Q3 2020 Facebook Inc Earnings Call
All.
All lines have been placed on mute to prevent any background noise.
After the speakers remarks, there will be a question and answer session. If you'd like to ask a question during that time. Please press Star then the number one on your telephone keypad. 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 2020 earnings Conference call.
Joining me today to discuss our results are Mark Zuckerberg, CEO, Sheryl Sandberg, COO and Dave Rayner 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.
In today's press release and in our quarterly report on form 10-Q filed with the SEC anyway.
Any forward looking statements that we make on this call are based on assumptions as of today and we undertake no obligation to update these statements as a result of new information or future events.
During this call we may present, both GAAP and non-GAAP financial measures a reconciliation of GAAP to non-GAAP measures is included in today's earnings press release, the press release and an accompanying investor presentation are available on our website at Investor Dot ASP Dot com and now I'd like to turn the call over to Mark.
Alright, thanks, everyone for joining us today, I hope, you're all staying safe and doing well.
We had another strong quarter as people and businesses continue to rely on our services stay connected and create economic opportunity.
Especially during these tough times.
Now 2.5 billion people around the world use one or more of our EPS each day more than 200 million businesses use our free tools and.
And there are more than 10 million active advertisers across our services.
Most of these are small businesses, which otherwise would have had a much harder time, moving online and reaching customers. During this pandemic and that's something that I'm really proud of.
But before I cover other topics.
The election is of course top of mind for everyone right now so.
Want to start there.
I've discussed our efforts.
Many times on previous calls, but I want to take a few minutes to reiterate how far we've come since 2016.
Four years ago, our security teams were looking for traditional threats like hacking, but.
But what we ended up seeing with something new coordinated interference campaigns using fake accounts.
I tried to spread misinformation and discord and since then we've built the most advanced systems in the world to find and remove these threats and it shows in the numbers.
The years since we've taken down more than 100 networks, including from Russia, Iran in China.
And we block millions of potentially abusive accounts every day no. Other company has systems nearly as advanced we've.
We've also taken industry, leading steps to make adds transparency.
So people know who's trying to gain their support but anyone who wants to run a political or social issue at us to go through our authorization process first in between March and September we rejected adds 2.2 million times before they can run.
For trying to target the U.S. without authorization.
We also build the ads library, where you can see any AD that is running on Facebook or Instagram and even if it's not targeted to you for political and social issue. As you can see you paid for the AD and what audience, we had reached making political advertising on Facebook more transparent than any other medium.
We are very focused on voter suppression working closely with experts in the space, including civil rights leaders and I'm grateful for their guidance here.
Our policies prohibit mis representations of when and how to vote.
In content meant to intimidate people into not showing up at polling places like claiming that ice will be there.
And we recently expanded.
His policies.
Two.
To include implicit Miss representations like for example claims that you will get Covance.
[noise] by voting in person.
From March through mid October we removed more than 135000 pieces of content.
In the U.S. for breaking those rules.
Now these are all changes we've made in the last four years and this helped us to protect the integrity of more than 200 different elections around the world, including in the EU, India, and Indonesia, and they've been important for stopping abuse as of next week's vote in the U.S.
But 2020 is also brought new challenges.
Coated raises questions about how people will vote safely, which will lead to higher levels of voting by mail and I'm worried that with our nation. So divided and election result, potentially taking days or weeks to be finalized.
There is a risk of civil unrest across the country and given this companies like ours need to go well beyond what we've done before.
That's what we've taken additional steps to help people registered to vote. However, they're comfortable to clear up confusion about how this election will work and reduce the chance of uncertainty and unrest.
I would take too long for me to cover everything we've done in detail, but I'd like to mention a few things first we ran at the largest voting information campaign in American history.
We estimate that we've helped 4.4 million people register exceeding the goal that we set for ourselves this summer.
We also estimate that in September we held 100000 people sign up to be poll workers and South Carolina saw 20% of their total sign ups to date over a single weekend that we ran that recruitment drive.
We're also taking a number of additional precautionary steps as.
As of this Tuesday, we blocked new political and social issue ads from running the week ahead of election day and after the election we.
We're doing this because well I generally believe that the best antidote to bad Beach is more speech in the final days of an election, there may simply not be enough time to contest new claims.
If any candidate or campaign tries to declare victory before the final results are called will put a notification to the top of People's Facebook and Instagram feed letting them know the results aren't final yet and we'll put an informational label on candidates post.
During the same.
We're also attaching an informational label to content that seeks to de legitimizing the outcome of the election or any particular voting method and.
And when there is a projected winter, we'll send people notifications letting them know and we'll show them into voting information Center.
We've been displaying at the top of our apps.
Finally, we've.
We've made a number of important content moderation decisions in recent weeks, including banning human on the end Holocaust denial contents as well as rejecting as that discourage vaccines and to be clear. This is not a shift in our underlying philosophy or strong support of free expression. Instead. It is a reflection of the increased.
The risk of violence and unrest.
And an increased risk of harm associated with vaccine misinformation as we near an approved cobot vaccine.
Even the strongest free expression advocate don't think you should be able to yell fire in a crowded theater because they recognize.
Your actions are speech should not be able to put people in imminent risk of physical Harman our policies year try to balance free expression and safety as well.
Thats what were doing.
Now I'll next week, we will certainly be a test for Facebook our systems have been tested in many elections over the last few years.
Election integrity is and will be an ongoing challenge and I am proud of the work that we've done here.
I also know that our work Doesnt stop after November Threerd.
We will keep anticipating new threats evolving our approach and fighting to protect the integrity of the Democratic process and the right people to make their voices heard around the world.
Now with that all said I want to spend.
The rest of our time talking about our product works.
We're making significant investments and hiring to develop a range of new products across the spectrum from messaging to reals to our commerce efforts to our longer term, a AR and VR platform work through Facebook reality labs.
Steve will share more on the scope of those investments and just a few minutes.
But what we faced intense competition in every area of what we do I am proud of the product that we keep delivering for our community now.
First on messaging of private messaging continues to be one of the fastest growing forms of communication now with roughly 100 billion messages exchanged everyday on what SAP alone.
But these conversations are still often fragmented across different apps and people tell us that they want to be able to use the app that they like best to reach everyone, who they want a message that address this we've been working on a long term infrastructure project. So let people message across apps and we've now started rolling out an update to Instagram that brings the best feature.
As for messenger and creates a better messaging experience across both apps and early feedback has been positive so far.
This quarter, we also extended release, a new way to create and discover short entertaining videos people.
People have always come to Instagram to express themselves and be entertained.
The community has been telling us that they want a way to make and watched short form videos for a while now.
The early results make me quite optimistic here.
I also want to say I've been impressed by the way our effects that.
They have been built by more than 400000 creators on our IR platform there.
There is obviously a lot of competition in this space as well, but I think that we're going to bring something new and higher quality that delivers value for creators.
And people who want to watch this content.
This quarter. We also took major steps forward in building. The next computing platform, we launched a quest to our most advanced virtual reality headset right in time for the holidays.
It delivers a real sense of presence like you are right there with another person or in another place than we've worked to make it accessible to more people. It's lighter faster has a sharper screen and a new price point of just $300.
Preorders of outpaced the original quest preorders.
By more than five X and have surpassed our expectations.
We're also laying the foundation for our glasses, which will be the Holy Grail of delivering a sense of presence that will not seeking you away from the physical World. One day, you are going to sit down for dinner with your parents, even if they are on the other side of the country or look up Directionally take out your phone.
Take yourself out of the moment.
We're working on the building blocks for true consumer a our glasses and in the meantime, we're partnering with luxottica the maker of Ray ban and Oakley to build our first smart glasses, which will launch sometime next year.
Supporting small businesses also continues to be a major focus for us and its important more important now than ever.
Sheryl is going to cover this in more detail shortly.
But I want to call out a few new products that we've shipped.
The Facebook shop Talbot gives people a dedicated place to shop in fine product.
The Facebook small business suite, let's businesses easily manage their presence across our apps and paid online events lets businesses creators and educators make money by live streaming classes talks and other event.
And what is that we just announced.
How were going to make it easier for people to buy products directly within a chat.
And integrating Wattup business features with Facebook shops, so that way when a small business at the shop. They can now establish or will be able to establish outcome a commercial presence across Facebook Instagram whatsapp all at the same time.
We continue to see a personalized advertising is helping small businesses find customers grow their businesses and create jobs.
I continue to believe that we need new regulation that allows for personalized and relevant ads, while protecting people data and privacy.
And I worry that some proposals, especially in the EU.
And actions planned by platform companies like Apple could have a meaningful negative effect on small businesses.
And economic recovery in 2021 and beyond.
This is one of the policy questions that we're going to we need to continue showing up and engaging on for the future of Internet there.
There are very different visions of that future held in different parts of the world.
Some are motivated by different values and others by strategic advantage.
We're going to have to stand up strongly for our vision of an internet where every individual can have access to free services and every small businesses and have access to the same kinds of tools to grow and create jobs, but the big companies have.
I am grateful to everyone at Facebook and all of our partners were working to make this vision a reality.
Im proud of all the new products and experiences we've been able to deliver this year and as always thank you for being on this journey with us and now I will hand, it over to Cheryl.
Thanks, Mark and high every line.
Join Mark in thanking all of you for joining us today.
This was a strong quarter for us any more business is shipped to that line to reach customers tell their stories and tell virtually.
Our total AD revenue for Q3 was 21.2 billion, which is a 22% year over year increase.
Our largest verticals, where E commerce retail and CPG and we continue to see broad growth across sectors, such as that as advertisers continue to optimize for measurable objectives like sales in web site visits.
The digital transformation has been underway for years that the pandemic has accelerated it dramatically.
As Mark said, we now have more than 200 million businesses using our free tools across our platform every month to create virtuous to our friends and communicate the customers.
We also now have more than 10 million active advertisers across our services every month, the vast majority of which are small and medium size businesses.
These businesses rely on personalized advertising to reach potential customers and grow.
According to the U.S. census Bureau, before the pandemic ecommerce chair of U.S. retail sales steadily increasing by an average of one percentage point a year for the past four years.
This share left by four percentage points in Q2 alone that's four years of change and less than 100 games.
That doesn't mean, we will continue to see sustained acceleration this may simply be future grants being pulled forward but.
But it is increasingly clear that the economic recovery will be driven by businesses finding customers and falling on line.
As the number of businesses failing digital accelerates during the pandemic, we have accelerated our efforts to support them.
On the product side, our teams have been working around the clock to build new tools that make operating online simple and efficient.
This quarter, we released Facebook business suite, a new interface for businesses to manage their pages in profiles across our apps.
Helping them save time and stay up to date with customers.
We also expanded Facebook and Instagram shop, Instagram checkout and launch the Facebook shop, Pat So businesses can showcase their products and consumers can discover brands and buy things they love.
And with more and more businesses using live streaming when they can't host events in person, we introduced paid online events to help them generate revenue.
And with that there are now more than 40 million people feeling a business catalog every month. So we created a new shopping button to make it even easier for people to discover a catalog and find something they'd like to buy.
Soon you'll also be able to click a wattup icon on a Facebook shop to chat directly with the business.
As well as improving our products. We are also helping business owners learned the skills they need to thrive on mine.
Our business resource had provides training to small businesses and everything from getting set up online to engaging with customers and.
And has been visited tens of millions of times since its launch just in March.
As the needs of our community evolve our training changes too.
We launched a new partnership with Coursera to change job seekers in skills like social marketing that are becoming ever more critical in a digital economy.
We have also builds on the success of our summer of support training program, which reached more than 17 million people and launching a new three months season of support to help businesses make the most of the holidays.
This includes our buyback Friday initiative to support black on businesses in their communities.
Well, we continue to invest in helping businesses. They are equally focused on keeping our platform safe.
Last month, we took an important step by agreeing along with you too than Twitter to a common set of definitions of hate speech and other harmful content.
This was done in partnership with the World Federation of advertisers and the global Alliance for responsible media.
There is more work to do but we're headed in the right direction as we continue to develop industrywide standards.
I want to acknowledge that despite these strong results, we faced significant headwinds, which Dave will talk about more.
There was an important debate taking place about the way companies use data including for online advertising.
We welcome this debate and have been advocating for new rules for the Internet in a range of areas from privacy and harmful content to election integrity and data portability.
While we face greater scrutiny than ever before we are also experiencing more demand from businesses for both our free and paid tool.
Especially our personalized ad products.
As this debate continues it is important that we don't lose sight of the hugely important role personalize ads play for small businesses.
Small businesses can't afford the broad mass marketing campaigns that big brands can.
A good example is clam medic beauty brand specializing in magnetic eyelashes, which started in a one bedroom apartment in Los Angeles, a little more than a year ago.
Co founders and then Kevin post photos and videos and Instagram and Facebook.
Unused personalize ads to reach people, they think might like their products, including women between 18 to 50, who are interested in beauty and cosmetics yeah.
So advertise to people who have visited their website made possible by personalized ads technology, which help them identify customer hot spots to focus on like California, and New York, Texas, Ohio, and several southern states.
We saw nine times increase in revenue in Q3 versus 2019 and doubled their revenue month over month.
Well so many businesses are struggling with here. This is help them to grow from five employees to 35.
There are countless stories like and in Kevin's among the over 10 million advertisers on our platform.
For many small and medium sized businesses personalized advertising, which uses data safely and in a privacy protected way is the secret ingredient that makes their success possible. These.
These businesses have the potential to be the driving force of the economic recovery in the months and years ahead as long as they can continue to rely on the data driven tools they use day in and day out.
We're living in a time of steep uncertainty. The next few months or quarters will continue to be precarious for so many businesses.
Whatever happens we will remain focused on keeping people connected and supporting businesses as they make the transition on line.
I want to close by saying, how grateful I am to our partners big and small all the new around the world.
And who are incredible teams, who are working hard every day.
To make a real and very positive difference in People's lives.
Now here's Dave.
Thanks, Sheryl and good afternoon, everyone, let's start with our community metrics in September we estimate that approximately 2.5 billion people used at least one of our services on a daily basis and that approximately 3.2 billion people used at least one of our services on a monthly basis.
Facebook Daily active users reached 1.82 billion up 12% or 197 million compared to last year.
Hey use represented approximately 66% to 2.74 billion monthly active users in September Emeas grew by 291 million or 12% compared to last year. So.
Turning to the financials all comparisons are on a year over year basis, unless otherwise noted.
Q3, total revenue was $21.5 billion up 22% or 21% on a constant currency basis.
We benefited from a currency tailwind and had foreign exchange rates remained constant with Q3 of last year total revenue would have been $114 million lower Q3 AD revenue was 21.2 billion up 22% or 21% on a constant currency basis.
The acceleration in advertising revenue growth from Q2 to Q3 was largely driven by strong advertiser demand, resulting from the accelerated shift from offline to online commerce that we saw in connection with the pandemic.
We are seeing particular strength among.
Among small and medium sized businesses, we're proud of the role that our services are playing in helping people stay connected and businesses reach consumers during these challenging and uncertain times.
On a user geography basis year over year AD revenue growth rates improved in all regions compared to Q2.
Asia Pacific and Europe were strongest and grew 30% and 25% respectively.
Both regions benefited from currency Tailwinds, USA, and Canada grew 20% rest of World grew 12% and was impacted by foreign currency headwinds.
In Q3, the total number of AD impressions served across our services increased 35% and the average price per AD decreased 9% impression growth was driven by both Facebook and Instagram.
The decline in average price per AD was primarily driven by the ongoing mix shift towards geographies and stories ads, which monetize at lower rates, although year over year pricing trends improved from the second quarter due to broad improvements in advertiser demand coupled with slower impression growth.
Other revenue was 249 million down 7%, primarily due to the timing of a new product launch as we transition to quest to which we began selling in the fourth quarter.
Turning now to expenses.
Q3, total expenses were $13.4 billion up 28% compared to last year in terms of the specific line items cost of revenue increased 33% driven primarily by infrastructure related investments, including both depreciation and operational expenditures.
R&D increased 35, 34%.
Driven primarily by hiring and investments in our innovation efforts, notably Facebook reality labs, as well as core product.
Marketing and sales increased 11% a slower growth rate than prior quarters due to a slowdown in consumer marketing and hiring.
Lastly, gn expenses increased 33% driven primarily by higher legal related expenses.
We added over 4100 net new hires in Q3, primarily in technical functions. We ended the quarter with over 56600 full time employees up 32% compared to last year. We continue to be pleased with our ability to recruit onboard and retain talent in this environment.
Operating income was $8 billion, representing a 37% operating margin our tax rate was 4%, which reflects a onetime benefit related to a tax election to capitalize certain R&D expenses for tax tax purposes.
Net income was $7.8 billion or $2.71 per share does.
The one time tax benefit resulted in EPS being 31 cents higher.
Capital expenditures were $3.9 billion driven by investments in Datacenters servers office buildings and network infrastructure.
In Q3, we announced that our 17th datacenter will be in Gallatin, Tennessee and will be 100% supported by renewable energy.
Based recognizes the urgency of addressing climate change and we're committed to help tackle this global crisis.
That is why in Q3, we set a new goal to reach net zero carbon emissions for our value chain. In 23. This is an addition to our current plans for our global operations to achieve net zero carbon emissions and be a 100% or 100% supported by renewable energy by the end of 2020 and beyond.
Free cash flow was $5.9 billion.
We repurchased $1.7 billion of our class a common stock completed the 5.8 billion dollar investment NGL platforms limited and ended the quarter with $55.6 billion in cash and marketable securities.
Turning now to the outlook ethics.
As expected in Q3, we saw based of D.A. use and then they use in the U.S and Canada declined slightly from Q2 levels, which were elevated due to the impact of the pandemic and Q4, we expect this trend to continue and that the number of D.A. used in many years in the U.S. and Canada will be flat or slightly down compared to Q3.
Turning now to revenue.
We expect our Q4 year over year AD revenue growth rate to be higher than our reported Q3 rate driven by continuous continued strong advertiser demand during the holiday season.
Additionally, I call as quest to orders have been strong which should benefit other revenue.
Looking ahead to 2021, we continue to face a significant amount of uncertainty.
We believe the pandemic has contributed to an acceleration in the shift and commerce from offline to online and we experienced increasing demand for advertising as a result of this acceleration.
Considering that online commerce is our largest AD vertical a change in this trend could serve as a headwind to our 2021 AD revenue growth.
In addition, we expect more significant targeting and measurement headwinds in 2021. This includes headwinds from platform changes, notably on iOS 14, as well as those from the evolving regulatory landscape.
There is also continuing uncertainty around the viability of Trans Atlantic data transfers in light of recent European regulatory development. Unlike other companies in our industry. We are closely monitoring the potential impact on our European operations as these developments progress.
Turning now to expenses.
We expect 2020 total expenses to be in the range of $53 billion to $54 billion narrowed from our prior range of $52 billion to $55 billion.
We anticipate that our full year 2021, a total expenses will be in the range of $68 billion to $73 billion driven by continued investments in product development and technical talent as well as a return to more normal levels of spend in areas like office operations and travel.
However, these are preliminary estimates as we have not yet finalized our 2021 budget.
We expect 2020 capital expenditures to be approximately $16 billion unchanged from our prior outlook.
For 2021, we anticipate capital expenditures to be in the range of $21 billion to $23 billion driven by investments in Datacenters servers network infrastructure and office facilities.
Our outlook includes spend that was delayed from 2020 due to the impact of the pandemic on our construction efforts.
Turning now to tax we expect our Q4 effective Q4 2020 effective tax rate to be in the mid teens and our full year 2021 tax rate to be in the high teens.
In summary, we are proud of the role that our services are playing and keeping people in businesses connected through these difficult times at the same time, we are continuing to invest aggressively in new products and experiences to better serve our global community with that Mike, 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 todays call. Please mute your computer speakers.
Your first question comes from the line of Brian Nowak from Morgan Stanley.
Thanks for taking my question I have two one for Mark one for Dave Mark There's a there's a lot of different types of consumer behavior on the platform for messaging posting video stories shopping et cetera, I'd be curious as you sort of look at the way in which people are using the products now versus the start of the year pre coded what's changed the most.
That surprised you and how does that sort of impact to your product priorities. As you continue to make sure you're delivering value for your advertisers over the next couple of years.
And then Dave I wanted to ask one about the initial 21 Opex Guide you mentioned sort of R&D and technical talent are there any specific projects or initiatives, we sort of look and you say these areas really need to invest materially harder in next year and then you may of this year. Thanks.
Sure. Thanks for the question.
In terms of.
What behaviors, we really saw with coated.
It was it an increase in well first of all there was an increase in almost everything across the board, which I think was somewhat temporary and is now returning to to.
The baseline levels of growth, which is partially what we're seeing but in terms of.
Some of the more permanent trends.
I think more people are doing.
Synchronous forms of connection so voice, calling and video calling I think we're seeing.
Continued to be to be elevated in a lot of areas.
We're seeing a stronger need for community.
That's been a theme that we've seen for a while but I think especially with.
With Covidien people feeling a little more isolated that has is growing the need to do that online so were really going to double down and invest in that area to help even more than we are today building out the infrastructure for community use as a foundation going forward.
People have more time.
Were they want entertainment so we're seeing video.
And gaming and things like that grow as well and not that seems to have been sustained.
That's it that's on top of all the Commerce trends, where you know I don't think we know exactly which way. This this will turn as Dave and Sheryl. Both died whether this is a sort of a onetime shift towards a dramatic increase in the amount of commerce to topping online versus.
A continued trend that we will see but but certainly we haven't seen any.
Any decline or return to baseline off of the quite elevated levels of of online commerce behavior that we see both from from consumers and small businesses.
Hey, Hey, Brian ill take that second question, it's Mark yes.
Outlined in his prepared remarks, we're making significant investments in hiring across a wide range of new products I'd, probably talk about you know big investments that we're making in our longer term a AR VR work through Facebook reality labs as well as continued investments in areas like messaging commerce.
And Reals.
The other thing that I would mention on that 2021 total expenses guide is that we expect to have higher expenses from office operations and travel once we have seen larger parts of the workforce returned to the office.
We estimate that in 2020, we saved approximately $1.5 billion on those expenses and you know in 2021, we would be kind of working off a higher employee count which is ultimately what drives those expenses. So we did we'd we'd expect to see a snap back of some of those savings.
Thanks.
Your next question comes from the line of Eric Sheridan from GBS.
Thanks, So much maybe I'll try to answer it also of course, maybe following up on Brian's question the way Dave answered it could turn it back to Mark would smoke would love to understand your philosophy around what you think the company needs to either invest in or sort of solve for for the unlock on.
Augmented reality of the long term it sort of a broad based consumer and enterprise platform.
That's where the next wave of computing, you've talked about in the past what do you see as sort of the three to five year roadblocks, you're investing against the key unlocked you're looking for in the business, maybe Sheryl if I could just ask you.
Probably the number one question we get from investors is that all the innovation you guys are doing on the commerce side, whether it be Facebook shops or transformation of Instagram around shopping at checkout, given the way you framed your statements around the shift in commerce in real time as.
As we continue through this current period, how are those sort of platforms position to capitalize very short term Q3 into Q4, and how are you thinking about that the ability for those ships to be there for advertisers and commerce participants in 21 of the odd thanks.
Sure well I can take the first one in terms of some of the milestones for the next computing platform I think that there are there are few things that I'm really looking for so there's there's virtual reality, there's augmented reality and then there's the whole.
Operating system of spatial computing in three d. around that and there are pieces that need to come together each of those VR we are.
The most advanced then.
The big milestone that I'm focused on here is we want to get to 10 million active units.
In AR VR system is because we think at that point.
That's when it will become of the.
The ecosystem will really be able to be self sustaining and and accelerate where independent developers will be able to to start it'll really economically make sense or independent developers to prioritize.
The Oculus platform above alternative gaming platform is because the installed base will be sufficiently large that they will get good returns.
Right now, we're finding a lot of the content development ourselves.
But we hope that.
That at some point in the next few years will will will reach that.
And we have we feel like we have line of sight to that.
Part of building out.
Hey, art is going to be a little bit harder than.
In that vein.
We are you know people do it they do at home, it's meant to be pretty immersive, obviously, you want the headset to be added.
Small uncomfortable possible, but fundamentally it's not the type of thing that you're gonna be wearing down the street that you need to really have a a very kind of stylish are socially acceptable form factor just yet.
Whereas I do thing to have viable augmented reality consumer glasses, you need to clear a number of technological hurdles to make it so that all that technology fits and what would be kind of a normal maybe stick rimmed consumer glasses form factor. So these are.
Our.
There were a number of fundamental technological advances that still need to be made there which is why I think that that product is still a few years out, but but it's one that we're very excited about.
The work that we're doing on VR and they are we'll share some.
A kind of the operating system and the ecosystem around them of the redevelopment and spatial development.
And that's also shared across you know some they are effect and things that we're seeing people use in reals and the camera on Instagram and Facebook messenger.
And that work I think is going quite well, where there are hundreds of thousands of creators and.
Developers and people building for that but all those pieces basically need to come together for the ecosystem to work and I I've been very impressed and excited by.
The progress that the that our teams have made honest I think that that the new quest to product is.
His extraordinary I I love using it and I'm really proud of the work that we've done there.
Well talk about Commerce, you know, we've been focused on making commerce more convenient more accessible to care across our appetite for people in business as well.
We always were at the top of the funnel for discovery and for connecting people to many businesses and products around the world and we saw even before the pandemic an opportunity to keep moving people down that funnel.
What happened with kind of viruses, we just massively accelerate the not this shift massively accelerated and we really doubled down on shipping commerce products. So that we could handle the you know the now 10 million small businesses, who advertise but the hundreds of millions who really rely on our free tools. So that they would be able to have that online.
And so you know Mark mentioned shop in his remarks, we launch that's very quickly in Q2, and we're seeing you know it's early but we're really pleased with the progress we've just announced expansion to what SAP. We're building for a stay stuck or building for Instagram.
And I think what we see is that acceleration really works and it's good because we can provide these tools to small businesses, but it also accelerates our AD revenue and I'll share. An example, there's an indigenous brand called sisters page they make handcraft handcrafted wellness products like so like.
So they were founded by sisters and before carotid virus, they were selling at local farmers markets and mall kiosks. So that obviously just went away overnight they pivoted to Facebook and Shopify, we're able to put themselves on line and then used our targeted <unk> targeted ads and have had a nine times return on AD sales.
And it increased their sales you know by tooling to over two and a half times during that and so what we see is that when we help provide the commerce tools. It can help the small businesses that rely on us and it can also tried our AD revenue.
Your next question comes from the line of Justin Post from Bank of America.
Great. Thank you Mark on prior calls you mentioned that eventually you know margins have to kind of I mean, Oh expense goes kinda has to match revenue growth. So interesting the midpoint of your range, 32% expense growth is.
Is that shows some optimism on revenues or are you investing in some products that could could pay off with some revenues down the road and just thinking about the progress with messaging you have a deal with beauty in Brazil, and opening up with other platforms is that something you're excited about over the next couple of years, that's starting to truly.
So some revenues thank you.
[laughter].
So Justin why don't I take the first part of that which is on the expense growth guidance and there we're not we're not giving guidance on and on revenue growth and theres not implied guidance on revenue growth. So at the mid you know at the mid point, you've got that right its sort.
Within the low thirtys and expense growth basis, that's fairly consistent with where our headcount growth is right now.
And that really reflects the you know the opportunities we see to invest we've been successful with hiring and retaining talent. We've got a lot of priorities given everything we have.
Scene from from Covidien, and the shift to online with commerce with messaging and also the big investments that were making for the long term in.
Facebook reality lab, so you know.
I think it's it's clear that we would expect there to be.
A margin decline next year.
Based on based on that guidance, but we're not giving specific revenue revenue guidance at this time and then Mark do you want to cover the messaging.
Sure I think the short answer is yes.
Yes, I think the goal is to build out a commerce platform around messaging with all of the tools, starting with Facebook shops, which we've already announced a will be coming to whatsapp and messenger.
Hi, messenger, so any small business will be able to set up a shop and have that kind of automatically establish a presence in those services to we're building out a number of tools around business messaging 70 people can.
Follow up and complete transactions and get support through.
Through messaging and then payments so that people can complete transactions too.
One of the early monetization products that is working.
Quite well argued click to messaging adds to that way if someone can get a you know a business can can run ads in Facebook or Instagram and in the destination for that AD can take the person to a thread a chat right either in messenger or what that to kind of further build out their relationship with us.
The consumer or complete a transaction and that's going quite well and I'm quite excited about that but but overall. This is a big priority is building out all.
All these commerce tools, both to that small businesses and all kinds of businesses can do this kind of commerce in Facebook and Instagram, but also within messaging like you say.
Your next question comes from the line of Brent <unk> from Jefferies.
Thank you.
You could just maybe talk little bit about the real engagement in what you're seeing so far I know, it's early but any observations there. Thank you.
I'm happy to jump in here.
I'm I'm quite excited about about the progress here, it's still quite early.
We've expanded reals into more than 50 countries. We've launched a number of new features a the results are encouraging.
There's a lot there's a lot more work to do here as well and I don't have any specific numbers to share here I'm, Dave I assume you don't have any any specific numbers that you would share either.
Yes, Thats right I think we're encouraged by the initial results, but but it's still early.
And your next question comes from the line of Heather Bellini from Goldman Sachs.
Great. Thank you I had two questions Mark I know you've been asked a lot about a AR VR on this call, but I was wondering if you could share with us how do you think about the advantage you're making on that front, hoping to drive differentiation from an E commerce perspective, and how much of a competitive differentiator can your work.
He hears commerce, obviously continues to accelerate online and then I just had a quick one for Dave about any update on the percentage of revenue from the top 100 advertisers I could have missed that.
Thank you.
Yeah, I mean, I think your question on augmented reality is a really good one because it hits on the stock that.
We mostly talk about it.
As a long term new kind of platform, but in the next couple of years I also think that there will be opportunities to build.
Build these kind of features into our mobile app.
In an increasing way to kind of help people express themselves like they're doing in Reals and stories I'm in our cameras. We have as you probably know rolled out a number of augmented reality commerce tools, an AD format spread so the type of things like for cosmetics people can try on.
Lipstick or or sunglasses to see what they would look like on them.
You know, we we think we can get to the public type to the place where.
For a more kind of items that you might buy to put in your house.
We will be able to for a lot more of that stuff the able to visualize what it would look like in your living room, they're just through your camera and augmented reality tool try on clothes different things like that over time.
There is a lot of this work that I think will help out.
By building new innovative experiences in our mobile App and all of that is also contributing to building up this longer term development platform around three d. and visual computing that will be very foundational to all of the VR and they are work longer term as well.
And Heather it's Dave we don't have an update on the top 100 advertisers statistic, but I would say that you know we continued to see strong growth from our small and medium sized advertisers in the quarter.
Continued strength with our direct response advertisers so.
We're really pleased with the broad base of broad base of advertisers that we saw in the quarter and helping those advertisers connect with business with consumers in this in this challenging climate. So I'm really pleased with what we're seeing on that front.
Your next question comes from the line of Doug Anmuth from JP Morgan.
Thanks for taking the questions one for Mark and then one for Sheryl or Dave.
Mark you touched on interoperability briefly I was hoping you could talk about your rollout effort, so far and how we should think about the key benefits and milestones there and then Cheryl or Dave would you still expect idea. If they don't have the same degree of impact on your business. As you did three months ago whenever it is actually rolled out or.
Possible that the delays benefited you with more time to work around and leverage other data sets in and therefore minimize the impact thanks.
I can speak about in drop.
It's it's been a long term infrastructure project that we've been working on to make sure that people can send messages between the ops we.
We started rolling out interoperability between messenger.
And Instagram messaging and that live in a lot of countries around the world now including in the U.S.
The initial feedback I think has been quite positive as it brought a number of features.
To Instagram that we previously it only had in messenger.
The big the big benefit the way that I think about this.
Is that in a lot of countries around the world.
There is a primary messaging app that most people use.
In the U.S.
That.
But it doesn't quite exist in the same way I'm I'm message is certainly the leading messaging app.
But there are of course people on Android can't use it and and there's still a if they are quite large portion of the population is on Android. So the messaging experience of the U.S.
It's very fragmented compared to what you would experience if you were in India, or China, or Brazil, or a lot of countries in Europe, which I think just makes it confusing it maybe it means that people have to have all these different apps to reach people that they're not sure where to reach people. It makes it a little bit harder to build out the business because.
System become businesses have to work across all these different places so our goal is.
As to make it so that people can just choose the one of our that they prefer using the most for messaging and can reach all the people who they want to reach across all of our different off from whichever of the ops is their favorite and of course that continues in multiple if they want yeah. This is gonna be a choice that people have.
But but I think it should simplify things and make it so that these three different networks.
The we've had between messenger Instagram and what's out in start to function a little bit more like like one connected interoperable system.
And that's division, there's there's more work to happen here, we of course want to bring in what's after that interoperability as well. They're more features you want to add even to the the messenger Instagram interoperability, but but it's good to see that starting to roll out after what has been a a pretty.
Pretty large engineering and infrastructure project.
And Todd on you know I'd at Bay, and I guess, iOS 14, more broadly obviously.
Obviously, Apple did delay the implementation of certain elements of their.
IOS 14 launch as it relates to some of the privacy initiatives, So I think that.
That impact won't be felt in Q4 were prior we would expect to have seen that in Q4. So I think it's it's mainly a delay in the impact rather than its a change in the impact so we're going to experience that in 2021. So.
Specifically as it relates to you know I'd say you know, it's going to have a disproportionate impact on.
App installs and thus our audience network and so Thats, obviously, a big challenge for App developers.
Who are looking to grow their business.
And you know in what is a difficult time. So we think that challenge will remain and when that implementation.
Happens, but yes in terms also of whether there is work.
Work that we can do to mitigate that impact the businesses reach out to us all the time on how they can continue to run effective ads in the face of these platform changes you know we're looking at various options, but our very best to you is that there is a there there are going to be significant headwinds next year as a result of these changes specifically on <unk>.
Yes 14.
Your next question comes from the line of Michael Nathanson from Moffettnathanson.
Thanks, well I have one for Mark and one for Sheryl I'm Mark will take you back to section to 30 didn't yesterday for a second.
It seems like you're the most comfortable C O about making changes to the law. So I wonder what are the change that you would propose does that pack that proposal in June resemble where we need to go and.
And what do you think the cost of these changes would be for Facebook.
And then for Sheryl you talked about the acceleration of more businesses and hit your embracing Facebook through this crisis can you talk a bit about what verticals maybe had been lagging.
Within their move to Facebook and Instagram and maybe how this crisis has accelerated certain verticals to her to spend more than they had before.
Sure I can talk about the first one.
Yeah.
So at this point, we have the benefit.
Of.
Seeing how different countries have adopted different types of regulation and.
Getting to understand how was that either mixed.
Problem is more effective for dealing with them.
Or in some cases makes it harder.
And actually makes a creates worse results so.
The approaches that that I think.
Seem to have worked best you know by looking at what France, and a few other countries have done.
Is is basically.
One which focuses on.
Creating a transparent process where companies have to report.
How they're doing moderation reporting on how much harmful content of different categories is is visible the portion of the content on the service.
What percent of it our content moderation systems can get to before people need to report itself.
And I I think a system like that.
That basically requires companies to meet certain thresholds or show improvement basically aligns incentives in the right way I'm to encourage companies to minimize the amount of that harmful content that people are seeing.
Yeah. It was there, but there are plenty of examples where there are other regulatory regimes that I think point towards.
That are counterproductive right or basically require companies to do things that that aren't quite getting it through the the most important aspect of the problem. You know is one example.
You know in some in some countries. There are rules, saying you have to get to certain content within a short period of time and and that I think is good on its face, but I think the reality is that a piece of content that's going to not be seen by many people maybe it's not as urgent to deal with is is one that is going to be problematic, but is going.
To be seen by lot of people, you really want to get to that sooner. So treating all content equally compared to just looking at the prevalence of how much bad stuff people are seeing I think is going to be less effective overall. So it's hard for me to speak to the cost to Facebook or other companies specifically because this is pretty nuance stuff and.
A lot of it will depend on specific language are detailed in how the slams.
But I do think at this point there are enough examples and other countries that you can that you can kind of get a sense of what helps create a more healthy ecosystem and what doesn't.
So on verticals our growth is very broad based and it's especially important for small to medium sized businesses.
No. These businesses have faced huge challenges in a pandemic and they've needed to become digital offering for the first time. So the free tools, we provide to get themselves online online presence noble presence.
Have been more and more important and personalize ads are more and more important you know the use of data, which we can do in a very privacy protective way to let them buy the audiences. They want are increasingly important you know big companies. They can't afford to buy a broad based AD campaigns that had countries our whole geography.
Small companies cannot survival any economic growth and the increasing ability to stay afloat and a higher has really been driven across the board by SMB.
No. Some verticals have you know experience more of a certainly E. Commerce is the leading example, but there are a lot of other businesses that have offs also lend themselves to online education is growing nicely retail there are others like travel and auto that would have a lag. It's during this but are starting to rebound as well I also watch.
We're talking about protocols I want to take the opportunity to say that I think there is a bit of a misunderstanding about the size of political ads on our services in Q3, combined political ads and government spending altogether, well, it's still low single digit percentages of AD revenue.
In the U.S. and globally, it's not a top 10 vertical in the U.S. aren't globally as well.
Your next question comes from the line of Mark Mahaney from RBC.
Hey, a question for Cheryl Cheryl you talked about an acceleration in AD revenue associated with.
Just the build out of social commerce could you double click on that a little bit more and explain that and is it just that the as the inventory becomes more transactional it's more valuable than they are for marketers are willing to bid more for it just explain that that links between the growth in E commerce activity on the network and the acceleration or the acceleration that address.
Thank you.
I think the acceleration I was talking about is really an acceleration to businesses moving online. They were just a lot of businesses that before the pandemic, where can you know consistently offline businesses. They sold locally they advertise locally you walk into their store and bought and what the Panda and this is already changing right businesses, we're already going.
On line, but we just have seen in massive acceleration in business is doing things online whether it's finding customers letting you know they're open selling curbside pickup you know when people couldn't walk into stores all over the world. They have to reach customers a different way that acceleration has really power to our business.
That's why there are 200 million small businesses or businesses using our free tool because a lot of these businesses have to get online for the very first time. That's why we have 10 million advertisers because once you have an online presence once you're doing things to reach customers online and even delivering products not in person you see that you see.
That acceleration and so it is that overall acceleration on to online commerce summer.
Some of our E commerce tools, that's really I think increase the number of small businesses all over the world that are using our free tools and our advertising with us.
Operator, we're going to take one last question.
Your last question comes from the line of Youssef Squali from Trust Securities.
Great. Thank you very much a one question for Mark and one for Dave Mark on the online game in his is an opportunities in emerging opportunity for you I was wondering how you get how you see your position today, just as you compete with very entrenched players like switching you too.
Do what do you need to do to win longer term and is VR and they are in the work you're doing potentially a competitive advantage over time and then Dave just given the amount of cash that you guys have on the balance sheet. I think you just added $5.9 billion in free cash flow this past quarter with a change in the administration.
And prospects for maybe higher capital gains and dividend a dividend taxes.
Change your way on how to manage or how you guys are managing your capital allocation and returned a short term. Thank you.
I can talk about gaming.
So this is an area that that I'm.
Very excited about I think it's a big growth area and one that I that I enjoy a lot personally.
It's.
So we're doing a number of things here.
And and I think you're right that the longer term virtual and augmented reality project do help here both in the.
The near term and the long term. It's also just a very exciting area of gaming, but most people are using gaming through our services through the Facebook gaming initiative that we have.
You know people stream games.
He wasn't using our live tools people want to be able to build community I think our features an hour I'm just kind of social focus as a company means that we are better able to serve gamestreamer. So you want to build out a community across our service.
That that part is going quite well and is growing quickly. We just launched our cloud initiative, which which plugs into both the phase for gaming work that we're doing and and the ads work that we do around helping a game companies get new customers that it.
It's it's sort of not a a completely different approach it it sort of plugs into the core things that we do.
So you are basically saying gaming combined with video and the community is work that.
That we're doing it in order to just kind of grow all of those at one.
Over the longer term I think the VR piece will obviously come into that as well some of the cloud gaming stuff that we're doing we'll of course be useful for VR as well and we're building a big community around that on Oculus, but this I do think will be a very exciting growth opportunity and the ability to offer a lot of innovation innovation over the coming years.
Yes, Thanks, Youssef so on our capital allocation our.
Our focus is in investing in growth and continuing to make sure that we make investments to drive the long term growth of the business that includes investing in our core product as well as investing in some of our longer term initiatives like Facebook reality labs.
This past quarter, we made an important strategic investment in GL platform. So that was a significant outlay of capital you know we continue to have an active share repurchase program authorized by the board and you know we will certainly factor in any changes in the tax landscape, but I wouldnt expect.
That too you know necessarily lead to a shift in our fundamental approach.
Great. Thank you for joining us today, we appreciate your time and we look forward to speaking with you again.
Ladies and gentlemen. This concludes today's conference call. Thank you for joining you may now disconnect your lines.