Q3 2021 Facebook Inc Earnings Call
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Good afternoon, My name is France, and I will be your conference operator today at this time I would like to welcome everyone to the Facebook third quarter 2021 earnings Conference call. All lines have been placed on mute to prevent air.
Any background noise.
After the Speakers' remarks, there will be a question and answer session. If you would like to ask a question during that time. Please press. The one and then the number four 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 earnings Conference call. Joining me today to discuss our results are Mark Zuckerberg, CEO, Sheryl Sandberg, COO and Dave Wehner CFO before we get started I would like to take this opportunity to remind you that our remarks. Today will include forward looking statements actual results may differ materially.
Really 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.
During this call we may present, both GAAP and non-GAAP financial measures a reconciliation of GAAP to non-GAAP measures is included in today's earnings press release, the press release and an accompanying investor presentation are available on our website at Investor FB Dot Com and now I'd like to turn the call over to Mark.
Hey, everyone and thanks for joining today.
Made good progress this quarter across a number of product priorities and our community continues to grow there are now almost $3 6 billion people, who actively use one or more of our services and I'm excited about our roadmap to keep building great new experience with portal.
As expected we did experience revenue headwinds this quarter, including from Apple's changes that are not only negatively affecting our business, but millions of small businesses and what is already a difficult time for them and the economy.
Sheryl and Dave will talk about this more later, but the bottom line is we expect we'll be able to navigate these headwinds over time.
That sense that we're already making today.
Before we get to a product update I wanted to discuss the recent debate around our company.
I believe large organizations should be scared.
I would much rather live in a society, where they are then one where they where the cancer.
Good faith criticism helps us get better.
My view is that what we're seeing is a coordinated effort to selectively use lease documents to paint a picture of our company.
Reality is that we have an open culture, where we encourage discussion and research about our work. So we can make progress on many complex issues that are not specific to just us.
The industry, leading programs to study the effects of our product can provide transparency into our progress because we care about getting this right when.
When we make decisions, we need to balance competing social equity.
Like free expression with reducing harmful content or enabling strong encrypted privacy with supporting law enforcement or enabling research and interoperability with locking down data as much as possible.
It makes it a good sound device to say that we don't solve these impossible tradeoffs, because we're just focused on making money, but the reality is these questions are not primarily about our business, but about balancing different difficult social values.
And I have repeatedly called for regulation to provide clarity because I don't think companies should be making so many of these decisions ourselves.
I am proud of our record navigating the complex trade offs involved in operating services, our global scale and I am proud of the research and transparency, we bring through our work.
Our programs are industry, leading we have made massive investments in safety and security with more than 40000 people and we are on track to spend more than $5 billion on safety and security in 2021, I believe that's more than any other tech companies, even adjusted for scale.
We set the standard for transparency with our quarterly enforcement reports and tools like local ads archive, we established a new model for independent academic researchers.
Access data, we pioneer the oversight board has a model of self regulation and as a result, we believe that our systems are the most effective at reducing harmful content across the industry and I think that any honest account of how we handle these issues should include that.
I also think that any honest account should be clear that these issues are primarily about social media.
That means that no matter, what Facebook does we're never going to solve the Motorola for example, polarization started to Verizon in the U S. Before I was born at the same time independent research shows that many countries around the world have flat or declining polarization. Despite similar social media use there in the U S.
Yes.
We see this pattern repeat with other issues as well the reality is our social media is not the main driver of these issues that it probably can't fix them by itself.
We shouldn't want to every other company in our industry to make the investments and achieve the results that we have.
I worry about the incentives that we're creating for other companies to be introspective as we have been.
I am committed to continuing this work because I believe it will be better for our community and our business over the long term.
Yes, we can change the underlying media dynamics, but there is a different constituencies that we serve so it has always been more important and then I try to keep our focus.
People <unk>.
The people who use our services because we build the best tools to stay connected to the people who care about to find communities that matter to you and to grow your small business.
And the reason, we've been able to succeed for almost two decades.
Because we keep evolving and building Facebook.
Facebook started in the dorm room and grew into a global website, we invented the news feeds and a new kind of ads platform. We became a mobile first experience and then we grew a whole family of apps that serve billions of people.
And there is so much more to build.
Even with all of the tools that we have today, we still can feel like we're right. There together with the people we care about when we're physically apart we can't teleport as holograms to instantly be it the office without a commute or at a concert with a friend or in your parents living room to catch up the creative economy and commerce tools are still need.
<unk>.
And there should be opportunity for millions of more people to make a living doing the work that they love.
Our three product priorities remain our focus on creators commerce and building the next computing platform.
Big part of our work with creators is our focus on <unk>.
Real is already the primary driver of engagement for our clients.
It's incredibly entertaining and I think that there is a huge amount of potential ahead.
We expect this to continue growing and.
I am optimistic that <unk> will be as important for our product as stories we.
We also expect to make significant changes to Instagram and Facebook in the next year to further lean into video and make real and more central part of the experience.
One aspect of this is giving all of our apps the goal of being the best services for young adults, which we defined as ages 18 to 29.
Historically young adults, who had been a strong base and thats important because they are the future.
But over the last decade.
The audience that uses our App has expanded so much and we focused on serving everyone. Our services have gotten dialed to be the best for the most people who use them rather than specifically for young adults and during this period competition has also gotten a lot more intense, especially with Apple I message growing in popularity and more recently the <unk>.
The Tic Toc, which is one of the most effective competitors that we have ever faced.
We are retooling our team to make serving young adults, they're northstar rather than optimizing for the larger number of older people.
Like everything this will about training and our products and it will likely mean that the rest of our community will grow more slowly than it otherwise would have.
It should also mean that our services become stronger for young adults.
This shift will take years not months fully execute and I think it's the right approach to building our community and company for the long term.
Our next product priority is commerce.
Helping people discover new products that they're interested in and reach customers in southern <unk>, we're going to unlock a lot of opportunity.
As Apple's changes make e-commerce and customer acquisition less effective on the web solutions that allow business businesses set up shop right inside our apps will become increasingly attractive and important to them.
We built solutions like ads section dynamically <unk> businesses website or their shop on our platform is depending on what will perform better for them and that will help more businesses navigate this challenging dynamic environments.
Building a full pledged commerce platform is a multiyear journey.
Marketplace is already at scale and lots of people rely on it, especially now with supply chain issues that make it harder to get new products.
<unk> are getting more developed and we have an exciting program planned for this holiday season, where we're working closely with a number of the businesses that have invested the most in shops to identify what works to find new customers and grow their businesses even faster now.
And our plan is to then scale those solutions more broadly in 2022.
Beyond the <unk> and Commerce I also want to share some thoughts on our longer term efforts to build the next computing platform and helped bring the <unk> launch.
This is a major area of investment for us and an important part of our strategy going forward.
And I believe this work is critical to our mission because delivering his sense of presence like you're right there with another person.
The Holy Grail of online and social experience.
Over the next ahead. These new platforms that are start to unlock the kinds of experiences that I've wanted to build since before I, even start with Facebook.
Along with those social experiences I expect a massive increase in the creator economy and amount of digital goods and commerce.
During the <unk> everyday then youll need digital close at a digital tool and different experiences.
Our goal is to help them the diverse reached a billion people and hundreds of billions of dollars of digital commerce with <unk> and.
And strategically helping to shape. The next platform should also reduce our dependence on delivering our services are competitive.
Building the foundational platform for the <unk> will be a long road.
We just released the 128 gigabyte quest to replacement of 64 gigabyte model for 299.
With Essilor Luxottica, we released our first smart glasses, and they're off to a strong start as well.
But bringing this vision to life.
Isn't just about building one glasses product there is.
A whole ecosystem, we're building multiple generations of our VR and air products same time as well as the new operating system development model of digital Commerce platform content Studios and of course, our social platform.
This reflects the significance of this for our business today, we are announcing a change to our financial reporting.
Next quarter, we will begin disclosing financial metrics for Facebook reality lab separately from our family of apps.
This will provide investors with additional visibility into the investments that we're making and augmented and virtual reality.
In 2021, we expect these investments to reduce our overall operating profit by approximately $10 billion.
And I expect this investment to grow even further for each of the next several years.
Dave will share more about this later, but I encourage you all to tune interconnect on Thursday to hear more about our vision and our work here in more detail.
I recognize the magnitude of effect on the future and I am grateful for the support of our investors the creative community and the thousands of talented people working on this effort inside our company to bring this inspiring future at all.
And with that here's Sheryl.
Thanks, Mark and hi, everyone.
This quarter, our total revenue was 29 billion up 35% year over year. Please.
We saw solid revenue growth across all regions and we continued to grow our user base.
We felt the impact of some big external factors in Q3.
One of <unk> some of the revenue softness we've seen and what we're doing to mitigate the headwinds and how businesses over the crucial holiday period and beyond.
To start let's take a step back.
Over the past decade, we've seen more and more business is just online.
Pandemic hit.
Digital transformation accelerated.
We've invested in tools and products over many years to help businesses make the checks.
So this acceleration drove very strong growth for us throughout the last few quarters.
We've been open about the fact that there were headwinds coming and we've experienced that in Q3.
The biggest is the impact of Apple's iOS 14 changes, which has created headwinds for others in the industry as well major challenges for small businesses and advantaged apples on advertising business.
We started to see that impact in Q2, but adoption on the consumer side ramped up by late June.
Critical mass in Q3.
As a result, we've encountered two challenges.
One is that the accuracy of our ads targeting decreased which increased the cost of driving outcomes for advertisers.
And the other is that measuring those outcomes became more difficult.
And targeting.
We focused on improving campaign performance, even with the increased limitations facing our industry.
We're building commerce tools to help businesses reach more new customers and get more incremental sales.
And over the longer term, we're developing privacy enhancing technology in collaboration with others across the industry to help minimize the amount of personal information we process.
While still allowing us to share relevant ads.
Progress in these areas will take time and will be a focus for us throughout 2022 and beyond.
Measurements as we wrote in a recent blog post we believe we are underreporting iOS web conversion.
This means real world conversions like sales and App installs are higher than what's being reported from any advertising, especially small advertisers.
We're making good progress fixing it.
<unk> will be able to address more than half of the underreporting by the end of this year.
And we will continue to work on this into 2022.
Another external factor is slowing ecommerce growth.
Strong ecommerce growth in recent quarters was driven in part by the acceleration of digital transformation that is now tapering off.
I think most people see the similar lines.
There was a period of time when many people who are able to stay at home and order things I Wonder things online much more.
But now in many places things have opened up and people are increasingly making purchases in person.
That doesn't mean ecommerce has stopped growing.
This is they're still making the shift online.
But ecommerce is no longer growing at the pace. It was at the height of the pandemic.
These factors have been compounded for many advertisers by major global supply chain issues and labor shortages.
Would you have left many consumer businesses with less inventory.
This has reduced their appetite to generate demand from consumers, which has impacted advertising spend.
Businesses in every region and across a range of verticals have been affected.
At the same time, we've also seen some impact from Covid surgeons around the world in places like Southeast Asia.
Overall, if it wasn't for Apple's iOS 14 changes, we would've seen positive quarter over quarter revenue growth.
And while we and our advertisers will continue to feel the effects of these changes in future quarters, We will continue working hard to mitigate them.
Despite the headwinds we remain confident about our future.
We believe Facebook and Instagram are the best place for people to connect with their friends and families build communities and starting grow businesses.
We believe there is still the best platform for advertisers to reach people, where they are and get measurable outcomes.
Our focus remains where it is always been building products that help people connect and business described.
Mark talked about video a moment ago.
Not only is this a growing area for us overall, but we're also continuing to get better monetizing it.
More than 60% of video revenue now comes from mobile first video, meaning videos that are shot vertically or are under 15 seconds.
Over 2 billion people per month now watch videos that are eligible for industry MAU, which are ads shown before during or after videos.
And we're expanding access to real ads on Instagram to more advertisers with automatic placement and new creative formats.
Another area, we're seeing good progress and lead generation.
<unk> products helps businesses generate quality needs of scale and meet customers, where they are on their preferred channel of communication, whether it's messaging forms or calls.
In April we started rolling out a new conversion leads optimization goals for higher quality leads.
And advertisers.
Also integrate the CRM with Facebook via our conversions API.
Our tests show that on average advertisers see a 20% increase in lead to cell conversion rate when they use both the optimization and the integration.
Q4 is the most important quarter of the year for many businesses large and small.
As always we're focused on making the holiday season, a success for them.
We're working to fix the measurement issues, they are experiencing and deliver the tools and products they need to grow.
And we're rolling out a range of holiday shopping experiences to help people find great deals support small businesses and good causes and shop with local and black owned businesses.
We're bringing exclusive gift shops that will be available when people check out on Facebook or Instagram like 20% off your first purchase and three shop shipping.
Turning next week, we'll host daily Lotte shopping experiences with companies large and small brands like Walmart Macy's benefit cosmetics and paint box now to educate shoppers and chair exclusive deals.
And we're bringing back one of my favorite campaigns ever by Black Friday to showcase black owned small businesses during the holidays.
It includes things like buyback collections, and the Facebook and Instagram shop tab, and a weekly by Black Friday show with live shopping segments from up and coming back on small businesses.
I want to close by saying, how grateful I am to our partners around the world and to our incredible teams, who are working so hard to help people and businesses throughout this period.
Now here's Dave.
Thanks, Sheryl and good afternoon, everyone. We delivered solid results in the third quarter in the face of a challenging mobile platform landscape in an evolving macroeconomic environment, let's begin with our community metrics. Our global community continued to grow even as we lapped elevated user growth in the third quarter of last year related to the pandemic.
We estimate that approximately $2 8 billion people used at least one of our services on a daily business base basis in September and that approximately $3 6 billion people used at least one on a monthly basis Facebook.
Facebook daily active users reached 193 billion up 6% or $110 million compared to last year.
<unk> represented approximately 66% to $2 91 billion monthly active users in September.
<unk> grew by $170 million or 6% compared to last year.
Turning to the financials all comparisons are on a year over year basis, unless otherwise noted.
Q3, total revenue was $29 billion up 35% or 34% on a constant currency basis, we benefited from a currency tailwind and had current foreign currency foreign exchange rates remained constant with Q3 of last year total revenue would have been $259 million lower.
Q3 AD revenue was $28 3 billion up 33% or 32% on a constant currency basis.
On a user geography basis year over year AD revenue growth was strongest in rest of world at 50%.
Europe, North America, and Asia Pacific grew 35%, 31% and 28% respectively.
Europe Asia Pacific and rest of world benefited from currency tailwind, though to a lesser degree than in the prior quarter.
In Q3, the total number of AD impressions served across our services increased 9% and the average price per AD increased 22%.
Impression growth was driven primarily by developing markets, especially in Asia Pacific.
Pricing growth benefited from advertiser demand and lapping COVID-19 related pricing weakness during the third quarter of last year. So as Cheryl netted growth was hindered by three primary headwinds first advertising spend was negatively impacted by performance and measurement headwinds related to Apple's ATT changes.
We are seeing some macro headwinds as growth in online commerce has moderated from the elevated levels experienced earlier in the pandemic and businesses based supply chain disruptions.
Third Covid resurgence is in southeast Asia have led to additional lockdowns in a curtailment of economic activity.
Other revenue was $734 million up 195% driven by strong quest to sales.
Turning now to expenses Q3, total expenses were $18 6 billion up 38% compared to last year.
In terms of the specific line items cost of revenue increased 38% driven mostly by consumer hardware costs core infrastructure investments in payments to partners R&D increased 33% driven primarily by hiring to support our core products and consumer hardware efforts.
<unk> sales increased 32%, 32%, mainly driven by marketing spend and hiring.
Lastly, G&A expenses increased 65% driven primarily by higher legal related costs and employee related costs.
We added over 4700 net new hires in Q3, primarily in technical functions. We ended the quarter with over 68100 full time employees up 28% up 20% compared to last year.
Third quarter operating income was $10 4 billion, representing a 36% operating margin our tax rate was 13% net income was $9 2 billion or $3 22 per share.
Capital expenditures, including finance leases were $4 5 billion driven by investments in data centers servers network infrastructure and office facilities free.
Free cash flow was $9 $5 billion, and we ended the quarter with $58 $1 billion in cash and marketable securities.
We repurchased $14 4 billion of our class a common stock in the third quarter and had 8 billion remaining on our prior authorization as of September 30th.
Today, we announced a $50 billion increase in our stock repurchase authorization.
Turning now to the outlook starting with.
Our results for the fourth quarter of 2021, we plan to breakout Facebook reality labs are <unk> as a separate reporting segment.
As we have discussed we are dedicating significant resources towards our augmented and virtual reality products and services, which are an important part of our work to develop the next generation of online social experiences.
The new segment disclosures will provide additional information on the performance of <unk> and the investments we are making.
Under this reporting structure will provide revenue and operating profit for two segments. The first segment family of apps will include Facebook, Instagram messenger and Whatsapp and other services.
The second segment Facebook reality labs will include augmented and virtual reality related hardware software and content.
As Mark noted, we expect our investment in <unk> to reduce our overall operating profit in 2021 by approximately $10 billion.
We are committed to bringing this long term vision to life and we expect to increase our investments for the next several years.
Ahead of the fourth quarter earnings call, we will share additional details about the reporting reporting format of our segment financials.
Turning now to the revenue outlook, we expect fourth quarter 2021 total revenue to be in the range of $31 5 billion to 34 billion.
Our outlook reflects the significant uncertainty we face in the fourth quarter in light of continued headwinds from Apple's iOS 14 changes in macroeconomic and Covid related factors in.
In addition, we expect non ads revenue to be down year over year in the fourth quarter as we lap the strong launch of <unk> II during last years holiday shopping season.
As previously noted we also continue to monitor developments regarding the viability of transatlantic data transfers and their potential impact on our European operations.
Turning now to the expense outlook.
We expect 2021 total expenses to be in the range of $70 to $71 billion.
Updated from our prior outlook of 70 to 73 billion.
We anticipate our full year 2022 total expenses will be in the range of <unk> 91 to 97 billion.
Driven by investments in technical and product talent and infrastructure related costs.
We expect 2021 capital expenditures to be approximately $19 billion updated from our prior estimate of 19% to $21 billion.
For 2022, we expect capital expenditures to be in the range of 29% to $34 billion driven by our investments in data centers servers network infrastructure and office facilities.
Large factor driving the increase in Capex spend is an investment in our AI and machine learning capabilities, which we expect to benefit our efforts in ranking and recommendations for experiences across our products, including in feed and video as well as improving ads performance and relevance.
We expect our Q4 2021 tax rate to be in the high teens absent any changes to U S tax law, we would expect our full year tax rate in 2022 to be similar to the full year 2021 right.
Please note that our outlook for 2022 expenses capital expenditures and tax rate are preliminary estimates as we have not yet finalized our 2022 budget.
In closing this was another solid quarter for our business despite facing some headwinds and we believe the investments we're making in our current services as well as new products and experiences will enable us to remain the best place for people to connect and for businesses to advertise both now and in the years ahead.
With that tranche, let's open up the call for questions.
Thank you we will now open the lines for a question and answer session to ask a question press one followed by the number four on your Touchtone phone. Please pickup your handset before asking a question to ensure clarity.
If you are streaming today's call. Please mute your computer speakers.
And your first question comes from the line of Brian Nowak with Morgan Stanley. Please go ahead.
It sounds like it's a pretty important part of long term adoption curious to hear about anything youll share about current user adoption current engagement or more color on the demographics of people who are using <unk> now than.
And then the second one just a little more question that Apple on the ATT changes I appreciate the color on accuracy and measurement improvements any more specifics you can share about where you've made the most progress.
<unk> to date and sort of some of the areas. We are seeing more challenges you need to continue to invest to really improve to navigate through this more challenging environment.
Yeah sure Brian on real that's been a bright spot for for Instagram and.
Currently we're seeing good growth globally.
Strength in a number of different markets, but we've we've been making a lot of progress on <unk> and have been and have been happy happy with it.
On Instagram in terms of the launch on Facebook Thats, that's earlier stage on the monetization front, we're just starting to roll out ads in Instagram. So its earlier on that front and we really haven't gotten to a monetization points with with <unk> on Facebook.
Charles do you want to take the.
Take the <unk> question.
I can take that I mean, when you start at the top of this you really have to think about what personalized ads are and we think there are better for people and businesses and they are especially important to small businesses.
They also can be delivered can be done in a very privacy safe way.
There are two big challenges coming from this iOS chat changes one is targeting and one is measurement I'm, taking the second one first on measurement.
We think we can address more than half of that underreporting by the end of the year and make more progress in the years ahead we.
We estimate we're underreporting iOS web conversions, we believe that real world conversions like sales and App installs are higher and so we have to do the work to help clients measure.
Properly.
In order for them to really understand the outcomes, they're getting an improving performance and again, we think we can get a good chunk of that bond maturing more and the next year.
Targeting as a longer term challenge our direct response products are built on user level conversions and as.
As a result of the iOS changes, we don't see the same level of conversion data coming through so we have to rebuild our targeting and optimization system to work with less data. So this is a multiyear effort. We are developing privacy enhancing technology to minimize the amount of personal information, we learn and using more aggregate are anonymised data while still <unk>.
Allowing us to show those relevant personalized ads and measure the effectiveness and.
In order for this to really work and benefit all businesses can require some cross industry collaboration and more commerce tools and those are going to be longer term effort.
Operator, we can go to the next question.
Our next question is from Eric Sheridan with Goldman Sachs. Please go ahead.
Thanks, So much maybe two if I can maybe show a following up there in terms of thinking in terms of quarters or years on both the targeting and the measurement piece can you help us just go one level lower in terms of what you're building in terms of what's in your control to put out into the advertising ecosystem versus what might just take time for advertisers to adopt and gift.
Comfortable with and better understand the data.
Drive their business outcomes and how they allocate advertising budget that would be up for you and then Dave maybe if I could follow up on Opex and Capex, just how should we be thinking about the elements of core Facebook versus some of the things you are trying to build against <unk> vision for the long term with reality labs, and how that might be a driver of.
<unk> versus transient nature of Opex and Capex in the years ahead. Thanks, so much.
But some of the technology, we can build ourselves we build AI. We made continued investments in AI that help us maintain or improve long term performance data. We're building some of around commerce 12, and those are tools, we can build that we need other people to adopt and then some of the targeting.
The opportunities we see handset take tools, we can build our tools, we can build in industry collaboration we're really working as part of several industry collaborative groups on what those tools will look like and how those get adopted so does obviously take more partnership in our last in our direct control.
Hey, Eric on the outlook on expenses in 2022, it's obviously early but we wanted to given an initial outlook of our expected expense range. Since we typically do that in Q3.
Mark outlined we had a lot of priorities that we're investing against across the business that includes.
A lot of areas in the core sort of family of apps, but also in <unk>.
We've got a lot of priorities in.
Advertising AI commerce privacy, so when you kind of pull all these things together, we've got a pretty.
Pretty robust spending plan next year.
The primary driver is going to be accelerating head count growth in 2022, so that's going to be something youll see.
Head count coming in above above 20%, obviously that we have this quarter and we also expect to have higher expenses from office operations and travel once larger parts of the workforce are returning to the office in 2022.
We're not providing a specific breakdown at this point or for segment expense.
Our next question as you go to that.
Our next question from Doug Anmuth with J P. Morgan. Please go ahead.
Great. Thank you one for Mark and one for Dave Mark just given the significant significant investments from both P&L expenses and Capex.
And clearly you are talking about the heavy focus on meta versus over the long term. It's just hoping you could help us recap kind of the one one year three year five year aspiration from a product perspective as you've done in the past and then Dave just on the 2022 expenses.
Which is about 29% to 38% growth do you have any commentary on revenue growth and 22 to go along with that.
I can talk about the meta versus in reality labs part of us.
So.
For the next.
One three years, especially I think what you'll see is us putting more of the foundational pieces into place. This is not an investment that is going to be profitable for us anytime in the near future.
But we basically believe that.
Ed.
The <unk> is going to be the successor to the mobile Internet.
It's going to enable social experiences.
Are the ultimate expression of what we try to build which is allowing people to feel really present with the people. They care about no matter, where they actually are and we think it's going to unlock a massively larger creative economy of both digital and physical goods.
That would exist today and allow millions of people to be able to do work doing what they love and enabling a whole different economy around that but I think there's going to be another important pillar of our business over the next decade. So on the next one to three years.
<unk>.
I almost I wouldn't focus on the sort of business outcomes.
There are quite as much as I would just note that the product to the infrastructure that we're putting in place. So there is there are new platforms theres hardware components, there's the whole virtual reality product line is the augmented reality product line.
We're kind of starting to put those pieces in place.
There is the operating system and development model for all these new creative tools.
E Commerce parts of what we're doing around this.
And how the timing of broader commerce efforts across the family of apps.
There's all the social platform work that we're doing with our horizon effort that touches a bunch of different areas of what we're doing.
I think youll see all of those pieces start to.
You can build out and start to mature a bit over the next few years.
And then if we do a good job on this and I would say later in this decade is when we would sort of expect us to be more of a real business story, but I think what we've what we kind of think about brick for the near term is are we delivering the product experiences that are completely groundbreaking electrical try. This legislation is amazing and continued <unk>.
Where this is going.
And that will pave the way for the future.
And as the business Northstar values that I mentioned in my opening remarks, or we hope that by the end of the decade that we can help 1 billion people use of meta versus in support hundreds of billions of dollars of digital commerce and I think if we can do that then this will be a good investment over that over the long term.
Hey, Doug it's Dave.
We're not at this point, providing a specific revenue outlook for 2022, we continue to see opportunities to grow both impressions in price next year, but we're obviously coming off an incredibly strong year of revenue growth in 2021. So we do expect deceleration in growth in 2022 from the full year 2021.
Right and.
Theres sort of uncertainty implied in our range for Q4 revenue and I think that holds true for the 2022 outlook as well.
A lot of factors at play, including advertisers working their way through the impact of the Apple platform changes were.
We're obviously navigating a challenging macroeconomic environment will have a better sense of how these things work.
Work together as we get through the holiday season, but.
But yes, given the expense growth that we outlined.
Implied in the 30.
North of 30%.
We don't expect revenue growth at that level. So we would expect 2022 margins to be lower than 2021.
Our next question answering that question posed with Bank of America Merrill Lynch. Please go ahead.
Great. Thank you, maybe one for Mark and one for Dave.
Getting 18 to 29 year old users is not easy I Wonder if you could maybe outline some of your strategies to kind of get some progress there I know, it's multi quarter and then Dave in your guidance for Q4 can you help us all on the <unk> impact is it contemplated to be about the same as <unk>, a little bit better as you work on your measurement.
Or is a little bit more of a headwind in Q4. Thank you.
Yes, Justin I can take.
Yes, I can take the I can actually take both of those questions.
In terms of the younger demographics.
Our products are obviously widely used by young adults and we remained focused on.
Building out building out those product capabilities and continuing to focus on making our products relevant for that audience. I think really there is a big part of that strategy.
And we've now got that we.
We've got that rolled out in over 100 countries since launching in August of last year, and we're continuing to invest in that experience and make ongoing product enhancements.
And so that's probably one of our one of our big focus points that I would point to in.
In terms of the IFA, maybe Paul I'll, just ask Gavin Unreal.
Yes, I think that this is going to be a very meaningful qual.
Qualitative change in how people use.
A lot of different products across the cost management, I mean, I think everyone's in a while if format comes along.
That allowed us new types of content right. So we saw this with news feed.
We started with the story is.
And I think real is.
From everything I've seen has the potential to be.
Nothing of that scale, where there are different flavors of it in a different apps, but I think as a format of it can be very fundamental and I think we're still closer to the beginning of that journey.
And then we are to its maturity.
In terms of just having it rolled out.
Some of the initial tests and experiences and it rolled it out.
And Facebook ad.
I mean, you mentioned all the countries that are sent in Instagram, but.
But it's just continuing to grow very quickly. So I think that that's going to be a big part of our focus here.
And I think we'll we'll.
I'm excited over the next.
Year or two to see how that growth in China.
I would bet will be like stories in our products today, sorry that cohort yes.
Yes, Justin on on the iOS question as it relates to Q4 versus Q3, the bulk of iOS 14 updates were completed.
As we entered Q3, which contributed to the step up in the impact from Q2 to Q3.
Since 2014 is now widely adopted we don't expect a similar step up in Q4, but importantly, we haven't gone through a holiday season with these changes and prices.
Our higher during the holidays, given strong demand and so there is uncertainty how that will intersect with the challenges on targeting and measurement coming from the iOS changes. So I think that brings some uncertainty into the Q4 outlook, it's reflected in our guidance range.
Alright, and you go to the next question.
Thank you. Our next question is from Youssef Squali with <unk> Securities. Please go ahead.
Great. Thank you very much two questions for me Mark is the weaker Facebook connect I was hoping you can provide us an update on the horizon. This is the that social app, where people can create games and experiences to Sharon together, one will finally come out.
After close beta I think it's been in for the last two years it seems to us that to more Facebook into the matter very successful you really need to have a VR AR VR social app. That's obviously cooling that's successful and the other question is around the again. This focus on 18 to 29 can you maybe just speak to the current trends.
And engagement at both Facebook and Instagram, among millennials and younger audiences I know youre speaking about a focus on it going forward, but how has it been trending of late thank you.
Yeah.
So I'll take the first and then Dave can talk about whatever number to you.
I want to share.
<unk>.
So first let me say I think we are.
On Thursday, it connects we're going to.
Going into quite a bit of detail about our vision for the for the <unk> and how we think we can help contribute to building. This site I encourage all due to the Q&A.
Part of that that we are going to talk about his horizon and how that fits into this and we.
We've been steadily working on this and on boarding more creators and more people to it and we're adding more world all the time.
I think you are right I think this is going to be a critical part of our platform and the work that we're doing here, we released work room. It's recently.
Really excited about how that experience has come together and I think due to your point you mentioned, it's important to have a VR social experience I actually think it is important to have an experience that goes across all of them portal Brexit I don't think we're going to end up with is just a.
Sure.
Something that's like a VR social network I think you want to be able to have these experiences where you.
You can you can feel.
Present with people have this immersive experience, it's going to be best if you are in and VR or AR and Youre a hologram.
But in these field work everywhere, but it needs to build to work across our whole family of apps.
You can still work on the web and on Boeing's non computers.
So theres a lot to do and whether we call it beta or not.
I think the reality is we're going to be this is kind of similar to the question before about where we're going to be in a year or three years. There's a lot of foundational infrastructure that just needs to get built up here and.
And part of what we're trying to reflect in the segment reporting and all of that is we're committed to doing this work, it's going to be a big investment we want to be transparent about it.
But we think it's very exciting and a huge opportunity for the future and I encourage you to tune in on Thursday to hear more.
And you said just on overall being the engagement trends our products are widely used by teams, but we are facing tough competition from alike.
Tictoc, particularly in Snapchat, and we're focused on.
Obviously, continuing to innovate and rollout products like Reals.
And attract the younger demographics and retain the younger demographics for our products and that's why we're continuing to build and invest in those areas.
Our next question is from Mark Mahaney with Evercore ISI. Please go ahead.
Yes.
Mr. Mahaney. Your line is open. Please proceed.
I apologize two questions on the.
IOS changes is it fair to say that that's the majority that accounts for the majority of the headwinds that you saw in Q3 and expect to see in Q4, and then secondly, a question for Mark just on the application of artificial intelligence to kind of help.
Moderate contents, the wrong word but to try to.
Make sure that inappropriate content is removed from Facebook and Instagram et cetera, where do you think you are in terms of getting that to be where you want it to be I know, it's been a multiyear investment journey experience.
Here. We are several years later is this a specific task you think you've been able to show success in using AI constructively. Thank you.
Hey, Mark it's Dave on the first question, yes, the Apple platform changes were the largest factor in terms of Q3 headwinds I mean it was.
The first full quarter impact of those new ATT policy changes following just the increased consumer adoption ramp up the iOS updates.
And if it if it really werent for that we would have expected sequential growth Q2 to Q3, so that was the largest headwind in the quarter.
Okay.
Sure I can.
Can speak a bit to the AI.
So my answer is yes, I think it's made a big impact.
We issued its quarterly transparency reports, which I should add.
We're industry, leading illness and both in terms of defining this.
In terms of the debt.
What we what we outlined so that people can hold us accountable.
And kind of see the breakdown of how we're actually doing but what we measure in those reports.
And disclosed is what percent of the content that we act on is our AI or orange hurdle systems, finding rather than people who have reported.
We have a lot of people who use our products if they find something thats.
That's problematic when they report stuff to us in the year.
Used to be before the last several years that most of what we did for for community integrity with just respond to incoming reports, but we decided hey, we should really try to get in front of us and build really sophisticated systems that were not just relying on people that tell us when their issues, but we can proactively to address that.
And most of these categories and we basically gotten to the point now where.
90% of the content.
We're basically meant that we act on where.
Identifying largely through the AI systems and it varies a bit by category.
So for for categories like nudity awareness.
A relatively easier to train a computer to identify that.
The numbers are very high some of the.
Categories like hate speech said have been harder because first of all we're operating in I think it's around 150 languages around the world.
I also thank you.
There's a lot of cultural nuance and that's where.
<unk>.
Got to make sure you understand these new windows all of those languages and that.
You want to you want to make sure that people can say and did an inventory system right. If some of the same something resets to encourage someone to do something hateful, that's bad but if you if someone wants to test basically said, hey, I saw the person doing this.
And people shouldn't be doing that you don't want to censor people do that.
So it ends up being a very challenging problem in FERC for the first couple of years of working on this.
And we're still at a relatively low.
Recall right where.
Our AI systems had.
10%, 15% of the content that we were addressing we were we were dealing with proactively but in recent years.
AI progress has been very impressive we are now above 90% of the of the content that we can we've taken action on there.
<unk> is also proactive even with each.
So overall I mean.
Let me just let me take this question a slightly different direction, which is I know that there was a lot of scrutiny of our effort and I guess I just wanted to say to the team and the people who work on this so I'm really proud of the progress that Vivek I think we have the best people in the world and we're doing the best job of US I believe across any company in the industry and.
I think this is an important area there should be scrutiny on it but I also think that any honest account of what's actually going on here should take into account that a huge amount of progress has been made and we will continue to be made by a lot of talented people who are working on.
Our next question is from Ross Sandler with Barclays. Please go ahead.
Thanks.
Dave One nitpicky question on the guide and then one kind of big picture for Cheryl maybe.
So since we are now focusing on the two year CAGR.
<unk>.
For the guidance for the high end of the fourth quarter revenue.
Actually hasnt acceleration on the two year CAGR. So I know, we're talking about headwinds and <unk>.
In our supply chain and everything like that but the sequential growth looks normal and then the two year CAGR is accelerating so I guess, where is the strength coming from and would you call that a strong <unk> environment and then Sheryl.
You talked about overhauling targeting longer term to have less focus on users or user based targeting and more contextual and kind of other things I guess high level, how do you think that will impact.
Overall return on Ad spend.
<unk> pre IBSA levels.
Look at Facebook as competitive position in the digital AD market versus some of the other large platforms like any impact on the long term.
As you kind of retool the.
Targeting thanks a lot.
Hey, Ross, it's Dave, we're giving sort of specific quantitative revenue guidance on Q.
Q4.
Yes, I think if you look at the range, it's from a sequential growth basis on a seasonal basis Q3 to Q4.
It's lower if lower sequential growth than we've seen historically, so I do think that reflects some of the uncertainty that we're seeing out there as it relates to how IBSA sorry.
With the iOS, 14, and ATT and IBSA impacts play into.
Pricing during the holidays and also the.
Macroeconomic factors like the supply chain issues. So I do think that kind of the seasonal sequential growth is lower than we've seen in the past.
With the range I think that reflects that uncertainty.
In terms of.
The overall, our overall targeting I think it's hard to say here and decide exactly where we're going to end up at the all of this is going to be a multiyear effort. We've definitely seen in hand already and we're definitely focused on tools to help advertisers. We think we have opportunities to strengthen targeting ourselves.
Both by the work, we do ourselves and as part of industry consortium.
Youre right in your question in that advertisers have to make a choice of where they advertise. So the question for US is how good are targeting D compared to others.
Our targeting can suffer compared to others like Apple who have the correct data themselves.
But I think our targeting still remains I think in very very many ways very good for advertisers.
When you compare us on ROI, we've always performed well, we still do even though we've taken a hit and we are focused on continuing to do that for businesses.
Our next question is from John Blackledge with Cowen. Please go ahead.
Great. Thanks, two questions first on the macro are you already seeing supply chain issues impacting.
<unk> AD revenue or do you expect them to be.
It used to be more impactful later in the quarter and then second question on Instagram given the rise of Reals is it cannibalizing engagement on the other Instagram surfaces. Thank you.
Yes, John I mean its.
Look we're not we're not the macroeconomic authority on all things I will tell you that what we're hearing from advertisers is they are they are seeing supply chain issues that was true in Q3 and had an impact there as well as we expect that to continue to carry.
Over into Q4.
We're also obviously that intersects with the challenges with.
With the targeting and measurement headwinds from iOS <unk>. So it is hard to our to parse exactly how the platform issues and the macroeconomic factors will play into Q4.
But I think those are the two biggest factors driving the range of potential outcomes that we have outlined in our in our guidance.
In terms of Reals and other <unk> services.
I can take a crack at that park and Cheryl want to add anything whenever we launch new experiences. This was true with stories.
It was true with Facebook watch it.
Youre always going to see.
Some amount of shifting of <unk>.
People's time and attention to the new areas.
And we do think that that benefits the experience overall and we think that makes the overall experience more engaging over time.
And we do think that if we are able to with real drive incremental.
Incremental engagement with with with Instagram and Facebook. So thats why we are investing to do that.
Our next question if you go to the next question.
From the line of Mark Shmulik with Alliancebernstein. Please go ahead.
Yes, hi.
Cheryl.
Specifically around kind of on platform commerce and that pivot.
Previously you've shared kind of merchant and user adoption metrics, but any progress you could share on that front as it relates to activity our users embracing it.
And then the second question kind of more broadly around recruiting and I know the recent posts to create kind of 10000 jobs tied to the meta versus in Europe, any particular kind of rationale for how youre thinking about recruiting kind of globally. Thanks.
So on Commerce, we have a lot of commerce activity on our platform already people are discovering lots of products to our feed and stories ads. This is our largest AD vertical and COVID-19 really accelerated it but it's also been one of the fastest growing vertical.
Over a five year period.
We believe we drive hundreds of billions of dollars of Offsite ecommerce gross merchandise volume today through our ads business.
And we think commerce tools will be built in late layered on top of that to help businesses reach more new customers and drive more incremental sales.
In this commerce efforts were focused on three areas continuing to be the best place to advertise making it easier to sell on the platform and improving the customer experience and I think we are in different places on those in the first in terms of continuing to be the best place to advertise we are a great place to find customers. We think the ROI is very strong.
<unk> continues to be competitive.
In terms of making it easier the second to tell on the platform here, we're catching up to other mobile and web shopping experiences and I think we have some work to do there and then the third improving the consumer experience to encourage people to shop I think.
We're also making progress there, but we've got some room to you Bob.
And Mark on the recruiting front, obviously, we've got a.
No big investments a year planned in 2022, that's going to be largely driven by recruiting we're going to have to do that globally, we're looking to build technical talent.
We are going to be hiring people to do more remote work and focusing on that we're going to be.
Vesting in head count outside of the Bay area.
And continuing to focus on building, our technical and product capabilities across the globe Europe is an important part of that and Thats why it was outlined in that announcement.
Operator, we have time for one last question.
Our last question will be from the line of Brent Thill with Jefferies. Please go ahead.
Thanks, Dave just on the Capex up at the midpoint over 70% there are a lot of questions just as it relates to.
What the surges related to there is there any more detail you can help us better understand that that investment.
Yes sure Brian.
And in my prepared remarks, our 2022 outlook.
It really reflects our significant.
<unk> increase in our planned investment in areas like AI and machine learning and a lot of that will be dedicated to <unk>.
Investing in areas, where we can use machine learning to improve.
Ranking and recommendations to power experiences across our products.
Areas like feed and in emerging areas like reels.
Also be dedicating that to ads as we work to improve ad relevance.
And leveraging.
Machine learning and AI to help.
Balanced out the loss of signal.
That we've experienced from some of the platform changes. So we think that we can.
As part of as part of sort of making our ads even more effective.
Up for that loss with with the with the large investments on the machine learning and AI side, and I think our position.
It gives us a good ability to do that so that's really part of the part of the logic behind the big increase in the Capex budget next year.
Great. Thank you again for joining us today, we appreciate your time and we look forward to speaking with you again.
And this concludes today's conference call. Thank you for joining US you may now disconnect your lines.
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