Kenneth Dorell :

Thank you. Good afternoon and welcome to Meta Platform's Second Quarter 2024 Earnings Conference Call. Joining me today to discuss our results are Mark Zuckerberg, CEO, and Susan Li, CFO. Before we get started, I would like to take this opportunity to remind you that our remarks today will include forward-looking statements. Actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are set forth in today's earnings press release and in our Quarterly Report on Form 10-Q, filed with the SEC. Any forward-looking statements that we make on this call are based on assumptions as of today and we undertake no obligation to update these statements as a result of new information or future events. During this call, we will present both GAAP and certain non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. The earnings press release and an accompanying Investor Presentation are available on our website at investor.fb.com. And now I'd like to turn the call over to Mark.

Susan Li :

Thanks Mark and good afternoon everyone. Let's begin with our consolidated results. All comparisons are on a year-over-year basis unless otherwise noted. Q2 total revenue was $39.1 billion up 22% or 23% on a constant currency basis. Q2 total expenses were $24.2 billion, up 7% compared to last year. In terms of the specific line items, cost of revenue increased 23% driven primarily by higher infrastructure and reality labs inventory costs. R&D increased 13%, primarily driven by higher headcount-related expenses and infrastructure costs which were partially offset by lower restructuring costs. Marketing and sales decreased 14%, due mainly to lower restructuring and headcount-related costs. G&A decreased 12%, mostly due to lower legal-related expenses. We ended the first quarter with almost 70,800 employees, up 2% from Q1. Second quarter operating income was $14.8 billion, representing a 38% operating margin. Our tax rate for the quarter was 11%. Net income was $13.5 billion, or $5.16 per share. Capital expenditures, including principal payments on finance leases, were $8.5 billion, driven by investments in servers, data centers, and network infrastructure. Free cash flow was $10.9 billion. We repurchased $6.3 billion of our Class A common stock and paid $1.3 billion in dividends to shareholders, ending the quarter with $58.1 billion in cash and marketable securities and $18.4 billion in debt. Moving now to our segment results. I'll begin with our Family of Apps segment. Our community across the Family of Apps continues to grow, with approximately 3.27 billion people using at least one of our Family of Apps on a daily basis in June. Q2 total Family of Apps revenue was $38.7 billion, up 22% year-over-year. Q2 Family of Apps ads revenue was $38.3 billion, up 22% or 23% on a constant currency basis. Within ad revenue, the online commerce vertical was the largest contributor to year-over-year growth, followed by gaming and entertainment and media. On a user geography basis, ad revenue growth was strongest in rest of world and Europe at 33% and 26% respectively. Asia Pacific grew 20% and North America grew 17%. On an advertiser geography basis, total revenue growth continued to be strongest in Asia Pacific at 28%. The growth was below the first quarter rate of 41%, as we lapped a period of stronger demand from China-based advertisers. In Q2, the total number of ad impressions served across our services and the average price per ad both increased 10%. Impression growth was mainly driven by Asia Pacific and rest of world. Pricing growth was driven by increased advertiser demand in part due to improved ad performance. This was partially offset by impression growth particularly from lower monetizing regions and surfaces. Family of Apps other revenue was $389 million, up 73%, driven primarily by business messaging revenue growth from our WhatsApp business platform. We continue to direct the majority of our investments toward the development and operation of our Family of Apps. In Q2, Family of Apps expenses were $19.4 billion, representing approximately 80% of our overall expenses. Family of Apps expenses were up 4%, mostly due to higher infrastructure and headcount related expenses, which were partially offset by lower restructuring costs. Family of Apps operating income was $19.3 billion, representing a 50% operating margin. Within our Reality Labs segment, Q2 was $353 million, up 28% driven primarily by Quest headset sales. Reality Labs expenses were $4.8 billion, up 21% year-over-year, driven mainly by higher headcount-related expenses and Reality Labs inventory costs. Reality Labs operating loss was $4.5 billion. Turning now to the business outlook. There are two primary factors that drive our revenue performance, our ability to deliver engaging experiences for our community and our effectiveness at monetizing that engagement over time. To deliver engaging experiences, we remain focused on executing our priorities, including video and in-feed recommendations. On Instagram, Reels engagement continues to grow as we make ongoing enhancements to our recommendation systems. Part of this work has been focused on increasing the share of original posts within recommendations so people can discover the best of Instagram, including content from emerging creators. Now, more than half of recommendations in the US come from original posts. On Facebook, we're seeing encouraging early results from the global rollout of our unified video player and ranking systems in June. This initiative allows us to bring all video types on Facebook into one viewing experience, which we expect will unlock additional growth opportunities for short-form video, as we increasingly mix shorter videos into the overall base of Facebook video engagement. We expect the relevance of video recommendations will continue to increase as we benefit from unifying video ranking across Facebook and integrating our next-generation recommendation systems. These have already shown promising gains since we began using the new systems to support Facebook Reels recommendations last year. We expect to expand these new systems to support more services beyond Facebook video over the course of this year and next year. We are also seeing good momentum with our longer-term engagement priorities, including Generative AI and Threads. People have used Meta AI for billions of queries since we first introduced it. We're seeing particularly promising signs on WhatsApp in terms of retention and engagement, which has coincided with India becoming our largest market for Meta AI usage. You can now use Meta AI in over 20 countries and eight languages, and in the US we are rolling out new features like Imagine Edit, which allows people to edit images they generate with Meta AI. Beyond Generative AI, the Threads community also continues to grow and deepen their engagement, as we ship new features and enhance our content recommendation systems. Now to the second driver of our revenue performance, increasing monetization efficiency. There are two parts to this work. The first is optimizing the level of ads within organic engagement. We continue to see opportunities to grow ad supply on lower monetizing surfaces like video, including within Facebook as the mix of overall video engagement shifts more to shorter videos over time, which creates more ad insertion opportunities. More broadly, we are continuing to get better at determining the best ads to show and when to show them during a person session across both Facebook and Instagram. This is enabling us to drive revenue growth and conversions without increasing the number of ads or in some cases even reducing ad load. The second part of improving monetization efficiency is enhancing marketing performance. We continue to be pleased with our progress here, with AI playing an increasingly central role. We're improving ad delivery by adopting more sophisticated modeling techniques made possible by AI advancements, including our Meta Lattice ad ranking architecture, which continued to provide ad performance and efficiency gains in the second quarter. We're also making it easier for advertisers to maximize ad performance and automate more of their campaign setup with our Advantage+ suite of solutions. We're seeing these tools continue to unlock performance gains, with a study conducted this year demonstrating 22% higher return on ad spend for US advertisers after they adopted Advantage+ Shopping campaigns. Advertiser adoption of these tools continues to expand and we are adding new capabilities to make them even more useful. For example, this quarter we introduced flexible format to Advantage+ Shopping, which allows advertisers to upload multiple images and videos in a single ad that we can select from and automatically determine which format to serve in order to yield the best performance. We have also now expanded the list of conversions that businesses can optimize for using Advantage+ shopping to include an additional 10 conversion types, including objectives like add to cart. Looking forward, we believe Generative AI will play a growing role in how businesses market and engage with customers at scale. We expect this technology will continue to make it easier for businesses to develop customized and diverse ad creatives. We've seen promising early results since introducing our first Generative AI ad features, image expansion, background generation, and text generation with more than 1 million advertisers using at least one of these solutions in the past month. In May, we began rolling out full image generation capabilities into Advantage+ Creative, and we're already seeing improved performance from advertisers using the tool. Finally, we expect AI will help businesses communicate with customers more efficiently through messaging. We're starting by testing the ability for businesses to use AI in their chats with customers to help sell their goods and services and to generate leads. While we are in the early stages, we continue to expand the number of advertisers we are testing with and have seen good advances in the quality of responses since we began using Llama 3. Next, I’d like to discuss our approach to capital allocation which remains unchanged. We continue to invest both in enhancing our core experiences in the near-term and developing technologies that we believe will transform how people engage with our services in the years ahead. We expect that having sufficient compute capacity will be central to many of these opportunities. So we’re investing meaningfully in infrastructure to support our core AI work in content ranking and ads, as well as our generative AI and advanced research efforts. Our ongoing investment in core AI capacity is informed by the strong returns we've seen and expect to deliver in the future, as we advance the relevance of recommended content and ads on our platform. While we expect the returns from Generative AI to come in over a longer period of time, we’re mapping these investments against the significant monetization opportunities that we expect to be unlocked across customized ad creative, business messaging, a leading AI assistant and organic content generation. As we scale generative AI training capacity to advance our foundation models, we’ll continue to build our infrastructure in a way that provides us with flexibility in how we use it over time. This will allow us to direct training capacity to gen AI inference or to our core ranking and recommendation work, when we expect that doing so would be more valuable. We will also continue our focus on improving the cost efficiency of our workloads over time. Reality Labs remains our other long-term initiative that we continue to invest meaningfully in. Quest 3 is selling well and Ray-Ban Meta smart glasses are showing very promising traction with the early signals that we’re seeing across demand, usage and retention increasing our confidence in the long-run potential of AR glasses. Finally, as we pursue these investments across near and long-term priorities, we will remain focused on operating the business efficiently. Turning now to the revenue outlook. We expect third quarter 2024 total revenue to be in the range of $38.5 billion to $41 billion. Our guidance assumes foreign currency is a 2% headwind to year-over-year total revenue growth based on current exchange rates. Turning now to the expense outlook. We expect full year 2024 total expenses to be in the range of $96 billion to $99 billion, unchanged from our prior outlook. For Reality Labs, we continue to expect 2024 operating losses to increase meaningfully year-over-year due to our ongoing product development efforts and investments to scale our -- to further scale our ecosystem. While we do not intend to provide any quantitative guidance for 2025 until the fourth quarter call, we expect infrastructure costs will be a significant driver of expense growth next year. As we recognize depreciation and operating costs associated with our expanded infrastructure footprint. Turning now to the CapEx outlook. We anticipate our full year 2024 capital expenditures will be in the range of $37 billion to $40 billion, updated from our prior range of $35 billion to $40 billion. While we continue to refine our plans for next year, we currently expect significant CapEx growth in 2025 as we invest to support our AI research and our product development efforts. On to tax. Absent any changes to our tax landscape, we expect our full year 2024 tax rate to be in the mid-teens. In addition we continue to monitor an active regulatory landscape, including the increasing legal and regulatory headwinds in the EU and the US that could significantly impact our business and our financial results. In closing, Q2 was another good quarter. We continue to execute well across our business priorities and have exciting opportunities in front of us to deliver more value to the people and businesses using our products around the world. With that, Krista let's open up the call for questions.

Brian Nowak:

Great. Thanks for taking my questions. I have two, one for Mark, one for Susan. Mark I wanted to sort of go back to some of the new generative AI-enabled use cases for users and advertisers. You talked about Meta AI, Studio, chatbots, [foundation] (ph) models. If you could just sort of hone in on one or two of those that you are most excited about, we are seeing good signal that could be a real driver for the business in '25, '26 just so we sort of know where are you most focused on all those opportunities it would be helpful. And the second one, Susan, you have a lot of CapEx priorities from building new infrastructure for next-generation models, compute capacity. Just walk us through again on the CapEx philosophy and any guardrails you have around ensuring you generate a healthy return on invested capital for investors from all the CapEx. Thanks.

Susan Li:

And Brian, I can take the second question. On the ROI part of your question, I’d broadly characterize our AI investments into two buckets; core AI and Gen AI. And the two are really at different stages, as it relates to driving revenue for our businesses and our ability to measure returns. On our core AI work, we continue to take a very ROI based approach to our investment here. We are still seeing strong returns as improvements to both engagement and ad performance have translated into revenue gains and it makes sense for us to continue investing here. Gen AI is where we are much earlier, as Mark just mentioned in his comments. We don't expect our Gen AI products to be a meaningful driver of revenue in 2024. But we do expect that they are going to open up new revenue opportunities over time that will enable us to generate a solid return off -- of our investment while we are also open sourcing subsequent generations of Llama. And we've talked about the four primary areas that we are focused here on the Gen AI opportunities to enhance the core ads business, to help us grow in business messaging, the opportunities around Meta AI, and the opportunities to grow core engagement over time. The other thing I’d say is, we are continuing to build our AI infrastructure with fungibility in mind, so that we can flex capacity where we think it will be put to best use. The infrastructure that we build for gen AI training can also be used for Gen AI inference. We can also use it for ranking and recommendations by making certain modifications like adding general compute and storage. And we are also employing a strategy of staging our data center sites, at various phases of development, which allows us to flex up to meet more demand and less lead time if needed while limiting how much spend we are committing to in the outer years. So while we do expect that we are going to grow CapEx significantly in 2025, we feel like we have a good framework in place in terms of thinking about where the opportunities are and making sure that we have the flexibility to deploy it, as makes the most sense.

Mark Shmulik:

Yes. Hi, thanks for taking my question. Just as we look at the revenue guidance and the outlook, Susan, any color you can share on just kind of the state of the overall digital ad market? And you've highlighted some areas where you are seeing strength versus kind of some of the idiosyncratic efforts you've made to kind of improve the efficacy of the ad product. Thank you.

Operator:

Your next question comes from the line of Eric Sheridan with Goldman Sachs. Please go ahead.

Mark Zuckerberg:

I can start and Susan can jump in, if she has anything else that she wants to add. So the WhatsApp stat I think, is really important as a business trend just because the United States punches above its weight in terms of, it is such a large percent of our revenue. So before, WhatsApp was sort of the leading messaging app in many countries around the world but not in the US. And I think now that we're starting to make inroads into leading in the US as more and more people use the product and realize that, hey, it was a really good experience, the best experience for cross-platform communication and groups and on all these different things. I think that -- that's going to just mean that all of the work that we are doing to grow the business opportunity there over time is just going to have a big tailwind if the US ends up being a big market. So that's one reason why it's really relevant. It is obviously also personally somewhat gratifying to see all the people around us starting to use WhatsApp, so I think that is pretty fun but maybe somewhat less relevant from a business perspective. Threads, I think it is another example of something that it got off to about as good of a start of any app that I can think of. I think, it was the fastest growing app to 100 million people. And it is a good reminder that even when you have that start, the path from there to 1 billion people using an app is still multiple years. And that's our product cycle. And I think that -- that's something that is a little bit different about Meta in the way we build consumer products and the business around them than a lot of other companies that ship something and start selling it and making revenue from it immediately. So I think that's something that our investors and folks thinking about analyzing the business, if needed to always grapple with, is all these new products, we ship them and then there is a multiyear time horizon between scaling them and then scaling them into not just consumer experiences but very large businesses. But the thing that I think is just super exciting about Threads is that we've been building this company for 20 years, and there are just not that many opportunities that come around to grow 1 billion person app. I mean, there are -- I don't know, maybe a dozen of them in the world or something, right? I mean, there are certainly more of them outside the company than inside the company, but we do pretty well and being able to add another one to the portfolio if we execute really well on this is just really exciting to have that potential. Now obviously, there is a ton of work between now and there. I mean, we are almost at 200 million. So it is a really good milestone, I'm excited about that. A lot of work between this and it being a large part of the business. But I do think that these kind of opportunities are pretty rare and that's something that we are just really excited about. I think the team is doing great work on it.

Operator:

Your next question comes from the line of Doug Anmuth with JPMorgan. Please go ahead.

Susan Li:

Thanks, Doug. I can go ahead and talk about both of those. So your first question was sort of about the longer-term CapEx outlook. We haven't really shared an outlook sort of on the longer-term CapEx trajectory. In part infrastructure is an extraordinarily dynamic planning area for us right now. We are continuing to work through what the scope of the Gen AI road maps will look like over that time. Our expectation obviously again, is that we are going to significantly increase our investments in AI infrastructure next year, and we'll give further guidance as appropriate. But we are building all of that CapEx, again with the factors in mind that I talked about previously thinking about both how to build it flexibly, so we can deploy to core AI and Gen AI use cases as needed. And making sure that we both feel good about the returns that we're seeing on the core AI investments, which we are able to measure more immediately. And then we feel good about the opportunities in the gen AI efforts. Your second question was about the Q3 revenue outlook. Again I mentioned this earlier. We have seen healthy global advertising demand on our platform. We are delivering ongoing ad performance improvements, which again we feel like is a result of many, many quarters of effort that have accrued and will continue to accrue value to our platform. And we saw basically in Q2 where revenue grew 22% that there was broad-based strength across regions and verticals including particular strength among smaller advertisers, and we expect that generally to continue into Q3.

Justin Post:

Great. Thank you. I just want to get back to the comment on US young adult user growth, especially maybe on Facebook and Instagram. I know you made a big change with Reels a couple of years ago. But what are those users doing on Facebook and Instagram? And can you give us any quantification of the usage growth? Thank you.

Operator:

Your next question comes from the line of Mark Mahaney with Evercore ISI. Please go ahead.

Susan Li:

Thanks Mark. On your first question about Marketplace, again we are obviously excited that it's been one of the drivers of strength in young adults. I would probably just say that more generally, Marketplace is one prong in a broader commerce strategy that we have which continues to be focused on basically creating the best shopping experience on our platform. Marketplace is obviously consumer oriented. The broader part of the commerce strategy is about making it easier for businesses to advertise their products, for buyers to find and purchase relevant items on our platform. And to that end, I’d say that we feel quite happy with also the investments we've been making in Shops ads. Shops ads revenue is growing at a strong year-over-year pace. We are seeing Shops ads drive incremental performance for advertisers, and it's also working well in combination with some of our other products like Advantage+ shopping. Your second question was about headcount. We continue to be disciplined about where we are allocating new headcount to ensure that it's really focused on our core company priorities, but we are also working down a prior hiring underrun. And as we further close that hiring underrun over the course of this year, I do expect that we will end 2024 with in-seat reported headcount that is meaningfully higher than where we ended 2023. We aren't providing sort of 2025 headcount growth expectations yet as we haven't started our budgeting process yet. But again, I expect that we’ll primarily target our hiring to focus on priority areas, and we will be running a very disciplined headcount process.

Youssef Squali:

Great. Thank you very much. So the AI system using Llama 3.1 has been incorporated in different variations and looks really impressive and seems to be getting closer to becoming a full search engine for virtually everything except for commercial queries so far. So are there any plans to open it up to the broader web? Kind of like what may be OpenAI is off to testing, maybe link it to third-party marketplaces for commercial search, et cetera. And then on Ray-Ban, can you maybe talk a little bit more about the opportunity to deepen your relationship with EssilorLuxottica? What would that look like? What kind of areas are the most exciting to you, Mark in that relationship? Thank you.

Operator:

Your next question comes from the line of Ron Josey with Citi. Please go ahead.

Mark Zuckerberg:

So Llama is the foundation model that people can shape into all kind of different products. So whether it's Meta AI for ourselves or the AI Studio or the business agents or like the assistant that's in the Ray-Ban glasses, like all these different things are basically products that have been built with Llama. And similarly, any developer out there is going to be able to take it and build a whole greater diversity of different things as well. Like I talked about, I think -- the reason why open sourcing this is so valuable for us is that we want to make sure that we have the leading infrastructure to power the consumer and business experiences that we are building. But the infrastructure, it's not just a piece of software that we can build in isolation. It really is an ecosystem with a lot of different capabilities that other developers and people are adding to the mix, whether that's new tools to distill the models into the size that you want for a custom model, or ways to fine-tune things better or make inference more efficient or all different other kinds of methods that we haven't even thought of yet, the silicon optimizations that the silicon companies are doing, all the stuff. It is an ecosystem. So we can't do all that ourselves. And if we built Llama and just kind of kept it within our walls, then it wouldn't actually be as valuable for us to build all the products that we are building as it is going to end up being. So that's the business strategy around that. And that's why we don't feel like we need to necessarily build a cloud and sell it directly in order for it to be a really positive business strategy for us. And part of what we are doing is working closely with AWS, I think, especially did great work for this release. Other companies like Databricks, Nvidia, of course, other big players like Microsoft with Azure, and Google Cloud, they are all supporting this. And we want developers to be able to get it anywhere. I think that's one of the advantages of an open source model like Llama is – it is not like you're locked into one cloud that offers that model, whether it's Microsoft with OpenAI or Google with Gemini or whatever it is, you can take this and use it everywhere and we want to encourage that. So I'm quite excited about that. The enterprise and business applications that we are going to be most focused on, though, in addition to just optimizing the advertiser experience like I talked about in my comments earlier, it is the business agent piece. I just think that there is a huge potential like I said earlier. I think pretty much every business today, it has an e-mail address. They have a website. They have social media accounts. I think in the future, they are going to have at least one, if not multiple business agents that can do the whole range of things from interacting to help people buy things to helping support the sales that they've done, if they have issues with the product, if they need to get in touch with you for something. And we already see people interacting with businesses over messaging working quite well in countries that have low cost of labor. But the thing is that in order to have someone answering everyone's questions is quite expensive in a lot of countries. And I think that this is like a thing that AI, I think is just going to be very well suited towards doing. And when we can make that easy for the hundreds of millions of businesses that use our platforms to pull in all their information and their catalogs, and the history and all the content that they've shared and really just quickly stand up an agent, I think that's going to be awesome. So we can combine Llama with a lot of custom work that we're doing in our business teams and couple that with all the other investment that the rest of the ecosystem is doing to make Llama good. And I think that's going to be huge, but that's just one area. I mean, this really goes across all of the different products that we are building, both consumer and business. So it is a lot of exciting stuff.

Operator:

Thank you. That question will come from the line of Ross Sandler with Barclays. Please go ahead.

Mark Zuckerberg:

I can start with the first one, and then I'll let Susan answer the second one. It is an interesting question. It is a little hypothetical because I mean, I do think it's true that if, let's say, there were no future foundation models. I think there would just be a huge amount of product innovation that the industry would bring to bear, and that just takes time. But then at the same time there are going to be future foundation models, and they are going to be awesome and unlock new capabilities and we are planning our products around those. So I'm not really planning our product road map assuming that there isn't future innovation. On the contrary, we are planning what's going to be in Llama 4 and Llama 5 and beyond based on what capabilities we think are going to be most important for the road map that I just laid out for having the breadth of utility that you're going to need in something like Meta AI, making it set businesses and creators and individuals can stand up any kind of AI agents that they want, that you are going to have these kind of real-time, multimodal glasses with you all the time that will just be increasingly useful for all the things that you're doing. And that -- I guess this kind of dovetails what I'd expect Susan to talk about next. And we do have this huge set of use cases already about people wanting to discover content and interact with their friends and businesses reaching people, and all that stuff is getting better with this, too. So there is -- I guess my point there was its just – there is some lag between the technology becoming available and the products becoming kind of fully explored in the space. And I just think that -- that was kind of my way of saying that I think that this is just a very exciting area where there's just going to be a lot of innovation for a long time to come. I'll let Susan take a stab at the numbers around the GPUs and all that.

Kenneth Dorell:

Great. Thank you all for joining us today. We appreciate your time, and we look forward to speaking with you again soon.

Mark Zuckerberg:

All right. Thanks, Ken, and everyone, thanks for joining. It's been a good start to the year, both in terms of product momentum and business performance. We estimate that more than 3.2 billion people use at least one of our apps each day, and we're seeing healthy growth in the U.S. And I want to call out WhatsApp specifically, where the number of daily actives and message sends in the U.S. keeps gaining momentum, and I think we're on a good path there. We've also made good progress on our AI and metaverse efforts, and that's where I'm going to focus most of my comments today.

Turning now to the business outlook. There are 2 primary factors that drive our revenue performance:

our ability to deliver engaging experiences for our community and our effectiveness at monetizing that engagement over time. On the first, we remain pleased with engagement trends and have strong momentum across our product priorities. Our investments in developing increasingly advanced recommendation systems continue to drive incremental engagement on our platform, demonstrating that people are finding added value by discovering content from accounts they are not connected to. The level of recommended content in our apps has scaled as we've improved these systems, and we see further opportunity to increase the relevance and personalization of recommendations as we advance our models.

Eric Sheridan:

Maybe I'll ask a two-parter. Mark, you used the analogy of other investments cycles you've been through around products like Stories and Reels. I know you're not giving long-term guidance today, but using those analogies, how should investors think about the length and depth of this investment cycle with respect to either AI and/or Reality Labs more broadly and mixed reality?

Mark Zuckerberg:

Yes. In terms of the timing, I think it's somewhat difficult to extrapolate from previous cycles. But I guess like the main thing that we see is that we will usually take, I don't know, a couple of years, I mean, it could be a little more, it could be less to focus on building out and scaling the products. And we typically don't focus that much on monetization of the new areas until they reach significant scale because it's so much higher leverage for us just to improve monetization on other things before these new products are at scale.

Operator:

Your next question comes from the line of Brian Nowak from Morgan Stanley.

Mark Shmulik:

I guess back to that product playbook that we talked about a few times, with kind of Reels now such a large share of kind of time spent on Instagram and Facebook, how do we think about the next leg of kind of monetization growth from here? In particular, as we kind of get back to kind of shopping on platform or other ways to monetize, any color there on the road map kind of just beyond ad insertion from here?

Susan Li:

Sure. Thanks, Mark. So Reels revenue continued to grow across Instagram and Facebook in Q1, and that's driven both by higher engagement and increased monetization efficiency through our ads ranking and delivery improvements. And we -- as we've mentioned before, we don't plan on quantifying the impact from Reels going forward, but it remains a positive contributor to overall revenue. And we expect that there are going to be opportunities for us to continue improving performance and growing supply.

Douglas Anmuth:

Can you just talk about what's changed most in your view in the business and the opportunity now versus 3 months ago? And is there anything you're more cautious about in revenue in the ad market? And is the AI opportunity just even bigger, and therefore, requiring more investment than expected?

Mark Zuckerberg:

Yes, I can speak to the first one. I think we've gotten more optimistic and ambitious on AI. So previously, I think that our work in this -- I mean when you were looking at last year, when we released Llama 2, we were very excited about the model and thought that, that was going to be the basis to be able to build a number of things that were valuable that integrated into our social products. But now I think we're in a pretty different place. So with the latest models, we're not just building good AI models that are going to be capable of building some new good social and commerce products. I actually think we're in a place where we've shown that we can build leading models and be the leading AI company in the world. And that opens up a lot of additional opportunities beyond just ones that are the most obvious ones for us.

Susan Li:

And I can take that second question, Doug. So we aren't giving full year 2024 guidance. And obviously, our revenue for the full year will be influenced by many factors, including macro conditions and things that are harder to predict the further out you go. And of course, over the course of 2024, we will also be lapping periods of increasingly strong demand. With that said, we expect to see good opportunities to continue growing engagement across our products, driven by the investments we made in AI-based content recommendations, our ongoing video work. And we also expect that we will continue to drive ads performance gains and continue to make our ads sort of more effective and deliver increasing value to advertisers.

Operator:

Your next question comes from the line of Justin Post from Bank of America.

Mark Zuckerberg:

And then on the question of shifting resources from other parts of the company. I would say, broadly, we actually are doing that in a lot of places in terms of shifting resources from other areas, whether it's compute resources or different things in order to advance the AI efforts. For Reality Labs specifically, I'm still really optimistic about building these new computing platforms long term. I mentioned in my remarks upfront that one of the bigger areas that we're investing in Reality Labs is glasses. We think that that's going to be a really important platform for the future.

Operator:

Your next question comes from the line of Youssef Squali from Truist Securities.

Kenneth Gawrelski:

As you look out through the coming period of product investment, how should we think about the relationship between Family of Apps revenue and cost growth? Is there any insight you can give us there?

Susan Li:

Yes. On the second part of your question first, so on the G&A side, that was really driven by legal expenses. We recognized some accruals in Q1 related to ongoing legal matters, and you'll see more detail on that in the 10-Q.

Operator:

Your next question comes from the line of Ross Sandler from Barclays.

Kenneth Dorell:

Krista, we have time for one last question.

Ronald Josey:

Mark, I want to follow up on a prior question that you mentioned optimism has grown internally quite a bit just with all the improvements and investments and innovations you're making. And we're seeing that in the experience for a few days of Meta AI. So can you just talk to us maybe how the $400 billion parameter model just might evolve the experience on Meta or how you think things might change over the next, call it, months, years, et cetera, as maybe messaging becomes a greater focus and things along those lines? So just a vision longer term.

Kenneth Dorell:

Great. Thank you for joining us today. We appreciate your time, and we look forward to speaking with you again soon.

Ken Dorell:

Thank you. Good afternoon and welcome to Meta Platform's Fourth Quarter and Full Year 2023 Earnings Conference Call. Joining me today to discuss our results are Mark Zuckerberg, CEO; and Susan Li, CFO. Before we get started, I would like to take this opportunity to remind you that our remarks today will include forward-looking statements. Actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are set forth in today's earnings press release and in our quarterly report on Form 10-Q filed with the SEC. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. During this call, we will present both GAAP and certain non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. The earnings press release and an accompanying investor presentation are available on our website at investor.fb.com. And now I'd like to turn the call over to Mark.

Susan Li:

Thanks, Mark, and good afternoon, everyone. Let's begin with our consolidated results. All comparisons are on a year-over-year basis, unless otherwise noted. Q4 total revenue was $40.1 billion, up 25% or 22% on a constant currency basis. Q4 total expenses were $23.7 billion, down 8% compared to last year. In terms of the specific line items, cost of revenue decreased 8%, 0driven mainly by lower restructuring costs that were partially offset by higher infrastructure-related costs. R&D increased 8% driven primarily by higher head count-related costs from Family of Apps and Reality Labs as well as higher non-head count-related Reality Labs operating expenses, which were partially offset by lower restructuring costs. Marketing and sales decreased 29% due mainly to lower marketing spend and restructuring costs. G&A decreased 26% due mainly to lower restructuring expenses. We ended the fourth quarter with over 67,300 employees, down 22% from a year ago while up 2% from Q3 as our hiring efforts have resumed. Fourth quarter operating income was $16.4 billion, representing a 41% operating margin. Our tax rate for the quarter was 17%. Net income was $14 billion or $5.33 per share. Capital expenditures, including principal payments on finance leases, were $7.9 billion, driven by investments in servers, data centers and network infrastructure. Free cash flow was $11.5 billion, which reflects a $1.6 billion payment of income taxes deferred from prior quarters of 2023. We ended the year with $65.4 billion in cash and marketable securities and $18.4 billion in debt. In the fourth quarter, we repurchased $6.3 billion of our Class A stock, bringing our total share repurchases for the full year to $20 billion. We had $30.9 billion remaining on our prior authorization as of December 31. And today, we announced a $50 billion increase in our stock repurchase authorization. Moving now to our segment results. I'll begin with our Family of Apps segment. In Q4, we saw continued community growth across the Family of Apps as well as Facebook, specifically. We're sharing today that as previewed when we first introduced our family metrics, we are transitioning away from reporting Facebook-specific metrics. As part of this transition, we will no longer report Facebook daily and monthly active users or family monthly active people. In Q1, we will instead begin reporting year-over-year changes in ad impressions and the average price per ad at the regional level while continuing to report family daily active people. For full year 2023, Family of Apps total revenue was $133 billion and ad revenue was $131.9 billion, each up 16% year-over-year. The largest contributors to year-over-year ad revenue growth were the online commerce, CPG, entertainment and media and gaming verticals. The online commerce and gaming verticals benefited from strong demand by advertisers in China reaching people in other markets. In 2023, revenue from China-based advertisers represented 10% of our overall revenue and contributed 5 percentage points to total worldwide revenue growth. Turning back to Q4 results. Q4 total Family of Apps revenue was $39 billion, up 24% year-over-year. Q4 Family of Apps ad revenue was $38.7 billion, up 24% or 21% on a constant currency basis. Within ad revenue, the online commerce vertical was the largest contributor to year-over-year growth, followed by CPG and gaming. On a user geography basis, ad revenue growth was strongest in Europe and Rest of World at 33% and 32%, respectively, followed by Asia Pacific at 23% and North America at 19%. Foreign currency was a tailwind to advertising revenue growth in all international regions. In Q4, the total number of ad impressions served across our services increased 21%, and the average price per ad increased 2%. Impression growth was mainly driven by Asia Pacific and Rest of World. Pricing growth was driven by advertiser demand and currency tailwinds, which were partially offset by strong impression growth, particularly from lower-monetizing services and regions. Family of Apps other revenue was $334 million in Q4, up 82%, driven by business messaging revenue growth from our WhatsApp Business platform. We continue to direct the majority of our investments toward the development and operation of our Family of Apps. In Q4, Family of Apps expenses were $18 billion, representing approximately 76% of our overall expenses. Family of Apps expenses were down 13% due to lower restructuring expenses. Family of Apps operating income was $21 billion, representing a 54% operating margin. Within our Reality Labs segment, Q4 revenue was $1.1 billion, up 47%, driven by Quest 3 sales during the holiday season. Reality Labs expenses were $5.7 billion, up 14% year-over-year due primarily to higher head count-related expenses and non-head count-related R&D spend. Reality Labs operating loss was $4.6 billion. Turning now to the business outlook. There are 2 primary factors that drive our revenue performance

Brian Nowak:

I have two. I appreciate, Mark, the color about sort of the learnings and the data feedback loop. Let me ask you one about sort of the advertising business and all of the new machine learning and new GenAI ad tools that you built and rolled out the last year or so. Can you just talk about some of the largest areas of improvement your advertisers say is really driving this inflection of advertising? And what are the areas where you still get the most feedback on for further areas of improvement in the ad business that we should think about? And then, Susan, maybe, one, the first quarter guide, specifically on the acceleration implied. Anything on -- more color on which surfaces or ad units or regions are sort of giving you confidence in that type of acceleration at this point in the quarter?

Operator:

Your next question comes from the line of Eric Sheridan from Goldman Sachs.

Mark Zuckerberg:

I'll take the first one. So the themes for the year of efficiency were to make us a stronger technology company by becoming leaner and more balanced towards our engineering work and more streamlined and to improve our financial performance, primarily with the goal of providing stability so we can invest in these long-term, ambitious visions around AI and metaverse over what we see as the coming decade or more as these things play out. And I think a lot of people looked at what we were doing as if it might have been some kind of short-term thing, which that's never really our focus. But the part about making the company leaner, I think, is the more important part to take forward, right? Because obviously, we're in a place now where the business is performing well. And I think the obvious question would be, okay, well, given that, should we just -- should we invest a lot more in things? And the biggest thing that's holding me back from doing that is that at this point, I feel like I've really come around to thinking that we operate better as a leaner company. So even though it's always -- there's always questions about like adding a few people here or there to do something. And I guess I just have more of an appreciation about how all of that adds up and in the near term, maybe makes you go a little bit faster. But over the long term, the discipline to kind of hold things to a more streamlined level actually improves the overall company performance. So I'm really focused on that. In 2024, we do have a big recruiting backlog from last year because part of the layoffs that we did included teams basically swapping out certain talent profiles for others. And we still need to hire some of the other talent profiles that we swapped people out for, and that will be ongoing through this year. But in terms of new head count that we added to the plan, it's relatively minimal compared to what we would have done historically. And I sort of expect that for the next period of time going forward, Even beyond 2024. My operating assumption is that we will also try to keep it relatively minimal because I think that -- until we reach a point where we're just really underwater on our ability to execute, I kind of want to keep things lean because I think that's the right thing for us to do culturally. So that's kind of the best window into how I'm thinking about this. The other piece that, I guess, somewhat dovetails into what Susan is going to talk to you next is that a big part of why I wanted to improve our profitability is to give ourselves the ability to go through what is a somewhat unpredictable and volatile period over the next 5 or 10 years. There are different risk factors that are geopolitical or regulatory or different things, but also the technology landscape is somewhat unknown. And we want the ability to be able to surge investment on things like building out larger training clusters or just making different investments where that's necessary. And in order to make sure that we have the flexibility to do that, we want to make sure that we keep our cost structure to a point where we sort of have some extra space built in. So those are really the 2 points. That was the theme that I laid out at the beginning of the year of efficiency last year

Operator:

Your next question comes from the line of Mark Shmulik from AllianceBernstein.

Mark Zuckerberg:

Sure. I can take the first one. I do think that AI is going to make all of the products and services that we use and make better. So it's hard to know exactly how that will play out. But for the work in Reality Labs, specifically, there's a bunch of areas. Like if you take smart glasses, before, we thought that we would have to build like full displays and holograms and deliver the sense of presence before that became a mainstream product. And now it seems quite possible that smart glasses that have AI assistance built in will be the killer app, and that the holograms and sense of presence will come later as a -- maybe on the same time horizon we were talking about before but could end up being just as important as we expected. But there could be a big market here even before that. So I think we'll figure that out over the next few years. But yes, I mean, overall, I think the 2 go together pretty hand-in-hand. I would have predicted that a lot of the parts of Reality Labs -- I guess the sequence in technology is sometimes surprising. We always kind of expected that as part of building glasses or any of these platforms that having an AI assistant would be a foundational part of it. But the fact that that's -- that there have just been big strides in that over the last year or 2 is just -- is a big opportunity for these products sooner. So I think it's still unknown exactly how that will play out, but I think we'll know more over the next few years. It's very exciting, though.

Operator:

Your next question comes from the line of Justin Post from Bank of America.

Susan Li:

Thanks, Justin. I can take both of those. So on your first question about messaging monetization, right now, the 2 primary avenues that we have there are click-to-messaging ads and paid messaging, which we are investing a lot in both to facilitate the full cycle of customer engagement. We saw that revenue growth from click-to-message ads remained strong in Q4. We see broadening advertiser adoption. And there, I would say that our focus in terms of where we're investing is really around enhanced optimization and reporting. So we're really trying to drive down funnel performance, enabling businesses to optimize for purchase. And we've seen strong growth in purchase optimization revenue on click-to-Messenger ads since we've rolled that out. And we're planning to bring purchase optimization to click-to-WhatsApp campaigns this year. And across the click-to-messaging ads, we're introducing more robust reporting to help advertisers kind of understand how people are engaging with them via click-to-messaging ads and what is the value of that engagement. And then, of course, in the longer term, this is a place where we're excited about the opportunities for increased automation to really help businesses scale their ability to have conversations with their consumers. On the paid messaging side, this is much earlier, of course, but we're seeing good momentum, driven by particularly strong growth from marketing messages. And we've also seen good results from our updated pricing model that we introduced in June. And here, we're really focused on making paid messaging easier to buy. So we're now testing the ability for businesses to send paid messaging directly on Meta Ads Manager. And then, again, similar to click-to-messaging, we are investing in ways to make it easier to get more done within the app. So here, we launched Flows globally in October, which enables businesses to offer richer user experiences within WhatsApp, things like selecting a seat on a flight or booking an appointment. We're seeing good early traction, and we're focused on just introducing more ways to help businesses easily create flows, and we'll plan on introducing more capabilities here. So there's a lot, I would say, going on in the portfolio of messaging monetization work that we're doing. Now your second question was around the 2024 outlook. And we obviously have not shared any guidance beyond Q1. But our revenue for the full year is going to be influenced by a number of factors, including macro conditions that are certainly harder to predict the further out you go. And over the course of 2024, as you said, we'll also be lapping periods of increasingly strong demand. So we don't provide guidance beyond Q1. There's certainly a range of outcomes, and we'll have a better read on how we will compare to future quarters as we progress through the year.

Doug Anmuth:

One for Mark, one for Susan. Mark, I believe you'd shifted FAIR out of Reality Labs into the Family of Apps. Can you just talk about some of the benefits there of moving that group as you pursue general intelligence? And then Susan, can you just walk us through your thought process on adding a dividend to your capital returns at this stage beyond the share repurchases?

Susan Li:

Doug, on your second question about why now in terms of initiating a dividend, returning capital to shareholders remains an important priority for us. And we believe introducing a dividend really just serves as a nice complement to the existing share repurchase program. The dividend doesn't change how much we will be -- or it doesn't change the way we determine the total amount of capital we return. And we expect that share repurchases will continue to be the primary way that we return capital to shareholders. But introducing a dividend just gives us a more balanced capital return program and some added flexibility in how we return capital in the future.

Ronald Josey:

Mark, I hope your knee is getting better. I wanted to ask you about Apple opening up its App Store in Europe and maybe what role that might play for Meta in further building out the App Store app install ads and things along those lines. And Susan, as a follow-up to maybe a prior question, you mentioned the potential around business messaging and the team -- what the team is doing around really testing with WhatsApp and Messenger. Just talk just how you might see this unfold maybe with AI Studio and maybe timing would be helpful.

Susan Li:

No. I was going to take the second question, I think, which was around the rollout of some of the GenAI features from a monetization perspective. And we're -- first of all, I would say that we don't expect our GenAI products to be a meaningful 2024 driver of revenue. But we certainly expect that they will have the potential to be meaningful contributors over time. Right now, the most near-term monetization opportunity is with our ad creative tools. We've talked about some of the places that we've been rolling those features out broadly with Text Variations and Image Expansion now globally available. And we're seeing those tools receive adoption and provide real value for advertisers even at this early stage. And we're going to keep investing in making those more useful and performant, which then leads to more advertiser adoption, and that can be sort of a virtuous feedback loop. Over a longer time frame, the GenAI features that we're bringing to business messaging, which I think was where your question originated, we think really represents a compelling opportunity. We're testing AI chats on a very small scale today with a few businesses, but it will take time to continue making those AIs increasingly useful. We're hearing good feedback from the businesses testing them, and we expect to make progress this year as we expand our tests further. I'd say one other thing is just on the consumer side, again, we think GenAI can make it easier for people to produce compelling content across all of our apps, including our messaging apps. And our AI assistant certainly provides also added utilities. So in all of these areas, I would say, we're following our typical playbook of testing and tuning the experiences until they're very good, and then we'll invest in growth and eventually explore monetization.

Ross Sandler:

Mark, just curious what you're seeing with Meta AI at this stage. You talked about rapid iteration of that, given your large audience. So yes, I guess, what's going on, thus far? Which of the apps in the Family of Apps have seen engagement increase from Meta AI? And do you think that there could be increased commercial activity as either your AI agent or some of the other ones out there get more usage within your apps?

Ken Dorell:

Great. Thank you for joining us today. We appreciate your time, and we look forward to speaking with you again soon.

Ken Dorell:

Thank you. Good afternoon and welcome to Meta Platforms’ third quarter 2023 earnings conference call. Joining me today to discuss our results are Mark Zuckerberg, CEO, and Susan Li, CFO. Before we get started, I would like to take this opportunity to remind you that our remarks today will include forward-looking statements. Actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are set forth in today's press release and in our quarterly report on Form 10-Q filed with the SEC. Any forward-looking statements that we make on this call are based on assumptions as of today and we undertake no obligation to update these statements as a result of new information or future events. During this call, we will present both GAAP and certain non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. The press release and an accompanying investor presentation are available on our website at investor.fb.com. And now, I'd like to turn the call over to Mark.

Susan Li:

Thanks, Mark, and good afternoon, everyone. Let's begin with our consolidated results. All comparisons are on a year-over-year basis unless otherwise noted. Q3 total revenue was $34.1 billion, up 23% or 21% on a constant currency basis. Q3 total expenses were $20.4 billion, down 7% compared to last year. In terms of the specific line items, cost of revenue increased 9%, as higher infrastructure-related costs were partially offset by lower content costs. R&D increased 1%, as higher headcount-related costs from Family of Apps and Reality Labs were partially offset by lower non-headcount related Reality Labs operating expenses. Marketing & Sales decreased 24%, due primarily to lower marketing spend and headcount-related costs. G&A decreased 39%, due primarily to lower legal-related expenses. We ended the quarter with over 66,100 employees, down 7% from the second quarter. Our third quarter headcount no longer included the substantial majority of the employees impacted by the previously announced layoffs. Third quarter operating income was $13.7 billion, representing a 40% operating margin. Our tax rate for the quarter was 17%. Net income was $11.6 billion or $4.39 per share. Capital expenditures, including principal payments on finance leases, were $6.8 billion, driven by investments in servers, data centers and network infrastructure. Capital expenditures were below the prior year levels primarily due to lower server and data center construction spend as we prepared to shift to our new data center design, as well as payment timing. Free cash flow was $13.6 billion, benefitting from a deferral of income taxes which was paid in the fourth quarter. We repurchased $3.7 billion of our Class A common stock in the third quarter and ended the quarter with $61.1 billion in cash and marketable securities and $18.4 billion in debt. Moving now to our segment results. I’ll begin with our Family of Apps segment. Our community across the Family of Apps continues to grow. We estimate that approximately 3.14 billion people used at least one of our Family of Apps on a daily basis in September, and that approximately 3.96 billion people used at least one on a monthly basis. Facebook continues to grow globally and engagement remains strong. Facebook daily active users were 2.09 billion, up 5% or 101 million compared to last year. DAUs represented approximately 68% of the 3.05 billion monthly active users in September. MAUs grew by 91 million or 3% compared to last year. Q3 Total Family of Apps revenue was $33.9 billion, up 24% year-over-year. Q3 Family of Apps ad revenue was $33.6 billion, up 24% or 21% on a constant currency basis. Within ad revenue, the online commerce vertical was the largest contributor to year-over-year growth, followed by CPG and gaming. Online commerce and gaming benefited from strong spend among advertisers in China reaching customers in other markets. On a user geography basis, ad revenue growth was strongest in Rest of World and Europe at 36% and 35%, respectively, followed by Asia Pacific at 19% and North America at 17%. Foreign currency was a tailwind to advertising revenue growth in all international regions. In Q3, the total number of ad impressions served across our services increased 31% and the average price per ad decreased 6%. Impression growth was mainly driven by Asia-Pacific and Rest of World. The year-over-year decline in pricing was driven by strong impression growth, especially from lower monetizing surfaces and regions. While overall pricing remains under pressure from these factors, we believe our ongoing improvements to ad targeting and measurement are continuing to drive improved results for advertisers. Family of Apps other revenue was $293 million in Q3, up 53%, driven by strong business messaging revenue growth from our WhatsApp Business Platform. We continue to direct the majority of our investments toward the development and operation of our Family of Apps. In Q3, Family of Apps expenses were $16.4 billion, representing approximately 81% of our overall expenses. FoA expenses were down 9% as growth in infrastructure-related costs was more than offset by lower legal-related expenses, marketing, and headcount-related costs. Family of Apps operating income was $17.5 billion, representing a 52% operating margin. Within our Reality Labs segment, Q3 revenue was $210 million, down 26% due primarily to lower Quest 2 sales. Reality Labs expenses were $4.0 billion, flat year-over-year as higher headcount-related expenses were offset by lower non-headcount related operating expenses. Reality Labs operating loss was $3.7 billion. Turning now to the business outlook. There are two primary factors that drive our revenue performance. Our ability to deliver engaging experiences for our community, and our effectiveness at monetizing that engagement over time. On the first, overall engagement on Facebook and Instagram remains strong. Reels, and video content more broadly, continues to grow and drive incremental engagement. AI- recommended content from unconnected accounts in Feed continues to become increasingly incremental to engagement, including in the US & Canada. These gains are being driven by improvements to our recommendation systems and we see additional opportunities to advance our systems even further in the future as we deploy more advanced models. We’re also developing entirely new experiences for our community. Our investments in AI capacity in recent years have enabled us to support leading Generative AI research and we’re meaningfully accelerating the pace of bringing that research into our products. We launched our first consumer Gen AI experiences last month that are built on top of our foundation models and are excited to learn from how people use these tools to make them increasingly valuable over time. Aside from Generative AI, Threads also remains a compelling long-term opportunity and we’re excited to build on the strong product momentum we have going into next year. Turning to the second driver, improving monetization. Here, our focus is on continuing to drive marketing performance for businesses, including through business messaging. There are four areas of this work, improving Reels monetization; creating engaging on-platform ad experiences; making it easier for advertisers to connect their marketing data, and increasingly leveraging AI across our ads systems and products. On Reels, we have continued to improve monetization and are now at a level where Reels is neutral to overall revenue. We’ve made tremendous progress over the last year building and scaling Reels as a consumer product, and it has now become part of the core experience on Instagram and Facebook. As such, we don’t anticipate quantifying the net revenue contribution from Reels going forward. We will still work to further improve Reels ads performance through ranking improvements and making Reels ads increasingly interactive, while also growing supply to give businesses more opportunities to get in front of people. We anticipate this ongoing work will help Reels be a modest tailwind to revenue in 2024 while we continue to strike the right balance between engagement and revenue growth. But our focus going forward will be on growing revenue and engagement on overall video, and more holistically across our product lines within Instagram and Facebook. Next, onsite experiences. We’re seeing sustained momentum with Click-to-Message ads. Click-to-WhatsApp ad revenue continues to grow very quickly in particular and is already at a multi-billion dollar annual run-rate. We’re progressing on our work to enable further down the funnel conversions, and longer-term, we’re excited about the potential of AI to help businesses message with customers more efficiently at scale. We’ve recently started testing AI capabilities with a few partners and will take our time to get the experience right, but we believe this will be a big unlock for business messaging in the future. We’re also excited about the potential for paid messaging, which serves as a nice complement to click-to-messaging ads by helping businesses develop ongoing relationships with customers once they’re in a messaging thread. Outside of business messaging, we’re seeing good early traction with Shops ads and in the third quarter we announced expanded commerce integrations with third party services to make it easier for businesses to set up a Facebook or Instagram Shop and run Shops ads. The third piece of our work is making it easier for advertisers to connect their marketing data. We’re investing in ways to make it easier for advertisers to adopt our Conversions API, understand its impact, and use it across a broader set of objectives. In addition to our existing support for AWS, in September, we announced the support of Google Cloud for the Conversions API Gateway. We’ve also introduced enhanced reporting and rolled out Conversions API for Business Messaging so click-to-message advertisers can now better understand the value of WhatsApp and Messenger and improve their performance. Last, AI. We are leveraging AI across our ads systems and suite of products, which is driving improved performance for advertisers. We’re increasingly adopting the use of larger, more advanced ads models and using AI to power ads products that provide increased automation to advertisers. We’re seeing strong traction with our Advantage+ Shopping solution, particularly around online commerce and CPG advertisers looking to drive online sales. And we’re continuing to invest in several other products within our Meta Advantage+ suite to help advertisers optimize and automate more of their campaigns. Before turning to our revenue outlook, I’d like to provide color on our hiring plans as we look to 2024. One important point to note is that we are currently operating with a significant underrun against our 2023 budgeted headcount. For much of late 2022 and early 2023, we had instituted a broad-based hiring freeze as we undertook our restructuring efforts. In addition, as part of those restructuring efforts, many teams elected to make deeper headcount reductions in order to hire different skill sets that they need. We have since resumed hiring but expect that much of our hiring that was originally planned for and budgeted in 2023 will occur in 2024. As part of our 2024 budget, we plan to selectively allocate incremental headcount toward four key company priorities, AI, infrastructure, Reality Labs, and monetization as well as toward our regulatory and compliance needs. Of those areas, we expect AI to be the largest area of increased investment as we further invest in Generative AI across our core products, internal tooling, and research efforts. We aim to offset some of this growth by continuing our efficiency focus and reducing planned hiring in other areas across the company in 2024. The net effect of our efforts to close out our 2023 hiring underruns and our efficiency-focused 2024 budgeting process is that we expect to end next year with reported, in-seat headcount meaningfully higher than our current headcount, but to grow at a slower rate beyond that. We also expect a step-up in infrastructure-related expense growth next year as we recognize higher depreciation and operating costs from running an expanded infrastructure footprint. In addition, we continue to monitor the active regulatory landscape, including the increasing legal and regulatory headwinds in the EU and the US that could significantly impact our business and our financial results. Of note, the FTC is seeking to substantially modify our existing consent order and impose additional restrictions on our ability to operate. We are contesting this matter, but if we are unsuccessful it would have an adverse impact on our business. Turning now to the revenue outlook. We expect fourth quarter 2023 total revenue to be in the range of $36.5 billion to $40 billion. Our guidance assumes a foreign currency tailwind of approximately 2% to year-over-year total revenue growth in the fourth quarter, based on current exchange rates. Turning now to the expense outlook. We anticipate that our full-year 2023 total expenses will be in the range of $87 billion to $89 billion, lowered from our prior range of $88 billion to $91 billion. This outlook includes approximately $3.5 billion of restructuring costs related to facilities consolidation charges and severance and other personnel costs. We expect Reality Labs operating losses to increase year-over-year in 2023. We are also sharing a preliminary outlook for 2024 expenses, CapEx and our tax rate. We expect full-year 2024 total expenses to be in the range of $94 billion to $99 billion. We continue to expect a few factors to be drivers of total expense growth in 2024. First, we expect higher infrastructure-related costs next year. Given our increased capital investments in recent years, we expect depreciation expenses in 2024 to increase by a larger amount than in 2023. We also expect to incur higher operating costs from running a larger infrastructure footprint. Second, we anticipate growth in payroll expenses as we work down our current hiring underrun and add incremental talent to support priority areas in 2024, which we expect will continue to shift our workforce composition toward higher-cost technical roles. Finally, for Reality Labs, we expect operating losses to increase meaningfully year-over-year due to our ongoing product development efforts in AR/VR and our investments to further scale our ecosystem. Turning now to the capex outlook. We expect 2023 capital expenditures to be in the range of $27 billion to $29 billion, updated from our prior estimate of $27 billion to $30 billion. We anticipate our full-year 2024 capital expenditures will be in the range of $30 billion to $35 billion, with growth driven by investments in servers, including both non-AI and AI hardware, and in data centers as we ramp up construction on sites with the new data center architecture we announced late last year. On to tax. Absent any changes to US tax law, we expect our fourth quarter 2023 and full-year 2024 tax rates to be similar to the third quarter of 2023. Please note that our outlook for 2024 expenses, capital expenditures and tax rate are preliminary estimates. In the future, we expect to provide our forward -- our initial forward year expense, capex and tax rate outlooks on the fourth quarter call. In closing, this was a good quarter for our business as our efficiency efforts are translating into improved financial results and we’re seeing momentum across our company priorities. We’re excited to build on this work in 2024 as we invest in areas that have the potential to meaningfully transform how people engage with our services and each other in the years ahead. With that, Dave, let’s open up the call for questions.

Brian Nowak:

Great. Thanks for taking our questions. I have two. The first one, Mark, just wanted to ask you about the open source model strategy. You've been a leader in developing a lot of unique open source AI models. You've got some high-profile distribution partners now. How do you think about the strategic opportunity for Meta from the growing open source model adoption? And then the second one, Susan, just on the operating losses at Reality Labs. I understand there’s product development and efforts to scale the ecosystem. Can you help us understand or give us examples of expenditure going on within Reality Labs that could also be ported and used over at Family of Apps perhaps over time?

Susan Li:

And Brian, I'll go ahead and take your second question, which is on the operating losses at Reality Labs and whether there's any benefit to Family of Apps from some of that work. So first, I should clarify, the majority of our Reality Labs costs are direct costs in headcount, operating expenses and product costs for the Reality Labs work. The remainder of the Reality Labs total costs are indirect costs such as facilities that get allocated based on our estimate of their benefit to Reality Labs. Now, as you alluded to, Reality Labs is working to build the future of online interactions. And we do expect you'll see some interesting ways that translate into work with the Family of Apps in the near term. For example, with avatars, you've already seen 1 billion avatars created so far. We expect that this will become increasingly important across the Family of Apps. And we're also starting to see how our hardware can help create unique content for Facebook and Instagram today with our Ray-Ban Meta smart glasses making it easier to capture and share to Family of Apps, including live-streaming, and we think that will obviously create more engaging content for the content ecosystem. Longer term, obviously, we think there's a lot of value from operating our Family of Apps experiences on top of a new computing platform that we helped develop, for example, having glasses on that enable you to have our Meta AI assistant with you at all times. And as glasses scale, they'll make it increasingly easy to capture compelling content from a first person point of view while you're staying in the moment or the activity that you're doing and sharing that content should enrich our content ecosystems even further. But again, the operating losses that are occurring within the Reality Labs segment are really driven by the Reality Labs work directly. And we think that over the sort of arc of the years ahead, there will be increasing shared benefits to our Family of Apps experiences.

Eric Sheridan:

Thanks for taking the questions. Maybe on the business, I have two. One, when you see maybe a wider divergence than we thought in terms of some of the regional performance of the advertising businesses, anything to call out region by region in teams of either macroeconomic conditions or levels of product initiatives having been rolled out in different parts of the world that might led to a wider divergence in operating performance in the ad business across the globe would be number one? And then two, Susan, you introduced this concept a couple of quarters ago about data center architecture, and you said it's now being deployed in the way you're allocating capital into the business. Is there any update on how we should be thinking about that on a multiyear view in terms of achieving additional capital efficiencies and be able to deploy less CapEx but maybe with a higher throughput or output on those dollars spent? Thank you.

Operator:

And your next question comes from the line of Mark Shmulik with Bernstein.

Susan Li:

Hi, thanks, Mark. I can take both of those. So your first question was around gen AI tools, especially for advertisers and you'll see that we have been increasingly testing these in our AI sandbox. And then as they become more mature, we incorporate them into our ads manager directly. We've incorporated them into some of our Advantage+ solutions. A few that I would highlight that we're rolling out this quarter are text variations, so generating multiple versions of ad text based on an advertiser's original copy that helps highlight the selling points of their products and services, giving them multiple text options to better reach their audience. Another one is image expansion, which helps adjust creative assets to fit different aspect ratios across multiple services like Feed or Reels. That allows advertisers to spend less time themselves trying to repurpose their creative assets in these different formats. Another one is background generation, creating multiple backgrounds to complement the advertisers' product images, allowing advertisers to tailor their creative assets for different audiences. And we're making this available actually through Advantage+ catalog ads. And so we really feel like we've introduced quite a lot of new ads products and features. You asked about the gen AI one specifically. So those are the ones I highlighted. We've actually introduced a number of others that are related to other dimensions of the ad creation experience that we expect will help improve our advertising performance, will help advertisers drive sales, especially over the holidays and especially in the Advantage+ shopping suite. So we're very excited about all of those upcoming launches, and we think that the early advertiser feedback has been very positive. Your second question was on looking ahead in Q4 and the impact of some of the geopolitical activity that we've seen around the world and how that might be affecting our business. So first, I think I should start by saying that our thoughts are with everyone who has been impacted by the horrific violence in the Middle East, and we know that our services can be a vital tool for information and connection and expression at a moment like this. And we're continuing to monitor the situation and are doing everything we can to keep people safe and to keep our services secure. Now in terms of how this translates into impact on the Q4 business, first of all, I should say that coming into Q4, we've been seeing continued strong advertiser demand in key segments, including online commerce and gaming. But having said that, we are also seeing more volatility at the start of the quarter. That's in part why we widened our guidance range to capture that uncertainty. And so for instance, while we don't have material direct revenue exposure to Israel and the Middle East, we have observed softer ad spend in the beginning of the fourth quarter, correlating with the start of the conflict, which is captured in our Q4 revenue outlook. It's hard for us to attribute demand softness directly to any specific geopolitical event. Historically, we have seen broader demand softness follow other regional conflicts in the past such as in the Ukraine war. So this is something that we're continuing to monitor. We've reflected the latest trends and advertiser reaction that we've seen into our Q4 outlook, which again, we think, reflects the greater uncertainty and volatility in the landscape ahead. I want to add here, too, that we are pleased with the fundamentals of the business and with our execution. We've seen promising engagement trends. We're continuing to drive ad performance improvements. We're executing well on our company priorities. So we'll continue to stay focused in those areas, and we'll also remain disciplined with our investment approach as we navigate a volatile environment.

Doug Anmuth:

Thanks for taking the questions. One for Mark and one for Susan. Mark, I was hoping you could talk more about the gen AI-driven vertical chatbots and Meta AI assistant rolled out of Connect a few weeks ago. How do you think about the potential for these products to improve both engagement and monetization over time? And then Susan, I know it's early but I was hoping you could talk a little bit qualitatively about some of the puts and takes to 2024 revenue growth. And then in particular, whether you'd expect revenue to grow faster than expenses off a normalized revenue base backing out restructuring? Thanks.

Susan Li:

I'm happy to take the second question. Thanks, Doug. We obviously have not shared a 2024 revenue outlook yet. You asked about what are some of the significant puts and takes, and I'd maybe point back to what I said earlier about the Q4 outlook just to highlight what a volatile macro environment we believe we're in. I think that will obviously have a big impact on the advertising market next year, and it's something we'll be keeping a very close eye on. But ultimately, we're very subject to volatility in the macro landscape. Certainly, our own ads performance is an area where we have invested a lot, and we've seen a lot of increased value that we've been driving for marketers. We've been increasing the conversions we deliver, higher -- and offering higher return on their ad spend so we think that will be an important factor. We're continuing to enroll a lot of new features, both gen AI and not in our ads tool, and we're continuing to improve the ranking and delivery models that underlie our ads infrastructure. We'll also be obviously lapping stronger periods, especially in -- as you saw with this quarter's results. So all of those factors, I think, will play into the 2024 revenue outlook. You also asked about the kind of the expense philosophy next year, whether expense growth will be tied to revenue growth. Obviously, the revenue outlook is uncertain. We talked a little bit about the -- what's going into the preliminary expense guide for 2024. The big components there are around infrastructure expenses. We do expect, given the increased capital investments that we have made in recent years, that depreciation expenses in 2024 will increase by a larger amount than in 2023. And we expect to incur higher operating costs from running a larger infrastructure footprint. The second big driver is on payroll. We anticipate payroll growth driven by the spillover of hiring that we had intended for 2023 into 2024. And we do expect that Family of Apps will be a larger source of payroll expense growth than Reality Labs in 2024. Additionally, hiring will generally be concentrated in technical roles, which will continue to shift our workforce composition towards a higher cost basis. And of course, the final piece being Reality Labs operating losses, which we expect to increase in 2024 across both the expense growth from higher payroll costs as well as higher non-headcount cost to support the development of our next-gen VR and AR products. How the expense and revenue outlook come together? Obviously, that's -- as we get more information on the revenue outlook for next year, that will influence that. Ultimately, we have talked about the framework that we introduced in the past. We recognize that we have very ambitious investments on the horizon, including over a long-time horizon with our Reality Labs work and newer, equally ambitious investments we've added in the gen AI road map more recently. And we recognize that we have to earn the ability to invest in all of those things by delivering consolidated operating income growth over time. So that's something we're very much focused on.

Justin Post:

Great. Thank you. I guess I'll ask about the DSA and DMA and also press reports that there could be a subscription offering in Europe. Maybe, Mark, how do you think about subscription usage for Facebook? Maybe an update on how Meta Verified is going and how you're thinking about the evolution of the model in Europe. Maybe we'll start with that. And then for Susan, I know you've talked a lot about Chinese advertisers. How do you think that could affect the growth as you comp that next year? Thanks a lot.

Youssef Squali:

Thank you very much. Two quick questions for me. First, can you share any early read into demand for Quest 3? It's been out for 10 days but I think you've been taking orders from these last three weeks? And is it priced to be at least gross profit breakeven or not necessarily? And then second, Susan, for 2024 as we think about growth, can you speak maybe about political spend contribution that you've had back in 2020 and how that may inform how we should think about its contribution for 2024? Thank you.

Ken Dorell:

Dave, we have time for one last question.

Ross Sandler:

Great. Hey, Mark, just going back to the AI agent theme. I know it's early but how would you rank the overall strategy here around these AI agents and AI Studio compared to other big initiatives that Meta has made in FoA over the years? Is this bigger than or as big as the Stories transition or the Reels transition? And any thoughts just kind of high level on that? And then the cost of serving up responses, especially stickers and images is a little bit more expensive than your core business of aggregating the News Feed. So how much more expensive, I guess, is the question? And are there things you can do to bring that cost down? Thanks a lot.

Ken Dorell:

Great. Thank you for joining us today. We appreciate your time, and we look forward to speaking with you again soon.

Kenneth Dorell:

Thank you. Good afternoon and welcome to Meta Platforms Second Quarter 2023 Earnings Conference Call. Joining me today to discuss our results are Mark Zuckerberg, CEO; and Susan Li, CFO. Before we get started, I would like to take this opportunity to remind you that our remarks today will include forward-looking statements. Actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are set forth in today's press release and in our quarterly report on Form 10-Q filed with the SEC. Any forward-looking statements that we make on this call are based on assumptions as of today and we undertake no obligation to update these statements as a result of new information or future events. During this call, we will present both GAAP and certain non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. The press release and an accompanying investor presentation are available on our website at investor.fb.com. And now, I'd like to turn the call over to Mark.

Susan Li:

Thanks, Mark, and good afternoon, everyone. Let's begin with our consolidated results. All comparisons are on a year-over-year basis, unless otherwise noted. Q2 total revenue was $32 billion, up 11% or 12% on a constant currency basis. Q2 total expenses were $22.6 billion, up 10% compared to last year. In terms of the specific line items, cost of revenue increased 15%, driven primarily by infrastructure related costs. R&D increased 8%, driven mainly by headcount-related costs from our Reality Labs and Family of Apps segments, as well as restructuring costs. Marketing and sales decreased 12%, due mostly to lower marketing spend and payroll-related costs. And G&A increased 39%, due primarily to an increase in legal accruals, which was partially offset by lower payroll-related costs. We ended the second quarter with over 71,400 employees, down 7% from the first quarter. Our second quarter headcount still included roughly half of the approximately 10,000 employees impacted by the 2023 layoffs. We expect that our third quarter headcount will no longer include the vast majority of impacted employees. Second quarter operating income was $9.4 billion, representing a 29% operating margin. Our tax rate for the quarter was 16%. This is lower than our previous full-year outlook as our higher share price provided a higher tax deduction and lowered our taxes. Net income was $7.8 billion or $2.98 per share. Capital expenditures, including principal payments on finance leases were $6.4 billion, driven by investments in data centers, servers and network infrastructure. Free-cash flow was $11 billion, significantly benefiting from a deferral of income taxes that we expect will be paid in the fourth quarter. We repurchased $793 million of our Class-A common stock in the second-quarter and ended the quarter with $53.4 billion in cash and marketable securities. Moving now to our segment results. I'll begin with our Family of Apps segment. Our community across the Family of Apps continues to grow. We estimate that approximately 3.07 billion people used at least one of our Family of Apps on a daily basis in June and that approximately 3.88 billion people used at least one on a monthly basis. Facebook continues to grow globally and engagement remains strong. For the first time, we crossed 3 billion monthly active users with Facebook MAU ending at 3.03 billion in June, up 3% or 96 million compared to last year. Facebook's daily active users were 2.06 billion, up 5% or 96 million. DAUs represented approximately 68% of MAUs. Q2 total Family of Apps revenue was $31.7 billion, up 12% year-over-year. Q2 Family of Apps ad revenue was $31.5 billion, up 12% or 13% on a constant currency basis. Within ad revenue, the online commerce vertical was the largest contributor to year-over-year growth, followed by entertainment and media and CPG. Online commerce benefited from strong span among advertisers in China, reaching customers in other markets. On a user geography basis, ad revenue growth was strongest in Rest of World at 16%, followed by Europe, North-America and Asia-Pacific at 14%, 11% and 10%, respectively. Foreign currency was a headwind to advertising revenue growth in all international regions. In Q2, the total number of ad impressions served across our services increased 34% and the average price per ad decreased 16%. Impression growth was primarily driven by Asia-Pacific and Rest of World. The year-over-year decline in pricing was driven by strong impression growth, especially from lower monetizing surfaces and regions. While overall pricing remains under pressure from these factors, we believe our ongoing improvements to ad targeting and measurement are continuing to drive improved results for advertisers. Family of Apps other revenue was $225 million in Q2, up 3% as strong business messaging revenue growth from our WhatsApp business platform was partially offset by a decline in other line items. We continue to direct the majority of our investments toward the development and operation of our Family of Apps. In Q2, Family of Apps expenses were $18.6 billion, representing approximately 82% of our overall expenses. FoA expenses were up 8% due primarily to legal-related expenses and restructuring charges, partially offset by a decrease in non-headcount related operating expenses, including marketing. Family of Apps operating income was $13.1 billion, representing a 41% operating margin. Within our Reality Labs segment, Q2 revenue was $276 million, down 39% due to lower Quest 2 sales. Reality Labs expenses were $4 billion, up 23% due to lapping a reduction in Reality Labs loss reserves in Q2 of last year, as well as growth in employee-related costs. Reality Labs operating loss was $3.7 billion. Turning now to the business outlook. There are two primary factors that drive our revenue performance; our ability to deliver engaging experiences for our community; and our effectiveness at monetizing that engagement over time. On the first, overall engagement within Facebook and Instagram remained strong. Reels continues to grow and drive incremental engagement. On Facebook feed, in particular, recommended content from accounts you don't follow has increased significantly over the past year, while also becoming more incremental to engagement, demonstrating that people are getting added-value from discovering content from unconnected accounts. Looking-forward, we are optimistic about our ability to increase that value even further by leveraging advanced AI techniques to improve recommendations. In addition to improving the value people get within our Family of Apps today, we're also investing in entirely new experiences for the future. We're standing up infrastructure to support new AI-powered products across our services, which will give people more tools to express themselves and connect. And we've been pleased with the initial reception of our new standalone app Threads since its launch earlier this month. Our focus now is on further developing this into a product that will be valuable for a large set of people over-time. Moving to the other driver of revenue, improving monetization. Here, we're focused on improving monetization efficiency of products that monetize at lower rates today like Reels and our messaging services and more broadly, driving measurable performance and returns for our advertisers. On Reels, we are making good progress on monetization with more than three quarters of our advertisers now using Reels ads. We remain focused on further reducing the Reels revenue headwind and narrowing the monetization efficiency gap with our more mature surfaces. However, we continue to expect time on Reels will monetize at a lower rate than Stories and Feed for the foreseeable future since people scroll more slowly through video content. Within messaging, billions of people and millions of businesses use our messaging services every day to connect. We see a significant opportunity to build tools and functionality for businesses to help facilitate those interactions and are seeing early but promising progress with WhatsApp's paid messaging solution today. In terms of our work to drive measurable performance for advertisers, it's concentrated in two primary areas, AI and onsite conversions. We're leveraging AI to move our systems towards using fewer larger models that enable us to leverage learnings across product surfaces and deploy improvements more quickly, broadly and efficiently. We're also leveraging AI to power advanced ads products like Advantage+ shopping, which continues to gain adoption. We're seeing this work translate into results for advertisers as conversion growth remained strong in Q2. In terms of driving on-site conversions, we continue to see strong results with click-to-messaging ads and are well positioned given our suite of messaging applications. Daily click-to-WhatsApp ads revenue continues to grow very quickly at over 80% year-over-year. We also recently started testing the ability to buy click-to-WhatsApp ads directly from the WhatsApp Business app, which now has more than 200 million monthly users. Looking ahead, we're focused on enabling businesses to optimize for conversions further down the funnel in our messaging applications. We're also investing in scaling other onsite objectives like lead generation and shops ads. Before turning to our revenue outlook, I'd also like to talk about our investment philosophy. We expect to bring the discipline and habits that we built during this year of efficiency with us as we plan for the future. At the same time, we remain focused on investing in the significant opportunities ahead. Part of supporting these initiatives will come from prioritizing them against other areas of work and shifting resources. However, in some cases, they will require incremental investment. This is particularly true in the areas we see the most significant opportunity, which include AI and the Metaverse. As I mentioned last quarter, we also remain focused on modestly evolving our capital structure over time. We were pleased to execute our second bond offering in May and expect a measured pace of future debt raises as we work toward improving our overall cost-of-capital, while maintaining a positive or neutral net cash balance. In addition, we continue to monitor the active regulatory landscape. With respect to EU-US data transfers, we saw a positive development with the European Commission's adoption of a final adequacy decision, which allows us to continue to provide our services in Europe. This is good news. Though broadly speaking, we continue to see increasing legal and regulatory headwinds in the EU and the US that could significantly impact our business and our financial results. Turning now to the revenue outlook. We expect third quarter 2023 total revenue to be in the range of $32 billion to $34.5 billion. Our guidance assumes a foreign currency tailwind of approximately 3% to year-over-year total revenue growth in the third quarter based on current exchange rates. Turning now to the expense outlook. We anticipate that our full-year 2023 total expenses will be in the range of $88 billion to $91 billion, increased from our prior range of $86 billion to $90 billion due to legal-related expenses recorded in Q2. This outlook includes approximately $4 billion of restructuring costs related to facilities consolidation charges and severance and other personnel costs. We expect Reality Labs operating losses to increase year-over-year in 2023. While we are not providing a quantitative outlook beyond 2023 at this point, we expect a few factors to be drivers of total expense growth in 2024 as we continue to invest in our most compelling opportunities, including AI and the Metaverse. First, we expect higher infrastructure-related costs next year. Given our increased capital investments in recent years, we expect depreciation expenses in 2024 to increase by a larger amount than in 2023. We also expect to incur higher operating costs from running a larger infrastructure footprint. Second, we anticipate growth in payroll expenses as we evolve our workforce composition toward higher cost technical roles. Finally, for Reality Labs, we expect operating losses to increase meaningfully year-over-year due to our ongoing product development efforts in AR, VR, and our investments to further scale our ecosystem. Turning now to the CapEx outlook. We expect capital expenditures to be in the range of $27 billion to $30 billion, lowered from our prior estimate of $30 billion to $33 billion. The reduced forecast is due to both cost-savings, particularly on non-AI servers, as well as shifts in CapEx into 2024 from delays in projects and equipment deliveries, rather than a reduction in overall investment plans. Looking ahead, while we continue to refine our plans as we progressed throughout the year, we currently expect total capital expenditures to grow in 2024, driven by our investments across both datacenters and servers, particularly in support of our AI work. On to tax, absent any changes to US tax law, we expect the tax rate for the rest of the year to be similar to Q2 2023. In closing, Q2 was a good quarter for our business. We're executing well across our core priorities and are continuing to make progress on delivering exciting new experiences for our community. With that, Dave, let's open up the call for questions.

Brian Nowak:

Thanks for taking my questions. Maybe a two-parter for Mark. Mark, you've spoken a few times over the last few months on AI agent and sort of building different types of assistants through the Llama. I guess, the two part question is, can you sort of talk to us a little bit about some of the use cases or consumer advertiser offerings you're most excited about enabling for some of these AI agents? And then the second one, just to sort of level-set on timing a bit, can you just help us understand some of the larger technological barriers in your mind the teams would need to overcome to really scale these types of agent products across the ecosystem? Thanks.

Operator:

Your next question comes from the line of Eric Sheridan with Goldman Sachs. Your line is open.

Mark Zuckerberg:

Yes, sure. I'll take a cut at both of those and Susan can jump into the second one, if there's any -- if there's anything that she wants to add there as well. All right. So Llama is an open-source project, which is a little bit different from building out a developer platform, although there will be an ecosystem around this. What we've seen around open-source work that we've done, which we've done a lot of in our core infrastructure work, design of servers and datacenters and basic infrastructure as well as in AI. And I pointed out some of these in my remarks upfront, like PyTorch and just a bunch of other models that we've released recently. One of the things that we've seen is that, when you release these projects publicly in open-source, there tend to be a few categories of innovations that the community makes. So, on the one hand, it's -- I think it's just good to get the community standardized on the work that we're doing that helps with recruiting, because a lot of the best people want to come and work at a place that is building the things that everyone else uses, makes it that people are used to these tools from wherever else they're working. They can come here and built here. But in terms of improvements that we expect to see from the community, there were really a few different types. One is specifically around safety and security. It's -- that's a very important issue in AI. In open-source software overall, we've just seen through the history here that open-source software gets scrutinized more and therefore ends up being more secure and safer. And we think that there's a very good chance and that's the likely outcome here. And whatever improvements that people make to harden it in the community, we will be able to roll that in to our work, both for the first-party products that we will launch, as well as making it easy to propagate that across the industry and make the AI that everyone uses safer. I would also hope to see efficiency improvements. I mean, even from the initial Llama that was just released as a research project, some of the improvements were around things like quantization and being able to run the model way more efficiently. Now, we're spending so much on AI CapEx that all the help that we can get from the community to make the stuff more efficient to run will be helpful, not just for individuals to be able to run powerful models on their laptop or locally or without a huge amount of compute, so individuals can afford it, but that should hopefully translate over-time into just a more efficient infrastructure for us, which hopefully could be quite a big savings. So that's more of what we're seeing there. We partnered with Microsoft specifically because we don't have a public-cloud offering. So this isn't about us getting into that, it's actually the opposite. We want to work with them because they have that and others have that and that was the thing that we aren't planning on building out. But one of the things that you might have noticed is, in addition to making this open through the open-source license, we did include a term that for the largest companies, specifically ones that are going to have public-cloud offerings that -- they don't just get a free license to use this, they’ll need to come and make a business arrangement with us. And our intent there is, we want everyone to be using that. We want this to be open. But if you're someone like Microsoft or Amazon or Google and you're going to basically be reselling their services, that's something that we think we should get some portion of the revenue for. So those are the deals that we intend to be making and we've started doing out a little bit. I don't think that that's going to be a large amount of revenue in the near-term, but over the long term hopefully that can be something. Not sure if there's anything else to add-on that, but Susan, you can jump-in if you want. On RL, let me just jump over to that for a second. I don't think we're going to break-out numbers right now, but I'll defer to Susan on that. I mean, one big thing for the next year is that the launch of [Quest 3] (ph), right. And basically, this is going to be the biggest headset that we've released since 2020 when we came out with Quest 2. And there's just a lot of expenses related to bringing that to market and I think that's at least in the near-term going to be one of the major drivers of this. So I think that's probably the main thing that I would point to there. We're continuing to -- continue to think, looking at the VR work that we're doing and the AR work, some of the neural interfaces work. I think we're leading in these areas. It's been good to see what others in the industry have done, because to some degree, it gives us more confidence that we're on the right track. And even though, I know from an investor standpoint, most people aren't investing on quite as long of a time horizon as we are here, so I kind of get that. A lot of investors might want to -- might want to see us spending less here in the near term. My view is that, we are leading in these areas. I believe that they're going to be big over time. We're -- I think we've shown that we can deliver good business results in the near-term while investing ambitiously in the long-term. So I'm planning on continuing to do that. And I do continue to believe that over-time we will be happy that we did that. So, I don't know Susan if there's anything you want to add there.

Operator:

Your next question comes from the line of Mark Shmulik with Bernstein. Your line is open.

Mark Zuckerberg:

Yes, I can start with the first and then Susan can take the second. I actually think our priorities have been pretty consistent for a few years now. I think the way that people hear that might be different. But, for example, last year, I think we were getting quite a bit of critique for the volume of AI CapEx spending that we were doing and now, obviously, people want to understand where that's going and where we think that trajectory is going and want to make it as efficient as possible. But I think at this point, it's more well-understood that that -- I think that was a good investment and it's driving results in the near term and enabling us to build some of the new experiences that I think we all think are pretty fundamental. I don't think Reels is new, although maybe even Threads when you said that. Threads, I would say, it's not that -- Thread is like -- it's not a massive project. It was -- I thought for a while that the opportunity around public conversations and kind of a text-based product was bigger than what had been executed yet in the markets, so we had a relatively small team work on that. And this year, I think there have been two things that have been -- that have just vastly exceeded my expectations, one was Llama. The initial model we thought it was interesting, but the scale of adoption, even just for the research version really spurred us to go do Llama 2 and that was vastly more than we expected. And the second is, Threads has been dramatically more than we expected in terms of the adoption and the rate of that. We thought this was going to be kind of a project that we just -- we had a small team working on for a while, but it really kind of blew up and created a big opportunity immediately. But no, I mean, I think over-time you should expect that we're going to focus on AI and the Metaverse. AI includes both all of the ranking and recommendation systems that power the core apps, so all the content that you're seeing in Facebook and Instagram, all the ads content that you're seeing, it also underpins all the safety systems that we build and increasingly it's all the generative AI stuff. So, all the agents, all the generative features that we're going to be rolling out and a lot of the other work that's going under license, the efficiency stuff that we're doing internally. And then the Metaverse stuff I think we've talked about for a while. So I don't think there's much change there except that it's sort of signals that we're getting from the market are it certainly not getting adopted a lot faster than we expected. That's sort of the somewhat sobering signal, but on the other side, I think a lot of companies that otherwise are doing, we respect and do great work. We don't necessarily view is building things that are ahead of where we are, which gives us confidence that we think the long-term thesis still will hold there. We think that we're going to be the leaders in it and nothing that we're seeing from the market makes us rethink that in a fundamental way. So, I think we're going to continue focusing on AI in the Metaverse as the two big thrust of what we're doing and all the other things kind of fall out of that.

Operator:

Your next question comes from the line of Justin Post with Bank of America Merrill Lynch. Your line is open.

Mark Zuckerberg:

Well, I think it's both overtime. The primary way that I think about this is that, we've been able to show that we can I think been quite successful at building large scale social experiences within the constraints of platforms that often our competitors are defining. I think we're going to be able to do even better work and there is a lot of things that I would like to see us build that we just can't because we're -- the ways that we're constrained by the competitors who build these platforms. And over-time, the main way that I think about this just from a product admission perspective is, we're here to build awesome experiences that help people connect. I think helping to shape the next platform is going to unlock that in a profound way for decades to come. And that's what I'm here to do and I think what a lot of people are here to do. So that's kind of the first principles as part of this. From a business perspective, I think there is going to end up being a large business component of this that is Reality Labs specific, directly the products that we're building there and having that be a good business. But I also think that a lot of this is going to be that it unlocks a lot of value for the other experiences, the current apps that we have, when you think of as the Family of Apps where we -- currently just a lot of the potential value, whether it's just engagement that could be created, features that we would love to build that we're not allowed to because Apple or others just don't allow us to build those things. And I think that that's really unfortunate for the industry. I think that there's a lot of lost engagement that would have happened, a lot of the monetization value that gets created. I mean, just look at what happened with our tracking transparency, the massive value destruction for small businesses because of the rules that were set by another platform. And that's not -- that's not -- in a future version of the world, it's not -- that would be recognized not by device sales or some new like experience that we're building in Reality Labs. You'd basically see that accrue through more efficient monetization of the apps and experiences that we're building in other places. So, I think it's going to be both. But I think this is just a very fundamental thing, this is a very long-term bet. I at a deep level, I understand the discomfort that a lot of investors have with it because it's just outside of the model of, I think, even most long-term investors, how you would think about this. And look, I mean I can’t guarantee you that I'm going to be right about this bet. I do think that this is the direction that the world is going in. There are 1 billion or 2 billion people who have glasses today. I think in the future they're all going to be smart glasses. And like -- and the time that we spend on TVs and computers, I think that's going to get more immersive and looks something more like VR in the future. And I think that what we're seeing is richer ways for people to communicate across even the mobile apps that we have going from text, to photos to videos just continual trend towards being more immersive. So, like all of these trends line-up to make me think that this is the right thing, I think, we're going to be happy that we did this. So that's kind of how I think about it, both from kind of a mission and product perspective, a business perspective and investment timeframe perspective. But I also understand the discomfort that some folks have with something that I can't put exact numbers on a near-term time horizon around.

Douglas Anmuth:

Thanks for taking the questions. One for Mark, one for Susan. Mark, you touched on it a bit, but can you just talk a little bit more about what you've learned from Threads early on, not just for that product specifically, but also as you look to leverage the Family of Apps platform to launch additional products over time. And then Susan, you lowered the CapEx outlook this year by $3 billion. Can you just provide more color on the delays in projects and equipment in 2023? And is there any way to frame how meaningful the CapEx increase could be in 2024? Thank you.

Susan Li:

And Doug, on your second question about our 2023 CapEx forecast and the impact on 2024. So I'll start with 2023. The reduced forecast that we gave for 2023, I mentioned on the call, is driven both by some cost savings, particularly on non-AI servers where we previously had some underutilized capacity and we've been identifying ways to be more efficient in the way that we allocate that capacity towards all of our various needs, as well as shifts in CapEx in 2024 that's coming from delays in data center projects and server deliveries and that'll just push that associated CapEx, which we were planning for in 2023 into 2024. We're still working on our 2024 CapEx plans. We haven't yet finalized that and we'll be working on that through the course of this year. But I mentioned that we expect that CapEx in 2024 will be higher than in 2023. We expect both data center spend to grow in 2024 as we ramp-up construction on sites with the new data center architecture that we announced late last year. And then we certainly also expect to invest more in servers in 2024 for both AI workloads to support all of the AI work that we've talked about across the core AI ranking recommendation work along with the next gen AI efforts. And then, of course, also our non-AI workloads as we refresh some of our servers and add capacity just to support continued growth across the site.

Youssef Squali:

Great, thank you very much for taking the questions. One for Mark and one for Susan maybe. Mark, you touched on this little earlier, but there is this open-source versus close- source debate going on with Meta as one of the companies on one-side of it with Llama and Llama 2 how do you see this market evolving over-time. Do you see one approach has been potentially superior to the other and therefore you will be likely to garner greater adoption, or is this really a win-win situation, just considering how early we are in this process and how large the potential [indiscernible]. And then, Susan, your guidance for Q3 implies at the midpoint of that at 20% growth, which is a pretty steep acceleration from Q2 of 11% or 12%, could you maybe just help us understand the drivers of that acceleration? And as we look into Q4, the comp remain pretty easy, is that sustainable into year-end. Thank you.

Susan Li:

And thank you, Youssef. For your second question, which I will take. You asked about our Q3 revenue outlook and maybe also what that implies looking forward into Q4. So, on the further acceleration that we've guided to in Q3. First of all, I'd just point out that Q3 2022 revenue declined 4.5% year-over-year. So we're really lapping a much weaker demand period a year-ago. And we've certainly seen demand this year stabilize. And so, it's really a much easier compare. We also are expecting that currency is going to flip to a three point tailwind from a one point headwind last quarter. And finally, as I've mentioned earlier on this call, we've been investing for a long time and I think executing really well across our core monetization work and continuing to grow engagement. And I think we're going to benefit from all of the investments that we've made in those historical and key priorities for us. In terms of what this means for Q4. We're not sharing a Q4 revenue outlook yet, there are obviously some tailwinds to year-over-year growth in Q4, again, the same point about a weaker compare applies and at current rates FX would be a larger tailwind in Q4 than we're expecting it to be in Q3. But we've had sizable fluctuations in advertiser demand over the last year. It's been a pretty volatile period. So, while we're seeing strong advertiser demand now and that's certainly informing our outlook, it's harder to predict as we look further forward. And there are a wide range of possible outcomes in Q4.

Operator:

Thank you, Ken. That will come from the line of Brad Erickson with RBC Capital Markets, your line is open.

Susan Li:

Yes. Thank you, Brad. I can go-ahead and take that one. So our growth in AI investments is really the thing that is driving the growth in our 2024 CapEx outlook. And I think there are a couple of components to that. There is both the core AI work, which powers our ranking and recommendation systems, which underpins both a lot of our content ranking and engagement growth, as well as the monetization work and that's an area where we're able to measure the ROI of our investments there, and we feel-good about the ROI of those investments and we want to continue investing appropriately to drive revenue growth. At the same time, being mindful of our desire to over the long-term decreased capital intensity. There is also another component, which is the next-generation AI efforts that we've talked about around advanced research and Gen AI and that's a place where we're already standing of training clusters and inference capacity, but we don't know exactly what will need in 2024 since we don't have any at-scale deployments yet of consumer business facing features and the scale of the adoption of those products is ultimately going to inform how much capacity we need. We think these are both going to be compelling investment opportunities and some of the AI capacity is fungible. So if we don't need end-up needing some of the capacity for our Gen AI work will be able to allocate it to our core AI work supporting ads and engagement, but we're really still working on our 2024 plans, we will have a clearer and more quantitative outlook as those planned shape up. But we are mindful of our intention to reduce the capital intensity of these investments over time.

Operator:

And this concludes today's conference call. Thank you for joining us. You may now disconnect your lines.

Deborah Crawford:

Thank you. Good afternoon and welcome to Meta Platforms' first quarter 2023 earnings conference call. Joining me today to discuss our results are Mark Zuckerberg, CEO, and Susan Li, CFO. Before we get started, I would like to take this opportunity to remind you that our remarks today will include forward-looking statements. Actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are set forth in today's press release and in our annual report on Form 10-K filed with the SEC. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. During this call, we may present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. The press release and an accompanying investor presentation are available on our website at investor.fb.com. And now I'd like to turn the call over to Mark.

Susan Li :

Thanks, Mark, and good afternoon, everyone. Let's begin with our consolidated results. All comparisons are on a year-over-year basis unless otherwise noted. Q1 total revenue was $28.6 billion, up 3% or 6% on a constant currency basis. Had foreign exchange rates remained constant with Q1 of last year, total revenue would have been about $816 million higher. Q1 total expenses were $21.4 billion, up 10% compared to last year. In terms of the specific line items, cost of revenue increased 2%, driven by infrastructure-related costs that were partially offset by lower Reality Labs cost of goods sold. R&D increased 22%, driven primarily by restructuring charges related to facilities consolidation and severance expenses and headcount-related costs from our Reality Labs and Family of Apps segments. Marketing and sales decreased 8% due mainly to lower marketing spend and headcount-related expenses. And G&A increased 22% due primarily to restructuring charges related to severance and facilities consolidation expenses and legal-related expenses. We ended the first quarter with over 77,100 employees, down 11% from the fourth quarter as our reported headcount no longer includes substantially all of the employees impacted by the November layoffs. Employees that were impacted by layoffs in March are still included in the first quarter headcount. First quarter operating income was $7.2 billion, representing a 25% operating margin. Our tax rate for the quarter was 22%. Net income was $5.7 billion or $2.20 per share. Capital expenditures, including principal payments on finance leases, were $7.1 billion driven by investments in data centers, servers and network infrastructure. Free cash flow was $6.9 billion, and we repurchased $9.2 billion of our Class A common stock in the first quarter. We ended the quarter with $37.4 billion in cash and marketable securities. Moving now to our segment results. I'll begin with our Family of Apps segment. Our community across the Family of Apps continues to grow. For the first time, we surpassed 3 billion people using at least one of our Family of Apps on a daily basis in March, and approximately 3.8 billion people use at least one on a monthly basis. Facebook continues to grow globally as well, and engagement remains strong with DAU and MAU growing sequentially across all regions in the first quarter. Facebook daily active users were 2.04 billion, up 4% or 77 million compared to last year. DAUs represented approximately 68% of the 2.99 billion monthly active users in March. MAUs grew by 53 million or 2% compared to last year. Q1 total Family of Apps revenue was $28.3 billion, up 4% year-over-year, and Q1 Family of Apps ad revenue was $28.1 billion, up 4% or 7% on a constant currency basis. Within ad revenue, the online commerce vertical was the largest contributor to year-over-year growth followed by health care and entertainment and media. Online commerce benefited from strong spend among advertisers in China reaching customers in other markets. However, other verticals remain challenged with financial services and technology verticals being the largest negative contributors to year-over-year growth. On a user geography basis, ad revenue growth was strongest in Rest of World at 9%, followed by North America and Asia Pacific at 6% and 4%, respectively. Europe declined 1%. Foreign currency remained a headwind to advertising revenue growth in all international regions. In Q1, the total number of ad impressions served across our services increased 26% and the average price per ad decreased 17%. Impression growth was primarily driven by Asia Pacific and Rest of World. The year-over-year decline in pricing was primarily driven by strong impression growth, especially from lower monetizing services and regions, foreign currency depreciation and lower advertising demand. While overall pricing remains under pressure from these factors, we believe our ongoing improvements to ad targeting and measurement are continuing to drive improved results for advertisers. Family of Apps other revenue was $205 million in Q1, down 5%, as strong business messaging revenue growth from our WhatsApp business platform was more than offset by a decline in other line items. We continue to direct the majority of our investments toward the development and operation of our Family of Apps. In Q1, Family of Apps expenses were $17.1 billion representing approximately 80% of our overall expenses. Family of Apps expenses were up 9% due primarily to restructuring charges and growth in infrastructure-related costs. Family of Apps operating income was $11.2 billion, representing a 40% operating margin. Within our Reality Labs segment, Q1 revenue was $339 million, down 51% due to lower Quest 2 sales. Reality Labs expenses were $4.3 billion, up 18% due mostly to employee-related costs and restructuring charges. Reality Labs operating loss was $4 billion. Next, I'll discuss our ongoing monetization work. As I mentioned last quarter, there are two primary levers to increasing monetization, growing supply and demand. On the ad supply side, our foremost focus remains on building engaging experiences for our community, and we're continuing to make encouraging progress on our product priorities. Our investments in the discovery engine are delivering results. In Feed, recommendations are contributing to engagement, and we've seen real time become more incremental to overall engagement on our services as we continue to improve our recommendation system. This is an important signal because it demonstrates that people are finding added value from the content we're helping them discover. Beyond that, we continue to focus on further narrowing the gap in monetization efficiency or monetization per time between Reels and our more mature surfaces, Feed and Stories. There are structural supply constraints with the Reels format as people view a reel for a longer time than a piece of Feed or Stories content, which results in fewer opportunities to serve ads in between posts. That will make it likely more challenging to close the monetization efficiency gap than it was with Stories. However, the overall economics of Reels will be determined by a combination of our ability to continue growing monetization per time on Reels and our ability to drive incremental engagement from Reels. As Mark noted, we have seen a 24% increase in overall time spent on Instagram from our ranking improvements since launching Reels globally. We continue to expect that Reels will become neutral to overall revenue by end of this year or early next year. The other side of monetization is growing advertiser demand. One area of focus is around driving advertiser performance, and we are seeing continued strong conversion growth for advertisers, which we believe, coupled with lower cost per action, is driving higher return on investment. We remain focused on continuing to improve ads ranking and measurement with our ongoing AI investments while also leveraging AI to power increased automation for advertisers through products like Advantage+ shopping, which continues to gain adoption and receive positive feedback from advertisers. These investments will help us develop and deploy privacy-enhancing technologies and build new innovative tools that make it easier for businesses to not only find the right audience for their ad, but also optimize and eventually develop their ad creative. Scaling on-site conversions is another important part of our work, and click-to-message ads continue to grow and bring incremental demand onto our platform. This format is mostly used by smaller advertisers today in Southeast Asia and Latin America, and one of the exciting opportunities ahead is to expand adoption to larger advertisers in more markets by investing in increased automation and reporting to help businesses more easily manage messages and measure results at scale. Before turning to our revenue outlook, I'd also like to talk about our operating philosophy given the recent significant changes to our investment plans. We believe increasing our organizational efficiency is vital to our long-term success. This will increase the speed of our execution and agility to ensure that we are constantly innovating for the people who use our services. Narrowing the scope of the projects that we are working on allows us to increase our focus on the highest leverage opportunities for the company, including AI today and the Metaverse longer term. It also enables us to invest in these areas while maintaining a strong financial position. As we look forward, I also expect that we will modestly evolve our capital structure over time to improve our overall cost of capital. We expect to do so through periodically accessing the debt markets to diversify our funding sources while still maintaining a positive or neutral net cash balance over time. In addition, we continue to monitor ongoing regulatory developments. We expect the IDPC to issue a decision in May in its previously disclosed inquiry relating to transatlantic data transfers of Facebook EU EEA user data, including a suspension order for such transfers and a fine. Our ongoing consultations with policymakers on both sides of the Atlantic continue to indicate that the proposed new EU-U.S. data privacy framework will be fully implemented before the deadline for suspension of such transfers, but we cannot exclude the possibility that it will not be completed in time. We will also evaluate whether and to what extent the IDPC decision could otherwise impact our data processing operations even after a new data privacy framework is in force. Turning now to the revenue outlook. We expect second quarter 2023 total revenue to be in the range of $29.5 billion to $32 billion. Our guidance assumes foreign currency headwinds will be less than 1% to year-over-year total revenue growth in the second quarter based on current exchange rates. Turning now to the expense outlook. We anticipate our full year 2023 total expenses will be in the range of $86 million to $90 billion, updated from our prior outlook provided in March. This outlook includes $3 billion to $5 billion of restructuring costs related to facilities consolidation charges and severance and other personnel costs. We continue to expect Reality Labs operating losses to increase year-over-year in 2023. Turning now to the CapEx outlook. We expect capital expenditures to be in the range of $30 billion to $33 billion, unchanged from our prior estimate. This outlook reflects our ongoing build-out of AI capacity to support ads, Feed and Reels, along with an increased investment in capacity for our generative AI initiatives. On to tax. Absent any changes to U.S. tax law, we expect our full year 2023 tax rate percentage to be around 20%. In closing, Q1 was a solid quarter for our business. Our global community continued to grow. We made important progress on our company priorities and improved the efficiency of our operations while strengthening the financial position of the company which sets us up well to execute on the opportunities ahead. With that, Dave, let's open up the call for questions.

Brian Nowak :

Thanks for taking my questions. I have two. The -- one for Mark, one for Susan. Mark, first one for you is on generative AI and how you think about generative AI and some of the division models and your large language models potentially impacting your long-term advertising business and finding ways to deliver more value for advertisers over the next two, three, five years? How do you see gen AI impacting advertising? Then the second one for Susan. Just as we're thinking about hiring expectations for '24 and beyond. I think there's been some ink in the press about potential 1% to 2% hiring going forward. Can you just talk to us about that a little bit? And how does using AI internally factor in your thoughts about long-term hiring? Thanks.

Susan Li :

Hi, Brian, it's Susan. Thanks for the question. You were asking about the 1% to 2% head count growth stat that's been out there. And I thought it was worth clarifying. So that comes from something Mark mentioned in a recent internal employee Q&A that he had expected company head count to increase only 1% to 2% year-over-year. And I want to clarify that Mark was actually speaking to employees about head count budgets that have already been allocated. What we've also said previously is we have been in a broad-based hiring freeze for the last half year. And as we complete our layoffs in April and May, we will resume hiring, and we would expect head count growth in excess of 1% to 2% in 2024 as a result as we ramp up those recruiting pipelines. But our long-term focus is very much on efficiency. And as hiring resumes, you'll find the biggest areas that we are hiring in will be to support priority areas like generative AI, ads, infrastructure, Reality Labs, some of the areas that we've been talking about. And you also asked about using AI internally and how that factors into our thoughts on long-term hiring. We certainly don't have enough visibility yet into how AI will make our workforce more productive, but it's something we're excited about. And I think we will have more clarity on that as more tools begin getting developed to enhance employee productivity across the industry.

Eric Sheridan :

Thanks so much for taking the questions. Maybe two, if I can. Mark, I was intrigued by your comment about open source and open systems with respect to AI. Obviously, we're coming off of Web2 in mobile, where there are a lot more walled gardens and ecosystems. Can you talk a little bit about what you might want to try to do, either from a priority or an investment standpoint to be a driver of more open-ended systems in AI compared to what we saw with Web2? And then maybe for Susan. You introduced the concept last quarter about revisiting your data center architecture over the medium to long term. Is there any update there for us in terms of how to think about AI as a driver of data center architecture medium to long term or what that might mean for capital intensity? Thanks so much.

Susan Li :

Hi, Eric, so I think your question had 2 parts. The first was an update on the data center architecture that we announced last quarter. And we're progressing with construction there, but the new data centers that we're building are intended really for future year capacity. So they won't come online for a few years. So we don't have too much more to share there, except that, that work is ongoing. And the second part of your question was really, I think about how AI might drive capital intensity over the next few years. So you can really think about our CapEx investment as having 3 broad buckets. The first, we've talked about before, non-AI compute needs. We do have ongoing general compute and storage needs to support the existing business, but this is an area where we've become much more efficient in terms of capital intensity and are very much focused on continuing to do so over time. The second area is in our core AI investments, which is really most of our AI investment today, and that's supporting the building of the discovery engine, ranking unconnected organic content, ranking ads, and we're focused on measuring the return of those investments and making sure that we feel good about the ROI of our spend there, and that really will drive our future plans in terms of that core AI spend. And then the third bucket is really around CapEx investments now to support gen AI. And this is an emerging opportunity for us. We're still in the beginning stages of understanding the various applications and possible use cases. And I do think this may represent a significant investment opportunity for us that is earlier on the return curve relative to some of the other AI work that we've done. And it's a little too early to say how this is going to impact our overall capital intensity in the near term. So to the extent that we spend more on CapEx in the near future, I expect it mostly to be to power this work. But I want to emphasize that we remain focused overall in striking the right balance between building out the AI capacity we need and being efficient with our CapEx spend.

Mark Shmulik :

Yeah. A couple of questions. Mark, this one's a bit more philosophical. But if we compare where Meta is today kind of pre-IDFA cookie-application type of world, how do you see the relative competitive position in digital advertising? In light of all of these technical integrations and AI tools because I think the prevailing view is that privacy will level the playing field, but it certainly doesn't seem that way. And then second, for Susan, I certainly appreciate the outlook on the revenue guidance. But in light of some of the commentary we've been hearing about U.S. consumers trading down, is there any additional color you can share about kind of where you're seeing strengths and weaknesses effectively quarter-to-date and beyond? Thank you.

Operator:

Your next question comes from the line of Doug Anmuth with JPMorgan. Your line is open.

Susan Li :

Thanks, Doug. I think there are a couple of components to this. A lot of this efficiency work that we've been undertaking and especially this year, is driven not sort of by solely financial imperative, but really with the focus of increasing operational efficiency. So that's been, I think, one of the foremost goals, and a lot of the work has been architected around that. And that really includes more carefully scrutinizing road maps, winding down projects that are no longer at the top of our priority list, reprioritizing investments. That's really a muscle that, I think, we have spent a lot of time building over the last half year, and I expect that we will be carrying that discipline into the way that we assess our product road maps going forward. Similarly, I think a lot of the work that we've done around increasing operational efficiency, around making sure that we feel good about management spans and layers and all that work, I think, is also in service of making us a company that can build more and ship faster. And we would expect to sort of continue to make sure that we think our organizational posture is really in service, again, of building and shipping product. And as we move forward, including out of the sort of the layoffs that we've been implementing in the direct restructuring work, we're going to continue focusing on efficiency work, including in other areas like helping investors -- sorry, helping developers build and ship quality products faster. We're going to be investing in tooling where we can to increase the velocity of product development. And we'll continue streamlining cross-functional or processes that might tax the development process or slow us down and make sure that we're really focused on also increasing the quality and frequency of collaborative and in person time to build relationships across the organization and get things done faster. So this is all -- I think I expect this to all be very much ongoing for us in the years to come.

Justin Post :

Hi, thank you. This could be for Susan or Mark. I think really interesting stat on the Instagram time you gave. But just wondering how you'd characterize the health of the Facebook user base and usage on the site? Obviously, DAUs went up to 68% this quarter. I think Asia was really strong. But what are you seeing there? And is there kind of a catch-up here where the real content could certainly helping Facebook time spend as well as you saw with Instagram. But just stepping out, I think there is an area of that usage could be flat or down. Just wondering what your thoughts there. And what you're seeing on the core Facebook. Thank you.

Operator:

Your next question comes from the line of Youssef Squali with Truist Security. Your line is open.

Susan Li :

Yeah. Thank you. Youssef, thank you. So for your first question, how much sort of has the -- the total expense guidance coming down, especially since we sort of issued our first passive guidance in Q3 last year, how has that downward sort of trend impacted our expectations beyond 2022 in the next two or three years. So we certainly haven't shared expense guidance for the out years. And frankly, that's something that we are ourselves working on internally as we lay our long term as we undergo our long-term planning exercise. But I do think that a lot of the muscle that we're building with regard to efficiency is going to translate into the longer run road map. And so I expect that we have really improved our cost structure over the last six months, and that's going to form the basis, along with an increased focus on operating efficiency going forward. I think that's going to form the basis for sort of our future outlook. And making sure that we are kind of constantly evaluating our investment road map to make sure that we are investing against the highest priority work and deprioritizing and winding down investments again where we don't see the ROI or we don't see a compelling opportunity. So again, we don't have guidance to share yet on the out years, but I do expect the overall efficiency ethos very much to be a part of the coming years. On your second question on what the potential impact to our European business is of the transatlantic data transfer rule. So first, I want to emphasize, we continue to be hopeful that the new EU U.S. privacy framework will be implemented before a deadline for suspension. But if it comes to that, there's a lot that we don't know in terms of the specifics of a final order and how long a suspension order would last, which would be important variables in determining the overall impact. What we do know is that roughly 10% of worldwide ad revenue comes from ads delivered to Facebook users in EU countries. But there are more details that we would need to understand, including the impact on advertisers in EU countries before we'd be able to really provide a more accurate or fulsome estimate of that impact.

Mark Mahaney :

Okay. Thanks. Two questions. Are there any restructuring charges still to be had, Susan, in Q2 or beyond that $3 billion to $5 billion that you talked about? Did we pretty much see all of that in Q1? And then secondly, I wonder if I could just get back to the broader opportunity around click-to-message. You've had -- Facebook has had these two wonderful assets or just three now messaging assets, but really leading off with WhatsApp for quite some time. It's always sort of undermonetized versus some of the other leading assets, but that seems to have really started to change. The numbers are becoming material. You mentioned that there's a real power alley in terms of marketers in Latin America and Southeast Asia. How can you take what is really a differentiated product and really kind of blow it out more? How do you -- is there anything -- are there steps you can take to really get more advertisers to realize the opportunity just given the kind of cultural shifts, if you will, towards embracing messaging? Thanks, very much.

Operator:

Your next question comes from the line of Ross Sandler with Barclays. Your line is open.

Mark Zuckerberg :

Sure. I'll take the first one, and then Susan can take the second one. On the AI tools, we have a bunch of history here, right? So if you look at what we've done with PyTorch, for example, which is -- has generally become the standard in the industry is a tool that a lot of folks who are building AI models and different things in that space use, it's generally been very valuable for us to provide that because now all of the best developers across the industry are using tools that we're also using internally. So the tool chain is the same. So when they create some innovation, we can easily integrate it into the things that we're doing. When we improve something, it improves other products, too. Because it's integrated with our technology stack, when there are opportunities to make integrations with products, it's much easier to make sure that developers and other folks are compatible with the things that we need and the way that our systems work. There are a lot of advantages, but I view this more as a kind of back-end infrastructure advantage with potential integrations on the product side, but one that should hopefully enable us to stay at the leading edge and integrate more broadly with the community and also make the way we run all this infrastructure more efficient over time. There are a number of models. I just gave PyTorch as an example, Open Compute is another model that has worked really well for us in this way, both to incorporate both innovation and scale efficiency into our own infrastructure. So there's -- our incentives, I think, are basically aligned towards moving in this direction. Now that said, there's a lot to figure out, right? So I mean you asked if there are going to be other opportunities. I hope so. I can't speak to what all those things might be now. This is all quite early in getting developed. The better we do with the foundational work, the more opportunities, I think, that will come and present themselves. So I think that, that's all stuff that we need to figure out. But at least, at the base level, I think we're generally incentivized to move in this direction. And we also need to figure out how to go in that direction over time. I mean I mentioned LLaMA before. And I also want to be clear that while I'm talking about helping contribute to an open ecosystem, LLaMA is a model that we only really made available to researchers. And there's a lot of really good stuff that's happening there, but a lot of the work that we're doing, I think we would aspire to and hope to make even more open than that. So we'll need to figure out a way to do that.

Deborah Crawford :

Operator, we have time for one last question.

Michael Nathanson :

Thank you so much. I have two, if you can hear me. The first is, Susan, I appreciate the confidence about Reels monetization going forward. But can you share a bit what's giving you the confidence that it goes from a headwind to a neutral to a tailwind down the line? Anything you can share on data points about ROAS or adoption? And then just quickly, all the updates on Messenger are really -- were great to hear. Do you think the adoption is also being driven by maybe loss of Signal? And how does messaging improve marketers' ability to basically retarget post-IDFA? So anything on Signal loss and how messaging helped you marketers regain that? Thanks.

Deborah Crawford:

Great. Thank you for joining us today. We appreciate your time, and we look forward to speaking with you again.

Deborah Crawford:

Thank you. Good afternoon and welcome to Meta Platform’s fourth quarter 2022 earnings conference call. Joining me today to discuss our results are Mark Zuckerberg, CEO; and Susan Li, CFO. Javier Olivan, COO, is also on the call and will join Mark and Susan for the Q&A portion. Before we get started, I would like to take this opportunity to remind you that our remarks today will include forward-looking statements. Actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are set forth in today’s press release and in our quarterly report on Form 10-Q filed with the SEC. Any forward-looking statements that we make on this call are based on assumptions as of today and we undertake no obligation to update these statements as a result of new information or future events. During this call, we may present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today’s earnings press release. The press release and an accompanying investor presentation are available on our website at investor.fb.com. And now, I’d like to turn the call over to Mark.

Susan Li:

Thanks, Mark and good afternoon everyone. Let’s begin with our consolidated results. All comparisons are on a year-over-year basis, unless otherwise noted. Q4 total revenue was $32.2 billion, down 4% or up 2% year-over-year on a constant currency basis. Had foreign exchange rates remained constant with Q4 of last year, total revenue would have been approximately $2 billion higher. Q4 total expenses were $25.8 billion, up 22% compared to last year. In terms of the specific line items, cost of revenue increased 31%, driven mostly by a write-down of certain data center assets as well as growth in infrastructure-related costs. R&D increased 39%, marketing and sales increased 4%, and G&A decreased 7%. Operating lease impairments and employee-related costs were the largest contributors to growth for all three expense lines. However, growth in marketing and sales was partially offset by lower marketing spend and growth in G&A was more than fully offset by a decrease in legal-related expenses. We ended the fourth quarter with over 86,400 employees, which includes a substantial majority of the approximately 11,000 employees impacted by our previously announced layoffs who remained on payroll as of December 31 due to applicable legal requirements. We expect the vast majority of the impacted employees will no longer be captured in our reported headcount figures by the end of the first quarter of 2023. Fourth quarter operating income was $6.4 billion, representing a 20% operating margin. Our tax rate for the quarter was 24%. Net income was $4.7 billion or $1.76 per share. Capital expenditures, including principal payments on finance leases, were $9.2 billion, driven by investments in servers, data centers and network infrastructure. Free cash flow was $5.3 billion and we ended the year with $40.7 billion in cash and marketable securities. In the fourth quarter, we repurchased $6.9 billion of our Class A common stock, bringing our total share repurchases for the full year to $27.9 billion. We had $10.9 billion remaining on our prior authorization as of December 31. And today, we announced a $40 billion increase in our stock repurchase authorization. Moving now to our segment results. I will begin with our Family of Apps segment. Our community across the Family of Apps continues to grow. We estimate that approximately 2.96 billion people used at least one of our Family of Apps on a daily basis in December and that approximately 3.74 billion people used at least one on a monthly basis. Facebook continues to grow globally and engagement remains strong. We reached 2 billion Facebook daily active users for the first time in December, up 4% or 71 million compared to last year. DAUs represented approximately 67% of the 2.96 billion monthly active users in December. MAUs grew by 51 million or 2% compared to last year. Q4 total Family of Apps revenue was $31.4 billion, down 4% year-over-year. Q4 Family of Apps ad revenue was $31.3 billion, down 4%, but up 2% on a constant currency basis. Consistent with our expectations, Q4 revenue remained under pressure from weak advertising demand which we believe continues to be impacted by the uncertain and volatile macroeconomic landscape. The financial services and technology verticals were the largest negative contributors to the year-over-year decline in Q4, but both have relatively smaller shares of our revenue. Growth remained negative in our largest verticals, online commerce and CPG, though the pace of year-over-year decline in online commerce has slowed compared to last quarter. The largest positive contributors to year-over-year growth in Q4 were the travel and healthcare verticals, though both are relatively smaller verticals in absolute share. Foreign currency remained a significant headwind to advertising revenue growth in all international regions. On a user geography basis, ad revenue growth was strongest in Rest of World at 5%. North America was flat, while Asia-Pacific and Europe declined 3% and 16% respectively. In Q4, the total number of ad impressions served across our services increased 23% and the average price per ad decreased 22%. Impression growth was primarily driven by the Asia-Pacific and Rest of World regions. The year-over-year decline in pricing was primarily driven by strong impression growth, especially from lower monetizing surfaces and regions, lower advertiser demand and foreign currency depreciation. While overall pricing remains under pressure from these factors, we have continued to make improvements to our ads targeting and measurement that we believe are driving more conversions and better returns for advertisers. Family of Apps’ other revenue was $184 million in Q4, up 19%, with strong business messaging revenue growth from our WhatsApp business platform partially offset by a decline in other line items. We continue to direct the majority of our investments towards the development and operation of our Family of Apps. In Q4, Family of Apps expenses were $20.8 billion, representing 81% of our overall expenses. Family of Apps’ expenses were up 23% due primarily to restructuring-related expenses and growth in infrastructure-related costs. Family of Apps’ operating income was $10.7 billion, representing a 34% operating margin. Within our Reality Labs segment, Q4 revenue was $727 million, down 17% due to lower Quest 2 sales. Reality Labs expenses were $5 billion, up 20% due primarily to employee-related costs and restructuring-related expenses. Reality Labs operating loss was $4.3 billion. Before turning to the outlook, I’d like to discuss our work to grow profitability by scaling monetization and improving our operational efficiency. There are two primary levers to increasing monetization

Brian Nowak:

Great. Thanks for taking my questions. I have two, one for Mark, one for Susan. Mark, the first one is on generative AI. I sort of wanted to dig a little more into how you think about your blue-sky potential user and advertiser use cases of generative AI? And how do you think about the timeline foresee some glimpses of those on the platform? And then the second one for Susan, just anymore color on the new data center architecture and how we should think about the long-term capital intensity of the business, whether it’s CapEx per minute, CapEx per DAU? How big of a long-term benefit could this change be to the overall cash flow? Thanks.

Susan Li:

Thanks, Brian. On your questions about CapEx, so your first question was about the new data center architecture that we talked about, which is underpinning the lower CapEx outlook. So we’re shifting our data centers to a new architecture that can more efficiently support both AI and non-AI workloads. And that’s going to give us more optionality as we better understand our demand for AI over time. Additionally, we’re expecting that the new design will be cheaper and faster to build than previous data center architecture. Along with the new data center architecture, we’re going to optimize our approach to building data centers. So we have a new phased approach that allows us to build base plans with less initial capacity and less initial capital outlay, but then flex up future capacity quickly if needed. We’re still planning to grow AI capacity significantly, and that connects, I think, to a lot of the things that Mark was describing earlier in his question. In terms of longer-run capital intensity, we certainly expect that the lower CapEx outlook will have some incremental benefit to CapEx as a percent of revenue, and that’s still really something that we are focused on over the longer term. The current surge in CapEx is really due to the building out of AI infrastructure, which we really began last year and are continuing into this year. We will be measuring the ROI of these AI investments, and their returns will continue to inform our future spend. Our intention is still to bring CapEx as a percent of revenue down, but capital intensity in the nearest term is really going to depend, in part, on the revenue outlook and our needs to further build AI capacity for future demand.

Eric Sheridan:

Thank you so much. Maybe I can ask a multiparter on going back to some of your comments on Reels. Mark, you always had this philosophy of letting the user sort of continue to grow engagement, and monetization has always lagged sort of consumer adoption of new products. How do you think about going a little bit deeper on the mixture of letting the engagement of short-form video continue to build versus eventually sort of continuing to drive higher levels of monetization against that product? Second, can you give us a little bit of color of how advertiser conversations continue to evolve around short-form video and the adoption of the Canvas and the utilization of that as a means to deliver a mixture of brand and DR messages? And then lastly would just be, can you quantify at all the gap that still exists between the engagement around short-form video and the monetization and how that might close as we look out over the next couple of years? Thanks so much.

Javier Olivan:

So on the advertisers reaction to Reels. We continue working on enabling more advertisers to participate in Reels app, more formats, more objectives, more tools to create them. And we’ve been making good progress with now over 40% of our advertisers use Reels across our apps. And between Direct Response versus brand, we are actually seeing progress with both, but Direct Response continues to be where advertisers are focused. And just as an example, Outletcity, which is a German fashion retailer, developed – created specifically for Reels to test the impact of conversions. And they found that Reels resulted in a 19x higher ROIs, 89% lower cost per purchase, and 9x higher lift in sales. So overall, very good results.

Operator:

Your next question comes from the line of Mark Shmulik with Bernstein. Your line is open.

Susan Li:

Thanks Mark. So on your first question, we are continuing to make progress in mitigating the impact from the ATT change. But this is more generally just the reality of the online advertising environment that we operate in now. So we’re continuing to work on building tools that mitigate the impact of those changes, and we see strong adoption of those tools, including tools we’ve talked about before like CAPI Gateway, etcetera. We’re also investing in ways to bring conversions on site, and we have a lot of ad formats that have been instrumental in doing so across both click-to-messaging ads, leads ads – lead ads and shop adds being formats that bring conversions on site. And then over the longer run, we’re continuing to invest in our privacy-enhancing technologies to more fundamentally enable us to deliver more performance and privacy-safe ads to advertisers. Javi, is there anything you want to add on that?

Mark Zuckerberg:

Alright. And I can give some color on – and I think there was a question about how we’re thinking about this efficiency theme as it applies to Reality Labs over time. I guess there are two ways that I think this applies. The first thing is, I think it’s important to not just think about Reality Labs as one thing, right? There are like three major areas, right? There is the augmented reality work long-term, which is actually the biggest area, but hasn’t – but it’s still a large research problem. There is a lot of work there that we haven’t actually shipped the product yet. VR, which is starting to ramp, right, Quest 2, I think, did quite well. We have multiple product lines there with the Quest Pro. And then the smallest by kind of budget size today is the Metaverse software program. And that’s – it doesn’t reflect the importance of it. I think the software and social platform might be the most critical part of what we’re doing, but software is just a lot less capital intensive to build than the hardware. So it’s the smallest part of the program. And within each of those areas, there are a lot of different things that we’re doing. So just like any project that we would run we’re constantly learning from how the products that we’ve shipped are doing, how the market is evolving overall, how competitors are doing, and what reaction they are seeing to different things, and what experiments are being played out. And we’re kind of constantly tuning the road map. And obviously, some of these are longer-term things, right? So you start planning out the hardware that you’re going to ship 2, 3 years in advance. But we’re kind of constantly looking at the signals and learning and making decisions about what it makes sense to do forward. So that’s definitely going to continue. And we will – even though I’m – none of the signals that I’ve seen so far suggests that we should shift the Reality Lab strategy long-term. We are constantly adjusting the specifics of how we adjust – of how we execute this. So I think that we will certainly look at that as part of the ongoing efficiency work. The other piece is just different tactics, things like trying to flatten the org, things like that. Those are going to apply across the whole company. So we expect that within the road map that we’re trying to execute, both on Reality Labs and Family of Apps, we just want to focus on making all of our work more efficient. A lot of the time, when people talk about efficiency, there is a lot of focus on prioritization and which big things can you cut. But I actually think what makes you a better company over time is being able to execute and do more things because you’re operating more efficiently, and you can get things done with fewer resources. So I’d like to kind of get us to that mode more, which I guess gets me to a higher level point in this, which is I just think we’re in – we’ve entered somewhat of a phase change for the company, where we just grew so quickly for like the first 18 years of the company’s growth. And it’s very hard to really crank on efficiency while you’re growing that quickly. And I just think we’re in a different environment now where we have a bunch of areas that, I mean, you’re still extremely exciting and growing quickly for the future, where I think the right strategy will be to focus on kind of top line growth. But I think a lot of what we do, it really just makes sense to really focus on the efficiency a lot more than we had previously and making sure that we can do that work more effectively. For what it’s worth, I think if we do that well, it will be – I think we will be able to do better product work. And I think it will be a more fun place for people to work because I think they are going to get more stuff done. So I’m pretty committed to this, and it’s going to go across all of the different things that we’re doing.

Doug Anmuth:

Great. Thanks for taking the questions. Susan, I know the expense outlook came down by $5 billion. I was just hoping you could talk about some of the areas where you may be able to get increased efficiency still? And then what does the new expense outlook suggest for hiring levels in ‘23? And then separately, I was hoping you could comment on the issues in Europe around Meta’s use of first-party data to target ads. How could this get resolved? And how should we think about the risk to Meta? Thanks.

Operator:

Your next question comes from the line of Justin Post with Bank of America. Your line is open.

Susan Li:

Thanks Justin. On ATT, I think what I would say is there is still certainly an absolute headwind to our revenue number. That is the impact of the ATT changes being in place. Having said that, we are lapping its rollout and adoption and we are making progress in mitigating the impact due to a lot of the work that both Javi and I just talked about, including the different advertiser tools, including ad formats that bring conversions on-site and including the longer term AI investments in privacy-enhancing technologies. The second part of your question was on, oh, anything from Android and other headwinds. On Android, it’s too early to know where this will land. I think Google is taking an approach that is collaborating with the industry, which we think is critical, and we will have updates as more time elapses there. And then your third – the third part of your question, I think was on regulatory issues in the EU, I think this was on DSA. We are expecting – we have been preparing for some time to comply with DSA and meet the compliance deadlines that we expect to come into effect this year. Those are meaningful but manageable segment of costs. We have been preparing for a long time, and those costs have been factored already into our total expense guidance.

Youssef Squali:

Great. Thank you. Two questions for me, please. First, maybe one for Susan. Just staying on the theme of the efficiency and with all the adjustments to your cost basis lately, can you maybe just speak to the relationship you are trying to build between revenue growth and OpEx, CapEx growth over time? I think the last time we saw them move in tandem or close to each other was back in 2017. So, are you at a point where you would want them to grow much closer to each other, or are we still in an investment mode and therefore, potentially margin compression mode beyond just 2023? And then maybe, Mark, can you just provide an update on kind of the health of the broad digital ad space, especially for the SMB side and DR. Just curious if coming out of Q4, you are incrementally bullish or you are still as cautious as that you are three months or six months ago? Thank you.

Javier Olivan:

No, I think you covered it well, Susan.

Ron Josey:

Great. Thanks for taking the question. Mark, I wanted to talk a little bit more around the progress on the AI discovery engine in Reels. And we are seeing it in our own usage in terms of content and categories and just getting more insights and content that we would like to see. But can you just talk about the added signal that Meta is seeing and gaining you to produce this more relevant content across Reels to Stories to Feed and maybe even to Messenger? Thank you.

Operator:

Your next question comes from the line of John Blackledge with Cowen. Your line is open.

Susan Li:

Yes. Sorry, I will go ahead and take the first question about Realty Labs, and Javi, you can take the second question on shop ads. On Reality Labs, we still expect our full year Reality Labs losses to increase in 2023, and we are going to continue to invest meaningfully in this area given the significant long-term opportunities that we see. It is a long-duration investment, and our investments here are underpinned by the accompanying need to drive overall operating profit growth while we are making these investments. I will turn it to Javi on the shop ads.

Operator:

Your next question comes from the line of Mark Mahaney with Evercore ISI. Your line is open.

Susan Li:

Thanks. This is Susan. On the click-to-messaging ads, so we are – this is one of our fastest-growing ads products. And we believe that they are bringing incremental demand onto our platform. I mentioned in my script that over half of click-to-message advertisers exclusively use click-to-message ads on our platform. In terms – you asked how we are going to scale and I think there are a couple of dimensions. In terms of demand, I think the biggest piece here is getting more businesses to adopt click-to-messaging ads via creating more entry points, simplifying creation flows. We are trying to integrate with partners who can help smaller businesses scale. So, there is a lot of work going on there. On the performance side, we are continuing to focus on just driving up the ROI that advertisers get from click-to-messaging ads. We are trying to give advertisers the ability to do more down-funnel optimization, create better in-thread experiences and simplify flows that help them drive conversion. And then ultimately, we are always focused on growing supply and in this case, growing the business messaging ecosystem by creating more ways for people and businesses to connect across our messaging app. So, I think an example of that would be something like business direct research on WhatsApp. So, it’s an opportunity we are very excited about and we have invested a lot in and we have seen very healthy growth. I will turn it to Mark on the efficiency question.

Deborah Crawford:

Operator, we have time for one last question.

Brent Thill:

Thanks. Susan, for your Q1 guidance, can you just remind us all what your embedded expectations are for market conditions, how you think about seasonality? What’s embedded in that guidance?

Deborah Crawford:

Great. Thank you for joining us today. We appreciate your time, and we look forward to speaking with you again.

Deborah Crawford:

Thank you. Good afternoon and welcome to Meta Platforms third quarter 2022 earnings conference call. Joining me today to discuss our results are Mark Zuckerberg, CEO; and Dave Wehner, CFO. Susan Li, VP of Finance and our Incoming CFO and Marne Levine, Chief Business Officer, are also on the call and will join Mark and Dave for the Q&A portion. Before we get started, I would like to take this opportunity to remind you that our remarks today will include forward-looking statements. Actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are set forth in today’s press release and in our quarterly report on Form 10-Q filed with the SEC. Any forward-looking statements that we make on this call are based on assumptions as of today and we undertake no obligation to update these statements as a result of new information or future events. During this call, we may present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today’s earnings press release. The press release and an accompanying investor presentation are available on our website at investor.fb.com. And now, I’d like to turn the call over to Mark.

Dave Wehner:

Thanks, Mark and good afternoon, everyone. Let’s begin with our consolidated results. All comparisons are on a year-over-year basis, unless otherwise noted. Q3 total revenue was $27.7 billion, down 4% or up 2% on a constant currency basis. Had foreign exchange rates remained constant with Q3 of last year, total revenue would have been approximately $1.8 billion higher. Q3 total expenses were $22.1 billion, up 19% compared to last year. This includes a $413 million impairment of certain operating leases as part of our ongoing work to align our office facilities footprint with our anticipated operating needs. In terms of the specific line items, cost of revenue decreased 1% as a reduction in Reality Labs hardware costs was offset by growth in infrastructure and content-related expenses. R&D increased 45% mainly driven by hiring within Family of Apps and Reality Labs segments as well as Reality Labs technology development costs. Lastly, marketing and sales and G&A increased 6% and 15% respectively, mainly driven by headcount-related costs. Our pace of hiring slowed in the third quarter, consistent with our previously stated plans. We added 3,700 net new hires in Q3, down from our Q2 net additions of 5,700 despite Q3 typically being a seasonally stronger hiring period. We expect hiring to slow dramatically going forward and to hold headcount roughly flat next year relative to current levels, which I will cover in my outlook section. Third quarter operating income was $5.7 billion, representing a 20% operating margin. Our tax rate was 21%. Net income was $4.4 billion or $1.64 per share. Capital expenditures, including principal payments on finance leases, were $9.5 billion driven by investments in servers, data centers and network infrastructure. Free cash flow was $173 million. We repurchased $6.5 billion of our Class A common stock in the third quarter and completed an inaugural debt offering of $10 billion. We ended the quarter with $41.8 billion in cash and marketable securities. Moving now to our segment results, I’ll begin with our Family of Apps segment. Our community across the Family of Apps continues to grow. We estimate that approximately 2.9 billion people used at least one of our Family of Apps on a daily basis in September and that approximately 3.7 billion people used at least one on a monthly basis. Facebook continues to grow globally and engagement remains strong. Facebook daily active users were 1.98 billion, up 3% or 54 million compared to last year. DAUs represented approximately 67% of the 2.96 billion monthly active users in September. MAUs grew 48 million or 2% compared to last year. Q3 total Family of Apps revenue was $27.4 billion, down 4%. Q3 Family of Apps ad revenue was $27.2 billion, down 4%, but up 3% on a constant currency basis. Consistent with our expectations, the headwind to year-over-year growth from Apple’s ATT changes diminished in Q3 as we lapped the first full quarter post the launch of iOS 14.5. However, this was offset by weak advertising demand, which we believe continues to be impacted by the uncertain and volatile macroeconomic landscape. As a result, our Q3 constant currency growth rate was in line with our Q2 rate. The healthcare and travel verticals were the largest positive contributors to growth in Q3. However, this was offset by continued softness in other verticals, including online commerce, gaming, financial services and CPG. On an advertiser size basis, revenue growth from large advertisers remains challenged, while we have seen more resilience among smaller advertisers. Foreign currency was a significant headwind to advertising revenue growth in all international regions. On a user geography basis, year-over-year ad revenue growth was strongest in Asia-Pacific and rest of world at 6% and 3% respectively, with both regions continuing to benefit meaningfully from strong growth in click-to-messaging ads. North America and Europe declined 3% and 16% respectively. In Q3, the total number of ad impressions served across our services increased 17% and the average price per ad decreased 18%. Impression growth was driven by Asia-Pacific and rest of world. The year-over-year decline in pricing was primarily driven by strong impression growth, especially from lower monetizing surfaces and regions, foreign currency depreciation and lower advertiser demand. Family of Apps other revenue was $192 million, up 9%, driven by strong business messaging growth from our WhatsApp business platform, partially offset by a decline in other line items. We continue to direct the majority of our investments towards the development and operation of our Family of Apps. In Q3, Family of Apps expenses were $18.1 billion, representing 82% of our overall expenses. FoA expenses grew 18% driven mostly by employee-related costs, infrastructure-related costs and the impairment of certain operating leases for office facilities that we plan to exit. Family of Apps operating income was $9.3 billion, representing a 34% operating margin. Within our Reality Labs segment, Q3 revenue was $285 million, down 49% due to lower Quest 2 sales. Reality Labs expenses were $4 billion, up 24% due primarily to employee-related costs and technology development expenses. Reality Labs operating loss was $3.7 billion. Turning now to the outlook, we expect fourth quarter total revenue to be in the range of $30 billion to $32.5 billion. Our guidance assumes foreign currency will be an approximately 7% headwind to year-over-year total revenue growth in the fourth quarter based on current exchange rates. Before turning to the expense outlook, I wanted to provide some context on the approach we are taking towards setting our 2023 budget. We are making significant changes across the board to operate more efficiently. We are holding some teams flat in terms of headcount, shrinking others and investing headcount growth only in our highest priorities. As a result, we expect headcount at the end of 2023 will be approximately in line with third quarter 2022 levels. We have increased scrutiny on all areas of operating expenses. However, these moves follow a substantial investment cycle, so they will take time to play out in terms of our overall expense trajectory. Some steps, like the ongoing rationalization of our office footprint, will lead to incremental costs in the near-term. This should set us up well for future years when we expect to return to higher rates of revenue growth. Turning now to the specific expense outlook for ’22 and ’23, we expect 2022 total expenses to be in the range of $85 billion to $87 billion updated from our prior outlook of $85 billion to $88 billion. This includes an estimated $900 million in additional charges in Q4 related to consolidating our office facilities footprint that we expect to record in the fourth quarter of 2022. We anticipate our full year 2023 total expenses will be in the range of $96 billion to $101 billion. This includes an estimated $2 billion in charges related to consolidating our office facilities footprint. We expect the slight majority of our 2023 expense dollar growth to be driven by operating expenses, with the remaining growth coming from cost of revenue. We expect the percentage growth rate of 2023 operating expenses to decelerate meaningfully as we curtail non-headcount related expense growth and keep 2023 headcount roughly flat with current levels. Conversely, our growth in cost of revenue is expected to accelerate driven by infrastructure-related expenses, and to a lesser extent, Reality Labs hardware costs driven by the launch of our next generation of our consumer Quest headset later next year. Reality Labs expenses are included in our total expense guidance. We do anticipate that Reality Labs operating losses in 2023 will grow significantly year-over-year. Beyond 2023, we expect to pace Reality Labs investments such that we can achieve our goal of growing overall company operating income in the long run. Before turning to our CapEx outlook, I’d like to provide some context on our infrastructure investment approach. We are currently going through an investment cycle, which is being driven – which is primarily driven by two large areas of investment. First, we are significantly expanding our AI capacity. These investments are driving substantially all of our capital expenditure growth in 2023. There is some increased capital intensity that comes with moving more of our infrastructure to AI. It requires more expensive servers and networking equipment, and we are building new data centers specifically equipped to support next-generation AI hardware. We expect these investments to provide us a technology advantage and unlock meaningful improvements across many of our key initiatives, including Feed, Reels and Ads. We are carefully evaluating the return we achieved from these investments, which will inform the scale of our AI investment beyond 2023. Second, we are making ongoing investments in our data center footprint. In recent years, we have stepped up our investment in bringing more data center capacity online. And that work is ongoing in 2023. We believe the additional data center capacity will provide us greater flexibility with the types of servers we purchase and allow us to use them for longer, which we expect to generate greater cost efficiencies over time. These investments, along with revenue headwinds, are contributing to higher capital expenditures as a percentage of revenue in 2022 and 2023 than we expect over the long-term. Turning now to the specific CapEx outlook for ’22 and ’23. We expect 2022 capital expenditures, including principal payments on finance leases, to be in the range of $32 billion to $33 billion updated from our prior range of $30 billion to $34 billion. For 2023, we expect capital expenditures to be in the range of $34 billion to $39 billion driven by our investments in data center servers and network infrastructure. An increase in AI capacity is driving substantially all of our capital expenditure growth in 2023. Turning to tax. Absent any changes to U.S. tax law, we expect our fourth quarter 2022 and our full year 2023 tax rate to be similar to the third quarter 2022 rate. In addition, as noted on previous calls, we continue to monitor developments regarding the viability of transatlantic data transfers and their potential impact on our European operations. In closing, we are pleased with the growth of the community using our Family of Apps and the engagement improvements we are driving with efforts such as Reels and our AI-powered content recommendations. While we are facing near-term headwinds on revenue, the fundamentals are there for a return to stronger top line growth. We are approaching 2023 with a focus on efficiency and spending discipline, and I’m optimistic that these moves will set us up well to achieve our goal of driving operating income growth over the long-term while investing for future growth. On a personal note, I’ll be closing out a decade at Meta in the next couple of weeks, including the last 8 years as CFO. In my new role, I’m looking forward to continuing to help the company achieve its long-term mission and execute on its financial plan. I couldn’t be happier to hand off the CFO role to Susan Li, who is one of the most talented executives that I’ve had a chance to work with in my long career in finance and tech. And with that, Martin, let me open up the call for questions.

Brian Nowak:

Thanks for taking my questions. If I could squeeze in two. The first one is on CapEx and return on invested capital. The CapEx spend and forward expectations are remaining somewhat higher than investors expected. So Mark, can you maybe just give us some examples of what these new AI investments are going to enable you to do differently going forward than in the past? And what’s a reasonable period in which investors expect to see material incremental engagement or revenue from these? And then the second one is on engagement. I thought your comments about incremental time spent from Reels were interesting. But maybe just to sort of address the big topic around time spent, can you give us any update on what U.S. time spent trends look like just to sort of give investors some incremental confidence in the durability of the platform in your oldest market? Thanks.

Susan Li:

Yes. Thanks, Brian. So as Dave mentioned in his script, we expect 2023 CapEx to be in the range of $34 billion to $39 billion, with our investments in AI driving all of that growth. We’re very focused on evaluating the ROI of our AI investments, and that’ll inform our level of future spend. But so far, we’ve seen continued strong impact on our recommendations products from advancing developments in our AI work. In the Q2 call, we had shared that a single AI advancement in scaling our recommendations models had led to a 15% watch time gain for Facebook Reels, and that gain has continued to grow. And we expect that there will be additional watch time improvements coming from that work. On the ad side, we’re also continuing to roll out more AI and ML improvements in some of the new ads offerings, and we’re encouraged by all of the early examples that we’ve seen. So this is something that we will be watching very closely. We think we’re early in this journey, but our level of CapEx investment will depend on the returns that we generate through these investments in AI. And if we generate significant engagement and revenue gains, we will continue investing here. And if we don’t, we will pace our spending accordingly.

Mark Shmulik:

Yes. Hi, thanks for taking the question. A couple, if I may. Mark, the first one, you kind of mentioned in your opening remarks that you expect to get back to kind of revenue growth in 2023. Any color you can share on kind of the key drivers behind that? And how much of that is – excuse me, macro-driven versus some of these initiatives that you guys are working on? And then secondly, for Susan, as we think about kind of the operating expense guidance into 2023, I know historically, those numbers have tended to skew a bit conservative. How much conservatism is baked in there? And how much flexibility is there to kind of toggle some of those expenses depending on the health of core? Thank you.

Susan Li:

And I’ll take that second question on next year’s OpEx guide. One thing I’d point out first is just next year’s guide includes an estimated $2 billion in 2023 expenses that are one-time charges as part of our office facilities consolidation as we continue to rationalize our real estate footprint. We also expect a little over half of our expense dollar growth in 2023 to come from OpEx, with the rest coming from cost of revenue. On the OpEx side, the growth in 2023 OpEx is primarily driven by headcount-related costs from employees that we’ve already hired through 2022, and those hires have primarily been concentrated in technical and more senior roles. So we expect the slowdown in payroll growth in 2023 will be the result of the slowdown in headcount growth overall. As we mentioned, we expect to end 2023 with headcount roughly flat to where we are now. And on the cost of revenue side, we expect the growth rate of cost of revenue to accelerate in ‘23 driven by the increased depreciation that we’re seeing play through from the big CapEx investments that we’ve made so far and then as well as from Reality Labs with the launch of the next generation of the consumer Quest headset later next year.

Justin Post:

Great. A couple of questions on the Reels transition. When you think about that business, and people coming to the site, do you think – how does it compare to the News Feed as far as repeat rates or retention? And are you a little worried that it’s a little less proprietary than your prior content? And then second, I think there are a lot of questions on CapEx. Just wondering if the build here for this year and next is one-time to kind of get your capabilities in place, and then maybe you can go back to kind of a mid-teens level as a percentage of revenue or is just the transition in the business just a higher capital intensity business? Thank you.

Susan Li:

And on your second question about the CapEx guide, I would really think about our CapEx investment as kind of the AI and non-AI components. On the AI side, which really is driving all of the CapEx growth in 2023, we will be pacing that future investment on the basis of the returns that we’re able to see and measure. So frankly, we’re hopeful that there will be a big opportunity to invest more here because we expect that this will be a high ROI area of investment for us. On the non-AI side, a lot of that spend is in ongoing investments on our data center footprint where we had stepped up our investment in recent years to build sort of ahead of our anticipated capacity needs, and that work continues in 2023. We do expect this component of our CapEx spend to become more efficient over time and we are actively looking for more efficiencies there. So I don’t know that we are benchmarking to an exact number on the combination of those two things. The future intensity, I think, is going to depend on the returns that we generate through those increased AI investments.

Operator:

Your next question comes from the line of Doug Anmuth with JPMorgan.

Dave Wehner:

So in terms of ATT impact, we’re – the primary factor is the lapping factor relative to Q2. So in Q2 of 2021, ATT had not been fully rolled out. It was largely rolled out by Q3 of ‘21. So the fact that we were lapping that period in the third quarter, we got a benefit relative to the second quarter, but that was offset by continued macro weakness. In terms of the efforts to attract content creators, and specifically as it relates to the overall cost structure, we don’t anticipate that, that’s going to have a meaningful impact to the cost structure. And obviously, it’s factored into our expense guidance.

Eric Sheridan:

Thanks for taking the question. Maybe two, if I can. Mark, I would love you to weigh in. Obviously, the company has faced a lot of headwinds from platform changes, competitive dynamics and a lot of macro impact, as we’ve talked about over the last 12 to 24 months. How much of this investment cycle is informed by your views around future-proofing the platform, so there are less externalities that can impact it and you’re in control more of your own destiny versus elements of curveballs that can be thrown at you that can cause volatility in the business in the medium to long-term? And then I’d love to ask one on the metaverse. Understood on the investment cadence in the metaverse over the next 2 years, even if qualitatively, how should investors think about the revenue opportunity over the next 3 to 5 years with between the hardware opportunity and the non-hardware opportunity as you see it as the metaverse evolves?

Susan Li:

How much of the…

Operator:

And your next question comes from the line of Youssef Squali with Truist.

Susan Li:

Hi. It’s Susan on the first question. We haven’t given revenue guidance yet for 2023, but our Q4 2022 guide is a range, and that range certainly encompasses, I think a wide variety of macro expectations. We are certainly in a period right now where we are seeing a slowdown in advertising demand, and that correlates with a lot of things that we are seeing outside of just our sector here, including rising inflation and supply chain issues sort of more broadly across the economy. So, with that in mind, we have undertaken a 2023 budget process that has applied higher scrutiny to almost all of the areas of our very broad investment portfolio, and we have taken what is an intentionally more conservative approach to our budget and our anticipated growth. You asked about the sort of fixed versus variable components of the 2023 OpEx guide. I think I had mentioned that over half – a little over half of that is coming from OpEx, the rest from cost of revenue. So, the cost of revenue piece that has the sort of the growth in depreciation, which is certainly fixed and is just playing through from prior year CapEx growth. Part of that is coming from Reality Labs and the launch of the next-gen consumer Quest headset. So, that sort of corresponds to the product launch. And then on the OpEx side, we – a lot of the growth in 2023 OpEx is coming from employees who we have already hired. We expect that we are going to have the same number of employees end of 2023. So, that’s an area where we are pretty focused on being disciplined also. And then finally, I would just mention, again, there is that $2 billion office facilities consolidation charge that’s also included in the ‘23 OpEx guide.

Operator:

Your next question comes from the line of Mark Mahaney with Evercore ISI.

Marne Levine:

Hi Mark, I will take this question. We have continued our broader work to rebuild meaningful elements of our ad tech. So, our system can improve performance and measurement with – and we have been making investments in the short and the medium-term and over the long-term. In the short and the medium-term, what we have been very focused on is evolving our ad system by growing on-site conversions with products like lead ads and ads that click to message. And we are continuing to make investments in AI and machine learning to improve measurement targeting and delivery. We have been pleased with our progress that we have made this quarter to help advertisers improve performance, targeting and measurement. I would be remiss if I didn’t talk about how AI and ML is really helping advertisers. One example of this is Advantage+ Shopping. We launched it in August. It’s a product that’s enabled by machine learning that helps clients test, learn and optimize their campaigns faster. It’s early, but a recent test across a cross-section of advertisers found that those using Advantages+ Shopping campaign saw a 32% increase in return on ad spend. Over the longer term, we are focused on investing in privacy-enhancing technologies, both our own portfolio of solutions, but also working with the industry to do that. And all of this is in the spirit of investing in this technology to help advertisers get more value.

Operator:

Thank you. That will come from the line of Brent Thill with Jefferies.

Dave Wehner:

Yes. Let me take at least part of that. I mean we are making a number of investments across the portfolio. Marne outlined some that we are making in the ad space. Obviously, the investments that we are making in product areas like Reels and the business messaging platform at WhatsApp are ones that we think will have a significant payoff for the – in business, both in terms of engagement and monetization. So, we are making a wide portfolio of bets. Still, the majority of our spending is directed towards our Family of Apps investment, and those are across both engagement and monetization, leveraging AI in many cases. And we are making good progress on those fronts and then leveraging as well what is today a fairly under-monetized resource in terms of our messaging platforms, building more scale around those as being a source of future revenue growth. We have already proven it out with our business – our click-to-message ads with a $9 billion business today. We think we can build a substantial sized business around paid messaging, which will complement that as well. So, I think we have got a lot of bets across the Family of Apps portfolio in addition to the work that we are doing on Reality Labs and the metaverse.

Marne Levine:

Just adding to what Mark just said, it is a challenging time for advertisers. And what they are focused on given the economic uncertainty is getting a strong return on investment. Going back to the Family of Apps and services, Reels continues to be the fastest-growing format on Instagram and Facebook, and it is a great way for people to discover new interest creators and connect with businesses. What we are focused on is making sure that businesses get a strong ROI on Reels. And one example that shows that we are delivering on this in terms of our investments is Corkcicle, which is the insulated drinkware brand that added Reels to its business-as-usual strategy and saw a 34% higher return on ad spend and a 34% higher sales. So, we are making progress with our investments and helping advertisers find that ROI that they are looking for.

Operator:

And this concludes today’s conference call. Thank you for joining us. You may now disconnect your lines.

Deborah Crawford:

Thank you. Good afternoon, and welcome to Meta Platform's Second Quarter 2022 Earnings Conference Call. Joining me today to discuss our results are Mark Zuckerberg, CEO; Sheryl Sandberg, COO; and Dave Wehner, CFO. Before we get started, I would like to take this opportunity to remind you that our remarks today will include forward-looking statements. Actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are set forth in today's press release and in our quarterly report on Form 10-Q filed with the SEC. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. During this call, we may present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. The press release and an accompanying investor presentation are available on our website at investor.fb.com. And now I'd like to turn the call over to Mark.

Sheryl Sandberg:

Thank you, Mark, for those kind words and for being a great leader and friend for the last 14 years. It has been an enormous privilege to work for you to help build this remarkable company. I'd like to focus on Q2 before making some wider observations about the business. Our total revenue in Q2 was $28.8 billion, a decrease of 1% year-over-year. Foreign exchange trends had a significant impact in Q2, in particular, the depreciation of the euro relative to the dollar. On a constant currency basis, we would have seen 3% revenue growth year-over-year. Similar to last quarter, we saw solid growth in APAC and other parts of the world outside of North America and Europe, where it's been a more challenging environment. These continue to be turbulent times for the global economy. Many of the macro factors having an impact on our revenue are continuations of things we've seen in previous quarters, such as the continued impact of the war in Ukraine and the normalization of e-commerce after the pandemic peak. But there are also new challenges with rising inflation and uncertainty around a looming recession. We know that recessions put pressure on marketers to make sure their ad budgets are spent in the smartest way possible. We're focused on helping them run efficient marketing campaigns to get the best possible return on investment, including helping them shift their ad strategies on our platform in line with user trends and our own evolving ad solutions. I want to pick up on some of the themes Mark just touched on that show how we're doing this. Reels monetization, evolving our ad system and AI and machine learning. First, Reels monetization. We launched Ads and Reels last year. It's growing quickly and we see it as an area where there is significant potential for growth in the future. It's going to take time but we have a playbook from our experience with Stories. Our focus right now with Reels is ramping up ad load, improving performance and making sure the ads are easy for advertisers to create. We're also using AI to better understand the content being published in Reels, so users can connect to the content that is most relevant to them and marketers can also show more relevant ads. A good example of a brand seeing results with Reels ads is Wild Alaskan Company, a sustainable seafood delivery business that is consistently adopting and testing our latest ad tools. When they tested adding Reels to their campaign, they saw a 36% increase in return on ad spend, a similar uplift in new subscribers and a 26% lower cost per new subscriber. Second, adapting our ad system to do more with less data. In the short and medium term, we're working to improve and evolve our ad solutions. We're helping advertisers improve the performance of their ads by growing on-site data conversions with products like lead ads, which make it easier for businesses to generate leads and with business messaging products like click-to-message ads, where you click on an ad in your Facebook or Instagram feed and it opens a chat with the business in Messenger, Instagram or WhatsApp. Business messaging is an area where we see big potential. We estimate that 1 billion users are messaging with a business each week across WhatsApp, Messenger and Instagram. Click-to-message is already a multibillion-dollar business for us and we continue to see strong double-digit year-over-year growth. These ads are proving particularly popular with SMBs in emerging markets like Brazil and Mexico, many of whom are new advertisers to Meta who come to us to advertise solely in this format. We're making it easier to create these ads directly from the WhatsApp Business app, which will help small businesses looking to find customers and grow. And big brands are incorporating business messaging into their campaigns like Paramount Studios, who used Click-to-Messenger to promote their blockbuster movie Top Gun

Operator:

[Operator Instructions] Our first question is from the line of Brian Nowak with Morgan Stanley.

Dave Wehner:

Yes. Brian, I can take both of those and then Mark can add any color if he would like. Reels is additive to time spent. But obviously, it does have a cannibalistic impact as well but the net impact is positive. There is some engagement that we think is coming out of surfaces like Feed and Stories, and we're getting that engagement on Reels. And that's been part of our explicit strategy to get reels in front of more users. But overall, it is incrementally beneficial to time spent. And then on headcount growth, we're not putting any markers yet out for 2023. But we're -- as Mark said, we're reducing our headcount growth rates, and we plan to be more focused on maintaining a lot of discipline on headcount growth as we go into 2023. So as we get closer to that and the setting of the budget, we'll be giving more explicit guidance on that, Brian.

Justin Post:

In the headwinds, you didn't mention TikTok. Are you seeing any dollars or advertisers pull that could be moving over there for maybe lower CPMs? Any thoughts on competitive headwinds? And then second, just a quick question on guidance. Is there contemplated pressure on quarter revenue in 3Q versus 2Q because of the Reel usage increases?

Dave Wehner:

And Justin, let me make sure I got that question. I think you were asking about Q3 and just pressure on Q3 because of Reels usage. Mark mentioned that we are really excited that the run rate on Reels crossed $1 billion, but it is overall because engagement is shifting to Reels. It is an overall headwind on the business. We haven't specifically quantified that, but there is a headwind on the business as Reels grows. In the long run we, of course, believe that this will be a tailwind on revenue but that's not happening in 2022. We're optimistic that it can be in the long run. But in general, the pressure that we're seeing on Q3 is overwhelmingly a macro one, where we're seeing sort of broad-based weakness across most of the verticals.

Eric Sheridan:

Two, if I could. One, in terms of honing the focus on investments inside the company and reexamining the cost side. How should we think about the mix between Reality Labs and Family of Apps and what the impact might be on relative loss or margin structure of the 2 segments as you hone the cost structure of the company and think about that investment cycle in both areas of the business? That would be number one. And number two, maybe just following up on Justin's question and broadening out a little bit. Is there any way to unpack some of the impact of macro, which is clearly outrunning some of the easier comps you'll be facing in Q3? Because we're lapping IDFA from a year ago, there was an easier comp on top of just IDFA and yet implied is that the rate of growth continues to sort of weaken in Q3 versus Q2. So maybe unpacking a little bit some of the headwinds versus tailwinds in Q3 to Q2 would be helpful.

Operator:

Our next question is from Mark Shmulik with Bernstein.

Mark Zuckerberg:

You want to take buybacks and then I'll take the product question? Do you want to go first?

Mark Zuckerberg:

Great. Yes. And on the discovery engine thing, there are a few different pieces of context that I think are important here. One is the social content from the people you know is going to continue being very important. And obviously, following people is an important signal. If you go back 10 years ago, the AI to basically figure out what types of things you were interested in, other than having a signal of what you directly follow, didn't really exist. It wasn't good enough. So who you followed or who you're friends with was this sort of amazing signal. And it was more unique in a way. Whereas now increasingly, AI is able to identify things that you're interested in that might be from accounts that you're not following or might even be whole topics that you're not following anyone in that topic. And that just unlocks a bigger corpus of content that you're going to be interested in. So the social parts of what we do will always remain. I think that, that will be a very kind of differentiated and important part of what we're doing. On the discovery engine piece, I do think that we're seeing a different approach than some competitors in that we have a lot of different types of content formats. So I talked about this a little bit upfront in my opening remarks. But the AI that we're building here, it doesn't just apply to videos or it's certainly not just short-form video. It also works with text and links and photos and content and groups and discussions on comments and all of these different things. And actually, one of the really fascinating AI problems is to produce just like basically a very large model. The AI researchers call it an embedding that's basically trying to unpack basically like meaning or semantics or kind of what a post is about into this very high dimensional mathematical space. But that can work across all different content types. And being able to do that well, I think we'll end up producing a different experience on Facebook and Instagram compared to some of our other competitors that are just focused on 1 content format. And I think in that sense, what we're doing is going to be pretty unique and is going to create a lot of value. I don't think people are going to want to be constrained to just 1 format. And I certainly think that people are going to always continue caring about what's going on with their friends and family and people they know as well. So this is all going to be kind of a growing thing that makes it so there's more interesting content available. And basically, it makes the service more -- just better for people to engage with and other things. And then part of the business challenge is just we need to make sure we can monetize Reels well. Like I said in my opening remarks, that's sort of on track but less than the rest of Feed today, but we're optimistic that we'll get it there. So that way, as this ends up increasing the overall engagement on the platform, it will also end up being a tailwind for the business, too.

Doug Anmuth:

One for Sheryl and one for Dave. Sheryl, I was hoping if you could just talk about what inning you think you're in, in building out and implementing the ads than to do more with less data for advertising. And do you expect that over time, you'll ever be able to return to the levels of targeting and measurement from before the platform changes? And Dave, if macro slows down more into perhaps next year and even beyond or your revenue growth flattens even for other reasons, are you prepared to [dial down] overall expense growth to a similar level to preserve margins and profitability?

Dave Wehner:

Doug, I just wanted to first kind of hit the premise of the question, which is if we continue to see macroeconomic challenges. It's just historically, macroeconomic challenges are often linked to some sort of cyclical effects. And we do know there's lots of things going on in the broader economy that point in that direction, including rate hikes and the like. So we do think there is a cyclical component of this. We know that advertising can be especially subject to these cyclical pressures. We do think that long term, digital within advertising continues to have a very positive future. And we think that we are positioned to continue to grow engagement nicely and build the best products in digital, in the market. So we're quite confident that as the market conditions improve, we'll continue to be able to return to nice levels of growth. But we also, I think, have demonstrated that we're willing to take into account the market environment as we plan our overall expense and capital base. So we'll continue to monitor that as we go into future budget and planning cycles.

Michael Nathanson:

I have two, maybe one for Sheryl and one for Mark. Sheryl, I'm interested in this juxtaposition position that Reels grew faster than Stories did. You reached $1 billion. Yet at the same time, you're saying that it's a harder business to monetize. So what drove -- why do you think the adoption was faster? And then in terms of the sticking points, when you talk to advertisers, what are the things that they need to solve for in order to move money faster to Reels? And Mark, I think going to one of the earlier questions about your advantages at Facebook. The previous moat, we would argue, was just the social graph of billions of people, families and friends. Do you think what you're building now with AI and from digital, how all those content is even -- is a better moat, is a better business than the one you had before, which was a pretty high barrier to entry, just given the social effects of the network you built? So those are my questions.

Mark Zuckerberg:

Yes. And in terms of building sustainable competitive advantages, in terms of the social graph, right, which you cited from before, people have been able to get that from phones for more than a decade now, right? So I don't really think that, that's been the thing for us. I think it's -- we're a serious technology company. We invest a lot in building infrastructure. And culturally, we focus on moving and learning faster than everyone else. And I think that those are sustainable advantages. And so certainly, I think that the AI technology infrastructure that we're building, I think it can compound and be better than others in the industry and that will be an advantage and make the product better over time. But I think at the end of the day, what that really comes down to is just I try to push the company to be one that learns faster and just keeps iterating and moving faster than we did in the past and then others in the industry do. And I think if we can do that well, then we'll continue to succeed. But I think the moment that we stop doing that, then we'll basically fall behind. It's a very competitive field and we need to keep on pushing ahead. But I think the reason why we have succeeded and seen so good results with Facebook, Instagram and the other social apps is because we basically focus pretty relentlessly on just pushing to constantly improve them. And we're going to do that with AI, too. And I feel pretty good about the internal results that we've gotten on this. It's a big effort at this point. We have multiyear road maps in place, so it's not like back when I was in a dorm room and just shipping code every week. I mean some of these are we're touching billions of people's lives and building really deep technologies. These are long-term things. But I think the same principles basically still apply for how you want to build a company and stay ahead. And I think that, that's going to be the sustainable advantage. But yes, I do think AI, if we can do this better in terms of recommendation systems, that's going to make Facebook better. It's going to make Instagram better. It's going to make the ads better, which is why in my opening remarks, I talked about AI as one of the big technology waves that we're riding. I think it's certainly -- I think that's the truth. It's kind of a big underlying factor for our business, but we need to execute on that well, and I think we're starting to see a bunch of good results on that.

Youssef Squali:

Just, I guess, a follow-up on Reels and thank you for the $1 billion run rate commentary. But just kind of stepping back, how far behind is monetization of Reels versus maybe Instagram Stories right now? I think you mentioned earlier that it's already tracking ahead versus when Instagram Stories were launched. Just trying to get a sense of how long before we get to parity. Is it a matter of several quarters or several years? And maybe how quickly did Stories get to parity with News Feed back in 2018? And Mark, how important is M&A to you accomplishing your vision of the metaverse? And I ask because one of the regulatory agencies just today announced a lawsuit to block your acquisition of Within, a seemingly pretty small VR fitness app.

Operator:

Our next question is from Brent Thill with Jefferies.

Dave Wehner:

Thanks, Brent, and you get the prize for asking just one question. The -- I think it's really -- there's a lot of unique factors in the place we are in right now. One is that we're also comping against these very strong periods for online advertising during the pandemic that make the downturn sort of coincide with some reversion to offline behavior that exacerbates the impact of, I think, what is a cyclical sort of finance-driven downturn with the reversion to sort of more offline behavior. So I think you've got some unique things going on in the online ecosystem that do sort of exacerbate some of those cyclical effects because of the tough comps. And we've seen, obviously, not just us, but others kind of experience that. I think in terms of prognosticating on the cycle itself and the duration, I'll leave that for better economists than I to understand how that may play out. But obviously, the continued difficult environment is factored into our Q3 guidance.

Ross Sandler:

Great. It's kind of something others have already asked on this call but maybe we could flesh it out a little bit better. But you talk about medium term, gaining competitive advantage and gaining back market share on the revenue side. But I think some folks on this call are doubting that looking at the 2Q numbers, which obviously have like IDFA and Reels in there, but the 3Q guide compared to the likes of Google, Amazon, TikTok and the numbers that they're putting up. And if you look at previous times where you've gained competitive advantage, you also had a big data advantage that seemingly you may not enjoy post-IDFA anymore versus those other companies. So can you maybe flesh out either specific products that you are working on, that you're pumped up about that could drive that competitive advantage on the revenue side and when that might happen? Is this a 2023 event or is this more kind of like long term that we think will claw that back?

Deborah Crawford:

Operator, we have time for one last question.

Mark Mahaney:

A couple of things. Dave and Sheryl, just wanted to wish you best of luck going forward, and Sheryl, particularly want to congratulate you. I think $5 billion to $120 billion over 14 years, that's pretty damn impressive, so congratulations. Wish you all the best going forwards. Two questions. One on AI. Mark, you talked about the advantages of AI. Any update on how AI is done in terms of tackling content moderation issues? Do you feel like you've made some breakthroughs there? And then, Sheryl, you talked about this click-to-message marketing opportunity, and you've mentioned a couple of times over the last couple of calls, it's a couple of billion in revenue, but particularly strong, I think, in Latin America and the Rest of World. Any thoughts on the opportunity for that as a business within North America and Western Europe? Is it just culturally different or are there certain things that can be done to make it just as good, as strong in those markets as it is in the others?

Sheryl Sandberg:

Mark, thank you for those kind words, and also thank you for this question because this will be the last one I take and it's exactly the note I'd like to end on because it's a part of our business we're so excited about. Click-to-Messaging ads is one of our fastest-growing ad format. It's already a multibillion-dollar business for us, growing at double digits. And that's because, again, I think it follows the playbook we've had of building a consumer engagement that businesses can be part of, having that consumer behavior happen first and then being able to work with businesses. So messaging is hugely -- sorry, growing hugely quickly everywhere in the world. And we have particularly engaged broad, very well-used messaging platforms and many of them. So when you think about consumers using it, we already know it, we already know that's happening. And then businesses are increasingly using it. And you're right that we've seen a lot of that behavior start in other parts of the world. But we are seeing that behavior in North America and Europe as well. And I think we're deep believers that, that behavior will continue to grow all over the world. So that means the click-to-messaging ads become the perfect opportunity. They help us move people from discovery to a direct relationship with a business. In a world where we're trying to do more with less data, they give businesses and consumers a direct connection, so it's much easier to measure ROI. And so we're investing heavily. You can message a business from Facebook and Instagram feed from Facebook, Instagram, Messenger Stories to WhatsApp, Messenger, Instagram Direct. You can see how many entry points we have to drive real engagement and real demand. And I'll end with a case study. RoamHowl Creative, they're a small business consultancy. They used click-to-messaging ads for lead generation. And then they compared those to their normal ads, which were driving website conversions. And the Click-to-Messenger ads resulted in 2.3x more qualified leads. And this is important, a 57% lower cost per lead. And that doesn't even take into account the fact that it was measurable, that even if the return had been the same, they would have been able to measure it and attribute it more directly to our platform. So we are hugely optimistic about this area of our business, and I am very convinced it will work and is already working everywhere in the world.

Operator:

This concludes today's conference call. Thank you for joining us. You may now disconnect your lines.

Deborah Crawford:

Thank you. Good afternoon, and welcome to Meta Platforms’ first quarter 2022 earnings conference call. Joining me today to discuss our results are Mark Zuckerberg, CEO; Sheryl Sandberg, COO; and Dave Wehner, CFO. Before we get started, I would like to take this opportunity to remind you that our remarks today will include forward-looking statements. Actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are set forth in today’s press release, and in our annual report on Form 10-K filed with the SEC. Any forward-looking statements that we make on this call are based on assumptions as of today and we undertake no obligation to update these statements as a result of new information or future events. During this call we may present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today’s earnings press release. The press release and an accompanying investor presentation are available on our website at investor.fb.com. And now, I’d like to turn the call over to Mark.

Sheryl Sandberg:

Thanks Mark, and hi everyone. Our total ad revenue in Q1 was $27 billion, which is up 6% year-over-year. We saw solid growth in APAC and Rest of World, but a more challenging environment in North America and Europe. Despite the headwinds Mark described a moment ago, we saw meaningful growth in areas like video ads and Click-to-Messaging ads. The changes to the ads landscape over the last year have caused significant disruptions to the ways many businesses advertise online. Our teams are working closely with our partners to help them navigate this new environment so they can continue to get great return-on-investment. And we’re focused on building products and tools that grow their businesses and ours over the long-term. I want to pick up on what Mark said about our ads strategy. As he described, it’s focused on three main areas. One, growing video monetization, especially short-form video like Reels, two, evolving our ad systems to do more with less data and three, investing in AI and machine learning to support our ads infrastructure. First, video. Half of the time spent on Facebook is video, and video surfaces on Facebook were a significant source of revenue growth in the first quarter. People already watch a lot of longer form video content that’s eligible for in-stream ads, which we monetize well. Stories monetization continues to grow across Facebook and Instagram. And with Reels growing quickly, there’s also a big opportunity as we get better at monetizing short-form video over time. We’ve accelerated our efforts to improve the Reels ads format. Our experience monetizing Stories is directly applicable here. Sorry. We’re leveraging what we learned with Stories ads to create ads for Reels that have a native format, perform well, and are easy for advertisers to create. We’re working closely with our partners to help them make the most of the opportunity with video, like experimenting with new formats and with campaigns that utilize multiple types of video ads. A great example is the U.S. restaurant chain Wendy’s. They used a range of video formats across feed, Stories, Reels and in-stream to promote their March Madness campaign, driving consumers to the first virtual Wendy’s restaurant in Horizon Worlds. We also worked with them to promote the campaign in Horizon Worlds itself, with a virtual welcome screen directing people to what they called the Wendyverse. The campaign was a big success, reaching 52 million people, and improving Wendy’s brand and message awareness across a number of metrics. Second, evolving our ads system. Our focus is on paving the way for the next era of personalized advertising, and there’s work we’re doing over the near, medium and long-term. In the near-term, we’re working closely with advertisers to help them navigate the new landscape, while we evolve and improve our ad solutions. For example, we’re encouraging partners to integrate with our conversions API to create a direct, reliable, and privacy-safe connection between their marketing data and Meta. And we’ve recently introduced a faster and easier way for SMBs to integrate with it called the Conversions API Gateway. One way we’re helping advertisers get better insights with less data is with conversion modeling. This can help them understand measurement and campaign performance, even when we’re not able to see or aggregate certain conversions. We’re also helping businesses connect directly with customers and grow more onsite data conversions through products like Click-to-Message ads. This is where you click on an ad in your Facebook or Instagram feed and it opens a chat with the business in Messenger, Instagram Direct or WhatsApp. It’s already a multi-billion dollar business, with healthy double digit year-over-year growth in Q1. A great example is Deichmann, Europe’s largest footwear retailer. They built a fully automated virtual Shoe Assistant to give customers personalized footwear recommendations, and promoted it through Click-to-Messenger ads on Facebook. They had an 85% click-through rate and saw 30% more incremental purchases than with their usual link ads. In the medium-term, we see an opportunity to grow other onsite conversion products like Lead ads, which make it easier for businesses to generate leads, and Shop ads, which direct you to a brand’s digital storefront on Facebook or Instagram. It’s still very early for Shop ads, but we think driving people to shops can be a compelling objective for commerce advertisers as we continue to improve our onsite commerce tools. Over the longer run, we’re also developing privacy-enhancing technologies which will help us minimize the amount of personal information we process, while still allowing us to show people relevant ads and measure performance for advertisers. And we’re collaborating across our industry on these and other standards that will support this next era of personalized advertising. Third, AI and machine learning, which are crucial components of these privacy-enhancing technologies and will drive improvements over time to our ads ranking and measurement capabilities. We’re significantly increasing our investment in AI and machine learning across the company this year and a large portion of this is going towards ads. We continue to innovate in order to deliver better performing ads in general, and these investments will help us do that while processing less individual level data. We also have a range of automated tools to make it easier for advertisers to create, manage and improve the performance of their ad campaigns. We’re constantly working to improve these tools and make them simpler for advertisers to use. Taken together, we think our range of solutions can help advertisers get better results now and over the longer term. We’re confident our apps will continue to be the best places for advertisers to reach people where they get measurable outcomes long into the future. As ever, I want to say thank you to our partners, large and small. And to our teams who are working so hard to deliver great results for businesses everywhere. Now, here’s Dave.

Operator:

Thank you. [Operator Instructions] And our first question is from the line of Brian Nowak with Morgan Stanley. Please go ahead.

Dave Wehner:

Brian, I’ll take a crack at both of those, and then Mark can add any color if he wants. In terms of cannibalization, Reels does pull time away from other surfaces, but we do believe it’s additive to overall engagement. And we’ve seen that in the past with other products like Stories. And so we’re seeing a similar pattern there. In terms of overall engagement for both Facebook and Instagram, there’s a lot of complexity with kind of looking through the period of COVID because that tends to create a lot of different peaks and troughs in engagement. But if you look back, engagement for both Facebook and Instagram, remain above the levels they were at pre-pandemic and that’s true both globally and in the U.S. So I think we’re pleased with that. On the CapEx front, let me just sort of address the overall ramp. It’s true we are investing significantly in AI and machine learning investments to power ranking and recommendations for things like Ads, Reels and Feed. And so that does add to the CapEx intensity of the business. And we do think there is additional capital intensity of the business as we make significant investments in AI and machine learning on top of just additional capacity growth. We’re not sharing an outlook beyond 2022 at this point. France, you can go to the next question. Go ahead.

Eric Sheridan:

Thank you so much for taking the question. Maybe one big picture and one more micro question. Mark, I think one of the questions we get the most from investors is when you think about where you’re trying to go with the Metaverse longer term, how do you think about the investment cycle versus the monetization cycle when you think about creating hardware, both on the physical side and the distribution layer for hardware versus the content and the creator cycle you need to solve for on the Metaverse over the medium to long-term? And second, I don’t know if I missed it or not, but I think last quarter, you called out on the Apple privacy changes, that the headwind might get worse in Q1 than it was in Q4. Can you give us an update on how those headwinds continue to evolve? And whether what you built over the last couple of years have somewhat future-proofed against future changes that Apple might make in the iOS ecosystem? Thanks so much.

Dave Wehner:

Eric, I’ll take the second part – the second question that you had. We expect – we’ve expected ongoing privacy headwinds from the iOS changes, and we continue to see them. Those are obviously factored into our Q2 outlook, along with the impact on demand that we’re seeing from things like the war in Ukraine. More specifically, ATT continues to be a headwind, but we’re also seeing incremental headwinds from iOS 15 and other regulatory changes. And again, we factored all of those headwinds into our Q2 outlook. Of course, any outlook on platform headwinds depends in part on the platforms themselves and how they write and enforce their policies. So I’d sort of put that caveat in as well. When you look at what we’re doing to mitigate those near-term, we’re working on improvements to our current solutions and Sheryl talked about some of those like privacy-enhanced technologies. Medium-term, we see the opportunity to move clients more toward on-site conversions. We’re seeing a lot of success in things like Click-to-Messaging ads, lead gen ads and then more nascent effort in Shop Ads. And then longer-term, we’re rebuilding our ads stack to employ more machine learning and AI to be more effective at ads with less data. So we think we’ve got a response that we’re building into the new environment, and we’re optimistic about the future.

Justin Post:

Great. Thanks. Dave, maybe I can follow on. You gave an outlook for maybe $10 billion headwind this year. Is it fair to assume a decent chunk of that in Q1 and when you lap that in Q4, you could see progress? And then I think there is a lot of concern for the social companies on Apple 16 potential changes with IP addresses and other factors. In the past, you’ve been able to call out potential headwinds. In the future, I’m wondering if you have – if you can say anything about iOS 16 or how you’re thinking about potential future Apple changes? Thank you.

Operator:

Our next question is from Doug Anmuth with JPMorgan. Please go ahead.

Mark Zuckerberg:

Yes. So I can talk about the AI-driven recommendations and discovery engine part. And I mean, maybe I can start to give some context on the ads too, and then someone else can jump in there. I think the biggest shift here is that now the universe of content that are candidates to show in a person’s feed is way bigger. It used to just be, okay, here are the people, here are the friends or businesses or pages that you follow. Maybe it was on the order of 1,000 or a few thousand potential posts a day that we could show and we built news feed system that could help rank those to show the most interesting ones to you at the top. But fundamentally, that was more a challenge of ranking a relatively small number of posts in the order that would be optimal. Now it’s a much more open-ended thing. There are millions of pieces of content that we could potentially show a person. And as our understanding of people and our understanding of content gets better through AI, we’re now better able to, across all different content types, text, links, photos, short-form videos, long-form videos, everything basically built to understand what the content is about, match it more with what people are interested in, which just means that there’s a lot more candidates to show people. The social content from your friends, I think will continue being a lot of the most unique and valuable content in the system, so that will still be there. But in addition to that, you’ll now have a lot of other interesting content. So overall, what does that mean? I think it will – this will be a – it will make the services more interesting. It will mean that there’s more interesting stuff to consume and interact with, both in Facebook and in Instagram, which should contribute to engagement over time. The parts of this that are about Reels, I think have some specific monetization questions where we need to ramp up that format. But the parts of this, which are just about showing better content in feed, should actually monetize quite naturally. And that’s something that I think we’re going to – we’re starting to see that kind of ramp-up in Facebook and Instagram already as a part of the experience. On the Reels monetization side, I mean, I think the main question here is, there’s the cycle, which – I mean, Sheryl should probably jump in and talk a little bit more about this. It just takes some time for all the advertisers to optimize the creative, right? It’s like when we started doing Stories, they had ads that were designed for news feed. And it just took some time for them to create effective content for Stories. And I think we’re going to see the same thing for Reels. And the way we think about the pacing of this is that we do show ads with Reels, but we’re going to show more as the content gets better and as that ramps up to not be a big kind of pain point in the user experience, where we basically match this, so that way as the ads get better across all these different formats, we’re willing to show more of them. And that’s why improving the quality of ads has also been really important for our business. So I’m not sure if there’s anything else you want to add on that, though, Sheryl.

Operator:

Our next question is from Youssef Squali from Truist Securities. Please go ahead.

Sheryl Sandberg:

I’ll take the regulatory question. Now is a really critical and interesting time in regulation for our industry because the rules that are governing the Internet are being rethought and rewritten, certainly in Europe but increasingly around the world. You spoke about the DMA. We expect DMA to have significant challenges for our industry. We’re working with European regulators on these rules. They are largely in the range of what we were expecting, but the final text has not been released yet, and the details on this will matter. But overall, the regulatory environment is a real challenge for our industry. One, we think we are well set up to meet working closely with regulators and doing things in our technology like privacy-enhancing technologies to do more with less data. But we expect this to can be – this to continue to be a significantly challenging time, not just for us, but across our whole industry.

Operator:

Our next question is from the line of Mark Shmulik with Bernstein. Please go ahead.

Dave Wehner:

So I'll take the first question, sort of in terms of the regional growth. So growth slowed in all regions due to pricing headwinds, currency was obviously a headwind in all the international regions. Europe decelerated very meaningfully, and the existing headwinds were compounded by the effects of obviously, the Ukraine war. In North America, we have a relatively higher exposure to off-site objectives. So the targeting and measurement challenges continue to impact growth in that region more. Also, I'd note that in North America, impressions were down year-over-year in Q1. So ad impressions were down year-over-year, though the rate improved from Q4. So it was primarily a demand-driven deceleration. When we look at APAC and the Rest of World, it benefited from strong demand in products like Click-to-Messaging ads. In Rest of World, growth decelerated the least of all regions. Macro conditions in Brazil improved a bit after softness in the second half of 2021. And then in APAC, it was – relative strength was pretty broad-based, but I'd call out particular strength in India and that's benefiting from good supply tailwinds in terms of impression growth.

Operator:

Our next question is from Michael Nathanson with MoffettNathanson. Please go ahead.

Sheryl Sandberg:

So on the mitigation timeline, we've talked before and I've talked before about two key challenges from the iOS, which is what you mentioned, targeting and measuring performance. We're working through mitigations on both. They are both a multifaceted challenge and they're interconnected because better measurement leads to better targeting for advertisers. On the first, we are improving our systems as we test and learn and supporting advertisers with best practices and we're working on automating tools that will help advertisers target better and we have to do it with less data. We have to do more with more aggregated and anonymous data. On measurement, we've been able to close a good part of the underreporting gap and shared that with advertisers, but the rest of the gap will take us longer to close. This is a particularly big challenge for small businesses, because we have to work with them. We have to work with them obviously, in a longer tail and more resource-intensive way.

Operator:

Our next question is from Ross Sandler with Barclays. Please go ahead.

Sheryl Sandberg:

Sorry, Dave and I are going back and forth. When you think about how we mitigate some of these challenges, there's a couple of things to think about. One, what are the solutions we have that can be on site. So as we develop some of our commerce products as people are using things like Click-to-Messaging ads, Click-to-Messaging ads are a good example of to close the loop, at least to the point where you're connecting directly with a customer, happens on our service. If our commerce efforts are successful over the longer term, we'll be able to close that loop directly on our end service. The other thing that was interesting and your question is you're right that this is about relative comparative advantage in a very highly competitive space that we have been able to use data, I think, in a privacy safe but very efficiently. Some of the data we've relied on has changed that's causing some near-term challenges and headwinds for us. But over the long run, once that settles out, advertisers are going to go where they get the best return. So we have highly engaged platforms, we still have very important data that is first-party that we are able to use to target. We're working on measurement solutions and we're also working on things without the industry. So we think while these times are challenging, over the long run, we do have a very strong competitive advantage when you look across the opportunities advertisers have to advertise both offline and online.

Brent Thill:

I know it's early on Reels monetization, but are there early learnings that you've learned and taken away so far that you could share? And then the second question we get is just on Reels budgets. Are they incremental to overall spend? Or are you seeing advertisers repurpose from Stories and feeds into Reels? Thanks.

Deborah Crawford:

Great. Operator, we have time for one last question.

Alan Gould:

Thank you for taking the question. Two questions. Dave, can you just confirm, did you say MAUs would be down sequentially in 2Q? And Mark, last quarter, you spoke – you were quite open about the competitive issues on TikTok, which seemed to be impacting the whole industry now. Any way of quantifying how much you think TikTok is impacting Facebook? Thank you.

Deborah Crawford:

Great. Thank you, everybody, for joining us today. We appreciate your time, and we look forward to speaking with you again.

Deborah Crawford:

Thank you. Good afternoon and welcome to Meta's fourth quarter and full year 2021 earnings conference call. Joining me today to discuss our results are Mark Zuckerberg, CEO; Sheryl Sandberg, COO; and Dave Wehner, CFO. Before we get started, I would like to take this opportunity to remind you that our remarks today will include forward-looking statements. Our actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are set forth in today's press release. And in our quarterly report on Form 10-Q filed with the SEC. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. During this call, we may present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. The press release and an accompanying investor presentation are available on our website at investor.fb.com. And now, I'd like to turn the call over to Mark.

Sheryl Sandberg:

Thanks, Mark, and hi, everyone. Our total ad revenue in Q4 was $32.6 billion, which is up 20% year-over-year. The close of the year also marked the first time our business generated more than $100 billion in annual revenue. I want to congratulate our teams and thank our partners for helping us reach this milestone. Throughout 2021, we saw solid growth, which continued in Q4. But there were a number of dynamic factors that created headwinds for us this past quarter in addition to those Mark described around competition and our shift to short-form video. We were lapping a period of strong demand in 2020 that benefited from very strong growth in online commerce, which has since slowed. Q4 was also the first holiday season after Apple's iOS changes, which have had an impact on businesses of all sizes, especially small businesses who rely on digital advertising to grow. This will continue to be a factor in 2022. We've also heard from advertisers about other macro trends that contributed to the headwinds in Q4, including global supply chain disruptions, labor shortages and inflationary pressures. A number of industry reports have pointed to people shopping earlier in the holiday season to avoid potential supply chain issues and shipping delays. This is in line with the behavior we saw from advertisers, many of whom front-loaded their spend earlier than usual. Mark talked about 7 areas of investment. I'd like to talk about our progress in 3 of those

Operator:

We will now open the lines for question-and-answer session. . And our first question is from the line of Brian Nowak with Morgan Stanley. Please go ahead.

David Wehner:

Yes. Thanks, Brad. I can probably take both of those -- or yes. So on Reels, I mean I think there's a lot of the characteristics of Reels that makes it quite similar to the transitions that we've gone through before. As in the past when we were focused on Stories, we're really focused on consumer experience and really making short-form video work effectively on both Instagram and Facebook, and we're already seeing that to be the biggest driver of growth on Instagram, and it's growing very quickly on Facebook. So we're really encouraged by what we're seeing. But we're really focused on making the consumer experience right. And over time, we do think it's a format that will work effectively for advertising, and we think the experience that we have for Stories will really lend itself well in the Reels format. So we're confident in our ability to monetize over time. But right now, there's relatively few ads in story -- sorry, relatively few ads in Reels today. So it's definitely something that from an impression growth and monetization perspective is going to be a headwind. On iOS 14, we saw the revenue impact with iOS 14 -- sorry, iOS just in general, in Q4, and that was in line with our expectations and similar to the Q3 headwind. But obviously, as we go into 2022, we're going to be lapping a period in which in Q1 and Q2, those headwinds were not in place in the year ago period. So that definitely makes for a tough comp in the first half of the year. And we believe the impact of iOS overall as a headwind on our business in 2022 is on the order of $10 billion, so it's a pretty significant headwind for our business. And we're seeing that impact in a number of verticals. E-commerce was an area where we saw a meaningful slowdown in growth in Q4. And similarly, we've seen other areas like gaming to be challenged. But on e-commerce, it's quite noticeable -- notable that Google called out, seeing strength in that very same vertical. And so given that we know that e-commerce is one of the most impacted verticals from iOS restrictions, it makes sense that those restrictions are probably part of the explanation for the difference between what they were seeing and what we were seeing. And if you look at it, we believe those restrictions from Apple are designed in a way that carves out browsers from the tracking prompts Apple requires for apps. And so what that means is that search ads could have access to far more third-party data for measurement and optimization purposes than app-based ad platforms like ours. So when it comes to using data, you can think of it that it's not really apples-to-apples for us. And as a result, we believe Google Search ad business could have benefited relative to services like ours is based a different set of restrictions from Apple. And given that Apple continue to take billions of dollars a year from Google Search ads, the incentive clearly exists for this policy discrepancy to continue.

Eric Sheridan:

Thanks so much. Maybe two questions, if I can. First, following up on Brian's questions about Reels. I think when we've gone through these transitions before, you've talked a little bit about what you're seeing from an engagement standpoint about Reels and how levels of engagement compared to other forms of engagement from a consumer perspective on the property and what the differential might be in terms of wallet's early innings in terms of differential ad pricing and how you think to close that gap. Is there any willingness you're able to give us on both engagement levels or pricing differential, so we can think through what the transition scope might need to be? And then, Sheryl, on the last call, if I remember correctly, you talked about elements of as we move into Q1 in the first half, some of the workaround efforts that the team were trying to implement would start to show some efficacy. Can you give us an update on where you stand internally on workarounds and broader advertiser community acceptance of some of the workarounds on targeting and measurement as we move into the first half? Thank you.

David Wehner :

And then, Sheryl, were you going to take the second part of the question on the mitigation front?

Operator:

Our next question is from Justin Post with Bank of America.

Mark Zuckerberg:

I can take the first one. So for Facebook, I think content from your friends is always going to be an important part of the experience. And so we'll be discussing stuff that you find with friends, whether it's in a group or community or public content or Reels or news or different content like that. But I think overall, you're right, that the balance of content that people see in Feeds is shifting a little bit more towards stuff that isn't coming from their friends, which you may discuss with your friends, but it is kind of shifting towards more public content. I think, at the same time, we're seeing this trend where if you can do your day-to-day behavior on a lot of this stuff, this pattern may resonate with you. But a lot of people now are taking a lot of the content that they may have previously shared in a Feed and sending it to friends over Chats, whether it's one-on-one or through group chats. And this is one of the reasons why I called out community messaging as one of the major priorities for us. Because if you look at the overall constellation of services, a lot of the kind of personal sharing is sort of shifting towards messaging. And a lot of the -- what we're seeing in Feeds is just basically this content consumption and a lot of just really highly engaging content that forms the basis for conversations, whether it's in Chat or in common trends in those Feed apps. But that that type of creative work is a lot more of what we're seeing across the Feed apps, so whether that's Facebook or Instagram.

Operator:

Our next question is from Doug Anmuth with JPMorgan.

Mark Zuckerberg:

I didn't talk about the first piece. I mean, I think we're probably a little further along than just the beginning, but I'd say we're closer to the beginning than the end of the trend on Reels. There's a big flywheel here where more creators share more content. And because we have a mix of content in the Feeds from all different types, we're only going to show Reels or recommend them. If we feel like there's high-quality content to show as there's more high-quality content, we show more of it. There certainly will be a lot more. We think it's growing -- it is going to grow a lot going forward, we believe. And engagement on both of those platforms. So yes, I mean I think that we probably will see as we're forecasting. And I think Dave has talked about here, the relative monetization rate of Reels for the next, I don't know, for whatever the foreseeable future is, will be lower than Feeds as we kind of displace some of that with this. But over time, we think that there's a potential for a tremendous amount of overall engagement growth and we think that in a steady state over time, we think that Reels should monetize closer to Feeds or Stories than other longer-form video. So I think we're optimistic about it. And I think that that's -- we think it's definitely the right thing to lead into this and to push us hard to grow real as quickly as possible and not hold on the brakes at all, even though it may create some near-term slower growth than we would have wanted. That's kind of -- that's the picture that I see. I don't know if you want to add anything to that?

Operator:

Our next question is from the line of Mark Mahaney with Evercore ISI.

David Wehner:

Yes, Mark, on the headwind, we're just estimating what we think is the overall impact of the cumulative iOS changes to where 2022 -- our 2022 revenue forecast is. So if you kind of aggregate the changes that we're seeing across iOS, that's sort of the order of magnitude. We can't be precise on this. It's an estimate. We've got ranges on the impact to our business. So we think it's a substantial -- the substantial headwind to work our way through. And obviously, we're working hard to mitigate those impacts and continue to make ads relevant and effective for users. I don't have anything specific on the ESG front. So I probably can't comment on that. I can follow up with you offline on that.

Youssef Squali:

Mark, you stated your goal of refocusing on growth of younger audiences on the last earnings call, and I think you even signaled back then that he could mean maybe let's focus on other constituency. I know it may be early, but any color maybe to share on growth on users and engagement by maybe age groups? And then probably another question for you. I'm curious about when you think we can start seeing the kind of the mesh in of apps like Instagram with AR and VR and the interoperability of these apps. Is that something where you think we're going to see gradually evolve? Or something that gets kind of opened only once the matter is sufficiently built up whenever that is?

Mark Zuckerberg:

Sure. And in terms of when there's some aspects to the metaverse showing up, I mean I talked about avatars in my remarks at the beginning and how we're making it to kind of increasingly both expressive and eventually, and we've shown some demos around photorealistic avatars of yourself that you can show up in all the different apps and your avatar can show across Facebook and Instagram and Messenger as well in Quest, and we'll expand that further. And I think I also commented before about our goal for 2022 to make it so that Horizon works not just in immersive VR but on 2D screens as well. Something you could potentially jump into those kind of worlds from Facebook or Instagram or different apps as well. So I think you're seeing some of that stuff will -- is already there. Some of it will come over the course of this year. Of course, the ability to message across apps is something that we've been working on for a while. You can already do that across Messenger and Instagram and there's more there that that we'll roll out over time as well. So I think you are going to see this stuff work seamlessly across the family.

John Blackledge:

Two questions. Maybe first one for Mark. How has Reels differentiated versus TikTok, YouTube Shorts and other short-form video services? And one for Sheryl, any further color on how SMBs are changing ad spend budget since the iOS changes? And is it slowing adoption of new SMB advertisers on Facebook?

Operator:

Our next question is from Lloyd Walmsley with UBS.

Mark Zuckerberg:

I think we had a follow-up on SMB.

Operator:

And our next question is from Lloyd Walmsley with UBS. SP136977589

Mark Zuckerberg:

I can take the Reels question. So we do see a huge amount of potential ahead. But I think sometimes when we say that there's -- that we're closer at the beginning, what that means is that we still have a lot of kind of fundamental questions to overcome in order to make progress to get where we're going. With this product, what we see is, there is very clear product market fit, and it is growing incredibly quickly. It -- we face a competitor in TikTok that is a lot bigger, so it will take a while to compound and catch up there. But fundamentally, we think that there's a lot of potential for it to continue growing. So to your question, do we have the content that we need, it's a flywheel. So the better tools that we can build for creators and the better monetization we can offer them, which tends to be an advantage that we have over other competitors is how effective our monetization and ad systems are, then I mean the bigger it gets, the more it will attract more creators, and it will kind of build on itself. And we think that we're earning at a scale where we're seeing that flywheel really kick in and start to grow. And if it keeps on compounding at the rates that it's growing at, this is going to grow extremely quickly over the next year and potentially beyond that. But yes, I think that's kind of the best summary that I can give of where we are. Clear product market fit, growing quickly, a long way to go to catch up to be the biggest in the space. But I think the pieces are in place and the focus is certainly there at this point to really go after that. It's just that as this grew, it is -- at least for the coming quarters, it's going to monetize at a somewhat lower rate, which is reflected in the guidance that Dave gave. But again, I think this is clearly the right strategy for us to push on. This is what people want. They enjoy the product. We're going to -- so we're just going to roll it out as quickly and as well as we can.

Deborah Crawford:

Great. Operator, we have time for 1 last question.

Ross Sandler:

I guess, Dave, a question on the Family of Apps segment margin. This hasn't come up yet, but it was down about 6 points year-on-year. And I know that you had kind of forecasted the expense growth that you came in at for '21. But I think that downtick is coming as a bit of a surprise for some folks who thought your ad business had fairly stable margins. So any more color on what's driving that? Is that just the revenue headwinds that you're experiencing or any other lumpy items? And then related to that, as you build out short-form video, how has your thinking evolved around paying rev share like YouTube does? Or other things like that to catalyze the shift? Any thoughts on that?

Deborah Crawford:

Thank you. Thanks to everybody for joining us today. We appreciate your time, and we look forward to speaking with you again.

Deborah Crawford:

Thank you. Good afternoon and welcome to Facebook's Third Quarter Earnings conference call. Joining me today to discuss our results are Mark Zuckerberg, CEO; Sheryl Sandberg, COO; and Dave Wehner, CFO. Before we get started, I would like to take this opportunity to remind you that our remarks today will include forward-looking statements. Our actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are set forth in today's press release. And in our quarterly report on Form 10-Q, filed with the SEC. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. During this call, we may present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. The press release and an accompanying investor presentation are available on our website at investor.fb.com. And now, I'd like to turn the call over to Mark.

Sheryl Sandberg:

Thanks, Mark and hi everyone. This quarter, our total revenue was 29 billion up 35% year-over-year. We saw solid revenue growth across all regions, and we continue to grow our user base. We felt the impact of some big external factors in Q3. I want to explain some of the revenue softness we've seen, and what we're doing to mitigate the headwinds and help businesses over the crucial holiday period and beyond. To start, let's take a step back. Over the past decade, we've seen more and more businesses chuffed online. When the pandemic hit, this digital transformation accelerated. We've invested in tools and products over many years to help businesses make this chuffed. So this acceleration drove very strong growth for us throughout the last few quarters. We've been open about the fact that there were headwinds coming, and we've experienced that in Q3. The biggest is the impact of Apple's iOS 14 changes, which has created headwinds for others in the industry as well, major challenges for small businesses, and advantaged Apple's own advertising business. We started to see that impact in Q2, but adoption on the consumer side ramped up by late June, so it hit critical mass in Q3. As a result, we've encountered 2 challenges. One is that the accuracy of our ads targeting decreased, which increased the cost of driving outcomes for our advertisers. And the other is that measuring those outcomes became more difficult. On targeting, we focused on improving campaign performance even with the increased limitations facing our industry. We're building commerce tools to help businesses reach more new customers, and get more incremental sales. And over the longer term, we're developing privacy enhancing technologies in collaboration with others across the industry to help minimize the amount of personal information we process, while still allowing us to show relevant ads. Progress in these areas will take time and will be a focus for us throughout 2022 and beyond. On measurements, as we brought in a recent blog post, we believe we are under-reporting IOS web conversions. This means real-world conversions like sales and app installs are higher than what's being reported for many advertisers, especially fall advertisers, we're making good progress fixing that. We think we'll be able to address more than half of the under-reporting by the end of this year. And we'll continue to work on this into 2022. Another external factor is flowing e-commerce growth. The strong e-commerce growth in recent quarters was driven in part by the acceleration of the digital transformation that is now tapering off. I think most people see this in their own lives. There was a period of time when many people who are able to stay at home and order things online and much more. But now in many places, things have opened up and people are increasingly making purchases in person. That doesn't mean e-commerce has stopped growing. Businesses are still making the shift to online, but e-commerce is no longer growing at the pace it was at the height of the pandemic. These factors have been compounded for many advertisers by major global supply chain issues and labor shortages, which have left many consumer businesses with less inventory. This has reduced their appetite to generate demand from consumers, which has impacted advertising spend. Businesses in every region and across a range of verticals have been affected. At the same time, we've also seen some impact from COVID surges around the world in places like Southeast Asia. Overall, if it wasn't for Apple's IOS 14 changes, we would've seen positive quarter-over-quarter revenue growth. And while we and our advertisers will continue to feel the effect of these changes in future quarters, we will continue working hard to mitigate them. Despite the headwinds, we remain confident about our future. We believe Facebook and Instagram are the best places for people to connect with their friends and families, build communities, and starting to grow businesses. And we believe they're still the best platforms for advertisers to reach people where they are and get measurable outcomes. Our focus remains where it has always been, building products that help people connect and businesses grow. Mark talked about video a moment ago. Not only is this a growing area for us overall, but we're also continuing to get better at monetizing it. More than 60% of video revenue now comes from mobile-first video, meaning videos that are shot vertically or are under 15 seconds. Over 2 billion people per month now watch videos that are eligible for in-stream ads, which are ads shown before, during, or after videos. And we're expanding access to Reels ads on Instagram to more advertisers with automatic placement in new creative formats. Another area we're seeing good progress is in lead generation. Our products helped businesses generate quality leads at scale and meet customers where they are on their preferred channel of communication, whether it's messaging forms or calls. In April, we started rolling out a new conversion with optimization goal for higher-quality leads. And advertisers can also integrate their CRM with Facebook via our conversions API. The tests show that on average, advertisers see a 20% increase in lead to sale conversion rate when they use both the optimization goal and the integration. Q4 is the most important quarter of the year for many businesses, large and small. As always, we're focused on making the holiday season a success for them. We are working to fix the measurement issues they are experiencing, and deliver the tools and products they need to grow. And we're rolling out a range of holiday shopping experiences to help people find great deals, support small businesses, and get causes and shop with local and black-owned businesses. We're bringing exclusive gifts to shops that will be available when people checkout on Facebook or Instagram, by 20% off your first purchase and free shop -- shipping. Starting next week, we'll host daily lad shopping experiences of companies large and small, brands like Walmart, Macy's, Benefit Cosmetics, and Paintbox Nails to educate shoppers and share exclusive deals. And we're bringing back one of my favorite campaigns ever, BuyBlack Friday, to showcase black-owned small businesses during the holidays. It includes things like BuyBlack collections and a Facebook and Instagram shop tab, and a weekly BuyBlack Friday show with live shopping segments from up-and-coming black-owned small businesses. I want to close by saying how grateful I am to our partners around the world, and to our incredible teams who are working so hard to help people and businesses throughout this period. Now, here's Dave.

Operator:

Thank you. We will now open the lines for question-and-answer session. .. And your first question comes from the line of Brian Nowak with Morgan Stanley. Please go ahead.

Dave Wehner:

Yeah, sure, Brian. On Reels, that's been a bright spot or for Instagram and currently we are seeing good growth globally, strengthened a number of different markets. But we've, we've been making a lot of progress on Reels and have been happy with it on Instagram. In terms of the launch on Facebook, that's earlier stage on the monetization front, we're just starting to rollout ads in Instagram, so it's earlier on that front and we really haven't gotten to a Monetization point with Reels on Facebook. Sheryl, do you want to take the iOS 14 question?

Dave Wehner:

Operator, we can go to the next question.

Eric Sheridan:

Thanks so much. Maybe 2 if I can. Maybe Sheryl, following up there, in terms of thinking in terms of quarters or years, on both the targeting and the measurement piece. Can you help us just go one level lower in terms of what you're building, in terms of what's in your control to put on into the advertising ecosystem, versus what might just take time for advertisers to adopt and get comfortable with and better understand the data that drive their business outcomes and how they allocate advertising budget, that would be for you. And then Dave, maybe if I could follow up on OpEx and CapEx, just how should we be thinking about the elements of core Facebook versus some of the things you're trying to build against Mark's vision for the long term with Reality Labs, and how that might be a driver of permanent versus transient nature of OpEx and CapEx in the years ahead. Thanks so much.

Dave Wehner:

Hey, Eric. On the outlook on expenses in 2022, it's obviously early, but we wanted to give an initial outlook of our expected expense range since we typically do that in Q3. Mark outlined we have a lot of priorities that we're investing against across the business that includes a lot of areas in the core sort of Family of Apps, but also in FRL. We've got a lot of priorities in advertising, AI, commerce, privacy. So when you pull all these things together, we've got a pretty robust spending plan next year. The primary driver is going to be accelerating headcount growth in 2022, so that's going to be something you'll see, headcount coming in above 20%, obviously that we have this quarter. And we also expect to have higher expenses from office operations and travel once larger parts of the workforce are returning to the office in 2022. We're not providing a specific breakdown at this point for segment expense.

Doug Anmuth:

Great. Thank you. One for Mark, and one for Dave. Mark, just given the significant investments in both P&L expenses and CapEx. And clearly, you were talking about the heavy focus on metaverse over the long term. Just hoping you could help us recap the 1-year, 3-year, and then 5-year aspirations from a product perspective, as you've done in the past. And then Dave, just on the 2022 expenses, which is about 29% to 38% growth. Do you have any commentary on revenue growth in '22 to go along with that. Thanks.

Dave Wehner:

Hey, Doug, it's Dave. We're not at this point providing a specific revenue outlook for 2022. We continue to see opportunities to grow both, impressions and price next year, but we're obviously coming off an incredibly strong year of revenue growth in 2021. So we do expect deceleration in growth in 2022 from the full-year 2021 rate. And this -- there's uncertainty implied in our range for Q4 revenue, and I think that holds true for the 2022 outlook as well. There's a lot of factors at play, including advertisers working their way through the impact of the Apple platform changes. We're obviously navigating a challenging macroeconomic environment. We'll have a better sense of how these things work together as we get through the holiday season. But yeah, given the expense growth that we outlined, which is implied in the 30 -- north of 30%, we don't expect revenue growth at that level, so we would expect 2022 margins to be lower than 2021. France, we go to the next question.

Justin Post:

Great. Thank you. Maybe one for Mark and one for Dave. Getting 18 to 29 year old users is not easy. I wonder if you could maybe outline some of your strategies to kind of get some progress there. I know its multi-quarter. And then Dave, in your guidance for Q4, can you help us on the IDFA impact? Is it contemplated to be about the same as 3Q, a little bit better as you work on your measurement or is a little bit more of a headwind in Q4? Thank you.

Mark Zuckerberg:

Maybe Reels. Yeah. I think that this is going to be very meaningful, qualitative change in how people use a lot of different products across the engine. I think every once in a while if format comes along, that allows new types of contents, right? We saw this with News Feed. We saw it with stories, and I think Reels is, from everything I've seen, has the potential to be something of that scale, where there are different flavors of it in different apps. But I think as a format, it can be very fundamental. And I think we are still closer to the beginning of that journey than we are to its maturity in terms of just having rolled out some of the initial tests and experiences and rolled it out in Facebook. And I mean, you mentioned all the countries that have been in Instagram, but it's just continuing to grow very quickly. So I think that that's going to be a big part of focus here. And I think we'll -- I'm excited over the next year or two to see how that growth, and I would bet will be like Stories is in our products today. Sorry, Dave. Go for it.

Operator:

Thank you. Our next question is from Youssef Squali with the Truist Securities. Please go ahead.

Mark Zuckerberg:

I'll take the first and then Dave will talk about whatever numbers you want to share. The first let me say I think we have -- on Thursday connects, we're going to be going into quite a bit of detail about our vision for the metaverse and how we think we can help contribute to building this side. I encourage all of you to tune in. Part of that that we are going to talk about is Horizon, how that fits into this. And we've been steadily working on this and on boarding more creators and more people to it. And we're adding more worlds all the time. And I think you're right, I think this is going to be a critical part of at least our platform and the work that we're doing here. We released Workrooms recently. I'm really excited about how that experience has come together. And I think it's your point, you mentioned it's important to have a VR social experience. I actually think it's important to have an experience that goes across all of the platforms. I don't think we're going to end up with is just a -- coming out like a VR social network, I think you want to be able to have these experiences where you can feel present with people and have this immersive experience. It's going to be best secure in VR or in AR and your hologram. But it needs to be able to work everywhere, it needs to be able to work across our whole Family of Apps, it needs to be able to work on the web, and on phones, and on computers. So there's a lot to do. And whether we call it beta or not, I think the reality is we're going to be -- this is kind of similar to the question before about where we're going to be in a year, 3 years, there's a lot of foundational infrastructure that just needs to get built up here. And part of what we're trying to reflect in the segment reporting and all that is we're committed to doing this work. It's going to be a big investment. We want to be transparent about it. But we think it's very exciting and a huge opportunity for the future, and I encourage you to tune in on Thursday to hear more.

Operator:

Our next question is from Mark Mahaney with Evercore ISI. Please go ahead. Mr. Mahaney, your line is open. Please proceed.

Dave Wehner:

Hey, Mark, it's Dave on the first question. Yes, the Apple platform changes were the largest factor in terms of Q3 headwinds. I mean, it was really the first full quarter impact of those new ATT policy changes following just the increase consumer adoption ramp of the iOS updates. And if it really weren't for that, we would have expected sequential growth Q2 to Q3. So that was the largest headwind in the quarter.

Operator:

Our next question is from Ross Sandler with Barclays, please go ahead.

Dave Wehner:

Hey, Ross, it's Dave, we're giving sort of specific quantitative revenue guidance on Q4. I think if you look at the range, it's from a sequential growth basis on a seasonal basis, Q3 to Q4. It's lower sequential growth than we've seen historically. So I do think that reflects some of the uncertainty that we're seeing out there as it relates to how IDFA -- sorry, the iOS 14 and ATT and IDFA impacts play into pricing during the holidays. And also the macroeconomic factors like the supply chain issues. So I do think the seasonal sequential growth is lower than we've seen in the past and with the range, I think that reflects that uncertainty.

Operator:

Our next question is from John Blackledge with Cowen, please go ahead.

Dave Wehner:

Yes, John, I mean, it's -- we're not the macroeconomic authority on all things. I would tell you that what we're hearing from advertisers is they are seeing supply chain issues that was true in Q3 and had an impact there as well as we expect that to continue to carry over into Q4. There also -- obviously that intersects with the challenges with the targeting and measurement headwinds from iOS 14. So it's hard to parse exactly how the platform issues and the macroeconomic factors will play into Q4. But I think those are the 2 biggest factors driving the range of potential outcome that we have outlined in our guidance. In terms of Reels and other IG services, I can take a crack at that, and then Mark and Sheryl want to add anything. Whenever we launch new experiences, this was true with Stories, it was true with Facebook Watch, and you’re always going to see some amount of shifting of people's time and attention to the new areas. And we do think that that benefits the experience overall, and we think that makes the overall experience more engaging over time. And we do think that it's -- we're able to with Reels drive incremental engagement with Instagram and Facebook. So that's why we're investing to do that.

Dave Wehner:

Can we go to the next questions.

Mark Shmulik:

Yes, one for Sheryl, specifically around kind of on platform commerce and that pivot. And I know previously you've shared kind of merchant and user adoption metrics, but any progress you could share on that product as it relates to activity or our users are embracing it. And then the second question kind of more broadly around recruiting. I know the recent posts to create kind of 10,000 jobs, guide to the metaverse in Europe. Any particular kind of rational for how you're thinking about recruiting globally? Thanks.

Dave Wehner:

And Mark on the recruiting front, obviously, we've got a -- big investments a year planned in 2022 that's going to be largely driven by recruiting. We're going to have to do that globally. We're looking to build technical talent. We're going to be hiring people to do more remote work and focusing on that, we're going to be investing in headcount outside of the bay area and continuing to focus on building our technical and product capabilities across the globe. Europe is an important part of that, and that's why it was outlined in that announcement.

Operator:

Very good. Our last question then will be from the line of Brent Thill with Jefferies. Please go ahead.

Dave Wehner:

Yes. Sure, Brent. I mean, I mentioned in my prepared remarks, our 2022 outlook really reflects the -- a significant increase in our plan investment in areas like AI machine learning. And a lot of that will be dedicated to investing in areas where we can use machine learning to improve ranking and recommendations to power experiences across our products. In areas like feed and in emerging areas like Reels we'll also be dedicating that to ads as we work to improve ads relevance, and leveraging. Machine learning and AI to help balance out the loss of signal that we've experienced from some of the platform changes. So we think that we can, as part of, sort of making our ads even more effective, make up for that loss with large investments on machine learning and AI side. And I think our position gives us a good ability to do that. So that's really part of the logic behind the big increase in the CapEx budget next year.

Operator:

And this concludes today's conference call. Thank you for joining us. You may now disconnect your lines.

Deborah Crawford:

Thank you. Good afternoon, and welcome to Facebook second quarter earnings conference call. Joining me today to discuss our results are Mark Zuckerberg, CEO; Sheryl Sandberg, COO; and Dave Wehner, CFO. Before we get started, I would like to take this opportunity to remind you that our remarks today will include forward-looking statements. Actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are set forth in today's press release and in our quarterly report on Form 10-Q filed with the SEC. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. During this call, we may present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. The press release and an accompanying investor presentation are available on our website at investor.fb.com. And now, I'd like to turn the call over to Mark.

Sheryl Sandberg:

Hi everyone. Thanks, Mark. I hope you're all safe and healthy. So this was a really strong quarter for our business. Our total revenue for Q2 was $29.1 billion, which is a 56% year-over-year increase. We've seen strong growth in all regions and across most verticals. Our strongest verticals are those that have performed well throughout the pandemic, including e-commerce, retail and CPG. And we're also seeing continued recovery in others like travel that were hit hard by COVID. Our performance continues to be driven by the ongoing digital transformation, which has accelerated during the pandemic and our long-term investments in tools and products to help businesses make the shift online. Not long ago, it was much harder and much more expensive for businesses to create a digital presence, take orders online and reach customers remotely. Our tools and products make these things easier and more accessible. Businesses and creators can set up pages, profiles and chats on Facebook and Instagram. They can engage with customers directly and groups or through Messenger and WhatsApp. And they can tell their stories in creative ways with Reels, Stories or by going live on Facebook and Instagram. With personalized ads, they can easily reach the people most likely to be interested in their products or services for just a few dollars. This has helped so many businesses, especially small businesses, find success when reaching people in person have been much harder. A great example is the Pizza Cupcake, a family-owned baking business in New York City. They've been selling at pop-up shops since 2018. But when COVID hit, pop-up locations shutdown and catering events canceled. So in March last year, they became an e-commerce business. In Q3 they tested their first Facebook ad campaigns in the New York Tri-State area and by the following quarter ramped up their budget to sell across 28 states. They've since made three new hires and plan to start shipping nationwide this year. They've expanded production, which has also led to jobs being created at fulfillment centers in Maryland, Florida, Arizona and California. We're constantly working to improve the effectiveness of our ad products to help businesses like the Pizza Cupcake reach customers and create a great return on their investment. We're doing this through our investments in machine learning and monetization of newer surfaces like Stories and Reels. In all of this, we're planning for the long term. Mark talked about some of the key elements of our strategy going forward, so all focus on the strategy for the ads business. If you think about the journey we've been on over the past decade or so, we started with desktop ads on the right hand side of peoples feeds, then consumer shifted to mobile and we put ads in News Feed. Then quarter-after-quarter, year-after-year, as we've created great new consumer products like Stories and Reels, we found the right way for advertisers to reach consumers within these products. And we're constantly working to make our ads deliver more for businesses and be more relevant for people. To support the growth of our ads business over the next 10 years, it's going to take a similar effort. We need to build on our success by developing innovative new products and discovery experiences, while giving everyone more control over their personal information. To build the next era of personalized experiences, we're focused on product innovations in four areas. The first is discovery. We want to keep making our apps the best places to discover products and businesses you'll love. For example, we're testing a new experience in News Feed where you can tap to browse content from businesses on topics like beauty, fitness or clothing, and reducing context to make smarter recommendations about which ads to show. So if you're watching a travel video, we could show ads for hotels and flights. The second area is commerce, which Mark touched on a moment ago. We're building a modern commerce system across ads, community tools, messaging, shops and payments. It's all about creating a personalized seamless customer journey, where it's easier to discover a product, buy it, pay for it and have it delivered to your doorstep. The third area is privacy-enhancing technologies. We know businesses are experiencing challenges because of platform changes. We want to make sure they can continue getting great results through privacy safe personalized ads long into the future. So we're collaborating across the industry to develop new technologies to help minimize the amount of personal information we process, while still allowing us to show relevant ads and measure their effectiveness. The fourth is building tools to help businesses beyond marketing. We want to help solve all kinds of businesses, whether it's customer relationship management, business messaging tools, or hiring through Facebook Jobs. We're helping people run their business across our apps easily with Facebook Business Suite. We're making it easier to message customers across our apps from a single interface, and we're expanding our Messenger API for Instagram as customers increasingly rely on messaging instead of phone calls. The digital transformation is a long-term trend that isn't going away. By focusing on innovation in these four areas, we will continue to help businesses of all sizes make the shift online and reach customers with privacy safe personalized advertising. As ever, I'm grateful to all the businesses who work with us, and I continue to be amazed by our teams all over the world. Throughout this period, we've been really lucky to have so many brilliant people working hard to keep people connected and help businesses survive and thrive online. Now, over to Dave.

Operator:

Thank you. [Operator Instructions] Our first question is from the line of Brian Nowak with Morgan Stanley. Please go ahead, sir.

Mark Zuckerberg:

Sure. I think I can probably take both of those. On commerce, I think the main thing to keep in mind is just the ads business is so large that it's going to take a long time before anything that we do with commerce is going to be particularly meaningful at scale. But I think overall, the strategy is really to work our way down the funnel from discovery and all the things that we're already world-class that with ads to making it so that those ads increasingly point to shops across our different services. In order to do that, each layer of the funnel that we're working on, we want to be world-class on its own, which means that basically there is this whole long tail of functionality that businesses have come to expect on the web and from other tools, and we need to make sure that that's available for shops and business messaging and all the tools, whether we do that through partnerships, with other e-commerce companies or building it up ourselves. So, we're seeing meaningful improvements every quarter in this in terms of how effective these are. There are already a pretty meaningful number of merchants and people who are using shops, and we expect this to compound over the coming years. But I just think in terms of the scale of the ads business that we're starting at, I just think realistically, we shouldn't expect that this is going to be a meaningful driver of our business or profitability in the near term, it's just going to take a while for that compounding to become meaningful numbers. But I think the strategy is the right one, it's creating a better product experience for people. When you click on an ad or when you engage with the business, it's just going to be much better to do that natively, whether you're in Instagram or Facebook or WhatsApp or whatever you're using, then go to a website that doesn't have your payment information and isn't personalized. So I think we're on the right path here, and we're focused on compounding this as quickly as we can. I guess for the second question on the creator economy. I mean, yes, there are a number of different companies that are focused on this. I'd say there are a couple of things here that are interesting properties of this. One is that if you're a creator and you're trying to get your content out there and you're trying to make a living, you want to be in all these different platforms. So I think a lot of what we're trying to do is, it's not necessarily the case that people are going to be on one platform versus another. We just want to make it so that that creators have their best content here and that we can help them make a living better than other platforms, and we think that if we do, we'll have an advantage on content over the long term, but it's not like we fundamentally have to win creators over from another place. Our monetization tools, I think, are a pretty big advantage that we bring to the table. Our advertising is world-class, so the ability to basically help creators make more money from the work that they're already doing, I think it's something that we should really be able to bring those set of tools to the table. We also have a lot of distribution an ability for people to find their communities and help personalize recommendations to help connect people with the people who are going to be interested in their content. So, I think about that is some of what we're seeing and why a lot of creators are excited about the work that we're doing. And over the long term, I think if we are able to make it so that, millions of creators are able to make a living across our platforms, I think that's just going to mean that there's going to be a long-term breadth and healthy set of content across the systems that I think is going to be increasingly important, especially as video becomes more important on our platforms like, what we're seeing both with Watch and Reels now.

Operator:

Our next question is from Justin Post with Bank of America. Please go ahead.

Dave Wehner:

Yes. Thanks, Justin. On the DAU front, we are seeing those trends being impacted by COVID, that's especially noticeable in some of the larger markets where we have high levels of penetration like North America and in Europe. And I'd say in North America, given our high level of penetration, we do expect sort of MAU and DAU levels to sort of bounce around from quarter to quarter, given kind of how significantly penetrated we are in that market. And then in Europe, we're seeing combination of seasonal slowness, as well as COVID-related softness, when we saw a restrictions ease, obviously, with Delta, we might see other trend, it's hard to predict how that's going to play out in this cycle, but that's kind of the best read on it I can give you at this point.

Dave Wehner:

Yes. And Justin, I mean obviously, from a capital allocation perspective, our overall focus is on growth, and we've repeatedly called out that as it relates to our investments in innovation, FRL is a big focus area for us and a major investment driver in our expense outlook. So we have mentioned that we're investing billions of dollars annually, and we expect to invest in this area for the foreseeable future. As we make progress towards building this next computing platform, there is a lot of hard work that needs to be done. But it is a big focus, but we haven't provided any more granularity on it. Okay. France [ph], you can go ahead and go to the next question, please.

Douglas Anmuth:

Thanks for the questions. I'm going to go two for Dave. Just first on the mix of slower impression growth and then with prices the driver here for the year. Is there anything else that we should be thinking about beyond the comps from last year? And how do you think that expanding surfaces to create more ad inventory going forward? And then secondly, just curious if your view on ATT has changed over the past three months at all? And if you could comment at all just early on some of your mitigation efforts and what you're seeing there? Thanks.

Operator:

Our next question is from Mark Mahaney with Evercore ISI. Please go ahead.

Dave Wehner:

Yes. Sure, Mark, and I certainly hit this with Justin's earlier question. We haven't given a specific breakout on what we're investing in FRL, it's obviously a significant investment we've categorized it is billions, and so your number is billions. So it's consistent with that saying billions. But beyond that, we don't have any more specificity to get. But it is certainly a significant investment. And I would say that is inclusive obviously of all of the efforts we're making across FRL, not just the metaverse. And then on pricing and ROI, Sheryl, you might be able to give some color on that as well. You're muted Sheryl. Hang on a second.

Mark Mahaney:

Okay, thank you.

Operator:

Our next question is from Youssef Squali with Truist. Please go ahead.

Mark Zuckerberg:

I can start off with the metaverse question. I do think that this is going to be a macro wave overall that a lot of companies are going to be able to ride and benefit from. So whether that companies like and videos that are building a lot of the graphics chips that are going to be really important for a lot of the content, but I think is going to be increasingly graphically intense, that certainly building those kind of graphics chips is not a thing that we're intending to get into, where certain accounting on companies like that in the industry to kind of continue improving compounding overall. But on the hardware side, I would say that we have a pretty big program on building virtual and augmented reality devices. And I mean, sure a lot of people are still going to be using phones and computers for a long time, but I think when it gets to what are the devices that are going to deliver the deepest sense of presence and that are going to be increasingly important over the next decade, we're certainly investing in that because we want to make sure that those develop in a way that's in line with the vision of these platforms helping people to interact with each other and socialize, then that means prioritizing certain feature development or certain sensors in the devices that we want to make sure that we can help push that in a direction that will help us to become a very social platform. So overall, I do think this is going to be a big space. The point that I was making is that, I think they're going to be a lot of winners and this is going to be nothing that one company builds alone, but I think it is going to be a whole ecosystem that needs to develop. So we're certainly making a lot of the key investments that we need to make in the foundational technology to be able to deliver the parts that we want to.

Sheryl Sandberg:

The only thing I'll add is that increasingly the brand DR distinction is less and less traditional, large brand advertisers that have done brand advertising for a very long time are increasingly learning to do direct response ads and use our different formats and use our different measurement tools. So even the categories that people are used to thinking about, I think it's more of the buy than the advertiser as our largest brand advertisers. I think many of them are becoming increasingly proficient and effective in what would traditionally be considered DR advertising.

Operator:

Our next question is from Ross Sandler with Barclays. Please go ahead.

Dave Wehner:

Yes. Ross, I can take that. I think it's a question of definition as well. I mean, we already like YouTube pay a lot out to the creative industry more broadly as opposed to specific individual creators. So for instance, we pay to on the music licensing front, we do a fair amount of that, there is significant payments we make there above and beyond what we're talking about with $1 billion commitment to creators that Mark outlined. This is obviously something that is part of the cost structure, but it's something that we've long had in our outlook. So I don't think it's a meaningful change in the business model or outlook, but it is something that we're committed to helping people continue to build a vibrant communities and businesses on our platform, just like we have with advertising. France [ph], you can go ahead and go to the next question, please. Thanks.

Mark Shmulik:

Yes. Thanks for taking my questions. A couple for Sheryl or Dave. The first on Reels ad, a lot of talk around kind of the upgrade cycle to video and any color you can share around the engagement, traction or effectiveness of kind of video ads on that type of a platform? And secondly, with 1.2 million stories now on shop, specifically those selling on Facebook, are there any learnings or noticeable differences in the effectiveness of the ad of their advertising or conversion rates? Thank you.

Dave Wehner:

Either way, Sheryl, I can take it if you want.

Dave Wehner:

Yes. So Mark, on the second question, we're obviously very focused on making sure that our ads are effective, and we've got good conversion rates for our advertising partners. So part of what we're doing there and Mark talked about this in the Q1 call is making sure that the ad units optimized for whichever experiences is converting the best. So if you've got a store, a shop on Facebook or Instagram is that converting better or is your own web store converting better and then that allows us to also just get better at making our shops and more effective. And so we want to do what's best for the advertiser and also continue to make our online and our own shops more effective. So no specific numbers to share there, but we're continuing to work to make our shops convert better. And France [ph], we can go ahead and go to the next question, please.

Brent Thill:

Thanks. Dave, just the modest deceleration to your two-year stack. There are a lot of investor questions. Do you mean more 3 or 3 points or de-cel or is it more 5 to 7, any more granularity you can add to what that modest de-cel looks like would be extremely helpful? Thank you.

Operator:

Our next question is from John Blackledge with Cowen. Please go ahead.

Dave Wehner:

Yes. Thanks, John. On the iOS changes, really very much in line with expectations on things like opt-in rates. So I would say overall the impact has been in line with our expectations. So not a huge surprise there. We're not fully rolled out with those changes, but Q3 will have the impact more or less of those being fully rolled out. And then in terms of the OpEx guide, yes, we do expect accelerating expense growth in the back half of 2021, and we're going to see that in areas like consumer marketing. So some of the non-headcount related spend, we expect to accelerate in the back half of the year. So that's the expectation on that front. And France [ph], we can go to the next question, please.

Colin Sebastian:

Great, thanks. Good afternoon, everyone. Maybe a couple of higher level questions, really coming out of F8 Refresh. First off, can you talk about the integration of messaging across the family of apps and how the opening of messaging APIs is adding functionality to apps and if this is contributing incrementally to more business activity through messaging? And then with advanced AI and machine learning now seemingly table stakes for most platform companies, Mark, I'm just kind of curious if this is still a significant competitive advantage for you in your view? And based on what you heard of F8, I wonder how important a product like PyTorch is in terms of moving faster in new product development things like that? Thank you.

Dave Wehner:

And France [ph], I think we have time for one last question.

Michael Nathanson:

Great, thanks. One for Sheryl and one for Dave. Sheryl, in the past I've asked you this question, but now we're seeing it. So post-pandemic, there has been a real weakness in TV impressions. And as TV dollars are going to look like to Avon in YouTube. So can you talk a bit about your vision for video and how they may seek opportunity maybe grab some TV dollars? I mean do you expand the definition of creators to include premium video content or sports? And then for you, Dave, following up on Doug's question, can you talk a bit, I know it's early, about the learnings from your aggregated event measurement? What has been the impact on things like signal loss, ROI or spending from those who have used it in the early days? Thanks.

Dave Wehner:

And Michael, I'll take the second question. I don't have specific data to share, but I mean just contextually, the work that we're doing with the aggregated events management API is part of the broader work that we're doing to rebuild meaningful elements of our ad tech. So that our system can continue to perform well, having access to less data in the future. And it really dovetails into some of the work that Mark was talking about with machine learning and AI, because that's going to be an important part of being able to make better use of less data. And so, again, why having access to the ML and AI capabilities that we have with Facebook or is going to be so important to the future and maintaining and growing the efficacy of ads. So I think broadly, we're pleased with the progress we're making on this. It is disruptive for advertisers to have to go through the process of also learning how to retool. So I don't want to lessen the impact this is having on our advertisers. I think it is a challenging period for them, and we're trying to help them work through it as effectively as we can. So with that, I think we are done. So thank you, everybody, for joining us on the call today, and hope everybody stays safe.

Deborah Crawford:

Thank you. Good afternoon, and welcome to Facebook's first quarter earnings conference call. Joining me today to discuss our results are Mark Zuckerberg, CEO; Sheryl Sandberg, COO; and Dave Wehner, CFO. Before we get started, I would like to take this opportunity to remind you that our remarks today will include forward-looking statements. Actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are set forth in today's press release and in our annual report on Form 10-K filed with the SEC. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. During this call, we may present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. The press release and an accompanying investor presentation are available on our website at investor.fb.com. And now, I'd like to turn the call over to Mark.

Sheryl Sandberg:

Thanks Mark, and hi everyone. I hope you’re all safe and healthy. This was a really strong quarter for our business. Our total revenue for Q1 was $26.2 billion, which is a 48% year-over-year increase. We’ve seen good growth in all regions, and we continue to see strong results in verticals that have performed well during the pandemic, like E-commerce, Retail and CPG. Our performance has been driven in large part by the continued digital transformation as more and more businesses shift online. For years, we’ve invested in products and tools to support this shift, and these investments have helped many businesses reinvent themselves during the pandemic. One of the best parts of my job is I get to meet SMB owners and hear what’s on their minds. Many of them tell me how they’ve used Facebook to adapt and grow. At a virtual roundtable with SMBs from Detroit this quarter I spoke to La’Asia Johnson, who runs an all-natural skincare company called Elle Jae Essentials. When COVID hit and she had to close her store, she started a Facebook Group called The Garden, which now has more than 1,000 members. They give her product ideas, and when she makes the products they suggest, as she says it, they sell quicker than she can keep them on the shelves. By pivoting online she’s been able to replace all of the income she lost from her store. I also spoke to Ita Reyes, who runs a yoga studio in nearby Ann Arbor. She started doing outdoor classes during the pandemic and needed to get the word out. She couldn’t afford to advertise to everyone in the city, and not everyone in the city wants to do yoga, so she uses personalized ads. This enables her to advertise to people in the area who are interested in yoga or meditation. It’s all done in a privacy-protected way, we show her ad to those people, and we don’t share their information with her. And then they sign up for her classes. Like everyone else, the business owners I talk to want to know what will happen next. Many are all-in online, so even when things reopen fully they want to be able to do more online than they did before. So understandably, they’re asking us what we’re doing to help them, not just now but over the long run. Part of the answer is continuing to improve our tools and products and creating new ones to suit their needs. And part of it is helping them navigate the headwinds that are coming down the line, whether it’s the iOS14 changes or potential regulation. On the first part, tools and products. We’re all-in too. From day one of COVID, we fast-tracked our work to help people buy and sell online. Initially, we focused on getting the experience right for sellers. As Mark said, we launched Shops nearly a year ago. We’ve continued to develop new features to help personalize the shopping experience and worked with partners to make transactions as seamless as possible. And we’ve created new formats, like Live Shopping, which bring to life the unique commerce experiences our platforms can offer. Now, we’re equally focused on getting the experience right for consumers. We’re rolling out the Shop tab in more countries and exploring new immersive formats, like Product Tags and Drops stickers, that enable more people to shop with creators and brands they love. We're also constantly developing and improving our ad products to help businesses reach people where they are and get the best possible return on investment. We continue to see strong growth in Stories ads and video ads, which we’ve invested in heavily. We’ve also seen strong growth across ads in Facebook Watch, which now has more than 1.25 billion people visiting every month. As the number of people watching video grows, we’re developing more opportunities for businesses and creators to reach them. We’re expanding Paid Online Events to more countries. We’re enabling more people to run instream ads, including in Live videos. And we’re developing ads in short-form videos, where we’re testing the ability for content creators to monetize their Facebook Stories with ads that look like stickers. On the second part, headwinds. Yes, there are challenges coming to personalized advertising and we’ve been pretty open about that. We’re doing a huge amount of work to prepare. We’re working with our customers to implement Apple’s API and our own Aggregated Events Measurement API to mitigate the impact of the iOS14 changes. We’re rebuilding meaningful elements of our ad tech so that our system continues to perform when we have access to less data in the future. And we’re part of long-term collaborations with industry bodies like the W3C on initiatives like privacy enhancing technologies that provide personalized experiences while limiting access to people’s information. It’s also on us to keep making the case that personalized advertising is good for people and businesses, and to better explain how it works so that people realize that personalized ads are privacy-protective. Small businesses don’t have to understand the alphabet soup of acronyms they’ll need to comply with, but they do need to have confidence that they can still use our tools to reach the people who want to buy what they’re selling in a privacy-safe way. We’re confident they can, and that they can continue to get great results as digital advertising evolves. With the roll-out of vaccines, there’s reason to be hopeful. But the pandemic is still causing real heartbreak and real hardship for people in many countries, and in particular, like Mark, my thoughts are with our friends and colleagues in India and Brazil right now. If the last year has taught us anything, it’s to not make assumptions, and to not expect things to get better for everyone at the same time. Whatever happens, we’ll continue to keep people connected, support the public health response, and invest in ways to support businesses now and in the long-term. I want to close by saying how grateful I am to all the businesses who work with us, big and small, who we learn from every day, and to our incredible teams who have supported millions of businesses through this turbulent time and set them up for success now and in the future. Now, over to Dave.

Operator:

Thank you. [Operator Instructions] Our first question will be from the line of Brian Nowak with Morgan Stanley.

Sheryl Sandberg:

I can start on the first. So, there's a lot of commerce activity on our platform already. People really discover lots of products through our Feed and ad Stories -- through our Feed and Stories ads. It's been our largest ad vertical. COVID really accelerated it, but it's been one of the fastest-growing verticals we've had over the last five years, and we believe that Facebook drives hundreds of billions of dollars of off-site e-commerce GMV today through our ads business. So, we've certainly made a ton of progress there. And our goals going forward are, we want to continue to be the very best place to advertise. We're going to have to do work to do that. As I mentioned in my remarks, that we can still use data in a privacy-safe way, get the right ads to the right person at the right time, but we think we are market leaders here. The other work we're doing, and Mark talked about it in his remarks and I did as well, is to make it easier to sell on our platform. Now, the shopping experience is really well-defined in other places, and we are later to that than we were to adds. So, we know we have a lot of work to do. We're working with partners to build some of the parts of the experience that we're not as an expert in, and we're integrating -- and we're integrating products like Shops. We have more than 1 million active Shops and more than 250 million people interacting with merchandise per month. So, we've made some good progress. But we recognize that getting to a really seamless transaction experience is going to take work on our side, and we're going to continue to invest there. I think, another area where we do have to do more is we have to improve the consumer experience to help people transact on the platform. We've done, I think, more work on the business side, on the integration side, and now we are focused on continuing to build that and continuing to build out the consumer experience. For the foreseeable future, ads are going to be the vast majority of our revenue in this area and that commerce vertical is so important to us. We don't need commerce itself or fees to become a big part of what happens in order to make the investment worthwhile, but we really have to focus on helping more businesses move online and have a great experience on our platform. And that, along with that, makes this a very worthwhile investment for us.

Operator:

Our next question is from the line of Justin Post with Bank of America. Please go ahead.

Dave Wehner:

Hey Justin, it's Dave. Yes, I can take -- I can take both of those. So yes, on the impression growth front, I think we're seeing a couple of factors. We talked about the COVID impact and the return to more normal levels, and that's affecting some of the impression growth. The second factor that we're seeing, and it kind of gets at some of your question, which is we're seeing really strong engagement on video, particularly internationally. And that's -- we're pleased with that. I'd point to a couple of examples there. I'd say Facebook Watch, we talked about the 1.25 billion users. Also, Reels is starting to get traction on -- and doing well on Instagram. Now, video currently has relatively fewer impressions on a time spent basis. So, that's playing into the engagement trends as well. And then finally, I would say, we are seeing competition in News Feed from both our own video products and also others’ products as well. So, that's factoring into it. And then, your second question was regarding any surprises with iOS 14-5. Look, I think it's really early. They just began rolling out the update. So, it's sort of very, very low kind of penetration rates of the new OS at this point. But a couple of things, I'd say, we continue to be concerned about the impact that this update is going to have on the ability of small businesses to use their advertising budgets effectively. That said, the impact on our own business, we think, will be manageable. We continue to expect it will be a headwind for the remainder of the year, but we're making encouraging progress, as Sheryl mentioned, on our own solutions to help advertisers navigate these changes. And that includes helping advertisers work with the Apple API as well as our own approach to using aggregated data for targeting and measurement that we call Aggregated Events Management. So, the goal there is really to maintain it in the long run, even improve performance with less data, so. And then, I'd also add that just in addition to these mitigations, we're also just seeing very strong overall ad demand, which is contributing to a more positive outlook for 2021. And I would say, just overall, the impact of these -- the specific iOS 14 changes are one element of some of the challenges with Apple. But, we think the impact of the Apple approach is really much bigger than this particular update around third-party data usage. Apple has a number of private APIs on hardware and software that advantage their own products and services in ways that are challenging, and we face that issue with -- in places like our messaging products and even with the hardware products we're launching. So, we generally don't think that this closed approach is the best one for the industry from an innovation perspective. Go ahead, France, next question.

Doug Anmuth:

One for Mark. Mark, you highlighted the three areas where you're doubling down across AR and VR, commerce and then the creator economy. Hoping you could talk about whether you view these efforts as helping Facebook control its destiny more as a platform, perhaps giving you more first-party data and whether they insulate you from other ecosystems over time? Thanks.

Operator:

Our next question is from the line of Ross Sandler with Barclays. Please go ahead.

Mark Zuckerberg:

Sure. I can start taking this some, and then Wehner, you can jump in if you want to add anything. Overall, I think that the narrative that you are pointing to is dramatically overstated by critics. We do not optimize our systems to increase the amount of time spent in News Feed. I explicitly do not give our News Feed team or the Instagram feed team goals around time spent. Our belief is that if we build a product that is more valuable, then people will engage more, but you should start by trying to build something that's more valuable, not by trying to increase the time that people are spending. So, we've done that for years, and I think it's yielded good results. So from that perspective, I know that what you're saying is something that -- that some folks like to throw around and say. But, I actually think that the more that different regulators or other folks dig into this, I actually think that our practices here are quite robust. And we don't want extreme -- extremist content or any of that stuff on our services. So, if anything, to the contrary of trying to promote that, we go out of our way to try to reduce that. And I think that that -- contrary to what a lot of these other folks say is it is actually in our business interest to reduce it because people don't like it, right? I mean, consumers don't like it. Advertisers don't want to be near it. So, I don't actually think that this kind of narrative about the Company is accurate. And we've tried hard to dispel it. I don't think we've been super successful of that. We will continue trying to work on that. But just to kind of be clear about how I see things, that's the basic download. I think, News Feed is still a huge part of the products and the home feed in Instagram. But increasingly, Stories is a big deal in Instagram, a lot of people are using Explore and IGTV. Video and Watch on Facebook are quite big. And as you say, a lot of people spend a lot of their time and attention is in messaging apps and private interfaces like that as well. So, I think there are a lot of different things that people are doing across the services. But, Wehner can jump in with any more color on that that he wants to add.

Operator:

Our next question is from the line of Youssef Squali with Truist Securities. Please go ahead.

Mark Zuckerberg:

I can start with this, and then Wehner can jump in on the second point, if you want to add anything. In terms of what changed, I think the big piece here is that Quest 2 is doing quite well. And I don't want to overstate it because I think compared to platforms that are kind of large, massive successes today, it's still obviously on the small end. But there's been a very real inflection in terms of adoption and engagement that we're seeing with Quest 2. It feels like there's something about the quality bar that we hit and the price that we hit and the fact that we're able to do that in a wireless form factor. But, I think it's just -- first of all, it's going to be really hard for anyone else, I think, to meet those different attributes. Some other folks might try to ship something that the claim is higher quality but has a wire. And I just don't think that consumers are going to want to go for that. So, we'll see how all of that plays out. But, I also just look at how the team is executing and the products that we have in the pipeline. And I want to make sure that we can really go all in and deliver this. But, I do admit Quest 2 has been a meaningful step up from Quest 1 in terms of the progress that we're seeing. And content is definitely a part of this. And we have a team internally that's focused on both first party, I guess it's all first-party, second-party and third-party content and making partnerships with studios. And that certainly is a big part of this. I think Quest has, I think by far the best lineup of VR content. And I think the road map of what's ahead is even more exciting, some of the stuff that's coming over the next few years.

Operator:

Our next question is from John Blackledge with Cowen. Please go ahead.

Mark Zuckerberg:

So, I can talk about the first piece, and then, Dave, maybe you can take the second piece. In terms of when these platforms will be more adopted, I think a lot of it is about form factor and use cases. I mean Quest 2, I think, is -- we kind of hit a key point, but I think there's still further that we want to go on the form factor of that. But I think the wireless part is key. So, I'll just say that again. So, I think that there's a lot that you can do in terms of getting products that might have better graphics or something. But with a wire, it really hurts the sense of immersion because you don't want to have like a wire wrapped around your neck while you're doing all this stuff. But the other big piece is the use cases, which is why I called out in my remarks in the beginning that one of the promising signs that we're seeing is that it is expanding out beyond games. Now, it's still primarily games. But, when we started on this journey, a lot of the reason why I said that I thought it made sense for us to invest in this is because I expect virtual and augmented reality to be some of the most social platforms that get built. And the fact that a number of the most engaging experiences on the platforms today are social and a lot of the top games are social, I think, is really promising. But also seeing things in terms of productivity, and like I mentioned, it’s just really promising that you're seeing the early signs of this becoming a broader platform. So, there's -- again, I don't want to overstate any of this because it's all quite early still, and all these things need to develop out. But, those are very promising signs from my perspective. And as those keep on developing out, then I think the platforms will be broadly applicable to more people. And then, the other thing I'd say is that we haven't really even gotten there on AR yet, right? I think virtual reality, the form factor constraints, I think, are a little less than what you're going to have in augmented reality, where in virtual reality, I think you need to get to a high-quality wireless experience. In augmented reality, you're going to really need a pair of glasses that look like normal looking glasses in order for that to hit a mainstream acceptance. And that, I think, is going to be one of the hardest technical challenges of the decade, it's basically fitting a supercomputer in the frame of glasses. So, I'm -- I find not a very exciting problem to work on. And I think that once that's achievable, potential on that is going to be quite big.

Operator:

Thank you. Our next question is from Lloyd Walmsley with Deutsche Bank. Please go ahead.

Sheryl Sandberg:

Yes. On the first, the relative ROI, you're exactly right. People are going to advertise. They're going to advertise on TV, on radio, on billboards, on different online platforms, and they're looking for relative ROI. That means a signal goes down and it goes down everywhere, we're competing differently. Our goal is to make sure that we can still do personalized ads. We do think that our relative competitive advantage has been that our ads are more personalized. And that's really important because as in some of the examples I shared, most small businesses, the yoga studio in Detroit can't afford to advertise to everyone in Detroit, much less everyone in Michigan, much less everyone in the U.S. And so, advertising using who lives there and who's likely to be interested in yoga and meditation is really important. We believe we will still be relatively better positioned. Virtual -- Phase 2, not all players, right, because we're not running the platforms, but based on many, we're still going to do better at that than a lot of digital players. We're still going to do better at that than TV or radio. But, when signal goes down, we're going to have to rebuild that capability, and that's what I talked about. In terms of the timing you asked specifically, we really don't know. The iOS 14 changes are really new. Regulatory changes that might happen at a state level or a global or a regional level or a national level haven't happened yet. So, we'll have to see. And I don't have a real sense of what those changes will be, what their impact will be right now. But, we are very focused on competing for those ad dollars and doing it as well as we can. In the consumer experience on the shopping side, where we are right now is we launched the shop -- a lot of the shopping tools, and we've had broad business adoption, and that's been good. We don't offer the full suite of tools that a lot of other places do. But more and more, we have shops functionality that people are adopting. We really need to work on the consumer side of the experience. I do think we have a unique opportunity there. You asked again, like what is our -- I think -- is my language at yours, but I think you were asking like what is our sustainable competitive advantage here. We have a lot of people doing a lot of activity. We increasingly have people looking for products. We increasingly have people finding products. And so, we've always been strong at the top of the funnel. Can we move people down the funnel? We think we can. But, that's going to take work, and it's also going to take some time for people to get used to that. But, in terms of the long-run competitive advantage, we have a lot of people looking for a lot of things, sharing a lot of things and continuing to find things they really like. And so, I'm very optimistic about our opportunity here, but it's going to take real work.

Colin Sebastian:

First, Mark, maybe as another follow-up on VR and AR and the connection or synergies you see between Reality Labs and the other priorities you mentioned around commerce, communications and creation. I'm curious if those are collaborative initiatives internally, or are they still somewhat siloed as far as product plans and development is concerned? And then, secondly, an area of connective tissue as well, I think, is unified payments. I'm just curious how important that will be to enable the shopping and transactions on the platform? And what role that DM and other digital currencies may play in that effort? Thank you.

Operator:

Our last question will be from the line of Michael Nathanson with Moffett Nathanson. Please go ahead.

Mark Zuckerberg:

I can start off by talking about the creator economy piece. I know there are a few important components here that creators need. One are the creative tools to be able to share the full range of expressions, right, so from any kind of writing, to audio, to video, to all these different mediums. Then the second is connecting that work with a large audience of people and helping people find their audience and community. And then, the third is monetization. And I'd say that we're probably strongest on the second two of those today. And I think we have creative tools, and we will invest more in building those. But, when it comes to helping people reach the largest audience or finding their specific audience, I think we are world-class at that. I think we're the best of that. And then, in terms of monetization, I also think that as our business results show, we are very efficient at that. And if we can put that to work for creators to help them make money from their work, then that can help achieve this goal of enabling millions of people to make a living through this kind of creative work. So, I think on those two pieces, especially on the monetization side and on the helping people connect with their specific community and getting as much distribution as possible, I think that we're going to do some really great and unique work to help a lot of creators out. And then, we'll build out the broader suite of tools, too, but I think that those two places are really where we enter this from.

Deborah Crawford:

Great. Thank you again for joining us today. We appreciate your time. And we look forward to speaking with you again.

Deborah Crawford:

Thank you. Good afternoon and welcome to Facebook’s fourth quarter and full-year 2020 earnings conference call. Joining me today to discuss our results are Mark Zuckerberg, CEO; Sheryl Sandberg, COO; and Dave Wehner, CFO. Before we get started, I would like to take this opportunity to remind you that our remarks today will include forward-looking statements. Actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are set forth in today’s press release and in our quarterly report on Form 10-Q filed with the SEC. Any forward-looking statements that we make on this call are based on assumptions as of today and we undertake no obligation to update these statements as a result of new information or future events. During this call, we may present both, GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today’s earnings press release. The press release and an accompanying investor presentation are available on our website at investor.fb.com. And now, I’d like to turn the call over to Mark.

Sheryl Sandberg:

Thanks, Mark, and hi, everyone. Like Mark, I hope everyone is safe and healthy. This was a strong quarter for our business as the acceleration of online commerce we’ve seen during the pandemic continued into the holiday season. Our total revenue for Q4 was $28.1 billion, which is a 33% year-over-year increase, our fastest growth rate in over two years. After a really difficult year for so many businesses, this holiday period was important. And while many businesses are still struggling, the good news is that Q4 was stronger than expected for retail. In the U.S., the National Retail Federation reported that sales in November and December went up 8% year-over-year and online sales were up 24%. This holiday period was also longer. Compared to previous years, advertisers started spending earlier and sustained that spend well beyond Black Friday and Cyber Monday. We saw robust performance across all regions as well as an improvement in brand advertising. The strength of our Q4 performance is a result of years of investments in free and paid tools to help businesses succeed online. Even before the pandemic, businesses were going digital, but COVID made this a necessity. Almost overnight, businesses had to create digital storefronts, figure out how to take online orders and find new ways to reach their customers. For many small companies, these steps, or even just setting up a website or a mobile app can be difficult and expensive. Our free and paid tools help solve these problems for businesses around the world. With so many businesses struggling when the pandemic hit, we asked our teams what do businesses need and how can we help? First, they need the tools to get their business up and running online. So, what can we do to make ours simpler and more effective, and can we build new ones to help them. Second, they need the digital skills and knowhow to succeed. So, how can we help more businesses with training and resources? And third, they need their voices to be heard. So, can we use our scale to amplify their voices and tell their stories? We’ve been asking these questions throughout the last year and into Q4. On the first, we accelerated our work on tools to make it easier for people to find brands and products they love and for businesses to manage their online presence and connect with customers. Mark talked about some of the new tools we’ve launched like Shops and Paid Online Events. In the fall, we also rolled out Facebook Business Suite, a new interface to help businesses manage their pages or profiles across our apps. We also continued to invest in making our products as effective as possible, so businesses can get more value for every dollar they spend. Personalized ads are privacy safe and help businesses reach customers where they are, which has been more important than ever during the pandemic. One notable area of progress this past year was in Stories ads, which have become more effective for direct response advertisers. One business that used Stories ads is Carlota Flower Lab, a florist in Los Reyes, Mexico. Before COVID, they made 70% of their revenue from face-to-face workshops. So, when the pandemic hit, founder, Paola Mendoza had to get creative. She used personalized ads on Instagram to reach new audiences and even found her first international customers with campaigns targeting California and Texas. One campaign for Dia de los Muertos, the Day of the Dead, in November, led to a 24 times return on ad spend, helping Paola triple her annual revenue in 2020, despite COVID. On the second, resources and training, we did some big things in 2020. We created a business resource hub, a one-stop shop for resources and trainings for small businesses that we’ve continued to build out through the end of the year. We committed to reach 1 million members of the black community and 1 million members of the Latinx and Hispanic communities in the U.S. with free digital skills trainings through our Elevate program by 2023. And we reimagined our Boost with Facebook events to reach businesses virtually with 100 million people tuning in throughout the year. This included our 12-week Season of Support to help businesses across 16 countries prepare for the holidays. On the third, a great example of how we amplified the voices of our businesses in Q4 is our BuyBlack Friday campaign, one of my favorite campaigns ever. In the U.S. black-owned businesses closed at twice the rate of others after the start of the pandemic, so we wanted to help people shop with them over the holidays. We created ways for people to find black businesses in their local area, a gift side featuring products from black businesses across the U.S. and even a BuyBlack Friday show on Facebook live that was seen by 15 million people. One of the small businesses we featured is a vegan skincare brand called Redoux from New York City. Its founder Asia Grant appeared on the BuyBlack Friday show, and that became one of her most successful sales days ever. The campaign gave her record revenue and web traffic, and she was even able to hire more people, something that’s so important, given current unemployment rates. Business owners like Asia and Paola have worked hard to adapt and grow online, but lots of businesses will continue to struggle in 2021. So, we’re going to keep listening to them and building on what we did last year. That means improving our products and tools to help businesses seamlessly manage their online presence, advertise across our apps and communicate with customers through business messaging. It means making more training available through programs like She Means Business for women and Elevate for diverse communities. And it means finding more ways to amplify their voices, whether it’s sharing the stories of small businesses worried that Apple’s iOS 14 changes will hurt their ability to reach customers or showcasing small businesses and gift guides and products, like businesses nearby. I want to close by saying how grateful I am to all the businesses around the world who work with us. Your partnership helps us build the tools you need so you can continue to grow and hire. And as always, I’m grateful to our incredible teams who have done so much to help businesses survive this difficult year, including coming up with great ideas like BuyBlack Friday. I hope that 2021 is a better year for everyone. Now, here’s Dave.

Operator:

[Operator Instructions] Your first question comes from the line of Brian Nowak from Morgan Stanley.

Sheryl Sandberg:

I can take the first. With Instagram Shopping, we launched a new shop tab on Instagram in Q4, and this is built on other shopping efforts we’ve had. We see this as an overall part of our commerce effort. We’ve always been, I think, a great place for people to discover new products and services, but we are very interested in taking people all the way down that funnel from discovery to purchase to finding products and services to checking out as well. And, our shopping efforts are part of that. We’re seeing nice uptick. It’s still really early days, but we think businesses are having a good experience and people are having a good experience. And as always, with our ad products and with our commerce products, we want to make sure we provide a great experience to the end user, so that they can find the things they’re looking for.

Operator:

Your next question comes from the line of Doug Anmuth from JP Morgan.

Dave Wehner:

Doug, I’ll take that. So, I don’t think our outlook has changed in any significant way on iOS 14. We continue to believe that that will be a headwind in the ads business. It’s in our view, not just limited to IDFA, but broader than that is we’re going to have to be providing a prompt asking people for permission to use third-party data to deliver personalized ads. So, that’s going to be true whether you’re using IDFA or not, and we do expect there to be high opt out rates related to that, and that’s factored into our outlook. We expect that to roll out sometime -- we expect later in Q1. But, the timing is uncertain, and Apple hasn’t given clarity on that at this point. And we do expect that will have increasing impact through the year as more users adopt iOS 14 and go through those permissions. When you think about what the mitigations might be, obviously there is going to be mitigation of the impact on us to some extent just because this is a platform-wide change, and so it will impact everyone. And so, that’s going to mitigate it to some extent. And in addition, over time, we hope to help businesses by providing more on-site conversion opportunities through initiatives like shops and also click to messaging ads. As it relates to specifically the audience network products, obviously that’s going to have a significant impact on audience network on iOS as we have explained in the past. But, it’s -- but the broader impact, given the size of that business is really to our -- to the core advertising business on iOS.

Eric Sheridan:

Maybe two, if I can. Mark, just coming back to your comments, what do you see as some of the key investments either on the hardware side or the content and application side to unlock the opportunity based on what you recently saw with the success of Oculus in the holiday period, where there’s a piece of hardware obviously that’s sold through quite well. And how do you think about aligning investments against the opportunity in the coming years? And then, maybe -- I don’t know if it’s for Sheryl or Dave, but maybe I could just follow up a little bit on Doug’s question. When you think out to the language you’re using about the back half of the year, is there any sense you can give us quantitatively about how to think about some of the tougher comps you’ll see as we move through ‘21 versus identifying the degree or the severity of different outcomes from some of the headwinds?

Dave Wehner:

Yes. Eric, it’s Dave. Just coming back to your question. I think, the context is, we have this -- we’ve had a tremendously strong quarter, Q4 of this year. A number of factors we talked about driving that. A couple of are pandemic related, which is just the shift to online commerce as well as the ongoing -- the shift to more spend on products versus services. In Q4, we also saw strength with sort of our full range of advertisers. We have seen sort of small and medium-sized businesses come back and start getting strength in Q2 and Q3 or Q3 specifically, and then, Q4, we also saw strength from some of our largest advertisers as well. So, as you look out in 2021, I think, we’re just going to be facing tougher comps in the back half of the year. Some of those things related to the pandemic had the potential to revert, whether it’s more consumer expenditure shifting towards services away from products. So, that will make it a little bit of a tougher comp. And then, you layer on top of that headwind to growth related to privacy-related headwinds. The biggest factor there is iOS 14. So, we certainly anticipate growth, but we’re just looking at tougher comps as we hit the back half of the year, given really, most importantly, the strength that we saw this year. And then, on top of that the headwinds that we’re seeing from some of the privacy changes.

Justin Post:

Great. Thank you. I guess, I’ll ask about regulation. I know it’s a tough topic. First, Mark, in your prepared remarks, you elevated a little bit competition with Apple. Is there anything going on with iOS 14 besides IDFA that maybe puts you in more direct competition with Apple? And then, secondly, obviously, the FTC filed their case since the last earnings call, maybe just open forum. Any thoughts on that that you’re able to share?

Operator:

Excuse me. This is the operator. I apologize, but there will be a slight delay in today’s conference. Please hold and the conference will resume shortly. Thank you for your patience. Speakers, we are now connected.

Dave Wehner:

Well, there’s a question about the FTC. Are we on now through this line?

Dave Wehner:

Okay.

Dave Wehner:

I think, you had covered the question of the dynamics related to the competitive landscape, and then there was a follow-on question around the FTC case and any thoughts that we have on that. I don’t think we have anything we necessarily are commenting on at this point.

Operator:

Your next question comes from the line of Ross Sandler from Barclays.

Dave Wehner:

Yes. I can hear you now.

Dave Wehner:

Yes. Sure, Ross. So, I mean, as you know, with the auction dynamic, the growth in pricing is -- does really depend on impression growth. And we saw impression growth slow this quarter to 25% from the Q3 rate of 35%. And some of that is just due to lapping product optimizations on Instagram during Q4 of ‘19 as well as just the normalization of engagement trends on Facebook. And so, we would expect that sort of overall story to continue into Q1 with those trends. And then, we’re also continuing to make iterative improvements that enhance the performance and benefit pricing over time. And the one example that we give there is Instagram Stories that, as you know, it’s been an area we’ve been focused on to try and make DR performance through better ads in our activity, work better on Stories, and we’ve been seeing some good progress there. So, we called that out as well as being a driver of price improvement. There’s still a gap with Stories ads and Feed ads, but we’ve been pleased with the progress we’ve been making on that front.

Colin Sebastian:

Two quick ones for me. I guess, given the ongoing efforts in private messaging, I’m curious, ultimately, what will differentiate Messenger from WhatsApp, other than branding or geography if there’s an inevitable consolidation of functionality there. And then, secondly, on Reels, I know it’s still early, but any update on performance or uptake as well as the roadmap for monetization, I think, would be helpful. Thank you.