Q4 2020 Facebook Inc Earnings Call

Good afternoon. My name is Mike and I will be your conference operator today at this time I would like to welcome everyone to the Facebook fourth quarter and full year 2020 earnings conference call. All lines have been placed on mute to prevent the back ground noise.

After the Speakers' remarks, there'll 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 Facebooks fourth quarter and full year 2020 earnings Conference call. Joining me today to discuss our results are Mark Zuckerberg, CEO Sheryl Sandberg Peter.

And Dave Wehner CFO before we get started I would like to take this opportunity to remind you that our remarks. Today will include forward looking statements actual results may differ materially from those contemplated by these forward looking statements.

Factors that could cause these results to differ materially are set forth in today's press release and in our quarterly report on form 10-Q filed with the SEC.

Any forward looking statements that we make on this call are based on assumptions as of today and we undertake no obligation to update these statements as a result of new information or future events.

During this call we may present, both GAAP and non-GAAP financial measure for 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 Dan FB 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 healthy and well our.

Our community of the business had a strong end of the year as Covid continue to keep many of us the apart and at home.

People and businesses continue relying on our services to stay in touch and create economic opportunity $2 6 billion people now use one or more of our apps each day and more than 200 million businesses. Most of these small businesses use our free tools to reach customers soon.

For those numbers give a sense of scale.

But some of the stories, we hear show the impact of groups of formed where COVID-19. The long haulers are helping each other through the scary experience, where there's not much else to turn to.

Teachers are sending classic assignments the students through whatsapp.

Local bookstores and coffee shops are using Instagram.

To let customers know the open for curbside pickup.

People come together to raise $1 $8 billion for nonprofits and personal causes through our fundraising tools last year include.

Including $175 million for Covid related causes of alone.

I'm proud of the role that our service has played in helping people support each other.

During what has been such a hard time.

I've spent a fair amount of time on recent earnings calls.

Talking about our election integrity efforts, so I'm not going to discuss them at length today, but as you want to call out that according to our estimates we easily surpassed our goal to help of 4 million people registered to vote.

Part of the largest ever.

The largest effort to distribute authoritative voting information in recent history and I want to thank everyone involved in our.

The teams and outside of involved with that effort.

So today.

I'm going to focus on our product work and specifically I'm going to focus on for teams.

Im excited about for the year ahead of <unk>.

We introduce private messaging.

Immerse tools for small businesses and building the next computing platform.

So let's start with communities.

And I think that's helping people build community.

As one of the most important things that we can do.

Our social fabric is made of multiple different layers through which we get our social support for them.

We of friends and family. The that's the most personal layer then we have the communities where part of where we feel a sense of purpose and belonging explore interest develop skills grow as individuals and meet new people.

And then finally, there is the safety net that society and government provided.

In many parts of the world.

Theres been an unfortunate decline in community participation.

The the last several decades.

The second layer and this isn't something that we can solve alone, but I think we can help so now that we've helped billions of people stay connected with friends and family, helping everyone find and participate in communities that are meaningful to them has been our next goal and we've updated our mission of few years ago to reflect this making it.

Give people the power to build community and bring the world closer together.

Today more than 600 million people are now members of the group on Facebook that they consider to be meaningful in their lives.

This has grown steadily over time and I hear all the time from people who are in parenting groups that they are a major resources, the navigate raising kids or.

Or from people, who found the group that shares the same health condition and they can lean on that community for knowledge and support the ore.

For people who've moved to a new place and joined the local groups to meet people and get situated.

The product focus now.

Now is to develop this community infrastructure beyond that feeds and message boards.

To help people build and run full self sustaining community institutions. So we're building tools to help groups getting this done together and provide support for people that span messaging video chat and even communities owned websites and we're exploring different ways too.

To raise funds, including donations merchandize.

And membership fees to help group leaders support their communities operations and hire people for different roles that are needed to build sustainable communities for the long term.

So as we continue to focus on this we.

We need to make sure that the communities that people connect with our healthy and positive in the.

That's something that we've been focused on for a while now one.

One way of course that we do this is by taking down groups that break our rules against things like violence or hate speech and in September we share that we'd removed more than 1 million groups in the last year alone.

But there are also a lot of groups. The we may not want to encourage people to join even if they don't violate our policies.

So for example, we stopped recommending civic and political groups in the U S ahead of the elections.

And.

We're continuing to fine tune of how this works, but now we plan to keep civic and political groups out of recommendations for the long term and we plan to extend that policy globally.

And to be clear. This is the continuation of work we've been doing for a while.

To turn down the temperature and discourage device of conversation and communities.

Along these same lines.

We're also currently considering steps that we can take to reduce the amount of political content in news feed as well, we're still working through exactly the best ways to do this and to be clear of course, we're still going to enable people to engage in political groups in discussions if they want to.

These can often be important and helpful and it can be ways that people organize grassroots movements or speaking out against injustice.

We learned from people with different perspectives.

So we want these discussions to be able to keep happening.

But one of the top pieces of feedback that we're hearing from our community right. Now is that people don't want politics and fighting to takeover of their experience on our services.

The one theme for this year is that we're going to continue to.

The focus on helping millions of more people participate and healthy communities and we're going to focus even more on being a force for bringing people closer together.

Next let's talk about private messaging.

As we've discussed before.

The people enjoyed connecting with friends and communities in the digital equivalent of the town square in.

<unk> like Facebook and Instagram the.

Fastest growing social experiences are about connecting privately and the digital equivalent of the living room and services like Whatsapp and messenger.

That's why we kicked off a big effort a couple of years ago to re imagine what a moderate in the social platform would look like if you built it from the bottom up to be privacy first and.

And we identified several core principles.

Private social platform should be built around the most intimate interactions that we have and thats one on one conversations the.

The most important aspect of privacy and security is that your conversations should stay between you.

And that means that your conversations should always be end to end the encrypted.

They should disappear when youre done with them.

The safety and reducing spam matter to that.

And that means that we should maintain a minimum amount of metadata to build sophisticated tools to stop of bad actors using these services.

And you should have choice over what services you use so we should make messaging of interoperable as possible across our apps.

And finally, no matter, what we should only store People's data in countries, where we know we can keep it secure and and we should continue opposing data localization and countries with weak records on human rights or privacy.

So I think the these.

Are the privacy principles that matter most to people first and foremost people care of their conversation the stay private.

But after that people also care about safety and other convenience to and from this perspective, Whatsapp and the direction that we're heading in with messenger or.

For the best private social apps available now we have a lot of competitors, who make claims about privacy the.

They are often misleading the Apple recently released so called nutrition labels, which focused largely on metadata that apps collect rather than at the privacy and security of People's actual messages.

But I message of stores non intent encrypted backups of your messages by default unless you disable icloud Apple and governments have the ability to access most people's messages. So when it comes to what matters most protecting people's messages.

I think that Whatsapp is clearly superior.

Now.

Since I try to use these earnings calls to discuss aspects of business strategy that I think are important for investors to understand.

I do want to highlight that we increasingly see apple.

As one of our biggest competitors.

<unk> is a key pillar of their ecosystem. It comes pre installed on every iPhone and the.

The preference it with private Apis and permissions, which is why I messages. The most of US messaging service and the U S.

And now we are also seeing Apple's business depend more and more on gaining share in apps and services against us and other developers. So Apple has every incentive to use their dominant platform position to interfere with how our apps and other apps work.

They regularly due to preference of their own.

And this impacts the growth of millions of businesses around the world.

Including with the upcoming iOS 14 changes many small businesses that will no longer be able to reach their customers with targeted ads.

Now Apple they may stay that they're doing this to help people.

But the moves clearly track their competitive interest. So I think that this dynamic is important for people understand the because we and others are going to be up against this for the foreseeable future now.

Our messaging services continue growing.

But it is an uphill battle and our services.

Just need to be that much better as private social platforms to succeed so to make sure that we remain the best of couple of years back we kicked off a number of long term efforts.

Net of started shipping recently had.

And more of these projects around the strengthening of encryption ephemerality interoperability at all from other tools are going to be shipping throughout this year.

So now let's talk about commerce.

Our goal here is to give every individual entrepreneur and small business access to the.

At the same kinds of tools that historically only the big companies have had access to the.

And we have always cared about this.

But the pandemic has made it more urgent.

It used to be the case that only large companies could afford to have the analytics or targeted advertising capacity to reach their customers and it was expensive to build these capabilities in it and often required building teams.

The storing large amounts of data in house switch the most small businesses can't do.

So one of the things that I'm. Most proud of is that we build the tools. So we can offer these same capabilities to small businesses often for free.

So when you hear people say that we hold a lot of data.

That's because of hundreds of millions of businesses that would have otherwise had to do this individually.

Would of had no easy way of doing so are now using our services to help them reach customers and when you hear people say that we're connecting data from lots of sources.

To help small businesses reach customers more efficiently.

The company's often do this themselves, but small businesses can't a lot of time. So we do this for them.

So when you hear people argue that we shouldnt be doing these things or that we should go back to the old days of targeted TV ads.

I think that what they are really arguing for is a regression.

Only the largest companies have the capacity small businesses are severely disadvantaged and competition is diminished.

So with our commerce tools.

We've made it so that a business can set up of shop ones.

And then they will have an online storefront and both Facebook and Instagram immediately and eventually on Whatsapp and messenger as well and we recently expanded checkout to all U S businesses, making the process of buying a lot more seamless and as the Lockdowns of continued we saw more businesses more small businesses and creators.

Also use paid online events.

That's the way to make money.

Whatsapp.

There is also an important part of our strategy here more than a 175 million people message a whatsapp business account every day.

We're building new features to make it even easier to transact with businesses in the App.

We introduced carts, which lets people browse catalogs select multiple products and send the order.

Is the message to our business.

And the more people that interact with businesses the better tools that we're going to need to provide for businesses to help them support their customers.

Many businesses need more than a phone to manage their customer service, so where we're building tools to let business of store and manage the whatsapp chats using our secure hosting infrastructure if they would like.

We're in the process of updating what the privacy policy in terms of service to reflect.

The optional experiences.

To clarify some confusion that we've seen this update does not change the privacy and of anyone of anyone's messages with friends and family.

All of these messages are intending encrypted, which means we can't see or hear what you say and we never will.

The person that your message chooses to share it.

And business messages will only be hosted on our infrastructure, it's the business chooses to do so.

So we want everyone to know the links that we go to to protect your private messages. So we are moving the date of this update back to give everyone time to understand what the update means.

Finally, let's discuss our work building the next computing platform.

This is one of the areas that I'm most excited about our progress heading into 'twenty 2021.

If you look at the history of computing every 15 years or so of new major platform.

Emerges that integrates technology more naturally and ubiquitously into our lives starting with mainframes and PC use the browser based computing and then mobile and <unk>.

I believe that the next logical step here.

Is an immersive computing platform that delivers the magical sense of presence the youre really there with another person or in another place.

Our phones can deliver this.

And neither can any other technology that has come before it.

This is going to unlock the types of social experiences that I have dreamed about building since I was the kid and and it's what we're building towards at Facebook reality labs.

We launched quest two in October and it is on track to be the first mainstream virtual reality headset.

We designed it so that anyone can jump in with the best and most immersive experience out there.

And at a price that makes it available to as many people as possible and.

And I think that Facebook has done more than any other company to help bring virtual reality to the mainstream and it's been great to see so many people embrace this especially this year during the pandemic.

We're seeing people use it to play games with friends when the can't be together in person to do workouts in their living room or to meet with colleagues, while they're working from home.

So there are a lot of reasons.

<unk> was one of the hot holiday gifts.

This year.

We're also seeing a growing ecosystem of developers building amazing new experiences for the platform.

Right now more than 60, Oculus developers are generating revenue in the millions and that's nearly twice as many as a few months ago.

In previous quarters I've talked about.

Our long term future goals when it comes to virtual reality, but I think the this quarter's results show.

The future is here.

Augmented reality glasses are going to be a key part of this vision to.

We're still working on some of the foundational technology to underpin the use and the ultimate product is still some years away, but this year. We're excited to deliver a first glimpse of what will be when we launched our first pair of smart glasses.

From Ray ban in partnership with Luxottica.

And during this pandemic. We've also seen portal has proven to be a great way for people to stay connected.

And especially over the holidays families had to celebrate apart.

This year of what we're focused on expanding the role of of portal and virtual reality presence into.

Into the workplace, bringing more features that can improve remote presence collaboration.

And productivity.

2021.

It has a lot of unknowns, we don't know when vaccines are going to be widely available when our teams will be back in the office.

When our lives are going to start feeling normal again, but what I do know is that we're going to keep investing in.

The innovating on the big themes that I discussed here in order to put more power in the hands of people and small businesses.

I personally believe the technology can unlock progress and opportunity and that the full story of the Internet has not yet been written that's why I'm hopeful for the year ahead and grateful that you were all on this journey with US and now here is Sheryl to talk about our business.

Thanks, Mark and hi, everyone.

Mark I hope, everyone is safe and healthy.

This was the strong quarter for our business as the acceleration of online commerce, we've seen during the pandemic continued into the holiday season.

Our total revenue for Q4 was $28 1 billion, which as of 33% year over year increase our fastest growth rate in over two years.

After a really difficult year for so many businesses. This holiday period was important.

And while many businesses are still struggling the good news is that Q4 was stronger than expected for retail.

In the U S. The National Retail Federation reported net sales in November and December and up 8% year over year and online sales were up 24%.

This holiday period was also longer.

Imperative of previous years advertisers started spending earlier and sustained that spend will be on black Friday and cyber Monday.

We saw robust performance across all regions as well as an improvement in brand advertising.

The strength of our Q4 performance is the result of years of investments in free and paid tools to help business of 16 online.

Even before the pandemic business since we're going to catch it all the co.

<unk> made that the necessity.

Almost overnight business is how to create digital storefronts figure out how to take online orders.

The new ways to reach their customers.

For many small companies these steps or even just setting up the website or mobile app can be difficult and expenses.

Our free and free tool helps all of these problems for businesses around the world.

With so many businesses struggling when the pandemic hit we asked our teams what businesses need and how can we help.

First the need the tools to get their business up and running online. So what can we do to make our simpler and more effective and can rebuild in the rooms to help them.

Second.

The needs of digital skills and Knowhow for 16.

How can we help more businesses of training and resources.

And third they need their voices to be heard.

Can we use our scale to amplify their voices and tell their stories.

We've been asking these questions throughout the last year and into Q4.

On the first we accelerated our work on tools to make it easier for people to find brands and products. They love.

And for businesses to manage their online presence and connect with customers.

Mark talked about some of the new tools, we have launched the shops and paid online events in.

The fall, we also rolled out Facebook business suite of new interface to help businesses manager of their pages of profiles across our apps.

We also continued to invest in making our products as effective as possible. So businesses can get more of that value for every dollar they spend.

Personalized ads of privacy safe and help businesses reach customers where they are.

It has been more important than average during the pandemic.

One notable area of progress this past year with <unk> stories ads, which have become more effective for direct response advertisers.

One business that your stories ads as carload of flower lab of florist, and with France and Mexico.

For Covid, they made 70% of their revenue from face to face workshops the wind.

Of the pandemic hit founder of Parliament dose of how to get creative.

He is personalized ads and Instagram to reach new audiences.

And even found her first international customers, but campaigns targeting California and Texas.

One campaign for Dia day listen with US the day of the data in November that true.

24 times return on AD spend helping pallet triple her annual revenue in 2020, despite COVID-19.

On the second resources and training, we did some big things in 2020.

We created a business resource hub of one stop shop for resources and trainings for small businesses that we've continued to build out through the end of the year.

We committed to reach 1 million members of the Black community and 1 million members of the Latin Nexsan. Hispanic communities in the U S with free digital skills training to our elevate program by 2023.

And we've re imagined our business with Facebook events to reach businesses, the virtually with 100 million people tuning in throughout the year.

This included our 12 week season of support to help businesses across 16 countries for pair for the holidays.

On the third a great example of how we amplify the voices of our businesses in Q4 is our by Black Friday campaign, one of my favorite campaigns ever.

In the U S. Black owned businesses closed the twice the rate of others. After the start of the pandemic. So we wanted to help people people shop with them over the holidays.

We created ways for people to find like businesses in their local area.

Scott featuring products from black businesses across the U S.

And even of by Black Friday show on Facebook lines of <unk> by 15 million people.

One of the small businesses, we featured as a vegan skincare brand called redo from New York City.

Its founder Asia Grant appeared on the Bai Black Friday Shadow.

And that became one of our most successful sales days ever.

The campaign gave her record revenue of web traffic.

And she was even able to hire more people something thats. So important given the current unemployment rates.

Business owners like Asia in Palo have worked hard to adapt and grow in line with.

Lots of businesses will continue to struggle in 2021, so we're going to keep listening to them and building on what we did last year.

Improving our products and tools to help businesses seamlessly manage their online presence.

Advertise across our apps and communicate with customers through business messaging.

It means making more training available through programs like she means business for women and elevate for diverse communities.

And it means finding more ways to amplify their voices.

Whether it's sharing the stories of small businesses worried that Apple's iOS 14 change of will hurt the ability to reach customers.

For showcasing small businesses and gift guides in products like businesses nearby.

I want to close by saying, how grateful I am to all of the businesses around the world who work with us.

The partnership helps us build the tools you need so you can continue to grow and hire.

And as always.

Grateful to our incredible teams the lift.

Thanks, so much to help businesses survive this difficult year.

<unk> coming up with great idea of like by Black Friday.

I hope the 2021 is the better year for everyone.

Now here's the day.

Thanks, Sheryl and good afternoon, everyone Q4 was the strong quarter capping off a solid year for our business as full year 2020 revenue grew 22% to 86 billion.

We have been encouraged to see improved demand for our ads during the second half of the year after facing significant headwinds at the onset of the pandemic.

Our results reflect the ongoing strength in the digital economy and the value, we're providing millions of businesses, who use our services to reach consumers and generate sales.

Let's begin with our community metrics.

In December we estimate that approximately $2 6 billion people used at least one of our services on a daily basis and that approximately $3 3 billion people used at least one on a monthly basis.

The daily active users reached 184 billion up 11% or $188 million compared to last year.

<unk> represented approximately 66% of the $2 8 billion monthly active users in December and they use grew $299 million or 12% compared to last year.

<unk> with our outlook U S and candidate the <unk> declined $1 million sequentially as usage continues to normalize from peak COVID-19 levels experienced earlier in the year.

Turning to the financials all comparisons are on a year over year basis, unless otherwise noted.

Q4, total revenue was $28 1 billion up 33% or 32% on a constant currency basis, we benefited from a currency tailwind and had for <unk>.

Exchange rates remained constant with Q4 of last year total revenue would have been $339 million lower.

Q4 AD revenue was $27 2 billion up 31% or 30% on a constant currency basis.

The growth in advertising revenue was largely driven by a strong holiday shopping season for retail which benefited from the ongoing shift to online commerce.

On the user geography basis AD revenue was strongest in Europe, which grew 35% and benefited from currency tailwind.

And Canada grew 31% and Asia Pacific grew 29% rest of world growth improved to 25%, but continues to be significantly impacted by currency headwinds.

In Q for the total number of AD impressions served across our services increased 25% and the average price per AD increased 5% in.

Impression growth was driven by both Facebook and Instagram the increase in average price per AD was driven primarily by Facebook mobile feed as well as pricing improvement and Instagram stories.

Other revenue was $885 million up 156% due to strong quest to holiday sales sales.

We've been encouraged by the positive reception of <unk> since its October launch.

Turning now to expenses Q4, total expenses were $15 3 billion up 25% compared to last year in terms of specific line items cost of revenue increased 49% driven primarily by hardware costs related to quest <unk> sales core infrastructure investments and payments to partners.

Randy increased 34% driven primarily by hiring and investments in core products as well as our consumer hardware efforts.

Marketing and sales increased 8% driven by hiring in marketing spend less.

Lastly, G&A expenses decreased 13% as we lap charges related to the legal settlement recorded in the fourth quarter of 2019.

In the past year, we added a record 13600 net employees and reached our goal of adding 10000 employees in tech and product rolls.

We ended the year with over 58600 full time employees up 30% compared to last year, we continue to be pleased with our ability to recruit onboard and retain talent in this environment.

Fourth quarter operating income was $12 8 billion, representing a 46% operating margin our tax rate was 14% net income was $11 2 billion or $3 88 per share capital expenditures were $4 8 billion driven by investments in data centers servers office facilities and network infrastructure.

The.

Free cash flow was $9 $2 billion, and we ended the quarter with $62 billion in cash and marketable securities.

For the full year, we repurchased $6 3 billion of our class a common stock and had $8 6 billion remaining in our prior authorization as of December 31.

Today, we announced the $25 billion increase in our stock repurchase authorization.

Turning now to the outlook, we continue to face significant uncertainty as we managed through a number of cross currents in 2021.

We believe our business has benefited from two broad economic trends playing out during the pandemic. The first is the ongoing shift to online commerce. The second is the shift in consumer demand towards products and away from services. We believe the shifts provided a tailwind to our advertising business in the second half of 2020, given our strength in product vertical sold via online.

Commerce, and our lower exposure to service verticals like travel looking forward of moderation of reversal in one or both of these trends could serve as a headwind to our advertising revenue growth.

At the same time in the first half of 2021, we will be lapping a period of growth that was negatively impacted by reduced advertising demand during the early stages of the pandemic.

As a result, we expect year over year growth rates and total revenue to remain stable or modestly accelerate sequentially in the first and second quarters of 2021 in.

In the second half of the year, we will lap periods of increasingly strong growth, which will significantly pressure year over year growth rates.

We also expect to face Mark significant AD targeting headwinds in 2021. This includes the impact of the platform changes, notably iOS for 14, as well as the evolving regulatory landscape while.

While the timing of the iOS 14 changes remains uncertain, we would expect to see an impact beginning in the late first beginning late in the first quarter.

There is also continuing uncertainty around the viability of Trans Atlantic data transfers in light of recent European regulatory developments and like other companies in our industry. We are closely monitoring the potential impact on our European operations of these developments progress.

Turning now to expenses.

We expect 2021 total expenses to be in the range of 68 to 73 billion unchanged from our prior outlook. This is driven by investments in technical and product talent as well as continued growth in infrastructure costs.

We continue to expect 2021 capital expenditures to be in the range of $21 billion to $23 billion.

Driven by data Center 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 continue to expect our full year 2021 tax rates to be in the high teens.

In closing 2020 with the unique operating environment that introduced a number of unforeseen challenges.

We've been pleased with our team's ability to adapt in order to maintain the reliability of our services deliver new products and experiences and support the millions of businesses, who use our platform to reach consumers.

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 pickup your handset before asking your question to ensure clarity. If you are streaming today's 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've two.

Two the first one for either Mark or Sheryl appreciate the color on Commerce I was curious just for any encouraging quantifiable signposts or learnings that you've seen so far in Instagram shopping and sort of give you confidence you are making progress in building out this opportunity in.

And then the second one Dave.

I appreciate the comment on the on the forward outlook and the outlook commentary I guess the question is when you sort of talk about this shift of consumer expenditure towards products away from services and other.

Essentially be a headwind in the back half as it as it reverses the last quarter. You mentioned you had 10 million of advertisers. So maybe talk to us about sort of some of the segments of advertisers do you think that you are missing and what initiatives you have in place to sort of broaden the advertiser base to bring more services on the platform. Thanks.

I can take the first.

With Instagram shopping we launched the new shop tab on Instagram in Q4, and this is built on the other shopping efforts we've had.

We see this as an overall part of our commerce effort.

We've always Dan I think of great place for people to discover new products and services, but we are very interested in taking people all the way down that funnel from discovery to purchase the finding products and services to checking out.

As well and our shopping efforts are part of that.

Being nice uptick it's still really early days.

But we think business that are having a good experience and people are having a good experience and as always with our app with our AD products and with our commerce products, we want to make sure we provide a great experience to the end user.

So that they can find the things they're looking for.

Hey, Brian It's Dave Yes the.

Peter that we've looked at there really is that when you look at the.

Data from the U S. DEA. It basically showed that in Q3, while the services consumer spend was still down year over year.

Spending on goods actually surged to record levels of the highest in like 15 years.

Have the results for Q4, but we expect that sort of trend continued if you look at the balance of our of our business it tends to skew more towards products relative to the overall GDP in the.

The overall consumer spend.

And for instance of the U S. So we just think of our overall exposed a little bit more of the products. We continue to invest to improve our exposure in travel sorry in service areas like travel.

But our expectation would be in 2021, we'll continue to have a similar skew towards products as we've had from the past, but we'll continue to make investments to make our AD products more relevant for services as well.

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

Yes.

Great. Thanks for taking the question for David Sheryl.

We know you mentioned significant AD targeting headwinds, but is your view on IBSA changed at all over the past few months I'm, just curious how youre thinking about Facebook the ability now to offset some of the impact just through things like limited logging mode in new Apis and other conversion tools and data and then if you could just talk a little bit more about.

How youre thinking about the impacts across San and then the core products. Thanks.

Any significant way on iOS for 14.

We continue to believe that that will be of headwind in the ads business.

Our view not just limited to <unk>, but broader than that is we're going to have to be providing a.

Eight.

Our prompt asking people for permission to use third party data to deliver personalized ads. So that's going to be true, whether you're using <unk> or not.

And we do expect there to be high opt out rates related to that and that's factored into our outlook.

We expect that to rollout sometime we expect later in Q1.

But the timing is uncertain and Apple hasnt given clarity on that at this point and we do expect that we'll have increasing impact through the year.

Users adopt the iOS 14 and go through those permissions.

When you think about what the mitigation might be.

Obviously, theres going to be mitigation of the impact on us to some extent just because of this as a platform wide change in that so it will impact everyone.

And so that's going to that's going to mitigate it to some extent and in addition over time, we hope that we hope to help businesses by providing more on site conversion opportunities through initiatives like shops.

And also click the messaging ads.

As it relates to specifically the audience network products, obviously, that's going to have a significant.

Significant impact on audience network on iOS as we've explained in the past.

But it's but the broader impact given the size of that business is really to our to the to the core.

Core advertising business on iOS.

Your next question comes from the line of Eric Sheridan from UBS.

Thanks, so much for taking the question maybe two if I can mark just conduct of your comments what do you see as some of the key investments either one of the hardware side or the content and application side to unlock the opportunity based on what you recently saw with the success of Oculus in the holiday period.

There was a piece of hardware, obviously, that's sold through quite well and how do you think about aligning investments against the opportunity in the coming years, and then maybe I don't know if its for Sheryl or Dave, but maybe I could just follow up a little bit on on Doug's question. When you think out to the language you're using about the back half of the year is there any sense you can give.

Quantitatively about how to think about some of the tougher comps you'll see as we move through 'twenty, one versus identifying the degree of the severity of different outcomes from some of the headwinds. Thanks. So much.

I can take the first one.

So when we started working on virtual and augmented reality, we basically laid out.

Paris, where we knew that virtual reality would be practical to build first.

And we view that that.

So it's kind of of all part of one.

Continuous ecosystem for <unk>.

Spatial immersive computing.

Computing and presence.

So the key things that we're trying to do with VR now I do believe that quest two is the first.

Mainstream virtual reality product it is doing quite well.

And I'm really proud of what we've been able to do there.

The goal there is.

We keep on.

Shipping content in titles in working with developers.

<unk>.

Shipping new capabilities to the device like last year, we shipped the ability to do now head of tracking.

So it's no one expected to be possible, yet, but the team working on that did some really great work.

It just made the device better.

And increase the value.

So.

We're continuing to work on new hardware as well the new hardware will kind of fit the same platform. So the the content that works on quest to should be forward compatible and so we're going to build one kind of larger install base.

<unk> the virtual reality headsets that we have and at the same time we're.

We are building towards a future of with some of the fundamental technology investments that we're making to be able to provide augmented reality glasses.

That hopefully will be able to support.

A lot of the same content in this ecosystem over time and take advantage of a lot of these foundational investments that we've made so this is this continues to be of long term.

Our long term investment.

I think it's.

Very important both for the vision of what we wanted to do like I said in my script before.

Earlier.

<unk>.

Some of the things that we're able to build with VR and AR are.

For the types of social experiences that I have wanted us to I wanted to build inside of the Kid.

And I'm excited to build on lock that and I also think strategically.

<unk> for us to have a little more control of our own destiny in terms of the the operating systems and platforms that all of our services operate on so.

Continue to be very focused on this and optimistic about what we're seeing.

Yes, Eric.

David just coming back to your question I think the context is we have this true we've had a tremendously strong quarter of Q4 of this year a number of factors, we talked about driving that.

A couple of pandemic related which is just the shift to online commerce as well as the ongoing the shift to more spend on products versus services.

In Q4, we also saw strength.

With sort of a full range of advertisers, we had seen sort of small and medium size business has come back and start getting strength in Q2, and Q3 of our Q3, specifically and then Q4. We also saw strength from some of our largest advertisers as well.

As you look out in 2021, I think we're just going to be facing tougher comps in the back half of the year some of those things related to the.

Related to the pandemic has the potential to revert whether it's more consumer expenditure shifting towards services away from products. So that will make it a little bit of a tougher comp and then you layer on top of that headwinds to growth related to.

Privacy related headwinds the biggest factor there is iOS 14 so.

Certainly anticipate growth but.

We're just looking at tougher comps as we hit the back half of the year given really most importantly, the strength that we saw this year and then on top of that the.

The headwinds that we're seeing from from some of the privacy changes.

Yes.

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

Great. Thank you I guess I'll ask about regulation I know I know, it's a tough topic.

First mark in your prepared remarks, you elevated a little bit competition with Apple is there anything going on with with iOS 14. Besides idea of Fei that maybe puts you in more direct competition with Apple and then secondly, obviously the FTC.

Filed their case since the last earnings call, maybe just opened for any thoughts on that that you're able to share.

Well in terms of the competition.

With the Apple specifically I laid out three or four product focus areas.

And with the exception of the work that we're doing on communities, which I think is quite separate from from the work that they do.

The other three areas I think are going to have very significant competitive overlap with apple.

In messaging certainly.

Such as the <unk>.

The popular service in the U S. So I think because of.

The fact that the pre install it and give there are several advantages that the that other apps don't have.

And commerce and supporting small businesses I think there you have some of the iOS for 14.

The changes that.

We think are going to be very problematic, especially for small businesses and then longer term as we move towards building.

The next computing platform.

I think we would expect to see them as more of a competitor there as well so.

I do think that this is sort of shaping up.

That we faced many competitors for either a lot of competitors in the the core social App work that we do.

Excuse me. This is the operator, I apologize, but there will be a slight delay in today's conference. Please hold and the conference.

Resume shortly thank you for your patience.

For two on mute.

The speakers we are now connected.

Was there another question on the last one that I was supposed to answer the question about the FTC.

Hey, guys.

Alright.

We are now through the slide.

Yes, you are connected.

Okay.

Alright, so where did I lose you.

Okay.

I think you had covered the question of the dynamics related to.

The competitive landscape and then there was a follow on question around the ft. FTC case of any thoughts that we have on that.

I don't think we have anything we necessarily are commenting on at this point.

Nothing on the case of an unregulated overall, because I think some of the question was focused on that day.

The.

The point that I would highlight is.

I actually think it would be very helpful to us.

Yes.

And the Internet sector overall for there to be clearer rules and expectations on some of these social issues around.

How content should be handled around how elections should be handled.

Around.

What privacy norms.

The governments want want.

One of C in place.

<unk>.

Because views.

These questions all of tradeoffs right all of the content of elections content.

Elections questions have tradeoffs between giving people free expression and of voice.

But some of their tradeoffs again safety and.

And privacy and other social equities, they're all very important and it's.

I think very difficult for a private company to balance.

Though is and I think it would be much better to have.

Just to be clearer guidance and clearer rules for the Internet, So thats going to be something that we continue to advocate for.

Mike can we go to the next question.

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

Hey, guys question about the price volume.

Now on the muted.

Can you hear me.

Yes of course.

Yes.

Question about the price versus volume metrics David.

Mentioned.

The first quarter of a long time of the price I think was up year on year I know, there's a lot of factors that go into that.

But you also mentioned that you are seeing strong traction from Dr. Advertisers around the stories format. So maybe just a little bit more color on.

Where we are in the stories versus feed.

Price dynamic and what kinds of Dr. Advertisers youre seeing the most traction around these stories ads. Thanks a lot.

Yes, sure sure Ross.

So I mean, as you know with the auction dynamic the growth and pricing is.

Does it really depend on a per impression growth and we saw impression growth.

This quarter to 25% from the Q3 rate of 35% and some of that is just due to lapping product optimizations on Instagram during Q4 of <unk> 19, as well as just the normalization of engagement trends on on Facebook.

And so we would expect that sort of overall story to continue into Q1 with those trends.

And then we're also continuing to make it or of improvements that enhance the performance.

Performance.

And benefit pricing over time and the one example that we would give there is Instagram stories that as you know it's been an area we've been focused on to try and make the.

Dr performance.

True better adds interactivity.

Work better on stories, and we've been seeing some good progress there. So we called that out as well as being a driver of the price improvement, there's still a GAAP with the stories ads.

And the <unk>.

Feed ads, but we've been pleased with the progress we've been making on that front.

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

Oh, great. Thanks, very much two quick ones for me I guess I guess, given the ongoing effort from private messaging I'm curious ultimately what will differentiate messenger for whatsapp other than branding of our geography. If there is an inevitable consolidation of the functionality there and then secondly on real I know it's still early.

But any update on performance of our uptake as well.

About the monetization I think will be helpful. Thank you.

Mark do you want to take this yes.

I can take the first one I mean, the biggest connection.

For the biggest difference between messenger and Whatsapp is.

Obviously, the connection to Facebook in the.

<unk>.

Of.

The same identity and graph that you use on Facebook come of that comes with the Divesture.

So even if you can send messages across the different apps.

And there is theres more interoperability.

And we bring the same world class of privacy features to both I think that that will still make the apps feel.

Fairly distinct.

I think the.

Kind of.

<unk> and <unk>.

The focus of the apps on.

Now how much different functionality. They include will vary I think whatsapp has always had.

We've always focused a lot on.

Making it a very utilitarian experience.

And placed more of a premium on <unk>.

Simplicity, there so we'll continue adding new functionality.

<unk> functionality, but we're more focused on keeping that minimal whereas in messenger, we have a lot more tools and features for expression.

And I would expect it will continue adding more of there as well.

On the second which we were really pleased with the early data on consumption and we have a bunch of work ahead of us to make it easier for people to create and discover content. We've now rolled out the product in over 50 countries.

In monetization of it.

We've launched the branded content tagging the us so that helps creators our share of the content and monetize we launched shopping in real and.

And we've said that we will launch adds the timing tends.

To be determined and we're going to follow the same pattern, we followed on other things like story.

We launched consumer products, we make sure there is product market fit and people are using it.

Then we launched an AD product and we make sure that it's beneficial for consumers and as David answered and I think the last question.

We work very diligently quarter by quarter on the basis point improvements that help us scale of products and we will do things to make it easier for people to create the right businesses to create the right AD format, we will do things to make does the ads and GAAP.

For the person who might be looking for that product or service.

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

Great. Thank you very much of two questions. Please mark I want to go back to the first team Doug of this class of communities and how youre looking to potentially deemphasize.

Vic and political groups.

How important or how.

Large is civic and political.

The content on the site is there a way to quantify the or quantify the engagement with it too.

To see if this is one of the the headwinds that Tom.

You guys talk about in terms of potentially.

The emerging in 2021 and second on the regulatory headwinds. There is just increasing talk of about section two of 20 protection I know it's.

It's a thorny subject, but from where you stand how do you see Facebook cannot just really Facebook part of other social media platforms dealing with it.

If it was either to the narrowed or even completely eliminated.

Yes.

Sure I can probably take both of those.

No I don't know if we have any stats to share on the size of civic and political content, but it's.

Pretty small minority of the content right in it.

And all of the feedback that we have from our community suggests that the vast majority of people would like to we'd like it to stay that way.

I think there has been.

This <unk>.

Brendan I think across society, where a lot of things have become politicized.

And the.

In politics.

Has kind of head of way of creeping into everything and I think of lot of the the work that were.

A lot of the feedback that we see from our community that people don't want that and they're in their experience and of that come to our services to connect with friends and family to connected communities that they care about.

And.

I think that we can.

Potentially do a better job of those core jobs that we have.

And do a better job of helping to bring people together and helping to promote healthier communities.

If we can reduce the amount of politics on our on our services now I mean, it's.

The.

We'll have to balance this carefully because we have a deep commitment to free expression. So I believe that if people want to be able to discuss the stuff or joined groups there.

This should certainly be able to do that.

Right.

But I just don't think that it's serving the community, particularly well to be recommending that content right now but.

One thing to mentioned just because you were asking about the headwinds and all of that is I don't think that this is a factor in any of that in winter can can jump in if there is any more of that you want to.

Add on that but I don't think that Thats, what what he had in mind in any way their weight of I'll Skip a beat for you to jump in if you want before going into the next question yes.

Yes, no I was just going to say that exact thing you said this is not something thats factoring into our outlook, it's not a it's not a headwind that is.

It is a factor in our 2021 outlook and certainly on the ads front as well of political is extremely small it's low single digit revenue even in the.

Active political quarter like we had so.

It is not factoring in neither of the outside of the engagement side of our outlook.

Yes.

Now going to your 230 question.

Yes.

I do think of.

Testified this about this in Congress I do think that Congress should update section 230 to make sure that it's working the way.

That people intend right.

After I think being in place for almost 25 years in the section 230 has been very important it helps give.

Rise to the Internet as we know it today and it's.

Given the internet platforms tools to build the balance free expression and safety.

And I think it's also gone pretty far in terms of helping to ensure the values like free expression.

<unk> built into the Internet DNA.

So I think that any changes should be.

Thought through very carefully and should be thought through.

Not just from the perspective of what.

The larger company you like.

Like Facebook or a Google.

Or Twitter it could handle in terms of updating their content moderation.

Policies, but it also from the perspective of making sure the new new companies can continue to emerge.

I think that's very important as well so we've supported changes in this.

For for a while back in 2018, we supported of change to prevent.

Sex trafficking and.

We will support the similar efforts to tackle harms like.

Child exploitation.

Imagery and material and opioids.

And and we'll for support and the push to make content moderation system is more transparent.

The details on all of this of course matter, but we hope to be able to work with the new Congress on this.

Greater we have time for one last question.

Your last question comes from the line of John Blackledge from Cowen.

Alright, great. Thanks, two questions Mark and community could you provide further details on layering more services, often Facebook groups and expectation for uptake of those new services and community evolve as a meaningful monetization driver.

In the coming years, and then on the idea maybe for Dave for Sheryl.

How do you think advertisers are prepared for the changes and all of the long tail advertisers be more impacted than the larger more sophisticated advertisers.

Yeah.

Yeah.

I can speak to the first point.

First for the business.

And I don't think we look at community separately from friends and family. They are both different types of content that show up in news feed and the people interact with but.

My guess is that it's probably already a pretty meaningful driver of the business and.

And the value of that people get from the services today, So absolutely I think as this continues to grow.

It should be in the future.

The big trend that we're the we're looking at now and then I tried to call out in my remarks earlier.

Is that right now.

There is a spectrum of different kinds of groups and communities on Facebook than ever.

Everything from.

The MIM groups that people find.

Entertaining and fund two groups that people really turned to for support when they have.

The kind of serious issues in their lives and.

I think the right now, though most of these communities.

They have the backbone of.

There is of feed.

There are ways to message people, but when I think about the physical communities that.

I'm a part of.

And my life the.

The often of more of an institutional structure right. There are some communities.

There are people, who it's their full time job to basically help.

Help people engage in.

And.

And.

We help people navigate them.

Thinking about things like the synagogue that I'm that I'm a member of credit I mean, there are people there of whose job. It is to help engage the congregation and help them get basically the.

The most out of out of everything that the the institution has to offer and that's a very important kind of a community organization and I would love for more institutions like that to be able to.

Organized and build community more effectively online. So there are lots of different tools that.

I think that.

If we provide.

Spanning messaging spanning video chat the.

Organizations, the own websites and other things that they do that if we can help.

And a lot of those areas then we can make it said groups on Facebook or not just not just the feed in a place where you post some content and maybe engage on a post but that we can really help more organizations of buildup community institutions like that and I think that that could be a very big contribution and something that I'm excited about technology.

To your second question, we think it's a really important question and one that we take very seriously. So small businesses are very reliant on personalized ads for the ability to use data in a very privacy safe way to get the customers who are interested in their products and services and that makes sense you know big businesses.

We can buy and add to the whole country, we can buy and that's one of the whole region small businesses can't they have to per time, the precise items since day, one and I think one of the mainstays of our businesses. We've enabled that targeting in a very privacy safe way without giving information without permission to advertisers and what's happening.

The idea is that small businesses are really concerns because they're worried that theyre not going to be able to buy effect of advertising.

All of personalized ads went away.

The businesses with the C of 60% cut in website sales now we don't think Apple's contemplating going that far that quickly but that is the that.

The general direction of.

What what would happen and you can see that that would be very detrimental to their business because the very detrimental of the economic growth because so much of our job growth comes from small businesses.

It's worth noting it is not just about advertisers some.

Some of these changes also impact developers and other forms of the businesses. We are starting to hear from trainers and developers who are worried that some of their free services will have to start charging of shutdown force them into subscriptions or other in payments for revenue now not all small businesses are aware of these challenges, but we are here.

Going from more and more of them Taylor.

Arrington.

Great. Thank you everybody 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 US you may now disconnect your lines.