own capital expenditure figures.

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