Q4 2021 Meta Platforms Inc Earnings Call
Good afternoon. My name is Frank and I will be your conference operator today at this time I would like to welcome everyone to the meta fourth quarter and full year 2021 earnings conference call.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during that time. Please press the one and then the number four on your telephone keypad.
Call will be recorded.
Very much Ms Deborah Crawford.
Facebooks Vice President of Investor Relations you may begin.
Thank you good afternoon, and welcome to <unk> fourth quarter and full year 2021 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.
<unk>.
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 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.
Hi, everyone and thanks for joining today this was a solid quarter for our product business. It was also an important one for our company and October Arena.
That would be our new name and we laid out our vision for the members and when we shared our plans to connect I said this is not something that we're going to do on our own the better first it won't be built by creators and developers who will be interoperable and it will touch many different parts of the economy and a month since it's been exciting to see lots of other companies.
Sure their own plans for the meta hers and how their experiences and products might show up too.
Look forward to partnering with a lot of them as we work to bring this to life together.
Last year was about putting a stake in the ground for where we're heading this year is going to be about executing.
And today I'm going to discuss our seven major investment priorities for 2022.
Community messaging commerce.
As privacy AI and of course, the <unk> and these are the areas that we're putting a lot more talent and budget towards.
Before I get to that.
To briefly touch on our Q4 results, which I know Sheryl and Dave are going to go deeper.
I'm proud of the work that our team did here, we shipped product our community continued to grow.
This is of all sizes turned to us to.
To help them reach people, but there are two things that I want to call out that are having an impact on our business.
First is competition.
People have a lot of choices for how they want to spend their time.
Apps like Tictoc are growing very quickly and this is why our focus on <unk> is so important over the long term as is our work to make sure that our apps are the best services out there for young adults, which I spoke about on our last call the.
The second area and related to this is that we are in the middle of a transition on our own services towards short form video lifestyles.
And as more activity shifts towards this medium we are replacing some time in news feed and other higher monetizing services.
So as a result of both competition and the shift to short term short form video as well as our focus on serving young adults over optimizing overall engagement.
Going to continue to see some pressure on impression growth in the near term no.
<unk> confidence that leaning harder into these trends is the right short term trade off to make in order to get long term gains, but we've made these types of transitions before with mobile feed and stories, where we took on headwinds in the near term to align with important trends over the long term and while vis.
<unk> has historically been slower to monetize we believe that overtime short form video is going to monetize more like feed or stories than like watch so I'm optimistic.
We'll get to where we need to be with <unk> two <unk>.
Ultimately our continued success relies on building new products that people find valuable and into a use it and in a competitive marketplace. We are focused on understanding the areas that we can deliver on for people and executing against the strategy.
David is going to share more on the impact to our business in a minute, but before we get to that I wanted to discuss our investment priorities for 2022.
The first one is <unk>.
Now, it's clear that short form video will be an increasing part of how people consume content moving forward and <unk> is now our fastest growing content format by far it's already the biggest contributor to engagement growth on Instagram and it is growing very quickly on Facebook too.
And as we continue to improve the tools for creators ranking for the people watching and as we rollout the product everywhere across the world. We expect that this will continue growing quickly. So looking ahead, we are investing in simplifying our video across Instagram building more grief creative and monetization tools for creators.
And helping more people discover and interact with relevant reals.
The next investment priority is community messaging, which is about chatting with groups of people that you have some clean common risk, whether that's a shared community interests or experience.
Already run some of the world's most popular messaging platforms, where people connect one on one or in groups with friends family and colleagues.
We're seeing people increasingly want to share more things and messages that.
They were previously maybe posted to feed so I think the popularity that we're seeing with apps like slack in the workplace or discord or telegram.
This trend too.
We're going to help people on whatsapp better organize their group chats and make it easier to find information for the communities that they're a part of like parent group. So our neighborhoods and we're also building community chest on Facebook and messenger for real time conversations within those groups and communities.
Now I also want to call out business messaging since it's an area where there is some real momentum here.
We estimate that there are more than 1 billion users are connecting with a business account across our messaging service with every week and we're partnering with companies like Uber and Geo Mark to help people book a ride.
One of their groceries delivered right from a check and we're building new tools to make buying online better for people and easier to manage for businesses and we believe that this can be an important business for us in the years to come.
We're also making good progress on our broader commerce efforts, we already hold a lot of businesses reached new and existing customers with personalized ads.
And our commerce tools are an extension of that.
Seamless way for people and businesses to buy and sell through our apps and our strategy here since introducing shops at year and a half ago has been to make it as easy as possible for people to make a purchase after discovering a new brand or product without having to switch over to a browser or reenter their payment info and Cheryl will share more about our progress here, including.
Some of the success, we saw over the holidays.
So next up is ads with Apple's iOS changes and new regulation in Europe . There is a clear trend where less data is available to deliver personalized ads, but.
People still want to see relevant ads and business is still want to reach the right customers. So we are rebuilding a lot of our ads infrastructure. So we can continue to grow and deliver high quality personalized ads.
Now the next two priorities I wanted to discuss focused on infrastructure that underpins all of our products. The first one is privacy and we've made huge investments in strengthening our approach to privacy, including rebuilding our privacy program and.
Our privacy review process, and we made updates to bring greater privacy to our products, including intend encrypted backups and disappearing messages on whatsapp.
And as an encrypted voice and video calling on messenger and over the next few years, we're focused on building out a.
A major privacy infrastructure projects that will include our privacy commitments at a deeper level of our technical foundation to make them more durable and make product development faster and.
This is Bob evolving environment.
Now onto AI.
This is one of the areas, where we've routinely seen stronger returns on our investments over time that we've expected.
Advances in AI enabled a lot of experience that I've talked about so far but it enabled us to deliver better ads to people, while using less data that's core to all of our safety and security work.
Meaningfully improve the relevance of Reals in overall content ranking in general and it pays plays a big role.
And our commerce efforts.
Artificial intelligence is also going to play a big role in our work to help build the <unk>, We just announced our AI research Supercluster, which we think will be the world's fastest supercomputer. Once it is complete later this year and this is going to enable new AI models that can learn from trillions of examples and understood.
Hundreds of languages, which will be key for the kinds of experiences that we're building.
Now looking ahead, we are focused on further scaling our computing power and transforming our AI infrastructure through advances in foundational research as well as improvements to data center design networking storage and software.
The last investment priority here with our members.
We are focused on the foundational hardware and software that are required to build an immersive embodied internet that enables better digital social experiences than anything that exists today on the hardware front, we're seeing real traction with quest to peoples has spent more than $1 billion on quest store comps.
Hence, helping virtual reality developers grow and sustain their businesses.
We had a strong holiday season, and Oculus reached the top of the App store for the first time on Christmas day, and the U S.
We are working towards a release of a high end virtual reality headset later this year and we continue to make progress developing projects <unk>, which is our first fully augmented reality glasses.
Diodes for software a horizon is core to our better verse division.
This is our social.
<unk> World building experience that we recently opened to people in the U S and Canada, and we've seen a number of talented creators.
Build world like a recording studio, where producers collaborate or a relaxing space to meditate and this year, we plan to launch a version of horizon upon mobile too so metal bring early <unk> experiences to more surfaces beyond that VR.
So one of the deepest and most immersive experiences are going to be in virtual reality.
Also going to build access world from your Facebook or Instagram apps, as well and probably more over time.
This will enable us to build even richer social experiences where you can connect with friends in the meta versus whether they're in VR or.
We're also focused on avatars, which will be how you represent yourself in horizon eminent across other developers experiences in the meta versus <unk>.
In December we rolled out our <unk> avatars SDK to all unity developers on quest and the rift and Windows based VR platforms, letting developers bring meta avatars to their own VR experiences.
And we just announced an update to let to further customize their avatar to better express herself and we're introducing digital clothing to starting with an NFL partnership you can share on your favorite team.
You can use your avatar across quest, Facebook Instagram and messenger.
So it serves as another bridge between our <unk> social apps in three D immersive virtual reality experiences.
We have a bunch of work ahead to make avatars that are expressive and high fidelity.
As they need to be to fully represent us and help us fill present with one another but I am very excited for the advances that we're making there.
So we are making meaningful progress across all seven of these areas is going to improve the services that we offer today and it will help power a more social intuitive and entertaining meta versus where people businesses and creators can authorize.
And this fully realized vision, it's still a ways off and although the direction is clear our path ahead is not yet perfectly defined but I am pleased with the momentum and the progress that we've made so far and I am confident that these are the right areas and investments for.
For us to focus on going forward two.
<unk> 2022 is the first page of the next chapter for our company.
I am grateful for all the talented team at meta and our partners for executing on this important work.
And of course for all of you who are on this journey with us.
And now here's Sheryl.
Yeah.
Thanks, Mark and hi, everyone.
Our total AD revenue in Q4 was $32 6 billion, which is up 20% year over year.
The year also marks the first time, our business generated more than $100 million in annual revenue.
I want to congratulate our team and thank our partners for helping us reach this milestone.
Throughout 2021, and we saw solid growth, which continued in Q4.
But there were a number of dynamic factors that created headwinds for us. This past quarter. In addition to that as Mark Mark described around competition and our shift to short form video.
We were lapping a period of strong demand in 2020 that benefited from very strong growth in online commerce, which has been flat.
Q4 was also the first holiday season after Apple's iOS changes, which have had an impact on businesses of all sizes, especially small businesses.
And thank you all advertising to Graham.
We will continue to be a factor in 2022.
We've also heard from advertisers about other macro trends that contributed to the headwinds in Q4, including global supply chain disruption labor shortages and inflationary pressures pressures.
Number of industry reports have pointed to people shopping earlier in the holiday season to avoid potential supply chain issues and shipping delays.
This is in line with the behavior, we saw from advertisers many of whom frontload their spend earlier than usual.
Mark talked about seven areas of investment.
Like to talk about our progress in three of the commerce and messaging.
First.
Like others in our industry, we faced headwinds as a result of Apple's iOS changes.
As we described last quarter Apple created two challenges for advertisers.
One is that the accuracy of our ads targeting decreased which increased the cost of driving outcomes.
The other is that measuring those outcomes the keen market accounts.
These challenges are complex can interrelated, we're working to try and improve things for example by making progress in closing the underreporting gap for iOS with conversion and by introducing tools like our aggregated event measurement solution to deliver better insights for advertisers.
These efforts will help to mitigate some of the challenges, but we expect the overall targeting and measurement headwinds to moderately increase from Apple's changes and from regulatory changes in Q1 and throughout 2022.
And the shift to short term video I want to emphasize that while we're going through a transition we're optimistic.
Right now <unk> monetize at a lower rate than feed and stories and we expect this to improve over time.
We've made successful transitions before the shift from web to mobile and another ship from feed Detroit.
We have a playbook here the experience we have from monetizing stories is directly applicable. So we are not starting from scratch, we think that over the long term the chip will be a success for us and our partners too.
Second Congress.
We launched a number of new tools in Q4, we released new features like ratings reviews, and community replies to product questions and significantly improved checkout stability.
We brought shops two groups and we started testing lab shopping for creators and early glimpse of the immersing shop immersive shopping experiences that will be possible in the network.
Our commerce strategy remains focused on three areas.
Continuing to be the best place for advertisers to find customers can get strong ROI, making.
Making it easier to sell on our platform and improving the customer experience.
We still have a lot of work to do compared to other mobile and web shopping experiences, but we're seeing promising early signs.
It's great to see businesses and consumers using social and immersive shopping experiences.
Product tags dropped from nine shopping.
A good example is the laundry.
Premium fabric care and home cleaning brand from Unilever.
To build awareness of the new line.
It's developed at the musician John Mayer.
In November we launched exclusively on Instagram for 24 hours and hosted a live shopping event a conversation between John Mayer and largest cofounder Lindsay Julia blades, where people could buy the new products as they talked about their lives.
Our long event generated more than $40000 in sales.
Overall, we're pleased with the engagement, we thought with our commerce towards over the holiday season, and Q4 as a promising milestone in our multiyear journey.
Sorry business messaging.
Our focus is on helping businesses and consumers connect.
Our largest monetization effort, it's click to messaging ads when you click on an AD in your Facebook or Instagram feed and it opened to chat with a business messenger Instagram director Whatsapp.
It's a great way for businesses to drive engagement.
And we've seen lots of demand from consumers, who want to use our messaging apps for everyday services like utilities financial services education and travel.
In Q4, we expanded the types of information people can choose to receive from businesses in the format in which they can interact with.
Continuing to invest in neutral to make it easier for people to help and make purchases right from a child.
More than 150 million users globally, now view of business catalog and whatsapp each month.
And new features like collections on Whatsapp, how businesses organize their product and make it straightforward for people to find things to buy.
As we enter 2022, our focus is where it has always been building products that help people connect business to scrap.
Making long term investments to evolve our business and continue to drive real value for our partners.
In the coming year will continue to invest in things that improve outperformance for our clients.
From video like real and then making the commerce experience better for consumers and marketers on our platform.
As ever I'm grateful to our partners around the world Big and small do we learn from every day and.
So our teams that matter, who work so hard to help businesses due to the holiday season and beyond now.
Now here's Dave.
Thanks, Sheryl and good afternoon, everyone.
As we announced in October beginning this quarter, we are reporting revenue and operating income in two segments family of apps and reality labs I will begin by discussing our consolidated results before moving to segments and ending with our outlook. All comparisons are on a year over year basis, unless otherwise noted.
We delivered solid results in the fourth quarter, ending a strong year for our business as full year 2021, total revenue grew 37% to nearly a $118 billion.
Q4, total revenue was $33 7 billion up 20% or 21% on a constant currency basis.
Unlike the first three quarters of 2021, we experienced a currency headwind in Q4 and had foreign exchange rates remained constant with Q4 of last year total revenue would have been about $307 million higher.
Q4, total expenses were $21 1 billion up 38% compared to last year in terms of the specific line items cost of revenue increased 22% driven primarily by reality lapsed hardware costs core infrastructure investments and payments to partners R&D.
R&D increased 35% driven primarily by hiring to support family of apps and reality labs, as we increase as well as increase in reality labs R&D operating costs.
Marketing and sales increased 34%, mainly driven by marketing spend and hiring.
Lastly, G&A increased to 107% driven primarily by legal related costs and employee related costs.
We added over 3700 net new hires in Q4, the majority in technical functions. We ended the quarter with over 71900 full time employees up 23% compared to last year.
Fourth quarter operating income was $12 6 billion, representing a 37% operating margin.
Our tax rate was 19% net income of $10 3 billion or $3 67 per share.
Capital expenditures, including principal payments on finance leases were $5 5 billion driven by investments in data centers servers network infrastructure and office facilities.
Free cash flow was $12 6 billion.
We repurchased $19 2 billion of our class a common stock in the fourth quarter and we ended the quarter with 48 billion in cash and marketable securities.
Moving now to our segment results I'll begin with the family of that segment.
Q4 total family of apps revenue was $32 8 billion up 20% Q4 family of apps AD revenue was $32 6 billion up 20% or 21% on a constant currency basis.
On a user geography basis year over year AD revenue growth was strongest in Asia Pacific at 31% rest of World Europe , and North America grew 28%, 20% and 15% respectively.
Currency was a modest headwind in all international regions.
In Q4, the total number of AD impressions served across our services increased 13% and the average price per AD increased 6%.
Impression growth was primarily driven by Asia Pacific and rest of world, while impressions in North America declined 6% year over year.
On a global basis compression growth benefited from AD load increases and user growth. This was partially offset by engagement related headwinds as we faced increased competition for People's time and has shifted engagement within our apps video services like <unk> that show fewer ads and feed our story today.
Pricing growth was broad based across regions worldwide pricing growth slowed from the third quarter as we lap stronger growth in the year ago period and face currency headwinds.
Pricing was also negatively impacted.
By advertisers facing challenges from macroeconomic factors and measurement and targeting headwinds.
Stanley about other revenue was $155 million down 8% due to a decline in payment revenue earned from games family of apps expenses were $16 9 billion up 35% due to higher legal related costs employee related expenses marketing and infrastructure marketing infrastructure related costs and payments to partners.
<unk> operating income was $15 9 million billion, representing a 48% operating margin.
We estimate that approximately $2 8 billion people used at least one of our family of apps on a daily basis in December and at approximately $3 6 billion people used at least one on a monthly basis Facebook daily active users were 193 billion up 5% or $84 million compared to last year.
<unk> represented approximately 66% of the $2 91 billion monthly active users in December .
<unk> grew by $115 million or 4% compared to last year.
Facebook user growth was impacted by a few headwinds in the fourth quarter.
In Asia Pacific and rest of World, We believe COVID-19 resurgence during prior periods pull forward user growth user growth in India was also limited by an increase in data pricing data package pricing.
In addition to these factors, we believe competitive services are negatively impacting growth, particularly with younger audiences.
Within our reality lab segment Q4 revenue was $877 million up 22% driven by strong <unk> sales during the holiday season.
<unk> expenses were $4 2 billion up 48% driven by employee related costs R&D operating expenses and cost of goods sold.
<unk> operating loss was $3 3 billion in the fourth quarter for the full year 2021 reality last operating loss was $10 2 billion.
Turning now to the outlook, we expect first quarter 2022 total revenue to be in the range of $27 billion to $29 billion, which.
Which represents 3% to 11% year over year growth.
We expect our year over year growth in the first quarter to be impacted by headwinds to both compression and price credits.
On the impression side, we expect continued headwinds from both increased competition for People's time and has shifted engagement within our apps towards video services like real which monetize at lower rates and feed and stories on.
On the pricing side, we expect growth to be negative and negatively impacted by a few factors.
We will lap a period in which apples iOS changes were not in effect and we anticipate modestly increasing ad targeting and measurement headwinds from platform and regulatory changes.
Second we will lap a period of strong demand in the prior year and we're hearing from advertisers that macroeconomic challenges by cost inflation and supply chain disruptions are impacting advertisers' budgets.
Based on current exchange rates, we expect foreign currency to be a headwind to year over year correct.
In addition, as noted on previous calls we also continue to monitor developments regarding the viability of Trans Atlantic data transfers and the potential impact on our European operations.
Turning now to the expense outlook.
We expect 2022 total expenses to be in the range of 90 to 95 billion updated from our prior outlook of $91 97 billion.
Our anticipated expense growth is driven by investments in technical and product talent and infrastructure related costs.
We expect 2022 capital expenditures, including principal payments on finance leases to be in the range of 29 to 34 billion unchanged from our prior estimate.
Our planned capital expenditures are primarily driven by investments in data centers servers network infrastructure and office facilities.
As we discussed previously this range reflects a significant increase in our AI and machine learning investments, which will support a number of areas across our family of apps.
Our reality labs products and services may require more infrastructure capacity in the future. They do not require substantial capacity today and as a result are not a significant driver of 2022 capital expenditures.
On the tax absent any changes to U S tax laws, we expect our full year 2022 tax rates to be similar to the full year of 2021 right.
Separately today, we announced that our class a common stock will begin trading on NASDAQ under the ticker symbol <unk> and the first half of 2022.
The new ticker symbol aligns with our rebranding from Facebook to meta.
In closing 2021 was a strong year for our business and an important year for the company as we aligned our corporate identity with our long term ambition to build the next generation of online social experiences, we're investing aggressively in 2022 to support our product roadmap as we worked to deliver new and engaging experiences for people and support the businesses and creators who rely on our search.
With that France, 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 one followed by the number four on your Touchtone phone.
Please pickup your handset before and your question to ensure clarity. If you are streaming today's call. Please mute your computer speakers.
And our first question is from the line of Brian Nowak with Morgan Stanley . Please go ahead.
Thanks for taking my questions I have two the first one on the the real transition you all talked about how you've been through other transitions in the past with mobile and stories et cetera, and you successfully navigated through is there anything that's unique or more challenging about the reals transition that makes you think it could take potentially longer to sort of scale.
Does add products for this format as opposed to other formats in the past and then the second one David when you sort of talk about the headwinds around AD targeting and measurement, becoming larger in the first quarter and then in 2022 is there anything other than sort of year on year data comps there or are you expecting other other chain.
Is from a signal perspective, and maybe help us understand any further changes do you expect to come on the signal loss perspective. Thanks.
Yes, Thanks, Brian I can probably take both investor.
Yes, so one on.
I mean, I think there is a lot of the characteristic in reals. It makes it quite similar to the transitions that we've gone through before.
As in the past and that we are focused on stories, we're really focused on consumer experience and really making short form video work effectively on both Instagram and Facebook and we're already seeing that data the biggest driver of growth on Instagram and it's growing very quickly on Facebook. So we're really encouraged by what we're seeing but we're really focused on making the consumer experience.
<unk> right.
And over time, we do think it's a format that will work effectively for advertising and we think the experience that we have for stories will really lend itself well in the <unk> format. So we're confident in our ability to monetize over time, but right. Now there is relatively few ads in story started relatively few ads in rails today. So it's definitely something that from an impression.
The monetization perspective, it's going to it's going to be a headwind.
On iOS 14.
We saw the revenue impact with.
<unk> 14, sorry, iOS just in general in Q4 and that was in line with our expectations and similar to the Q3 headwind.
But obviously as we go into 2022, we're going to be lapping a period in which.
In Q1 and Q2.
Those headwinds were not in place in the year ago period, So that definitely makes for a tough comp in the first half of the year and we believe the impact of iOS.
Overall as a headwind on our business in 2022 is on the order of $10 million. So it's a pretty significant headwind.
Headwind for our business and we're seeing that impact in.
In a number of verticals e-commerce with an area, where we saw.
A meaningful slowdown in growth in Q4.
And similarly, we've seen other areas like gaming be challenged but on E. Commerce. It is quite noticeable or notable that Google called out seeing strength in that very same vertical.
And so.
Given that we know that E. Commerce was one of the most impacted verticals from iOS restrictions. It makes sense that those restrictions are probably part of the explanation for the difference between what they were seeing and what we were seeing.
And if you look at it we believe those restrictions from Apple are designed in a way that carves out browsers from attracting pumps Apple requires for apps.
And so what that means is that search app search ads.
Could have access to far more third party data for measurement and optimization purposes than App based AD platforms like ours.
So when it comes to using data you can think of it.
But it's not really apples to apples.
For us.
And as a result.
We believe Google search ads business could have benefited relative to services like ours that faced a different set of restrictions from Apple.
And given the outlook continues to take billions of dollars a year from Google search ads to be incentive clearly exists and its policy discrepancy to continue.
Our next question is from Eric Sheridan with Goldman Sachs. Please go ahead.
Thanks, So much maybe two questions. If I can first following up on Brian's questions about <unk> I think when we've gone through these transitions before you've talked a little bit about what youre seeing from an engagement standpoint about reals in our levels of engagement compared to other forms of engagement from a consumer perspective on the property and what the differential might.
In terms of wallets early innings in terms of differential of AD pricing and how you think to close that gap is there any willingness you are able to give us on both engagement levels or pricing differential. So we can think through what the transition scope might need to be.
And then Sheryl on the last call if I remember correctly, you talked about elements of as we move into Q1 in the first half some of the work around efforts that the team. We're trying to implement would start to show. Some efficacy can you give us an update on where you stand internally on workarounds and broader advertiser community acceptance of some of the work.
<unk> on targeting and measurement as we move into the first half. Thank you.
Okay.
Sure I can start with.
Your first question on some of what we're seeing on engaging of engagements.
Renewables and short form video overall are very engaging.
And a lot of what we're seeing.
Is that there is.
People are spending a lot a lot more time and.
I think I mentioned this in my script upfront that.
Growing very quickly this is already the biggest contributor to engagement growth on Instagram.
But I think it was one of the biggest contributors that we're seeing positive engagement on Facebook to already.
But I think going back to the last question. When you. When there is a question of what are there any factors here that will what are the similarities and differences to what we've seen in the past the big similarity.
This is certainly not the first time that we've gone through a major format evolution.
And you know what these transitions to call out in common from desktop to mobile feed feed to stories and now.
And now to <unk>.
In the beginning our AD system and business or not is tuned for the new format.
So as the engagement of the new things starts to replace with some of the engagement and the whole thing.
The near term.
Headwind for revenue, but it's not that part of it at this point now is not that big of a concern for us I mean, it makes some of this stuff.
Not as clean in the near term, but over the long term, we're pretty optimistic about that.
Dynamic that I think is actually a little bit different with reals.
And then what we've seen with stories and mobile speed in the past.
With real I would say that.
The teams are executing quite well and the product is growing very very quickly.
The thing that is somewhat unique here is that tictoc is so big as the competitor already and also continues to grow at quite a fast rate off of a.
Off of a very large space.
<unk>.
So that so the question that was asked before around are we.
Are.
That was asked before around is there anything thats going to make it so that we.
It takes us longer to kind of get to where we want on this it is that even though we're compounding extremely quickly.
We also have a competitor that has that is compounding at a pretty quick right too, but overall thats. The question real is extremely.
Engaging I think overall engagement will grow as a part of us.
And Ed and Thats why were optimistic about the future, but theres a lot of work to do here.
And then Sheryl were you going to take the second part of your question on the mitigation front, yes. So when we talked about mitigation. We've said there are two key challenges from the IRS changes targeting and measuring performance.
Targeting it's very much a multiyear development journey to rebuild our adds optimization system to drive performance, while we're using loss data and as part of this effort. We are investing in automation to enable enable advertisers to leverage machine learning to find the right audience with less effort and regain its reliance on targeting that's going to.
A longer term effort.
Measurement there were two key areas within measurement, which were impacted as a result of Apple's iOS change it and I talked about that on the call last quarter as you referenced.
The first is the underreporting gap happening here because that advertisers were either not getting the rois are actually getting on this part we have made real progress on map underreporting gaps with last quarter and we believe we'll continue to make more progress in the years ahead.
I do want to caution that it's easier to address this with March campaigns and harder with small campaigns, which means that part will take longer and it also means that Apple's changes continue to hurt small businesses more.
The second area underneath the measurement challenge is really our really data delayed at.
I'm part of the iOS changes, we and many other AD platforms, we received less granular conversion data on a delayed basis.
And when advertisers shared with us that this makes it real time decision, making especially difficult and that's particularly important during the holiday period, where people are often pending a lot and really monitoring their ads and adjusting spend.
Not even on a daily basis, and often on an hourly basis and that was one of the challenges we face during this holiday quarter.
Our next question is from Justin Post with Bank of America. Please go ahead.
Great. Thank you a couple mark just on a big picture basis.
We're adding a lot of short form video and maybe the content shifting from content from your friends to general content.
Does that mean for Facebook I'm sure you've thought about a lot of it but how do you think about the evolution of Facebook as a platform and then and then for Dave.
As you think about the measurement and targeting challenges when we get out to September and October .
Should we be effectively lapping the issues or is there a reason to think it could actually get worse in the second half just thinking about revenue growth kind of reaccelerate. Thank you.
Yeah.
I can take the first one.
So for Facebook I think.
Content from your friends is always going to be an important part of the experienced and so we will be discussing stuff that you find with friends, whether it's in a group of community or public content or reals or news or different content like that but I think overall you are right that the <unk>.
Balance of content that people see in feed.
Is shifting a little bit more towards.
So it's stuff that isn't coming from their friends.
What you may discuss with your friend this but but it is kind of shifting towards more public content I think at the same time, we are seeing this trend.
But if you think about your day to day behavior on a lot of this stuff.
This pattern may resonate with you but.
You know a lot of people now are taking a lot of the content that they may have previously shared in our fields and sending it to friends over over chat, whether it's one on one or through group chat and this is one of the reasons why I called out community messaging as one of the major priorities for us because if you look at the overall constellation of services a lot.
To be kind of personal sharing is sort of shifting towards messaging.
And a lot of the what we're seeing in fee is.
Basically this content consumption.
<unk>.
And a lot of just really highly engaging content that that forms the basis for conversations whether it's in chat or in common threads in the speed up but.
That's.
That type of creative work, it's a lot more of what we're seeing across the feed apps, whether thats Facebook or Instagram.
Hey, Justin it's Dave on the.
On the second part of your question, it's really about sort of what's the landscape of headwinds look like as it relates to targeting and measurement.
And there are I think what we're seeing is kind of two things going on we've got incremental headwind coming from things like <unk>.
Which provided some additional sort of targeting and measurement headwinds, but those are those are far less significant than than the changes made with iOS.
$14, five which really started to have an impact more seriously on the business in the second half of last year. So I think that lapping effects can be very pronounced in the first half of the year, where we're lapping periods that didn't have that impact. So that's we're going to see the biggest impact from <unk>.
From the lapping, but we're continuing to face more headwinds as it relates to <unk> 16 and also.
Further regulatory headwinds that restrict the use of data for targeting purposes in regions like Europe . So we're continuing to see headwinds I think we're working to mitigate.
But the biggest lapping effect will be in the first half of the year, where we didn't have the big iOS 14 headwinds in the same period last year.
Our next question is from Doug Anmuth with J P. Morgan. Please go ahead.
Thanks for taking the questions.
Mark you talked last quarter, I think about how <unk> would become better integrated into both Facebook and Instagram can you just talk about where you are in that process. Clearly we've seen some just curious if theres more in the product pipeline and could that deeper integration potentially have even greater drag on revenue going forward and then Dave just curious.
If you're willing to comment on a reality lab spend.
Loss number in 'twenty two.
I can talk about the first piece I mean, I think we're.
We're probably a little further along than just the beginning but I'd say, we're closer to the beginning them yet.
Don Unreal.
There is a.
Big flywheel here, we're more creators share more content.
Because we have a mix of content.
From all different types, we're only going to show real to recommend them.
We feel like there is high quality content to show so as there is more high quality content. We show more of it. There is certainly will be a lot more we can get scoring.
Is going to grow a lot.
Going forward, we believe.
Sure.
And engagement on both of those platforms. So yeah, I think that we probably will see.
As for forecasting and I think David's talking about here.
The relative monetization rates of Reals for.
For the next I don't know if for whatever the foreseeable future as will be lower than <unk>.
As we kind of displaced some of that in the best but overtime. We think that there is a potential for a tremendous amount of overall engagement growth and we think that in a steady state over time.
We think the real should monetize closer to theater story has been other longer form video so.
I think we're optimistic about it and I think that Thats, we think it's definitely the right thing to lean into this and to push as hard to to grow real as quickly as possible and not hold onto breaks at all.
Even though it may create some some nearer term.
Slower growth than we would've wanted that's kind of that's the picture that I say I don't know if you want to add anything.
I think that's exactly right and that's what's kind of factored into the guidance, we're providing specifically for Q1 and then touch on the expense outlook, we're not breaking out expenses by.
By segments that I, probably can get some color here, we're expecting accelerating head count growth in 2022 to be the biggest contributor of expense growth and that's largely in tech and product roles to support the Senate product priorities that mark laid out community messaging commerce ads privacy AI that averse.
And.
The.
A number of those investment priorities mapped to our family of apps segment, and we expect family of apps to continue to drive the majority of expense growth in 2022, although we do expect reality lab operating loss to increase meaningfully in 'twenty two.
That's incorporated into our outlook.
Our next question is from the line of Mark Mahaney with Evercore ISI. Please go ahead.
Mark.
Mr. Mahaney. Your line is open Sir one more time, okay got it.
Alright, I want to ask two questions. Please first on ESG could you just there's been a series of steps that have been taken or reducing the ability to do political targeting the introduction of the take break feature within Instagram and then maybe a few other things that arguably have been put out there to kind of address some of the ESG concerns where do you think you are in turn.
We are addressing some of those that we've heard in the investment community and then yes.
Yes, David I think you mentioned this $10 billion headwind and I think that was related to some of these.
These policy changes to Apple policy changes could you just give a little color as to how you came up with that number thanks a lot.
Yeah.
Yes, Mark on the on the headwind, we're just estimating what we think is the overall impact of the accumulative iOS changes too.
Our 2022 or 2022 revenue forecast and so if you kind of aggregate the changes that we're seeing across iOS.
That's sort of the order of magnitude we can't be precise on this it's an estimate.
Ranges on the impact to our business, but we think it is.
Substantial.
The substantial headwind to work our way through and obviously, we're working hard to mitigate those impacts and continue to make ads relevant and effective for.
For users I don't have anything specific on on.
On the ESG front.
So I probably can't comment on that can follow up with you offline on that.
Our next question is from Youssef Squali with <unk> Securities. Please go ahead.
Great. Thank you I have two questions as well Mark you stated your goal of refocusing on growth on.
Younger audiences on the last earnings call and I think even signaled back then that it could mean, maybe less focus on other constituency.
I know you maybe.
Early but any color maybe to share on growth on users and engagement by maybe each group.
Groups and then.
Probably another question for you I'm curious about when you think we can start seeing the kind of the meshing of apps like Instagram with AR VR and the interoperability.
And are really a piece of these apps is that something where you think we're going to see gradually evolve or something that gets kind of open normally wants to maverick sufficiently built up whenever that is.
Let me take the first one I can take this one on slide on user growth user I think what we said about overall kind of user growth as we're we're certainly seeing an impact from strong competition, particularly with younger audiences. So.
That's true and we're kind of seeing that seeing.
Seeing that globally, if you look at kind of the overall.
User growth landscape for the fourth quarter, we're seeing.
<unk> and <unk> and in U S and Canada.
Sort of.
Bounce around.
Expected indicated given our high level of penetration and then if you look at the rest of the rest of world. We've seen some some headwinds there kind of a little bit unique in the quarter in areas like India, where we saw data plan pricing increase lead to slower.
Growth there so that's another kind of.
Some unique elements of the quarter on that front.
And in terms of.
What are some aspects of the met or are showing up I mean, I talked about avatars and then my my remarks at the beginning and how we're making at <unk>.
Increasingly both expressive and eventually and we've shown some demos on photo realistic avatars of yourself that you can show up and all the different options. You are avatar can show across Facebook, Instagram and messenger as well as in question well expand that further and I think I also commented before about our goal.
For 2022 to make it so that horizon.
It's not just an immersive VR, but on <unk> screens as well so you could potentially jumped to those kind of world from Facebook or Instagram or different apps as well, so I think youre seeing some of that stuff.
Is there any bear some of it will come over the course of this year of course, the ability to message across ops is something that we've been working on for a while you can already do that across messenger and Instagram and.
There is more there that.
That will roll out over time as well. So I think I think you are going to see this stuff works seamlessly across the family.
Our next question is from John Blackledge with Cowen. Please go ahead.
Great. Thanks, two questions maybe first one for Mark how is real differentiated versus tick tock Youtube shorts and other short form video services and one for Sheryl any further color on how smbs are changing ad spend.
<unk> since the iOS changes and is it slowing adoption of new SMB advertisers on Facebook. Thank you.
Sure So I can start with real.
One of the things that I think we've seen because there are some fundamental formats and social media feeds and stories and now I think there's real shortly.
A short form video format that.
Within the context of a different network or community. The same format will take on different characteristics. So for example, the kind of discussions that you might have in a feed on Twitter or pinterest or different from what you would do in Facebook or.
Or Instagram, even given a relatively similar formats.
So I think to some degree even if a creator chooses to re share.
Their content across a number you'll have different discussions with your friends across across the different services based on who is there and there is a social dynamic where we're friends in different communities Crappiest as well. So you see somewhat different roles across Facebook and Instagram and I'm trying to see different stuff across kicked off too.
But what we're seeing is that this is all growing incredibly quickly. So it's hard to know exactly where this is going to settle in the end but.
But we just think the appetite that people have.
There has been this long term trend that I've commented on a number of times, where over the time that I've been running this company.
Hum.
18 years this week.
Basically we've gone from.
Texas being the primary way that people share and.
And consume content online at the beginning of the early two thousands too so we've got cameras on our phones.
Photos became the primary thinking now that mobile networks are starting to get <unk> gotten really good.
The video is really becoming the primary thing and it is a lot more natural and engaging this is partially by the way why I think that an even more immersive format around virtual reality and augmented reality is going to be the kind of next step after video and why we're so invested there, but but definitely what were seeing with short for video as it is the next step.
From the kind of visual fields that we have and the amount of engagement and content that people want to share and interact with them, whether it's taking it and sending it to a friend and messaging are commenting in line or just having fun watching it themselves.
In general we're seeing that people have spent a lot more time on this.
Then what we have and what we've seen from <unk>. So far and that's also reflected in the success that other apps like kicked off a pad. So there is a lot more to go here. We think we will have competitors across the industry, but you know as we've seen with some of these other formats to it'll feel different depending on the context in which its implemented in the content from your friends.
Our next question is from Lloyd Wamsley with Ibs pain.
I can't Thank you had a follow up on it.
Anthony F&B. So it's a good question because you know as we've said the iOS changes definitely hurt advertisers across the board, but they are much harder for smbs. The progress we made on the measurement gap, which I talked about before we've made more progress with larger clients and we have with Smbs. It's also the key person.
The lines that are more important for F N b.
And F&B really needs to buy a very small targeted audience that they were looking for and the larger the business the more you're able to personalize the Atlanta <unk> definitely seen that that has more of an impact for F. N. B, we do feel over the long run that we believe we have strong benefits for smbs amusing.
Our AD system, we arent going to continue to work on these measurement gaps and continue to make sure Smbs can use that we're also working hard on F&B is adopting some of our commerce tool.
And some of our other solutions like business messaging and <unk> seen some success there, but you are right that this remains a challenge.
And our next question is from Lloyd Walmsley with UBS you May go ahead.
Hi, Thanks for taking the question, maybe one for Mark and one for Sheryl.
Mark if we looked at short form video how do you feel right now about the state of your content and your matching algorithm relative to where you want it to be I mean do you have the content you need.
Getting it in front of the right users or is there is there are a lot of room to improve this and drive more engagement.
And then Sheryl.
Where exactly are you in terms of rebuilding the AD product and what are the key things you.
You need to see to kind of rollout or what are your customers either need to adopt or do on their end to really start to see improvement to ROE <expletive> and earn a return on that budget like are there certain features like Kathy that you need to get adopted are there tools in the pipeline are there things that you need to do on there and what what do we need to see to.
To see that come back.
I can take the <unk> question.
So.
We do see a huge amount of potential ahead, but I think sometimes when when we say that.
<unk>.
That there is.
We're closer to the beginning with.
With that means is that we still have a lot of kind of fundamental questions turn it to overcome in order to make progress to get where we're going.
With this product what we see is there is very clear product market fit and it is growing incredibly quickly.
We face a competitor in tech talk that there is a lot bigger so it will take a while to compound and.
Catch up there, but fundamentally.
Think that there's just a law.
A lot of potential for it to continue growing so to your question of do we have the content that we need.
It's a flywheel so.
Better tools that we can build for creators and the better monetization, we can offer them, which tends to be an advantage that we have over over other competitors is how effective our monetization and our systems are dead.
The bigger it gets the more it will attract more creators and it'll it'll kind of builds on itself and we we think we're at a scale, where we're seeing that flywheel really kick in and start to grow and if it keeps on compounding at the rates since growing out that this is going to grow extremely quickly over that over the next year.
And potentially beyond that.
But yes, I think that's kind of the best summary that I can give of where we are clear.
Clear product market fit growing quickly long way to go to catch up to be the biggest in the space, but but I think the pieces are in place and the focus is certainly there at this point to really to really go after that it's just as as those grow as it is at least for the coming quarter or is it kind of monetize at a somewhat lower.
<unk>, which is reflected in the guidance that Dave Dave, but you know again I think this is clearly the right strategy for us to push office is what people want.
They enjoy the product we're going to so we're just going to roll it out.
As as quickly and as as.
As well as we can.
On the question of what we need to see to rebuild AD products and continue to grow return on AD spend in the short run as I talked about we're working on measurements, we're rolling out new ways to help businesses continue to measure campaign.
Using Apple S. K AD network, API and meadows aggregated events measurement and conversion modeling. So we have specific products that people can adopt that helped that.
Over the longer term, we need to develop privacy enhancing CAC to help minimize the amount of personal information, we learn and we use more aggregate used more anonymize data plus scale, allowing us to show relevant ads and that's going to take US time, but one thing I do want to point out. There are also a lot of things that small businesses and large.
Businesses can do.
Take advantage of the many.
Targeting and measurement tools the half so while we have seen an impact from these changes. We also didn't start from a place where 100% of our millions of millions of advertisers are using the tools that are available. So while we continue to get those were all the way on the adoption curve to learn and adapt to these changes.
There are also advertisers out there that arent, giving even the basic thing is yet that we can continue to work on and improve their performance. We still believe there's a lot of performance improvement left in the system.
Great operator, we have time for one last question.
Our last question will be from the line of Ross Sandler with Barclays. Please go ahead.
Alright, Thanks for squeezing me in.
I guess, Dave a question on the family of apps.
<unk> margin. So this hasn't come up yet, but it was down about six points year on year.
I know that you had kind of forecast that the expense growth that you came in at for 'twenty, one, but I think that downtick is coming is a bit of a surprise.
For some folks who've got your AD business with fairly stable margins. So any more color on what's driving that is it just the revenue headwinds that you're experiencing or any other lumpy items and then related to that as you build out short form video.
How has your thinking evolved around paying Rev share like Youtube does or other things like that too.
To catalyze the shift any thoughts on that.
Yeah, Rob I think in terms of in terms of lumpy items. I mean, you will see that G&A was up.
A pretty substantial amount in in Q4, so a part of that is related to legal related expenses that tend to be.
Tend to be lumpy.
So there was a factor there I think in general as it relates to the family of apps and in margin I'd come back to the commentary that I made on.
On the investments that we're making and family of apps.
Being an area, where we're investing heavily in 2022 across the priorities that mark outlined including real messaging Commerce ads.
The big investments that we're making on the Capex side, it's primarily geared towards AI and machine learning for us.
For the family of apps business so.
Segment. So there is a lot of investments that we're making there.
Second question.
Yes.
Oh yeah.
Yes in terms of payments to partners that clearly will play into the expense profile as we as we as we grow that.
As we grow short form so.
That's also reflected as part of the guidance for expenses so.
Over time that will that will that will be an impact as well and that's part of the investments that we're making automobile side and is factored into the 2022 outlook.
Thank you. Thank you everybody 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.