Q1 2020 Earnings Call

Good afternoon, My name is Mike and I will be or conference. Operator today at this time I would like to welcome everyone to the Facebooks first quarter 2020 earnings conference call.

All lines have been placed on mute to prevent the background noise.

After the speaker's remarks, there'll be a question answer session if you'd like to ask a question during that time. Please press Star then the number one on your telephone keypad. It's called will be recorded. Thank you very much Mr. Edward Crawford Facebooks, Vice President Investor Relations you may begin.

Thank you good afternoon, and welcome to Facebook first quarter 2020 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 acts.

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 FCC.

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 measure a reconciliation of GAAP to non-GAAP measures is included in today's earnings press release the press release.

And then accompanying investor presentation are available on our web site at Investor Dot F.B. Dot com.

Finally, we hope that everyone listening today is staying safe.

The vast majority of us at Facebook are working productively from home and everyone. On this call. This afternoon has dialed in remotely and now I'd like to turn the call over to Mark.

Alright, thanks, everyone for joining us today before we get started I also just want to say that I know the very hard time.

For a lot of people.

No one of your calling in for New York, where this has been particularly tough although almost everyone has been affected by what's going on in some way.

So I just want to start by acknowledging that and taking a moment to think ever on working on the front lines to help us get through this.

There's a lot of uncertainty now about the world and what it will look like over the coming months and.

Shirlon, Dave are going to give some more context and what that means for our business.

The impact on our business has been significant.

And I remain very concerned that this health emergency and therefore, the economic fallout.

Well last longer than people are currently anticipating and.

Well there are massive suicidal cost.

From the current shelter in place restrictions.

I worry a the reopening certain places to quickly before infection rates.

Had been produced a very minimal levels will almost guarantee future outbreaks and worst longer term health and economic outcomes.

So with that said I want to use this time today.

To discuss how we're responding to coated.

What we're seeing across our services and some reflections on how we plan to run the company going forward.

So response has been focused on three areas.

Helping people stay connected while we're all apart assisting the public health response.

And working on the economic recovery, especially for small businesses.

I'll start with how we're assisting the public health response.

The first step here is connecting people with authoritative health information and we built a cobot 19 information center with authoritative information from health officials and governments and messages encouraging people to stay home a that are coming from public figures. They trust and we put this code at 19 information.

Center at the top of everyone's Facebook out and so far weve directed more than 2 billion people to it.

Equally important is.

It's also limiting the spread of misinformation.

We don't allow content that puts people it imminent risk of physical harm.

So when people share hoaxes like that inhaling water cures coated which is both false and will be physically harmful if anyone does that we take that down.

For other types of misinformation.

We partner with independents that checkers to have a mark to more than 4000 pieces of content related to cope it does fall.

Which has resulted in more than 40 million warning labels being seen across our services.

We know that these work because 95% of the time when someone sees a warning label they don't click through to view that content.

Now beyond helping people broadly access high quality information. We're also focused on helping government and health authorities I get better data in a privacy protective way.

To inform key policy decisions that they need to make as well.

So we partnered with Carnegie Mellon a to run a widespread symptom survey on Facebook and we're using their findings.

Reduce.

Do you see a county by County maps of the symptoms that people are experiencing across the country and soon globally as well and since people experiencing symptoms is a precursor to them going to the hospital or getting more seriously ill. A this tool can help local governments and health officials plan how to allocate scarce resource.

I like PPV and ventilators as well as determine when it's safe to start reopening an area or when an area, we'll need to have tighter shelter orders of symptoms reemerge.

And just this morning, we notes that were working to connect these symptoms surveys to.

To ground truth infection rate data from large serology and PCR studies, a that are funded separately by the Chan zuckerberg initiatives in order to more accurately determine the true inspection and exposure levels globally.

On a local region basis as well.

So.

Yeah. This is work that we're uniquely positioned to do because Facebook is a global community and people use their authentic identity. It's on our service. So that means that we can make sure the potatoes meaningful.

We're very focused on doing this in ways that we know are going to be helpful to the health response.

And that protect People's privacy and human rights, which is why are we primarily focused on how aggregate data can help.

No outside of Facebook pursuing my work at the Chan Zuckerberg initiative with alongside the leading experts and science and health.

Continues to inform my views on the best ways for us to assist in this health response.

And also what we should expect going forward or would this disease.

All right. So next I want to discuss.

How we're helping people stay connected with the people they care about even while we can't be together during this period.

So this is our core mission and I'm proud of how we've supported people around the world. During this time, we know that people, especially rely on social apps and types of crisis and times when we can't be together in person and right now we're experiencing both of those all around the world at the same time so.

We're seeing major increases and use of our services.

For the first time ever.

There are now more than 3 billion people actively using Facebook Instagram Watson or messenger each month.

That includes 2.6 billion people using Facebook alone and more than 2.3 billion people are using at least one of our services every day.

In many other places had been hardest hit by the virus.

So just volume has increased more than 50% and voice and video calling it more than doubled across messenger and Whatsapp and Italy. For example, we've seen up to 70% more time spent across our ops Instagram and Facebook live use doubled and one week.

And we've also seen a time in group video calling increased.

By more than a thousand percent over March.

And making sure that our services are stable and reliable during this period as a top priority.

We're monitoring usage closely and adding capacity in our data centers, where we can.

The investments we've made in shared infrastructure that however, all of our different services over the years.

They've helped us manage through this but it has been a challenge while our teams have been working remotely.

No I'm sure in these numbers to give you a sense of the surge in people relying on these services that were saying.

Obviously I wish the circumstances, we are different and I don't expect that this exact spike in usage will sustain over a longer period of time.

But in some areas I think we are seeing an acceleration into pre existing long term trends like a dramatic increase and online private social communication.

That is likely to continue.

And if nothing else. This use it shows that for a lot of people around the world.

These services are a part of the social infrastructure that brings us together.

Now even before Koeppen 19, our product strategy is already focused on building out private social platforms.

And then they bring online commerce, so it's well aligned with what people need now.

Last week, we announced a number of new product improvements around video presence, which has emerged as an especially critical part of the private social platform. During this time. Our view is that video presence includes three categories.

Video, calling video rooms and live video.

And we plan to we had an offer the best services for social uses.

Each of those different categories.

You're calling it was when you actually ran a person's phone or computer and its by far the most used to type of video chat.

Between Whatsapp and messenger, they're more than 700 million daily actives participating in calls.

We're doubling the size of what's happened video calls from Salt four to eight a this is important because what's up is.

The most popular and encrypted calling service. So if you care about privacy and encryption and you want to build to reach anyone you're probably using whatsoever.

Now you're going to get your whole family or larger group together on call.

For video rooms.

We announced a completely new product called Messenger. Then you here is that you can create a room for any activity or that you want ascendiant your friends or haven't discover your room on Facebook and then they can just drop in hang out for a bit and this is different from any other video presents experience because it is serendipitous.

You don't have to plan and event and scheduling advanced you don't want.

But can be much more spontaneous and fund and and then I've really enjoyed getting to use this as we've been building out messenger rooms internally and I'm looking forward to get in more people's hands around the world soon.

My video, but it's also particularly important right now people used to primarily livestream physical events, but it's it's almost no. One is planning physical that's right now live streaming has become the primary venue for many of them.

Whether that's the Pope's weekly mass on Facebook live or do you Jays hosting dance parties on Instagram.

Every day more than 800 million daily activities are engaging with lives strings.

Cross workout classes concerts and more.

And we pivoted the Facebook events team to help people creed online events, including enabling people in small businesses to charge.

People joined there were events in order to support small businesses that rely on in person services before.

The last area of our response that want to discuss is how we're helping with the economic recovery, especially for small businesses.

Cheryl will talk about this more but with so many businesses forced to close their physical store fronts.

More or looking to build their digital presence is.

And those which already invested in their digital presence as are increasingly viewing them.

As their primary storefronts.

So we're working on a number of ways to deepen this experience, helping to buy items and services directly within our apps.

I mean, we're gonna have a lot more to share on the soon.

Overall, though our business depends on the success of small businesses. So this is a moment, where we feel that we're well positioned to be champions for small businesses interest and supporters of important infrastructure that they're going to need in order to move online.

One aspect of online commerce.

Don't dimension is the partnership that we just announced with Geo platforms in India, but.

The largest Facebook and whats out communities in the world are in India.

And we think that there's an especially important opportunity to serve small businesses and enable commerce there over the long term.

By bringing together Geo marred, which is geo small business initiative to tech millions of shops across India with what.

We think that we're going to build to create a much better shopping and commerce experience and Theres a lot more than we can do here and I'm looking forward to making progress with the team at Geo.

Now beyond our immediate plans are to help respond to the endemic.

I also want to share some reflections on how we're planning to run the company during this period.

I've always believed.

In times of economic downturn, the right thing to do is to keep investing and building the future and I believe this for a few reasons.

First when the world changes quickly people have new needs and that means that there are more new segments to build.

Second.

Since many big company is we'll pull back on their investments.

There are lot of things that wouldn't otherwise get built but that we can help deliver.

Third I believe that there was a sense of responsibility and duty I tend to invest in the economic recovery and to provide stability for your community and stakeholders. If you have the ability to do so.

And we're we're fortunate position to be able to do this along with our strong financial position and the important social value our services provide.

We're planning to higher these 10000 more people in product engineering Rolls. This year. So we can continue building and making progress.

That said with advertisers spending less than our business performance below expectation.

We do plan to moderate.

Some areas of our expense growth, especially in business functions.

We accepted our profit margins I will decrease this year as we continue investing.

And Dave will share more on our financial outlook in a few minutes.

Economic pullback.

Certainly reinforced for me the importance of maintaining high margin.

Our financial position has allowed us to continue investing and building products and making investments like our partnership with Geo even when the underlying economic conditions are challenging.

As always I I am grateful to everyone on this journey with us and that's especially true during this period.

Our services plan, especially important role right now.

And helping people stay connected and assisting the public health response and working on the economic recovery I really want to thank all of our employees, who are working hard to deliver these services and everyone who is believed in Austin supported our company over the years to help us get to the point, where we can deliver these services for people around the world. So thank you.

And with that you're as Sheryl to talk more about our business.

Thanks, Mark Hi, everyone.

As Mark said this is an extraordinarily challenging time, it's a public health emergency a global economic crisis, and a time of great anxiety and personnel tragedy for so many.

My Heart goes out to everyone on this call with why someone they love and to everyone for the money raised so many are suffering.

Well I talked about how our company has responded during this emergent multiple people say, it's an important how we see our responsibility and how you're thinking about the future.

I'm going to talk more about the impact we have seen in our business and what we are doing to help other businesses survive and recover and that's changing landscape.

Our total AD revenue for Q1 was 17.4 billion, which is a 17% year over year in Korea.

After a strong start to the quarter without significant impact on our business as a consequence of that pandemic from the second week of March on North.

This impact has not been south evenly.

We've seen strong growth in gaming and relative stability in technology, and ecommerce, which is one of our largest sector.

There are few contributing factors here.

At people stay at home these sectors.

He has had their products and services.

Second advertisers in these sectors tend to optimize for measurable objectives, and we are generating sales at lower prices due to the overall reduction ad demand.

On the other hand, we've seen significant declines in travel in auto as these industries have been hit particularly hard.

These trends are continuing in the first two weeks at Q2, and Dave will share more on that shortly.

Companies of all types are adapting to a world where people aren't walking into their stores are saying our brand on billboards.

With more people spending time on our products and services than ever before we are focused on continuing to deliver free and paid tool to help business has reached the right people at the right.

And I'm, finding new ways to support those struggling to get the lifetime and pay down player.

People are looking for businesses on Facebook and Instagram more than usual during this crisis.

Our free products are particularly important in many brick and mortar businesses having quickly online.

Even in the United States before the crisis, one and three companies. They didn't have a website because they can be expenses and difficult to set up even if that's the time.

A Facebook page or Instagram business profile is spray and in a matter of minutes establishes a digital storefront.

Many are finding creative ways to engage their customers using our free products from Jens offering workouts on Facebook live.

For the restaurants, using what's happened messenger to reach customers with delivery option.

In Thailand, when can get Penguin each have their close the door as if it's nine restaurants, they started selling to go boxes.

They promoted them with Facebook posts and customers could order through messenger and they got 350 sales and one minute.

The second offer led to 2500 hotspot itself.

After initially putting their employees on unpaid leave the sales increase their revenue and helped her store employees to full pad.

Marketers of all sizes have more limited budget, so they need to make every dollar work as hard as possible.

That means measuring the value of their advertising is more important than ever which is something our personalized I'd provide.

For years, we have made major investments and systems and tools that enable businesses to easily understand their return on investment.

And the current environment. These investments are paying off.

We're also launching new products to help businesses adapt to changing circumstances.

Our team moved quickly to make gift cards available on both Facebook and Instagram, giving customers the option to support businesses by paying upfront for products and services. They can use later.

We also made it possible for people to create fundraisers for local businesses with a few simple quick.

Fundraisers have been available to support nonprofits and people since 2015, but given the overwhelming interest in helping small businesses weather the storm.

Navies tools available for businesses as well something we never expected to do.

We also launched temporary service changes to make it easier for businesses to share critical information like inventory update shipments. He tells our new ways to buy.

For example, if a restaurant needs to ship to a delivery model. They can now at food delivery links to their Facebook page or Instagram business profile.

Great and these products quickly in the current environment wasn't easy and I'm grateful to our product and engineering teams are executing so well working from home.

The business resource have we launched in early May is a one stop shop with businesses of all sizes can find support and virtual training that can help them migrate online.

People can take courses on everything from how to connect with customers via messaging and Facebook live.

Got it increased online sales.

We are fortunate to be in a strong financial position.

We can continue to pay all of our employees and contractors. During this difficult time, which is why we believe we have a real responsibility to help others, especially small businesses around the world.

In mid March we announced a 100 million dollar grant program to help 30000 small businesses across the more than 30 countries to be called.

Applications opened this month and we're focused on getting cash into their hands as soon as possible.

Economic crisis hit vulnerable communities, the hardest, especially women and women of color and the families who depend on them.

That's why half of the grants available on the U.S. are earmarked for women minority and veteran and businesses.

We've also worked closely with the U.S. government small business administration to spread the word to small businesses about how to apply for relief and learn reaching 30 million accounts across Facebook and Instagram with this information.

Businesses aren't the only one spacing hardship newsrooms are too.

At a time when critical information is needed to keep immunity safe news organizations are saying steep declines in AD revenue.

In late March we announced a 100 million dollar investment to support the news industry with 25 million and grant funding for local news organizations and 75 million in marketing spend to get money to publishers.

We have a responsibility to help during this uncertain times by connecting billions of people when they are separated physically getting vital health information on it to people on a dramatic scale and helping small businesses survive.

Oh, I close by saying, how grateful I am to our partners and teams around the world.

During this unprecedented time, we are trying to stay close to the never to business as large and small they adapt to these significant challenges.

I also want to thank our teams for ensuring our services keep running and working so hard to launch new products. So we can continue making a real difference in people's lives.

This is such a difficult period for everyone and we are grateful for the important work that is being accomplished by so many.

Now here's Dave.

Thanks, Sheryl and good afternoon, everyone.

Going Mark and Cheryls comments, my thoughts are with everyone facing challenges during this difficult an unprecedented time.

Before turning to results I wanted to comment briefly on Facebooks operating posture. During the crisis. We took early action to ensure that all employees our employees were safe and move to a global work from home stats on March six in the week prior to the WH declaring covered nineteena global pandemic.

We're currently operating with over 95% of our full time employees working from home with safety being the number one priority for those essential workers, who need to come into our data centers and other facilities.

We have been able just the both support our existing employees and onboard new employees throughout this period.

While we are by no means operating at 100% of capacity across every dimension of our operations. We have continued to ship the product releases maintain service availability review concept and stay connected with our business customers.

Given the circumstances, we had been pleased the dedication and professionalism with which to Facebook team is tackling the challenges presented by this crisis.

Now turning to the results.

'cause it 19 pandemic is having a broad impact on our community metrics revenue expenses and business operations.

Our community metrics reflected increased best like increased engagement as people around the world. The sheltered in place. It's gratifying to people are using our family of apps to stay informed and can connect with people and organizations that they care about.

In March we estimate that on average 2.3 billion people used at least one of our services on a daily basis and had approximately 3 billion people were active on a monthly basis.

We have seen increased usage across all of our services, particularly in markets that have been most impacted by the virus, including a surge in video and voice, calling on messenger and Whatsapp.

People around the world have increasingly turn to Facebook as well.

The active users reached 1.73 billion up 11% compared to last year. He is represented approximately 67%. That's a 2.6 billion monthly active users in March.

Let me use grew 228 million or 10% compared to last year.

We expect that we will lose some of this increased engagement when shelter in place restrictions or relaxed and life returns to a more normal cadence, which we all look forward to.

Turning now to the financials Q1, total revenue was $17.7 billion up 18% or 19% on a constant currency basis.

At foreign exchange rates remain constant with Q1 of last year total revenue would have been 270, <unk> $5 million higher.

Q1 AD revenue was $17.4 billion up 17% or 19% on a constant currency basis.

Again, the cobot 19 pandemic had in a meaningful impact on our revenue revenue with strong from the beginning of the quarter through the first week of March when we began to see a steep slow down in our ads business, particularly in countries that implemented shelter in place measures to reduce the spread the virus.

Hi, Cheryl mentioned, there was a great deal of variability by vertical during the last three weeks of March traveling auto where our weakest verticals and we saw relative strength in gaming technology any commerce. These trends have continued into Q2.

We've seen relatively comparable pullbacks amongst large and small advertisers.

So that 19 had an impact across the globe in Q1 on a regional basis AD revenue growth was strongest in Asia Pacific a 21% followed by U.S., Canada, Europe and rest of world at 16% each.

Turning now to our pricing volume metrics in Q1 total number of AD impressions served across our services increased 39% and the average price spread decreased 16% growth of impressions was primarily driven by Facebook mobile news feed.

Due to product optimizations, we made prior to the pandemic as well as from increased engagement that I talked about earlier the decline in average price per AD was largely attributed attributable to the reduction in advertiser demand during the last three weeks in March.

Other revenue was 297 million up 80% driven primarily by sales of Oculist products. As a reminder, we launched quest in May 2019.

Turning now to expenses Q1, total expenses were $11.8 billion up 1% on a reported basis. Excluding the 3 billion dollar expense. We recorded in Q1 related to our settlement with the FTC Q1 of last year that is related to our settlement with the FTC total expenses were up 35% year over year.

Cost of revenue increased 23% driven primarily by depreciation related to our infrastructure stats.

R&D grew 40% and was driven primarily by investments in core product as well as our innovation efforts, particularly in a AR VR.

Marketing and sales grew 38% and was driven by consumer and growth marketing.

Finally, excluding the FTC expense for Q1, it's funny 19.

And I agree, 49% driven partially by an increase in estimated credit credit losses related to Kevin Knight.

We had over 3300 net new hires in Q1, primarily in technical functions and ended the quarter with over 48000 full time employees up 28% compared to last year as I mentioned earlier, we continue to recruit and onboard new employee successfully well into work from home environment.

Operating income was $5.9 billion, representing a 33% operating margin at our tax rate was 16%.

Net income was $4.9 billion or $1.71 per share.

Capital expenditures were $3.7 billion, driven by investments and data centers servers office buildings and network infrastructure, we had $7.3 billion of free cash flow in the quarter.

And we repurchased $1.2 billion of our class a common stock.

We ended the quarter with $60.3 billion of cash and investments.

As I mentioned last quarter, though we booked the FTC expense in 2019, we did not pay the 5 billion dollar settlement amount until after the first quarter of 2020 closed.

In addition, this past week as Mark mentioned, we signed an investment agreement to invest approximately $5.7 billion into Geo platforms in India. Our strong balance sheet proved to be an important asset this quarter, enabling us to commit to a long term growth priority in India, even in the midst of a troubled global economy.

Turning now to the outlook.

With the Cobot 19 crisis like all companies, we are facing a period of unprecedented uncertainty in our business outlook certainly in the nearly eight years I've been with Facebook.

We expect our business performance will be impacted by issues beyond our control, including the duration and efficacy of shelter in place orders the effectiveness of economic stimuli around the world and the fluctuation of currencies relative to the U.S. dollar.

In the latter point of alone since the WH show declared cobot 19, as a pandemic we've seen the U.S. dollar appreciate 5% relative to the foreign currencies, we do business then.

Given the increasing uncertainty in our business outlook, we're not providing specific revenue guidance for the second quarter or full year 2020, rather I would like to provide a snapshot of revenue performance in the second quarter, thus far.

Theres, a tremendous amount of macro uncertainty so it's difficult to extrapolate performance based on a small sample of data.

After initial steep decrease in AD revenue in March we have seen signs of stability reflected in the first three weeks of April.

AD revenue has been approximately flat compared to the same period, a year ago down from the 17% year over year growth in the first quarter of 2020.

The April trends reflect weakness across all of our user geography as most of our major countries have had some sort of shelter and placed guidelines in effect.

We are understandably cautious given that most economists are forecasting a global GDP contraction in Q2, which if history, where a guide would suggest that the potential for an even more severe advertising industry contraction.

In terms of expenses, we're continuing to monitor the covet 19 situation and its impact on our business in operations and religious chart plans accordingly.

We expect to realize operational savings in certain areas such as travel events in marketing as well as from slower head count growth in our business functions.

However, we plan to in to continue to invest in product development and to recruit technical talent.

In addition, we've committed over $300 million to date and investments to help our broader community. During this crisis, which will have an impact on our financial performance. This year.

As a result, we expect total expenses in 2020 to be between 52 and $56 million down from the prior range of $54 billion to $59 billion.

Well this reflects a moderate reduction in the planned growth rate of total expenses, our overall expense.

In the face of expected revenue weakness will have a negative impact on our 2020 operating margins.

Turning now to tap capital expenditures are significant investments in infrastructure over the past four years have served us well during this period of high user engagement.

We plan to continue to grow our capex investments to enhance and expand our global infrastructure footprint over the long term.

In 2020, we now expect capital expenditures to be approximately $14 billion to $16 billion down from our prior range of $17 billion to $19 billion.

This reduction reflects a significant decrease in our construction efforts related to shelter in place orders given the strong engagement growth and related demands in our infrastructure. This year's capex reduction should be viewed as a deferral into 2021 rather than savings.

Turning now to tax we expect our full year 2020 tax rate will be in the high teens, although we may see fluctuations in our quarterly rate depending on our financial results.

Our thoughts are with those in the community are facing health challenges during this crisis and with those healthcare workers on the front lives. We are also mindful of the challenges many businesses are facing in this crisis, including the 140 million small businesses, we use our platform.

This is first and foremost on helping our broad community navigate these challenges.

With that with that Mike, let's open it up for questions.

We will now open the lines for a question 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 meet your computer speakers.

Your first question comes from the line of Fry Noah from Morgan Stanley.

Thanks for taking my questions Ive, everyone is it safe I've I've to just that the first one for for Sheryl or Dave I. Appreciate all the color on the different add verticals between gaming E Commerce travel and autos et cetera, I guess I'd be curious to hear about sort of.

What happened in the the decline in the AD business you saw in March compared to the stability in April sort of what changed in those verticals and then understanding you're not giving guidance, but talk to us about some of the the key verticals that would be needed to sort of bring the business back to growth as we go throughout the year.

Then the second question for Mark you talked a little bit about Smbs curious to hear about some of the the key investment areas initiatives. You really think you need to execute on to make the SMB offering more comprehensive and 21 and beyond.

Okay, Brian did you want to take that Cheryl.

First and all the second Okay, you take that I'll take the second yeah sure sorry, we're doing our coordination.

So Brian yes, the the trends that we saw in a in the.

End of Q1, Yeah, we saw a pull back pretty broad based pull back, especially concentrated and in some of the areas to be talked about things like travel in auto, but really kind of broad base large and small advertiser is you know we saw relative strength, even that in a few categories.

Like gaming, where you have.

Always on campaigns that we're able to pick up some some supply because the lower pricing kind of cleared at the levels that those advertisers were trying to acquire users that so that is.

What are the benefits of the auction and then E commerce.

We've seen which was not as strong as gaming, but we've seen that show signs of stability as well and all of those trends sort of continued into you know into Q2. So I don't think there's a lot of vertical shifts, but I think we've seen E commerce sort of.

Do reasonably well what we're seeing is really I think pretty straightforward, we're seeing people who are driving towards online conversion events do well because they're able to.

Able to kind of bid in the auction and get those get those users and get the results that they're looking for and people who are like looking for offline or or more top of funnel brand.

There, we see more pull back in stands.

To your second question on SNB is you know there's really two two parts to this one is what are we doing now to help smbs weather, the storm and come back to business and be able to pay their employees in the second is ongoing add work we do.

On the first I think we've been really focused we came out early with our hundred million dollar grants program and we're rolling it out very aggressively around the world trying to get money that people very quickly and we're building specialized products. We never would've thought of before you know fundraisers were something that we did for nonprofit or people not small businesses. So in essence.

Very difficult time for SMB is we're really focused on doing everything we can to help them survive and even thrive as they help transaction online.

No Smbs are also a major part of our business going forward and on there. It's really the execution, we give quarter after quarter to make our ads performed.

We offer very personalize adds that can be directly targeted at small group, we do that in a very privacy protective weighing those ads are often most important for small businesses, who can't afford to buy broad based media and so all of the work we do they continue to allow our getting all of the work we didn't make the adds more personalized all of the work we do them.

Free tools available, which is important for all the online businesses, who use our frito. If there were 140 million of them as well as an 8 million who are our advertisers and the final between US that's enough in both of our business. We work on it every day, we're continuing to work on an everyday through that's crisis and we'll continue beyond that.

I think we'll go to the next question.

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

Great. Thanks for taking question I've too I think probably both for Mark first hope you could talk more about the functionality of what's happened perhaps other platforms as you expand in India with the Geo platforms partnership no. There other markets, where you could see something similar or is this strategy here.

Oneq to India, and then second just given the increased engagement with communication tools and voice and video in particular, how does that translate into increased activity in the feed and within stories. Thanks.

[laughter].

Sure I can I can speak to the first one and they can.

If there any any stats in particular to share in the second one and for commerce on whats out more broadly.

We're very focused on making it to that small businesses can have a presence on all of the ops right Facebook Instagram Whatsapp.

And messenger and can communicate organically with people and then increasingly you can.

Can do things that can help them drive transactions.

So we started rolling out things like catalogs, and what that we're working on payments to build to complete transactions.

When we rolled out a new AD format quick to messaging ads, where basically a lot of small businesses and different businesses are finding that their message threads with people perform.

Better for for driving sales than their websites or other presences. They basically by adds inside Facebook or Instagram that some people to to chat threads and then as we build that all these tools around that around making those threads more valuable we think that those ads will only increase in value, which is the way.

We're currently thinking about that business.

In India with Geo.

You know Geo has had this vision for awhile I want to be careful not to put words in their mouth, but just from from what they've.

Basically described both to Austin publicly.

About their Geo Mart vision is you know there are millions of small businesses and shops across India and they want to try to help.

Help get them onto a single network that you'll be able to communicate with through what Sop and do payments online through what does so I think if that is.

A great very large example.

Of how we can why are up and help small businesses in the country. We're we have the largest whats out community, but certainly all the products and technology that we're building to enable that partnership are gonna be things that we want to do around the world. So we're very excited about about working with them to to drive.

This vision forward and then extending it everywhere for over the the becoming months in years.

Hi, Dave I don't know if you want to say anything about the second point I think it at a high level. I mean, you may have stocks they want to share, but I think it.

We have seen a broad based increase and use of the product. It's hard to know what is just correlated with the pandemic versus you know people are doing more video chat or messaging. So therefore, they they also connect more and other parts of the product, but I do think overall.

We believe that providing a broad set of social tools for people is and just providing more value for people.

It does accrued all the different services, which is important because as you know some of the services for our business. We include identity. So we don't.

Yeah, and I'm, the only thing I'd add there as we talked about the 39% increase in AD impressions and that's really driven by engagement increases on our feed products and stories products as well as the search that we've seen in the video and and messaging So really wasn't limited to chip.

On messaging at least it was broad based as Mark said and that's creating supply on the AD impressions side as well.

Your next question comes from Justin Post from Bank of America Merrill Lynch a great. Thanks. So maybe you could talk a little bit about the AD auction dynamics are you seeing.

Ecommerce and digital replace auto and other categories and how efficiently as that auction working and secondly can you give us any color on percent of ads that come from direct response versus brand or maybe CPC bidding versus CPM. Thank you.

Sure I can take that Justin.

In terms of the at auction dynamics, Yes, I mean, we are seeing when when verticals doing better than the other or people fall out of the auction you know we have very.

Very dynamic content, it's a and so we're able to backfill that with other bids from other.

Other clients. So you know, we're seeing a lot of bidding into the system from gaming in E Commerce as prices come down. It's also more economic and they can get the ROI. So that they want so it's a natural way in which says that that happens and you see you see a replacement effect. There said, so that's working well.

Far more <unk> is by far the majority of our revenue we haven't given a specific number on what is direct response, but you know it's it's really for many years driven our best as it continues to drive our business and I would say if anything covetous accentuated the importance of people who are bidding.

For online conversions and so I think we've seen a falloff in in some of the more sort of broad based brand advertising right now and really a focus on those things that are driving direct results today, which isn't really surprising given the economic climate.

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

Hey, guys just to follow up so last question I think about four years ago, you've mentioned with the top 100 advertisers were.

Just under 25% of revenue and coming down so I guess, how does that mix with today and.

I think you mentioned large and small advertisers were kind of pulling back in March and April out about the same rate, but any any more pronounced do you sell from large versus small any color there.

And then second question is Mark you mentioned in her opening remarks that.

Something along the lines of high margins are important to the company, especially given the economic environment. So how do you think about.

A balancing levels of investment with revenue.

Over the long term has your thinking around that.

Changed versus you know I think you mentioned that comment maybe a two years ago has anything changed the way you're thinking about margins. Thank you [noise].

Hey, Ross, it's Dave I'll take that first one yeah, we've we've seen sort of a pullback of advertising from both large and small advertisers and you know I would say given the uncertain economic climate, we know smbs are getting hit hard but are busy.

This is quite diversified there's no one size fits all for Smbs you know we've got some businesses that are obviously suffering greatly from the shelter in place orders and then we have Smbs are also digital natives and have online objectives and those are doing relatively better. So we've got got Smbs, who are in gaming in E commerce into like so we are we are seeing.

Being we are seeing I think a fairly a.

Fairly diverse range of.

Smbs and I would say in terms of in terms of the diversity of our business. That's you know that that remains very high we're not concentrated but we haven't updated that specific stat. Then we get back four years ago, but we remain very diversified from an advertiser perspective.

Yeah, and I can I can talk to the margins a bit.

You know overall I think during a period like this there are lot of new things bad that need to get built and I think it's important the rather than slamming on the brakes now.

As I I think a lot of companies May [noise].

That is.

It's important.

To to keep on building and keep on investing and building for the new need that people have an especially to make up for some of the stuff that that other companies would would pull back on and I think that's.

In some ways, that's an opportunity in other ways I think it's a responsibility to keep on investing in the economic.

Recovery so.

That's in the near term, but the other reflection that I've, how does that I.

I think if you're going to have a business, which is primarily advertising, which is our plans. After the long term then I think you have to recognize that advertising is more volatile and sensitive to the macro economy and therefore, if you're if you're going to have this kind of a business I think.

You really want to maintain high margins. So that we when we go through periods. Like this you can make sure that we remain stable and healthy and able to keep on building. The things that are important for the long term. So what would I guess I'd want to.

Just.

Be clear on is that we're willing to accept a reduction in margins in the near term, but we understand and I personally.

How did have an appreciation for the importance of maintaining high margins overtime. So obviously, it's not that we're gonna when I kind of take things down. This year and then continue taking things down a lot in the future I think you know over over the coming years I'm. If we invest a lot more now I think we are going to.

Look for ways to manage expenses to make sure that we can maintain high margins overtime.

Your next question comes from the line up Youssef Squali from Suntrust.

Great. Thank you very much to question Mark can you discuss the performance of your game platform, including Oculist, so far how satisfied.

Are you with the traction that there and what are you doing to better position the company to take advantage of the increase engagement, we're seeing on other platforms competing platforms and maybe Dave or Cheryl can you speak to the trend you're seeing in markets, where could might change. It earlier say, maybe January and February and how they're performing.

Today any learnings from these markets. Thank you.

Sure. So I can talk a bit about games, we have a few big areas of investment here.

One is just in our mobile apps.

Massive amount of growth and live streaming.

I talked about live video.

My opening remarks, and you know people live streaming gaming content is.

Certainly one big category, that's growing quickly in that we're investing a lot in so.

That I think is doing quite well we.

So recently had some some a pretty big launches of an up in that area and we're going we're going to keep on.

Investing there and on the virtual reality side you know this has always been a long term vision quest has.

Has surpassed our expectations I wish we could make more of them faster. During this period <unk> I do think that it's one of those areas, where you know as people can't go out into the world as much the ability to have technology that allows us to be physically present or feel president.

Even when we can't be physically together whether that's.

Quest or portal or any of the software that there were building around video presence on that stuff is certainly seen I'm, especially large spikes and usage.

And it's possible that that a that this spring this accelerate some of the trends around adoption of things like virtual or augmented reality, but but I'm not sure what will happen there long term, but in the near term I I'm quite pleased with how quest is doing and and I wish we could make more of them.

Hi, Yes, if I'll take the second part of that question. So you know I think probably the market. They would be most instructive would be a market like China, but you know I think for US China is a bit different because we don't have users in China. So the business. There is trying to based advertisers reaching people outside of China. So it's.

It's hard to extrapolate too much from that we did see a pullback of revenue in China earlier in the quarter and we have seen a recovery there and a recovery.

But one thing that's hard to know is part of that is is really kind of mixed up in the vertical verticals is well try that tends to for us index pretty highly west gaming and E Commerce and.

Those those segments that are driven towards online outcomes.

Where where we're seeing relative strength, so it's hard to hard to really read too much into into the experience.

Your next question comes from the line up Eric Sheridan from yes.

Thanks for taking my question, maybe two if I can one bigger picture one dovetailing all the comments Rob E. Commerce I'm curious if there's anything you're seeing in terms of the behavior of users on the platform that would make you want to accelerate or change path in product development to capture some of the supply and demand you might be seeing if people want to sell.

So in an omni channel world and some of the demand that might be there on the buyer side to connect.

Commerce broadly across Facebooks property as an output at the current environment and the thing maybe if I could just gets one quickly I don't you called that out but I am curious if you could identify the credit loss assumption in the quarter and what that number might have been or was that something room at the we opt for the 10-Q four thanks so much.

Dark did you want to do you want to take the ecommerce humidity both.

I mean, I can I can talk to a briefly and then you can add to it if you think that theres more.

<unk>.

We are seeing increases in.

The consumer behavior around this but I think the bigger thing is just that.

Yeah for all the small businesses that we serves and a lot of small businesses that are out there that are still primarily physical there's a.

You know there's been a oh.

A big push to get online and to do more selling online and I think if there are lots of opportunities for for us to support them and building the tools that they need to do this we're seeing a lot of businesses that were primarily physical.

Now moving towards selling stuff online for the first time and we're seeing a lot of businesses that already had a digital presence now really transition to having their digital presence be primarily by either primary presence and that I I think that that trend while there may be something some short term so.

Like I do think plays into a <unk> preexisting long term trend.

And we'll certainly want to accelerate that aspect of our product road map to make sure that we can serve a lot of those businesses. During this period when it can help them with the recovery and get through this so.

We're working on a lot of work stream is there.

We'll hopefully have have more to share over the coming weeks.

Yeah, Eric on on on the bad debt expense that increased by 193 million.

That'll be the number that's in the queue and the majority of that relates to charges.

Obviously that we're taking related to the code 19 pandemic in our views on collectability of certain accounts in that environment.

Your next question comes from the line of marketing from RBC.

Hi, Thanks, two questions Mark at the very beginning you talked about the economic fallout, possibly lasting longer than people think.

You just any detail behind that is there something you're seeing in the data is it your gut reaction and then.

Following up a little bit on air cared Ann's question. You know these these kind of events crises can create new I don't know paps streams or whatever so you talked about shopping what about what SAP. There's a surgeon usage whatsapp is there something that's happened that makes it more interesting more long term more interesting isn't a as a monetization vehicle.

Because of the surgeon usage of whats happen. Thanks.

Sure I can I can take those two.

I think that we'll see a meaningful economic hit if I had to predict for the period of the health emergency and.

I think that you guys as Dave said in his comments.

Yeah.

The efficacy of the shelter in place orders and how well that's going I think will be a big determinant of of how long and how painful the economic.

Fallout is from US so there's certainly a range of outcomes I don't I don't think I have any particular inside that that that's not public or that the that you don't have.

But I I worry that this could be worse than that at least some people are predicting.

The who is the other question was monetization on Whatsapp.

I think that there's a huge opportunity on whatsapp if for no. Other reason than a better has 2 billion people using it and we haven't done significant work on building out the business, yet and we have some tools there, but we're still early in the phase of.

You know, we've built out what that business theres tens of millions of businesses that are that are signed up in that are using not so it's there's tremendous demand people want to.

Communicate with businesses and we've been in the process is building out the infrastructure to do payments and more commerce.

AD units like like what I mentioned around quick to messaging ads.

Are performing well so I think all the indicators are positive.

But it's just a generally.

Topped opportunities so far and one that were but I think is very exciting to build out over the coming years.

I think debrosse trying to say that Theres. Once last question yeah. Thank you if we could just take one last question. Please.

Your last question comes from the line of Colin Sebastian from Baird.

Great. Thanks for taking my question I guess first Dave I was hoping I know this is not a key focus right now, but any updated thoughts or timeline on some of the targeting and measurement headline headwinds that you that you spoke about on the last call and then with respect to both the ongoing investment priorities as well as the slow.

Our growth in headcount.

Is there anyway, you could articulate which areas are.

Our seeing that slowed down versus those that are they getting full support. Thank you.

Oh sure called I can take both of those yeah, I mean, the targeting headwinds are having an impact on the business, but obviously, that's that's dwarfed by the impact that Kevin 19 is having right now.

We continue to see the three factors around.

Around targeting and this hasn't changed the regulatory pressures with GDPR and see CPGA and similar regulations.

The news by platforms that make third party.

Targeting and measurement more difficult to then our own moves on watching privacy controls. So these are impacting the whole industry and we believe we're relatively well positioned.

We've got a lot of first party signal that said I think this will have a broad impact on return on investment and could affect you know what advertisers are able to.

You know find to acquire customers effectively forward their businesses may not be able to grow as quickly as they otherwise could it that could have a negative impact on.

You know on their growth in the economy, and obviously revenue for us. So certainly it's it's a challenging time to make it tougher for businesses to grow but.

We're certainly continue to continue to have that headwind in the in the in a in the longer and longer term.

Right, Okay sorry.

Sorry, I Didnt I forgot investment priority work continue to focus on recruiting on that on the SEC side, so product and <unk> and and and.

In engineering, so we're sort of fully hopefully going down that path that switzer core product and so our innovation efforts and we are slowing down headcount in business function. So some of the function is related to things like advertising sales.

Slower in those departments given the given the overall economic climate.

And then there are certain areas there were just finding efficiencies theres less travel there's less entertainment.

I think that may persist for quite some quite some time. So we're seeing savings there and we're gonna be looking at getting marketing efficiencies, because obviously prices are coming down on the marketing front. So that we can get the same impact for less dollars. It also looks for efficiencies on marketing spend so those are the area I would I would call out.

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

Ladies and gentlemen. This concludes today's conference call. Thank you for joining US you may now disconnect your lines.