Q3 2019 Earnings Call
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This call will be recorded thank you very much ms., Deborah Crawford Facebooks, Vice President of Investor Relations you may begin.
Thank you good afternoon, and welcome to Facebook third quarter 2019 earnings Conference call. Joining me today to discuss our results are Mark Zuckerberg, CEO , Sheryl Sandberg, COO and Dave when our 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 FCC.
Any forward looking statements that we make on this call are based on assumptions as of today.
Undertakes no obligation to update the statement as a result of new information or future events.
During this call we may present, both GAAP and non-GAAP financial measure a reconciliation of GAAP to non-GAAP measures is included in todays earnings press release.
The press release, an accompanying investor presentation are available on our website at Investor Day, F.B. Dot com and now I'd like to turn the call over to Mark.
Alright, Thanks, Deborah Thank you all for joining us today.
Before we get started I want to talk about the announcement, we just shared that do Desmond Hellmann is gonna be leaving our board to focus on her health and other commitments.
There was has been a wonderful and thoughtful voice on our board for six years and I'm deeply personally grateful for everything that she has done for this company.
Okay.
This was a good quarter for our community and our business.
We're now around 2.8 billion people using Facebook, Instagram Whatsapp and messenger each month.
Around 2.2 billion people using at least one of our services daily the Facebook I've had a particularly strong quarter, including in the U.S. and Canada.
We also recently released now that we estimate that more than 140 million business is mostly small businesses are using our services each month to grow create jobs and become social hubs in their communities.
This is going to busy quarter on a lot of front.
We've launched a number of new exciting products like Facebook dating in the U.S. just doing quite well.
Rights for Instagram, our camera first experience to share with your close friends.
Facebook news, our dedicated product for news that we built in partnership with news publishers.
And we introduced horizon, a new social experience for VR.
We also released hand tracking technology for Oculus and Oculus link.
Your your quest is basically now were referred to.
We're making progress building out the private social platform across Whatsapp and messenger Instagram direct and we have multiple exciting initiatives around commerce and payments that were moving forward from marketplace to Instagram shopping to payments Whatsapp and continuing our discussion on Libra.
There's also been a busy quarter on the policy and social issues front, we formally entered into a settlement with the FTC to make structural changes and build a rigorous privacy program that will set a new standard for our industry.
We're about a year out now from the 2020 elections, and we're just announced for the systems. We've built our so advance that we proactively identified and removed multiple foreign interference campaigns coming from Russia in Iran.
And we found ourselves in the middle of the debate about what political speech is acceptable in the upcoming campaigns.
But today I want to focus on talking about principal.
Because from a business perspective, it might be easier for us to choose a different path than the one that we're taking so I want to make sure that everyone is clear about what we stand for and why we're making some of the decisions that were making.
Now I'll give a speech a couple of weeks ago about the importance of standing for voice and free expression.
Believe strongly and I believe that history supports that free expression has been important for driving progress and building more inclusive societies around the world.
At times of social tension.
There was often been in urge to pull back on free expression and is that we will be best served over the long term by resisting the surge and defending free expression.
Today is certainly a historical moment of social tension and I view, an important role of our company as defending free expression.
Now this has never been absolute and of course, we take our responsibility to prevent harm very seriously too I.
I think we invest more in getting harmful content off our services than any other company in the world.
Most closely knowing that we have more than 35000 people working on safety and security and that our budget for this work is billions of dollars here more than the whole revenue of our company at the time of our IPO earlier this decade.
And we're going to keep on investing more here.
While we work hard to remove content that can cause real danger I think we also need to be careful about adopting more and more rules. The restrict the way that people can speak in what they can say.
Right now the content debate is about political ad.
Should we block political ads with fall statements should we block all political ad.
Google Youtube and most internet platforms run these same at.
Most cable networks run these same ads and of course national broadcasters are required by law to run them by FCC regulation.
I think that are good reasons for this in a democracy I don't think it's right for private companies to censor politicians or the news.
And although I've considered whether we should not carry these ads in the past and I'll continue to do so.
Alan So far I've thought that we should continue.
Ads can be an important part of voice.
Especially for candidates and advocacy groups that the media might not otherwise cover so they can get their message into the debate.
And it's hard to define where to draw the line.
We really want to block ads for important political issues like.
Like climate change our women's empowerment.
So instead I believe that the better approach is to work to increased transparency ads on Facebook are already more transparent than anywhere else.
We have a political ads archived so anyone can scrutinize every out thats. Ron you can see every message who saw it how much was spent and that's something that new TV or print media does.
Now this is an earnings call I want to talk about the business impact of all of this.
Some people accuse us of allowing the speech because they think that all we care about as making money and that's wrong.
Can assure you that from a business perspective, the controversy that this creates far outweighs the very small percentage of our business that these political ads makeup.
We estimate that these ads from politicians will be less than 0.5% of our revenue next year.
No we are doing.
To put this in perspective.
FTC fine that these same critics said wouldn't be enough to change our incentives with more than 10 bucks bigger than this.
The reality is that we believe deeply.
Political speeches important and that's what's driving that.
No other people say that this policies part of a broader pattern of US building a system that incentivizes inflammatory content to fuel our business and again to the contrary I think that we've done more than any of the other major internet platforms to try to build positive incentives into our system.
We don't but any of our news feed or Instagram field teams set goals around increasing time spent on our services.
We rank feeds to encourage meaningful social interaction, helping people connect with friends family in their communities.
We have real people come in and tell us what content they saw.
That was most meaningful to them and spark valuable discussions and then we will systems to try to surface that kind of content.
We've taken many steps over the years to fight click fate and polarization and now we've been testing, we're moving like counts and Instagram and Facebook.
And we do this because we know that if we help people have meaningful interactions they'll grow that they'll find our services more valuable and that's the key to building something sustainable and growing over time.
Now last year, you, probably remember that we made a series of changes that emphasized friends and family and reduced time spent on our services.
One change removed 50 million hours and viral video watching a day and we did this knowing that would mean that people spend less time on our apps, which is not what you do if you're just prioritizing engagement over everything else.
Hi Tech getting these incentives right very seriously and we're willing to make huge sacrifices and the short term to do what we think is right and we will be better over time.
Now finally, some people say that this is just.
Oh, hey, cynical political calculation and that.
We're acting in a way that we don't really believe because we're just trying to appeal.
Service that's wrong too.
Yes, a lot of criticism from both progressives and conservative.
Frankly, if our goal we're trying to make either side happy then we're not doing very good job because im pretty sure everyone is frustrated with us.
Our values on voice and free expression or non partisan.
But unfortunately in our current environment a lot of people look at every decision through the lens of whether it's going to help or hurt the candidate they want and winning their next election.
Now a lot of people have told US you got to pick a side or on both sides are just because a lot of problems for you and.
Sadly from a practical perspective, they maybe right.
But we can make decisions that way.
So over the next year of campaign, we're going to be at the center of the debate anytime there's content or policies on any of our services that people believe could advantage or disadvantage their side.
This may lead to more investigations and the candidates are going to criticize us.
I expect that this is going to be a very tough year.
We try to do what we think is right, but we're not gonna get everything right.
This is complex and anyone you said that the answers are simple hasn't thought long enough about all the nuances and downstream challenges.
I get that some people are going to disagree with our decision.
I guess, what some people are going to think that these decisions may have a negative impact on things that they really care about.
Welcome to anyone can say.
We're not doing what we believe or that we haven't thought hard about this year.
I could be wrong.
But my experience running this company. So far has been that if we do what we believe is right.
When its unpopular for years at a target.
Then eventually it has worked out best for our community and for our business too.
And there's a lot at stake here.
We are the crossroads not only in our own country.
But in the future of the global Internet as well.
China is building its own internet and media ecosystem that is focused on very different values and as these systems compete.
The question of which nations values will determine what speeches allowed for decades to come really puts into perspective, the issues that we face today.
Because while we may disagree on exactly where to draw the line on specific issues.
We at least can disagree and that's what free expression is about.
Voice and expression have been important for progress throughout history.
I've been important in the fight for democracy worldwide.
And I believe that voice and expression are an important part of the path forward today and that's why our company will continue standing for these principles.
As always.
Grateful for all of your support and everything that we do and Thats, especially true today. In addition to these challenges there were lot of great things that are going on that I'm incredibly proud of and excited about and I'm glad that our community and business trends continue heading in a good direction.
Happy to talk about any of these things in the Q1 day and now here is Sheryl to talk more about our business.
Thanks, Mark Hi, everyone.
It was a strong quarter for our business AD revenue grew 28% year over year, and we saw strong performance in all regions number Facebook and Instagram.
Mobile AD revenue was 16.4 billion contributing approximately 94% of total AD revenue.
We know we have a very important responsibility to keep people safe and continue innovating to how bigger because of all sizes scrap.
We're working hard to demonstrate our commitment to the billions of people and 140 million businesses.
Our platform every month.
I want to start by talking about some of the protections we're putting in place to keep people say.
As Mark said, the 2020 elections are only a year away, we're continuing to invest in people and technology. So that we can disrupt networks of bad actors signed in the midst add content and stop take account before people see them.
We're also making political advertising on Facebook more transparent than anywhere else.
Our team, we started requiring adds about social issues elections or politics again authorize before running.
This quarter, we strengthened does requirements to ask for even more information.
Helping people understand who is trying to influence there that without becoming harbingers of political chase ourselves.
It is critical to empowering people in keeping in thanks.
We're also holding ourselves to a higher standards when it comes to protecting people from discrimination on thanks.
Earlier this year, we reached an important settlement national their housing line CAC value communication workers of America, and others to restrict targeting options for housing planning and credit that.
Now advertisers in these areas are required to his new buying process and by the ended the year people will be able to the all current housing asking United States.
Well these changes could have a small negative impact on our business in the short term we believed at the right thing to do for people enter business over the long term.
At the same time, we're continuing to innovate to grow our business and help advertisers criteria.
We do that same printing or AD products, and creating new formats to help advertisers more easily reach their current and future customers.
From the biggest brands and of World to local Barber, we're committed to leveling the playing field for businesses of all sizes.
We give business is free tools that previously only the largest companies can access.
But we know this is not enough.
We also need to ensure that small businesses have the digital skills to uses tools and secondly.
With a holiday shopping season approaching we launched a series of holiday Boot camp training sessions in 17 of our offices around the World from New York Philippines.
We also simplified business manager our tool for managing campaign to help businesses more easily create AD spend aligned with careful.
We are continually making these basis point improvements to help advertisers save time and money and build their business.
We're also focused on developing products to help businesses rich people, where they are.
Stories are a great example, and we're continuing to see fast adoption across Facebook Messenger Instagram Inmarsat.
To make it easier for more businesses to create ads for the stories format. We recently launched customizable templates for Facebook Instagram messenger.
After uploading existing photos and videos.
Advertisers can change from different last color and text options.
It helps businesses more easily create more engaging story.
Messaging is one of the fastest growing areas for online communication and especially between businesses and people.
We seen businesses use messenger to reach customers generate new leads and even tell card.
For example, French automaker Reno used a combination of Instagram stories, and click to messenger ads to drive sales of a limited edition vehicle the catheter tip.
Yes.
Based on weather only advertising channel and over the sand 30 days. They sold 100 cars 20 directly through messenger.
This quarter, we added a click to messenger feature in stories have businesses. Congrats some attention in stories and and continue the conversation.
We also continue to build new formats and enable brands to interact with people and fun and engaging lists and may commerce more convenient.
Earlier this year, we launched pulling stickers for ads on Instagram stories, and this quarter. We introduced our next wave of interactive advertising to help build even stronger connections between people and businesses.
According to Emarketer.
63% of Internet users surveyed in the U.S. say, they've tried and augmented reality experience created by a brand to help advertisers experiment Macbeth, we launched a small beta test this quarter.
As part of the test, we makeup and Italian cosmetics brand you say, our ads to give people an easy way to try and different chains of lipstick and they sat 27% lesson purchases.
Well it is still very early days, we are making it easier for people to browse cover buy and sell across our platform.
Take place with marketplace as an example.
We launched the commerce platform three years ago. This month, and we're now seeing millions of interactions between buyers and sellers everyday.
Furniture to use vehicles people have an opportunity to discover the things they love and advertisers and nearly 100 regions have an opportunity to reach people where they shop.
I want to close by saying, how Cray play into our partners around the world to continue to give us valuable feedback on how we can better deliver on our responsibilities and help them graph.
I also want to thank Steve for teams deeply committed to making progress on the major social issues facing the internet and our company and driving growth for businesses.
Thanks, everyone and here's Dave.
Thanks, Sheryl and good afternoon, everyone. Let me begin with our community metrics. We were pleased with the growth of the Facebook community. This quarter daily active users reached 1.62 billion up 9% compared to last year led by growth in India, Indonesia, and the Philippines. This represents approximately 66% to the 2.4 or 5 billion monthly active.
Users in September .
And they use grew 8% or 178 million compared to last year. We were pleased with the growth trends in all regions, including us in Canada.
In terms of our family metrics, we continue to grow and estimate that on average around 2.2 billion people use at least one of our apps on a daily basis in September and around 2.8 billion were active on a monthly basis.
As a reminder, the family metrics, our best estimate of our de duplicated audience across Facebook Instagram Messenger and Whatsapp, we believe that these numbers better reflect the size of our community and the fact that many people are using more than one of our services.
Overtime, we anticipate family metrics will play the primary role in our disclosures and how we talk about the company.
Turning now to the financials all comparisons are on a year over year basis, unless otherwise noted.
Q3, total revenue was $17.7 billion up 29% for 31% on a constant currency basis as expected we saw a deceleration in our constant currency revenue growth versus the second quarter.
Had foreign exchange rates remain constant with the third quarter of 2018 total revenue would have been approximately $297 million higher.
Q3, total AD revenue was $17.4 billion up 28% or 31% on a constant currency basis.
In terms of regional AD revenue growth.
Pack and rest of world were strongest and grew 35% and 34% respectively.
APAC got more of a revenue lift from our recent product optimizations will rest of world benefited from favorable macroeconomic trends compared to the weaker environment in Q3 of last year.
North America, and Europe grew 27% and 24% respectively.
In Q3, the number of AD impression served across our services increased 37% and the average price per AD decreased 6% impression growth was primarily driven by ads on Facebook news feed Instagram stories, and Instagram feed the year over year decline in average price per ads was primarily driven by the ongoing mix shift towards geographies.
Geographies and stories ads, which monetize at lower rates.
Payments and other fees revenue was $269 million up 43%. This year over year growth was driven primarily by new sales in new products, notably Oculus Quest.
Turning now to expenses total expenses were $10.5 billion up 32%.
We ended Q3 with approximately 43000 fulltime employees up 28%.
Operating income was $7.2 billion, representing a 41% operating margin.
Our Q3 tax rate was 17% net income was $6.1 billion or $2.12 per share.
Capital expenditures were $3.7 billion, driven by ongoing investments in Datacenters servers, and network infrastructure and office facilities.
We generated $5.6 billion in free cash flow and ended the quarter with approximately $52.3 billion and cash and investments.
In Q3, we bought back approximately $1.2 billion per class a common stock.
Turning now to the revenue outlook.
As I indicated on our second quarter call. We continue to expect a more pronounced deceleration of our revenue growth rate in Q4.
We expect our Q4 revenue.
Reported revenue growth rate will decelerate by mid to high single digit percentage compared to our Q3 rate.
This deceleration is largely driven by the lapping of several successful product optimizations in Q4 last year as well as AD targeting related headwinds.
Since these factors are largely unique to Q4, we would expect our revenue growth deceleration in 2020 versus the Q4 rate to be much less pronounced.
Turning now to the 2019 expense outlook.
Due to the FTC settlement announced earlier this year, we're providing our expense outlook on a dollar basis for additional clarity.
We anticipate 2019 total expenses will be approximately $46 billion to $48 billion. As a reminder, this range includes $5 billion and accruals. We recorded in the first half of 2019 related to our FTC settlement.
We expect 2019 capital expenditures will be approximately $16 billion compared to our prior estimate of $16 billion to $18 billion.
Our capital expenditures are driven primarily by our ongoing investments in Datacenters servers and network infrastructure.
Turning now to tax we expect our Q4 tax rate will be in the range of 18% to 20%.
I'd also like to share our initial outlook on 2020 expenses.
We anticipate that our 2020 total expenses will be in the range of $54 billion to $59 billion.
Our plan to Reaccelerate head count growth as well as growth in non head count related expenses like marketing factors into this guidance.
We expect that 2020 capital expenditures will be approximately $17 billion to $19 billion driven by investments in Datacenters servers office facilities, and our net network infrastructure.
Lastly, we anticipate our 2020 effective tax rate will be in the range of 18% to 20%.
In summary, Q3 was strong quarter for Facebook, we were pleased with the growth of our community and continued momentum in our ads business at the same time, we continue to make investments in important areas like privacy safety and innovation with that operator, let's open up the call for questions.
We will now open the lines for a question and answer session to ask a question press star followed by the number one on your Touchtone phone. Please pick up your handset before asking your question to ensure clarity. If you are streaming today's call. Please unmute your computer speakers.
Your first question comes from the line of immune from Jpmorgan.
Thanks for taking the question.
Dave can you just help us understand a little bit more on the Fourq you on the revenue detail just some of the product improvements from last year that you're lapping and then also just how you're thinking about the AD targeting headwinds considering that the they didn't seem to show up in the Threeq numbers that much and then Mark can you just.
Talk about Instagram shopping.
How thats ramping and how you're thinking about expanding that initiative as you're going deeper into Fourq you here. Thanks.
Hey, Doug it's Dave.
Yes on the on the Q4 outlook, we are lapping a few different product optimizations. We made a couple of does that I would site is optimizations and how the add auction operates.
Which can have a.
Impact and also.
An increase in AD load on IBG feed and stories.
And so as I noted these are factors that are.
That are largely Q4 related and given that we would expect that 2020 revenue deceleration to much less pronounced.
And then in addition in Q4 and over the longer term, we do continue to expect to face AD targeting related headwinds and uncertainties and I'd I'd just go back to the three factors that I cited in the past that the regulatory landscape is continuing to evolve. So for example, when GDPR came into effect, we saw a number of people who opted out.
On allowing us to use context from the apps and web sites. They visited per AD targeting and then the second factors. Just we're seeing proposed changes from mobile platforms that are more oriented towards privacy, which could affect.
Marketing and measurement and make that more difficult and then finally, we are rolling out our own product changes such as the recent launch of I would say thats, our our user control on what data stored on Facebook activity. So I'd say those three factors still factor in and what comes to this I'd say the majority of that potential signal loss is still in front of us rather than behind us. So.
I think those headwinds are still are still real and out there and that factors into our outlook as well.
I think the Instagram shopping question.
We think there's a big opportunity over the long run here, because 90% more than 90% of Instagram users are following a business, but on the shopping product itself is still very early days and we're working to improve product and it's quite small we started testing in Q3 shopping at the idea that shoppers can tap on AD product description page and.
Can purchase from the businesses mobile site again, we think interesting products, but very nascent our overall commerce efforts go across not just Instagram Facebook and all of our properties and our goal is to make it more convenient accessible and secure for people and business can browse discover buying Sal I think we have standing country.
You to be a great place for people to browse and discover that continues to drive.
Okay, Great majority of our business and well for the foreseeable future, but as we can help people reduce friction and close that lease we think that's a good opportunity for people and proposition.
Your next question comes from the line of Justin Post from Bank of America Merrill Lynch.
Great. Thank you, maybe one for Mark and one for Dave first on watch with all the OTA launches is kind of interesting can you talk about your usage of the watch tab and what your overall professional content strategy is and whether it could start contributing revenues going forward and then Dave you mentioned the head count growth accelerating could you give us some of the areas where you'll be at.
Head Count next year. Thank you.
Thanks.
I'm happy to talk about watch for a little bit I don't think we have any new status a share on this but I mean overall.
We rolled out the tab.
For almost the first year, we were really tuning it just to make sure that it would be retentive and very valuable for people. So in general.
Think about the stuff that we can.
We try not to put something in front of a lot of people.
Unless we're confident that theyre going to find and useful and want to come back and use it multiple times and we can put a lot of things in front of people who've tried them once but.
But we want to wait until it until things are kind of retentive and useful so we got to there on watch it's growing well.
And that is.
So we're kind of still now focused on continuing to make it better and.
Continuing to grow at the.
Premium content part of it.
I think the right way to think about this is almost as.
Marketing to help people.
People try out the tab for the first time.
It's.
There are some good tent pole pieces of content that people really love the common they check out the product to two experienced side and then they stay for a lot of the other.
You will content that's in there that might not be talking about as much in the news. So that's I think the right way to think about that.
Hey, Justin it's Dave on the 2020 expense outlook that includes.
Head count growth and also other expense growth sort of around infrastructure is a big factor as well, we're seeing that large capex build over the last several years flowing through depreciation and cost of revenue. So that's that's a driver of the the growth as well.
We are planning to access re accelerate or accelerate hiring in 2020, and that's really going to be focused on the important priorities for the company. So that includes our privacy safety and security investments. So we are investing a lot in.
In privacy related to.
Building the products and also working on.
Flying with the FTC settlement.
And then we're continuing to invest heavily in our innovation investments that includes building products around Facebook and Instagram and continuing to prove those but also in new developing areas like air VR.
So.
Those are those are big factors in growth and then we are planning on.
Growing non head count related expenses as well like marketing and ultimately that will depend on on how the ROI of those investments play out over time.
Your next question comes from the line of Eric Sheridan from Us.
Thanks for taking my question, maybe two if I can.
We gave you give us a little bit of color on Asia and rest of world and why those had accelerated any additional color you gave on so the western Europe for things you saw in the quarter that might have impacted the growth rates at those regions and.
Going to the Q4 guidance for any color you can give us on how different regions of the world might be impacted against the.
To high single digit deceleration off the levels of of Q3, just so we have a better understanding of where you might seeing some of those tougher comps or product optimization play out on a global scale. Thanks, so much.
Thanks, Eric we're not not breaking out specific regional impact, but let me give you some color around.
The acceleration in areas like rest of world in APAC.
APAC benefited from some of the product optimizations, we did in that in the quarter. One thing that I would say theres, just how we manage AD load in balance some of our internal promotion units and sort of use it as internal how spend and the nature of the changes that we made in that.
More pronounced impact and some of the lower ARPU countries and unlock more impression growth in those markets.
That was.
That was one of one of the factors and then.
Sale was particularly weak last Q3 so.
That.
That had a good compare on a macro economic basis.
In terms of the Q4 guide.
No not anything I would say specifically there.
In the U.S. will have a shorter holiday season hard to know how thats going to play into it just given the late arrival of Thanksgiving.
But I think overall.
The the product opposite optimizations that we're we're comping against in Q4.
For global changes, so I think we're going to see the deceleration.
Impact all regions.
Your next question comes from the line of Brian Nowak from Morgan Stanley .
Thanks for taking my question if I have two.
Diversified marquee you mentioned that Facebook App in particular had had a strong quarter in the U.S and Canada. We can see it and do you numbers will be curious to hear about any specific products or changes or types of behavior, you're seeing that really is driving the stronger engagement on on big Blue.
Then the second one.
You have so many monetization I got to call on most products to come when you talk about commerce, and GTV and stories and discover just sort of think about the timing of these which one or two of those are you sort of most excited about to drive the business into 2020. Thanks.
Yes ill take I can take the first one on the Facebook App, it's a bunch of different places in which I think we made improvements I would say globally, especially outside the U.S. We saw good good improvements around engagement around video.
Yes, I think it was it was less video on more core core core feed engagement. So it's a bunch of a different of different factors and I think we're seeing good engagement from.
A bunch of cohorts in the west which is good but of course, we are highly penetrated in in the U.S and Canada. So we would expect.
We would expect that to bounce around.
So I.
I think that we saw great credit this quarter. We are we are quite penetrated.
In terms of monetization opportunities I can speak to that Mark can add color. If we would like obviously still and Cheryl that we'd like to add color as well. So stories is obviously one of the big growing areas for us and continues to be a big driver. We're also seeing opportunities around Instagram explore going into 2020.
We're now we're now.
Monetizing with that product and more advertisers are buying from it and then Sheryl is going to jump in and I think some additional color.
In terms of our core advertising products and growth, it's worth really remembering that our core feed products for Facebook and Instagram are growing nicely and when we see a lot of opportunity to continue that Chris.
Definitely stories is a big part of the success. We've had I think a lot of success moving advertisers to where people RDR. That's what happened with mobile ads people weren't really doing mobile ads and we help them get there I think we've taken our experience on how to help advertisers migrate to the right places and been able to do that even more quickly and new formats like story. So.
As far more than 7 million advertisers, we already have 3 million advertising across Facebook Instagram Messenger stories, and I think thats, because we learned that we have to do a lot to help them.
For example, advertisers can now by stories across Facebook Instagram Messenger pilot line.
We had automatic default templates, which convert your feed ads into vertical stories format and this quarter. We just launched customizable templates, which help you save time and resources.
As we have to help advertisers news, we've learned how to make those investments in making the formats really easy to measurement really easy the buying really easy now the mix to stories is a big opportunity for US story still don't monetize at the same latency news feed right now so we're keeping an eye on that growth over the long run pretty.
Siting and I think our ability to help people migrate is something that were able to prove that quarter over quarter.
Your next question comes from the line of Mark Mahaney from RBC capital markets.
Mark what would you who would you want to add to the board or what what sort of voice, which you want to add to the board that would be particularly helpful. For you and the company now and then David could you talk about that stories monetization gap to what extent its closing at the rate at which it is closing thank you.
I can take the stories monetization gap first and gift market second.
So on on on that I think what we're continuing to see with stories monetization is that as a product that is experiencing a lot of impression growth.
And whenever we have a product that is experiencing high impression grant that puts pressure on the auction in terms of price.
And we've also seen.
Good impression growth on.
On on the feed sizes as well so if you if you noted.
In the commentary I when I talked about the drivers of impression growth I listed feed feed impressions from Facebook first so I think thats also.
Showing showing good growth so I'd say overall.
Not a not not a big change in in the.
In the gap there and overall the impression growth is really the story for.
For stories and will remain the story, we think for it.
The near future, so that will not be a price driven revenue growth story that rather an impression growth revenue growth story.
Yet on board members.
I would look there are there a lot of great leaders, who.
Serve on our board you have served on our board, it's been an incredible benefit in running the company.
We faced a very wide.
Range of issues here from really hard technological problems to issue scaling large organizations to of course, a lot of now major regulatory and social issues and having different people are different perspectives, you can help us navigate that and provide.
Boasted advice and oversight.
To make sure that we're doing a good job is really important and I just want to add.
One more time.
Really did an amazing job on on our board and I'm sad to see her go.
And.
She has really helped shape a lot of.
A lot of what we do and.
I am just incredibly grateful perfect mentioned in here.
Your next question comes from the line of Lloyd Walmsley from Deutsche Bank.
Hi, Thanks, two questions. If I can first you mentioned a little bit earlier that fake feature that you rolled out this quarter and just a few markets. So can you give us a sense of what you're seeing in terms of.
Early user response to this how it may be impacting targeting in those markets.
And then secondly.
You disclosed on occasion kind of daily search query volumes you are now expanding AD inventory more into search. So wondering if you can give us an updated sense of query volumes and then how we should think about Pat coverage ramping over time.
Within search given.
A lot of the searches.
The platform today or are people searches and how we should think about that thanks.
Sure It late I'll take those in terms of the fate rollout.
We initially launched that in August and we've been continuing to slowly roll that out globally, and we'll be doing that over the next several months through the ended the year.
And we're rolling it out globally on a percentage basis.
We seen up a positive reception to having this feature as an option it's too early to share adoption.
And we'll just have to see kind of overtime, how that gets picked up and how that gets adopted but I think too early to really share much about it.
In terms of.
In terms of search.
We are showing ads in marketplace and EFI search results.
Really the vast majority of searches on Facebook or for people not not topics related to retailer ecommerce, it's very early days.
From a revenue perspective, it's not it's not material at this point.
Your next question comes from the line of Youssef Squali from Suntrust.
Thank you very much two questions for me as well my quick GDPR now over a year old how has it impacted your business relative to your own expectations and how does that inform your views.
The potential.
Impacts from TCPA in 2020.
Then on VR it seems like you're out.
Revision excuse me has taken a bit longer than expected to mitigate to materialize can you speak to the gating factors there and do you feel that now that quest is at $400 and there seems to be a lot more content out there.
We're going to see potentially an acceleration in adoption. Thank you.
Use if I'll take the question I think it was about GDPR and how thats gone relative to expectations.
We've seen.
Options.
Around.
People, who are opting out of allowing us to use contat context from from the apps and so I'd say.
At that.
Was.
Largely within the range of expectations that we saw that we saw on it it is having an impact in the people who are opting out are seeing less relevant ads.
Obviously that will impact.
But I think the quality of experience in terms the ads they get and also the monetization.
For us so I think that is kind of playing out as we expected.
CCP I think is still a work in progress. So we're watching the developments on that closely Thats, the California consumer Privacy Act.
And.
That has.
Met many similar provisions to GDPR, but it's a different line, we're going to have to watch how that evolves, but we do think that that say.
Factor that we're watching closely.
And we'll have to see how that develops I think mark a question was on Oculus sure not also just add something on privacy.
I think it's very important that there is federal privacy legislation.
You know GDPR encodes a lot of important principles and in order for businesses to be able to operate.
Especially starting to get started and keep the market competitive you want to make sure that there aren't 50 different regulatory frameworks that companies need to follow.
We could handle that if we needed to were a big company, but in terms of for the market. Overall I just think it would be a lot better if we add a very clear set of rules.
The federal level on privacy. So we'll continue tried to work with folks to.
To to try to do what we tend to help there on VR and AR.
You're right that this is taking a bit longer than we thought and.
I'm still optimistic I think the long term.
Vision and the reasons why thought this we're going to be.
Important and big.
Our unchanged. So we're seeing a lot of people use these products and love them.
And because of that I think that we're still going to get there. Obviously, the fact that it's taking a little longer than we had than we thought.
It cuts both ways on one hand that of course means that the future might be a few years further out in that it might be more expensive to develop because we'll be.
Funding this for a bit longer until it gets there but in the other hand from our perspective.
We're not a company that is traditionally done hardware.
Or built operating systems are these kind of product. So every year that we get to practice and get better and build our brand around oculus in terms of building the best products that we had in the space I, just think that we're going to be better off when when this is really ready to.
To be a completely mainstream thing with hundreds of millions of people using it.
You're right that quest is growing and doing quite well.
We are we're selling them as fast as we can make them.
The demand has been strong.
And the content is starting to pick up both on the AAA really high quality side and.
Some of the Indy stuff that I think is quite good I'm just I'm very excited about what we're seeing and very optimistic about the future.
Your next question comes from the line of Ross Sandler from Barclays.
Great. So guys just a question on the.
2020, ROE outlook, calling for a more modest deceleration.
So Dave I guess, what are some of the headwinds tailwinds that.
See in 2020.
Called the deceleration is this a function of lapping some of the impression acceleration you're seeing now in some of these innovations that you've had in 19.
Or is there things like.
The.
Drying up as relates to introduce you funding market and some of those companies potentially coming back on their marketing plans is that.
Material softer or what are some other headwinds for next year and then.
One housekeeping question is good for Q mid to high single digit dsos, referring to constant FX growth rate or is that reported U.S. dollar growth rate that you're expecting.
Do you sell from thank you.
Yes, sure Ross the it say, it's a reported its a reported number that we're getting that on on a mid to high single digit deceleration from the reported growth rate I don't think there's we had huge difference in them but.
We're getting it on a reported on a reported basis. So in terms of the deceleration.
We continue to expect deceleration into 2020, but b, we believe more.
More moderated and the reasons for that.
We expect the deceleration we do continue to see these AD targeting related headwinds.
Which has.
Been playing out slowly, but we think are still in front of us the majority of potential signal loss on targeting is still in front of us and Thats. The three factors that I cited the regulatory landscape potential platform changes and then the adoption of our own products like I say that were just rolling out now it's all of those will play into.
That potential deceleration of revenue growth in 2020, and obviously, we're lapping what's been good performance in 2019, where we've made a lot of product improvements and growing off of large base. So I think we are.
Experiencing deceleration from from that perspective.
Specific sort of high level of deceleration going into Q4 work, where citing the specific optimizations that we're lapping in Q4, which were more significant.
Your next question comes from the line of Heather Bellini from Goldman Sachs.
Great I just wanted to go back to the opening remarks about the 35000 people I think you mentioned that you have working on safety and.
That is that you're spending more I think your budget for this area. You said has more than it was that when you went public in 2012, so maybe about $5 billion.
This was wondering if you could share with us your view on how much you're using you talked about AI in the past being helpful. Here, how how long does this have to be as resource intensive from a people perspective or do you see the ability over time.
With technologies like AI potentially helping you to get more leverage out of this existing budget. So maybe you don't have to continue to ramp it as quickly as your user base and engagement continues to grow. Thank you.
Sure. So overtime, we may not have to ramp it as much but I don't I don't foresee anytime in the near future that AI is going to make it to that.
The cost comes down in general what we have to do is.
We use computers and AI for what they are good for which is.
Looking at a lot of content very quickly in making quick judgments and we have teams of people doing what people are good for which is making nuanced human judgments and build the computer systems that way they can flag and get rid of some of the worst stuff and so they can.
Flag for human review some of the stuff at the border line and then there's just so much content flowing through the system that we do need.
A lot of people looking at this and I don't I don't think that.
Thats going to change anytime soon and Heather I would add.
That.
When when you're using systems to look at content.
When you are using AI and machine learning systems, it's a real benefit to have actual people looking and tagging that content classifying it because it helps those.
Machine learning learning algorithms be able to learn what they're looking at so you actually have we do have actually ramp in people who are doing the tagging and classification. So theres actually expense related to say either on the on the human side.
The near and medium term as well so.
Very much in line with what Mark said overtime, it's an opportunity to maybe slow down the growth, but it's not going to change the dynamics in the near term.
Your next question comes from the line of Colin Sebastian from Baird.
Thank you Marc maybe a bigger picture question I'm wondering how you think about the increase in scrutiny Rovers sites impacting your or the company's ability to explore new services new markets and ultimately remain competitive for does that not really a factor at this point and then on payments.
Related to the what's up test I'm, just wondering how far off in the distance do you think we are from seeing a connected payments ecosystem across the family of apps and do the growing pains for Libra impact the timing of them. Thank you.
Sure. So look I think some of what you might be asking about our the antitrust questions that are out there and the investigations and.
I could talk a bit about this if it's helpful. I mean look I think a lot of the antitrust questions.
That are out there that that.
Are going to be about our acquisition of Instagram right and some of the.
How that might affect other things that we do today, but so they're going to be a lot of scrutiny of that acquisition in particular and.
So I think if it's helpful. I'll go back to what it was like at the time there.
When we when we did that acquisition.
Just to kind of lay out how we were thinking about this and.
And at the time of course in some ways, we considered Instagram to be a competitor.
But we've always thought that the better way to talk to think about Instagram was that it was it's complementary to Facebook and what we're doing.
Back in 2012.
People generally didn't think of Instagram is competing with our core service.
We thought about Instagram in the context of this new mobile camera space that was complementary.
If you remember back then we were building the Facebook camera App.
There were lots of different services or is that Cameron plus fiscal cam social can vary snap see it either even apps like past the role in the same space.
We thought the mobile photo is we're going to important. So we were competing there were things like Facebook camera.
But we ultimately thoughts that we're going to do better work. If we if we were building with Instagram.
But if you remember at the time Instagram was focused on helping people take photos.
Apply creative filters and ensure them publicly across different social networks, including Facebook right. It wasn't to a full featured social network itself.
The only had about 30 million people using at the time.
And I remember, specifically, Kevin and I set a goal that we hope that one day Instagram might reach 100 million people and I know that that seems quaint today compared to how well it's done but remember that a lot of the other services that were Instagram peers, and we're growing quickly at the time, including.
Startups strong teams and very talented founders like path.
Don't really been exists today anymore.
Look I mean at the end of a day the FTC.
Makes its judgment on what we can do you have to see how will this context when they made this decision in 2012.
And the reality is it ends up being a lot more complementary than I think we ever expected.
But look I mean building services like this is hard right Instagram wouldn't be what it is today without Kevin and Mike who are just really incredible product leaders and and of course, it a lot of amazing work.
But it also wouldn't be what it is without everything that we put into it whether that's the infrastructure or our advertising model or spam and safety services and a lot more and I know what can be really hard.
Given how well things have gone to look back and remember what the world was like at the time that we made this acquisition.
But our outlook was really different then and the outcome was not at all guarantee it.
So look I mean, I think for all the concern about whether there is enough competition.
The space today continues to be incredibly competitive.
Different competitors in the space today, like snapshot, which shows that people are always building new ideas and on mobile phones of course remember that.
Apple and Google is built cameras and private photo sharing and.
No management directly into their operating system. So.
That kind of gives you a picture of how we think about.
Some of the scrutiny that's coming and.
And just how we think about.
During these things in general.
Youre.
Concerned about commerce, yes, sorry, yes, how far off as a connected commerce.
Payments ecosystem.
Well, I mean, where do a lot of stuff around commerce I mean, it's we have Facebook marketplace is probably the most advanced in is.
Hundreds of millions of people use that to buy and sell things on Instagram shopping of course, a lot earlier, but we're very optimistic about it.
But but optimistic on the timeframe of year, so right not nada driving next quarter's business.
And then in terms of payments that theres multiple approaches that we're taking there were of course working on payments in what staff, we have our tests going in India.
The test really shows that a lot of people are going to want to use this product, we're very optimistic that we're going to launch.
Everyone in India soon but of course will will share more news when we have that.
And we also differentiate between payment systems.
Yet.
Our built on top of the existing financial infrastructure I'd like what we're trying to do with whatsapp payments or.
When we when we make payments and Instagram shopping.
And our work with something like Libra that is trying to build.
Some new technological infrastructure for for financial services.
So they're working on different thing if Libra works then it will be able to make it set certain kind of payments, whether they're micro payments.
Or remittances across borders, we'll be able to be done much faster and much more affordably then can happen today on top of existing rail. So I remain optimistic that we'll be able to do work there, but we're just working across a lot of different fronts here. Because this is a huge space. It's one of the areas that I.
The most excited and optimistic about for the years ahead.
Theres a lot to do which is why we have a lot of different projects that we're trying to push forward here.
Operator, we have time for one last question.
Your last question comes from the line of Michael Nathanson from Moffett needs.
Thanks, Let me ask one of market one of Dave So Mark I remember a couple of quarters ago. We asked you about the embracing and maybe paying for news it looks like you've got some deals with some publishers you talk a bit about that transit and what's the rationale is and maybe how big is that vision for any news and then per day. It has reported Tonight.
Cognizant, who I guess it one of the Facebook Screeners ahead of AI is dropping the contract do you expect to bring that job in house wares out of third party outsourcing opportunities.
Joe do that and then I'll wrap on.
Yes, Thanks, Michael No plans to bring that in house, we obviously have a lot of people in house, who work with.
The third party.
The third parties on that front, we have a wide variety of different partners beyond cognizant, who work with us.
There is no.
Change in model planned on that front.
So we continue to obviously invest heavily in that work and we'll continue to work with other partners in that space.
All right so on news.
There are two things that I'm quite excited about here one is just building a dedicated product space.
For for high quality news and the second is having a.
Business partnership with news publishers that I think can be sustainable over the long term. So I'll talk a bit about both of them and why I think they're important we'll start with the product.
Which is if you look at the Facebook App overall for a lot of years.
The app with synonymous with news feed right domains had in the App and of course, everyone, who uses Facebook pretty much uses newsfeed and one of the questions that we had was there of course, a lot of things that that some people want to do but not everyone and we weren't sure. If we were going to be able to build secondary tabs and the app that.
That.
That could be meaningful even if.
Most people didn't use them, but we started building things like marketplace those.
A tab that and even if the majority of people on Facebook don't use it it's still hundreds of millions of people are using it so thats really.
It's really valuable.
We don't watch.
We're seeing a similar trend there it took us a little while to to really get it to work the way that we wanted but now it's growing quickly that's going to one hundreds of millions of people are using it we rolled out Facebook dating.
I don't know if that will be many hundreds of millions of people just because of the size that market, but it's going be very useful for for tens of millions of people around the world, maybe maybe 100 million or more.
And we're of course during this groups.
And there will be opportunities through this and other places, including with news. So I think in the future. If this works out.
What we're going to see is that how people use the Facebook app is going to be they're going to keep on using newsfeed, they're going to keep on sharing with friends and family, but the average person will also probably have one two or three other apps or kind of secondary tabs that they use that are quite useful for them and connecting with their broader community on Facebook, but.
As things that each individual user going to vary from person to person. So it's not going be that everyone is using news feed they're going to have.
Different people are going to care about different things, whether its community as their marketplace for some more dating or news for others.
And surely.
Even though not everyone comes to Facebook, because they want high quality news.
I believe that there are going to be whether it's 10 or 20%.
At a floor, who I think would really wants something like this and and we're going to work with the news publishers to make this very valuable and I'm optimistic that we can get there so thats kind of the product strategy on the Facebook side.
Produce publishers the thing that I am excited about is look.
I do think that we have a responsibility to help work with news publishers to fund.
Hi quality journalism.
You know, it's no secret that the Internet has disrupted the business model for journalism, and I think that that means that the major internet platforms have a responsibility.
To foreign partnerships and help to fund this work and the challenge that we've had historically.
Is that when most of the usage of the acquisition news feed.
What our community told US is that they really wanted more content from friends and family unless other stuff right so less public videos.
Less it lessens.
Other content, besides friends and family so.
Even though we were talking to a lot of news publishers and we wanted to find a way to support.
And they of course wanted more distribution and in some kind of financial relationships didn't really make a lot of sense in the past to pay for content is that a lot of our community was generally telling us that they wanted to see other stuff instead of that but now with a dedicated news tab. We finally have a space.
Where the business model forward really works for us to be long term sustainable financial relationship with news publishers, where we can pay them for high quality content that can go in there that will be what would fuels the tab and makes it a great product.
And I think in doing so this can be a long term.
Virtuous cycle and sustainable business model in way that we can help support journalism and I'm really happy to to us.
Great. Thank you. Thank you all for joining US today, we appreciate your time and we look forward to speaking with you again.
Ladies and gentlemen, this concludes todays conference call. Thank you for joining US you may now disconnect your lines.