Q1 2022 Meta Platforms Inc Earnings Call

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 met our first quarter 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. The call will also be recorded. Thank you very much Ms. Deborah <unk>.

Meadows, Vice President of Investor Relations you may begin.

Thank you good afternoon, and welcome to meta platforms first quarter 2022 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 from those contemplated by these forward looking statements factors that could cause these results to differ materially are set forth in today's press release and in our annual report on Form 10-K filed with the 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 Dot FB Dot com and now I'd like to turn the call over to Mark.

Alright, hey, everyone and thanks for joining us today.

We made progress this quarter across a number of our priorities and our community continues to grow more people use our services today than ever before and I am proud of how our products are serving people across the world. During what has been a difficult period for a lot of people.

I talked last quarter about some of the near term challenges facing our business. Some are specific to meta like our transition to short form video, which doesn't monetize as well for now, but which were quite optimistic about over the long term.

Some are specific to our industry like signal loss, resulting from Apple's iOS changes, which is a meaningful headwind, but we also expect that with the right technology investments will navigate okay over time.

Other challenges our broader macro trends like the softness in ecommerce after the acceleration we saw during the pandemic.

The war in Ukraine, which is a real tragedy on a humanitarian level.

It has also had an impact on our business, we've been blocked in Russia, and we decided to stop accepting adds from Russian advertisers globally, and we've also seen effects on business globally. Following the start of the war.

Taking a step back I want to share some thoughts on our business trajectory and operating philosophy.

First I think it's useful to level set on our business trajectory over the last few years after the start of Covid the <unk>.

Celebration of ecommerce led to outsized revenue growth, but we're now seeing that trend back off.

Based on the strong revenue growth we saw in 2021, we kicked off a number of multiyear projects to accelerate some of our longer term investments, especially in our AI infrastructure business platform and reality labs. These.

These investments are going to be important for our success and growth over time. So I continue to believe that we should see them through.

But with our current business growth levels, we are now planning to slow the pace of some of our investments.

Dave will give more detail in his commentary.

I also want to share how I'm thinking about investments and margins.

Last year, we began looking at our business has two segments family of apps and reality labs.

On the family of apps side I am confident that we can return to better revenue growth rates overtime and sustained high operating margins in.

In reality labs, we're making large investments to deliver the next platform that I believe will be incredibly important both for our mission and business are comparable in value TV reading mobile platforms today.

Recognize that it's expensive to build this it's something that's never been built before and it's a new paradigm for computing and social connection.

So over the next several years our goal from a financial perspective is to generate sufficient operating income growth from family of apps to fund the growth of investment in reality labs, while still growing our overall profitability.

Now Unfortunately, that's that's not going to happen in 2022, given the revenue headwinds, but longer term that is our goal and our expectation.

Of course, our priority remains building for the long term. So while we are currently building our plans to achieve this it is possible that prolonged macro economic or business uncertainty could force us to trade off against shorter term financial goals.

But we remain confident in our long term opportunities and growth.

Now with that.

I wanted to dive deeper on what we're seeing in three of our main investment priorities that I expect to drive this growth Reals ads.

And the <unk>.

Let's start with rules there.

There are two key trends that we're seeing here first the increasing popularity of short form video and second the advancement of AI recommendations driving more of our fields.

Rather than just social content.

On the first point.

Since I started Facebook 18 years ago, we've seen multiple shifts in the media types that people use and we started as a website primarily with text then people got phones with cameras and the main format became images on mobile apps.

Last several years mobile networks have gotten faster and now video is the main way that people experienced content online.

Short form video is the latest iteration of this and it's growing very quickly.

<unk> already makes up more than 20% of the time that people spend on Instagram video overall makes up 50% of the time that people spend on Facebook and Reals is growing quickly there as well.

The second point is that while we are experiencing an increase in short form video. We're also seeing a major shift in feeds from being almost exclusively curated by your social graph or follow graph to now having more of your feed recommended by AI, even if the content wasn't posted by a friend or someone you follow.

Social content from friends and people and businesses you follow will continue being a lot of the most valuable engaging and differentiated content for our services, but now also being able to accurately recommend content from the whole universe that you don't follow directly unlocks a large amount of interesting and useful videos.

And posts that you might have otherwise missed.

Overall, I think about the AI that we're building not just as a recommendation system for short form video, but as a discovery engine that can show you all of the most interesting content that people have shared across our systems and.

And Facebook that includes not just video, but also text posts Slinks group post re shares and more on Instagram that includes photos as well as video in the future I think that people will increasingly turn to AI based discovery engines to entertain them teach them things and connect them with people who share their interests.

And I believe that our.

Our investments in AI.

All of the different types of content, we support and our work to build the best platforms for creators to make a living.

We will increasingly set our services apart from the rest of the industry and drive our success and we're also finding that having an ambitious vision around building. The world's discovery engine is attracting a lot of the most talented AI folks to work on this program.

Next let's talk about ads.

Cheryl will discuss this in more detail, but I want to highlight that this is also a large investment for us.

There are three main trends to highlight in our ads business right now first we're managing headwinds from the shift to short form video that I, just mentioned and the near term. This is a drag on revenue because <unk> monetization is less than theater stories, but.

But I expect that that will improve over time we've.

We see this type of media format transition multiple times before.

Back in 2012, when we transition from desktop to mobile feed we saw mobile feed growing massively, but not monetizing well, yet and we leaned into it went through some tough quarters and then it became the foundation of our business today.

<unk> in 2018, when people started using stories more instead of feed but stores didn't monetize as well as feed yet we still double down on stories.

Another tough period.

But came out stronger than ever.

So we've run this play before and were running it again now we're focused on growing reals as a major part of the discovery engine vision and we expect that this expansion and engagement to shift from a short term headwind to a tailwind at some point.

Now while this is playing out.

We're also managing the headwinds from signal loss that we've discussed a lot recently.

This means growing first party understanding of what people are interested in by making it easier for for people to engage with businesses and our apps.

That's completed purchases on Facebook or Instagram or messaging businesses on whatsapp or messenger.

It also means making sure that we build the best privacy enhancing technologies to provide accurate targeting and measurement to advertisers, even when purchases aren't happening within our apps.

We're making major AI investments to build the most advanced models and infrastructure in the industry over the next year or two we hope that this drives better recommendations for people higher returns for advertisers and increases our revenue growth even in the face of signal loss.

Over the longer term I think that these large technology investments can provide a sustainable competitive advantage over others in the industry.

The last priority that I want to discuss today is the met averse.

While we are focusing on the biggest opportunities and challenges of today I think it's important to build the foundation for the next era of social technology as well.

The centerpiece of our strategy is the social platform that we're starting to build with horizon.

Still early but as we build out the experience. The next focus will be on growing the community. We plan to launch a web version of Horizon. Later this year that will make it easy for people to step into the meta versus experiences from you know a lot more platforms, even without needing a headset.

I think the best experience will be on virtual and eventually augmented reality platforms.

And especially on our platforms like quest.

We're in an upcoming release from the moment you put on your headset youre going to be embodied.

With your meta avatar and ready to interact in horizon with her friends right from your quest home.

But making this available everywhere will mean that you can interact with anyone on whatever device or platform that they want to use.

Our other focus for horizon.

He is building out the <unk> economy, and helping creators make a living working and the meta versus.

We expect to be meaningfully better at monetization than others in the space and we think that that should become a sustainable advantage for our platforms as they develop.

On the hardware side meta quest two continues to be the leading virtual reality headset. Later this year, we will release a higher end headset code named project, Cambria, which will be more focused on work use cases, and eventually replacing your laptop or work setup. This premium device will.

Have improved ergonomics and full color pass through mixed reality to seamlessly blend virtual reality with the physical World. We're also building in eye tracking and face tracking so that your avatar can make eye contact and facial expressions, which dramatically improves your sensitive.

<unk>.

It's also.

A good example of why.

We're developing hardware in addition to the social platforms.

We're bringing horizon to more platforms, but if you want to be able to make eye contact or have your physical facial expressions.

Automatically get translated to your Avatar in real time, then our hardware will provide the best meta versus experience, whether you're playing a game or meeting with coworkers and horizon work rooms.

We'll share more details about product Cambria in the months ahead, as we get ready to launch it.

I believe the areas that we've discussed today are the right places for us to be doubling down on our work. The questions. We face are not going to be resolved overnight.

We also faced a number of these challenges before so I'm confident that we can navigate this period, while continuing to invest in our future I'm grateful for everyone on our team who is executing on this important work for our partners and for our investors, who believe in us and the future that we're building together and now here is Sheryl.

Thanks Mark.

Hi, everyone.

Total AD revenue in Q1 was 27 billion, which is up 6% year over year.

We saw solid growth in APAC and rest of world, but a more challenging environment in North America and Europe .

Despite the headwinds Mark described a moment ago, we saw meaningful growth in areas like video ads and click to messaging ads.

The changes to the ads landscape over the last year have caused significant disruption to the way many businesses advertise online.

Our teams are working closely with our partners to help them navigate this new environment.

Yeah.

So they can continue to get great return on investment and.

And we're focused on building products and tools to grow their businesses and ours over the long term.

I wanted to pick up on what Mark said about our AD strategy.

You described it is focused on three main areas, one growing video monetization, especially short form video lakefield.

Two evolving our AD system to do more with less data.

And three.

Investing in AI and machine learning to support our ads infrastructure.

First video.

Have a good time spent on Facebook is video and video surfaces on Facebook, where a significant source of revenue growth in the first quarter.

People already watch a lot of longer form video content, that's eligible for <unk>, which we monetize well.

Tories monetization continues to grow across Facebook and Instagram.

And with real it's growing quickly there's also a big opportunity as we get better at monetizing short form video overtime.

We've accelerated our efforts to improve the Reals ad format.

Our experienced monetizing stories is directly applicable here.

<unk>.

I'm sorry.

Yeah.

Hmm.

We're leveraging what.

We're leveraging what we learned with stories ads to create ads for wheels that having native format performed well and are easy for advertisers to create.

We're working closely with our partners to help them make the most of the opportunity with video like experimenting with new formats and with campaigns that utilized multiple types of video ads.

A great example is the U S restaurant chain Wendy's.

We used a range of video formats across feed stories, where else and in stream to promote their March madness campaign driving consumers to the first virtual Wendy's restaurant in horizon where else.

We also worked with them to permit the campaign and horizon World itself with a virtual welcome screen directing people to what they called the windy versus.

The campaign was a big success, reaching 52 million people and improving Wendy's brand and message awareness across a number of metrics.

Second evolving our ad system.

Our focus is on paving the way for the next era of personalized advertising and there's work we're doing over the near medium and long term.

In the near term, we're working closely with advertisers to help them navigate the new landscape.

We evolve and improve our AD solutions.

For example, we're encouraging partners to integrate with our conversions API to create a direct reliable and privacy safe connection between their marketing data and meta.

And we've recently introduced a faster and easier way for Smbs to integrate with it called the conversions API gateway.

One way, we are helping advertisers get better insights with less data is with conversion modeling. This can help them understand measurement and campaign performance, even when we're not able to see or aggregate certain conversions.

We're also helping businesses connect directly with customers and grow more onsite data conversions to <unk>.

Products like click to messenger ads.

This is where you can click on an AD in your Facebook or Instagram feed and it opens a chat with the business and messenger Instagram direct or Whatsapp.

It's already a multibillion dollar business with healthy double digit year over year growth in Q1.

A great example is dykeman Europe's largest footwear retailer.

They built a fully automated virtual shoo assistant to give customers personalized footwear recommendations and promoted at their click to messenger ads on Facebook.

Adding 85% click through rate and top 30% more incremental purchases and with their usual link ads.

In the medium term, we see an opportunity to grow other onsite conversion products like lead ads, which make it easier for businesses to generate leads and chop ads, which direct you to a brand's digital storefront on Facebook or Instagram.

It's still very early for shop ads, but we think driving people to shops can be a compelling objective for commerce advertisers as they continue to improve our onsite commerce tools.

Over the longer run we're also developing privacy enhancing technologies, which will help us minimize the amount of personal information we process.

While still allowing us to show people relevant ads and measure performance for advertisers.

And we're collaborating across our industry on these and other standards that will support this next era of personalized advertising.

Third AI and machine learning, which are crucial components of these privacy enhancing technologies and will drive improvements over time to our ads ranking and measurement capabilities for.

We're significantly increasing our investment in AI and machine learning machine learning across the company this year and a large portion of this is going towards that.

We continue to innovate in order to deliver better performing ads in general and these investments will help us do that while processing less individual level data. We also have a range of automated tools to make it easier for advertisers to create manage and improve the performance of their ad campaigns.

Constantly working to improve these tools and making them simpler for advertisers to use.

Taken together, we think our range of solutions can help advertisers get better results now and over the longer term.

We're confident our apps will continue to be the best places for advertisers to reach people, where they get measurable outcomes long into the future.

As ever I.

I wanted to say, thank you to our partners large and small and to our teams who are working so hard to deliver great results for businesses everywhere.

Now here's Dave.

Thanks, Sheryl and good afternoon, everyone, let's begin with our consolidated results all comparisons are on a year over year basis, unless otherwise noted Q1 total revenue was $27 $9 billion up 7% or 10% on a constant currency basis had foreign exchange rates remained constant with Q1 of last year total revenue would have been about 800.

$93 million higher.

Q1, total expenses were $19 $4 billion up 31% compared to last year in terms of specific line items cost of revenue increased 17% driven primarily by core infrastructure investments payments to partners and content related costs R&D.

R&D increased 48%, mainly driven by hiring to support family of apps and reality labs marketing and sales increased 16%, mainly driven by hiring in marketing spend and lastly, G&A increased 45% driven mainly by legal related costs and employee related costs.

We added over 5800 net new hires in Q1, the majority in technical functions. We ended the quarter with over 77800 full time employees up 28% compared to last year.

First quarter operating income was $8 5 billion, representing a 31% operating margin our tax rate was 16% net income was $7 5 billion or $2 72 per share.

Capital expenditures, including payments principal payments on finance leases were $5 5 billion drift.

Driven by investments in data center servers network infrastructure and office facilities free cash flow was $8 5 billion, we repurchased $9 4 billion of our class a common stock in the first quarter and we ended the quarter with $43 9 billion in cash and marketable securities.

Now moving to our segment results I'll begin with the family of apps segment Q1 total family of apps revenue was $27 2 billion up 6%.

<unk> family of apps AD revenue was $27 billion up 6% or 10% on a constant currency basis growth decelerated from the fourth quarter due to a variety of factors prior to the war in Ukraine.

Faced expected headwinds related to the continued slowdown in our online E.

E Commerce vertical which has quickly grown quickly during the COVID-19, pandemic as well as ongoing targeting and measurement challenges impacting advertising spend.

We experienced a further deceleration in growth following the start of the Ukraine War due to the loss of revenue in Russia, as well as a reduction in advertising demand both within Europe and outside the region.

We believe the war introduce further volatility into an already uncertain macroeconomic landscape for advertisers.

Foreign exchange rates were also a headwind to growth in the quarter.

On a user geography basis year over year AD revenue growth was strongest in rest of world and Asia Pacific at 21% and 20% respectively.

North America grew 1% in Europe was flat year over year Europe advertising revenue was disproportionately challenged by the factors related to the war in Ukraine.

In Q1, the total number of AD impressions served across our services increased 15% and the average price per AD decreased 8%.

Impression growth was driven primarily by Asia Pacific and rest of world the year over year decline in pricing was driven primarily by the ongoing mix shift in AD in AD impressions towards regions and services that monetize at lower rates.

Family of apps other revenue was $215 million up 9% as revenue growth from the Whatsapp business API offset a decline in payments related revenue earned from games.

Our family of apps expenses were $15 7 billion up 27% driven mainly by employee related expenses infrastructure costs and legal costs.

Family of apps operating income was $11 5 billion, representing a 42% operating margin.

We estimate that approximately $2 9 billion people used at least one of our family of apps on a daily basis in March and that approximately $3 6 billion people used at least one on a monthly basis.

Facebook daily active users were $1 96 billion up 4% or $82 million compared to last year da use represented approximately 67% of the $2 94 billion monthly active users in March.

<unk> grew by $83 million or 3% compared to last year Euro.

Europe da use and May use declined sequentially and were negatively impacted by the loss of users in Russia. Following the government's block of Facebook in the country. We expect this trend to continue in the second quarter and this will likely cause a global <unk> to be flat to down sequentially.

Within our reality Labs segment Q1 revenue was $695 million up 30% driven by quest to sales.

Reality labs expenses were $3 7 billion up 55% driven by employee related costs R&D operating expenses and cost of goods sold reality labs operating loss was $3 billion in the first quarter.

Turning now to the outlook.

We expect second quarter 2022, total revenue to be in the range of $28 to 30 billion. This outlook reflects a continuation of the trends impacting revenue growth in the first quarter, including softness in the back half of the first quarter that coincide with the war in Ukraine.

Our guidance assumes foreign currency will be approximately a 3% headwind to year over year growth in the second quarter based on current exchange rates.

In addition, as noticed noted on previous calls we continue to monitor developments regarding the viability of Trans Atlantic data transfer and their potential impact on our European operations and we are pleased with the progress not a political agreement.

Turning now to the expense outlook we.

We expect 2022 total expenses to be in the range of $87 billion to $92 billion lowered from our prior outlook of 90 to 95 billion.

We expect 2022 expense growth to be driven primarily by the family of apps segment, followed by reality labs.

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.

Absent any changes to U S tax law, we expect our full year 2022 tax rate to be above the Q1 rate and in the high teens.

In closing our advertisers are adjusting to a new digital advertising landscape brought about by recent mobile platform changes, while navigating a complex set of macroeconomic challenges.

The resulting revenue headwinds we have adjusted our plans for hiring and expense growth. This year, we continue to see a lot of opportunity across our investment priorities and remain committed to dedicating additional talent and capital towards these areas, while ensuring our investment plans are appropriately calibrated to the operating environment with that France, let's open up the call for questions.

Thank you we will now open the lines for 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 screaming todays call. Please mute your computer speakers.

And our first question is from the line of Brian Nowak with Morgan Stanley . Please go ahead.

For taking my questions I have two the first one on <unk> engagement I appreciate the color about the percentage of time, it's going through <unk> wanted to ask about the incrementally of that time, maybe can you talk to us a little bit about what youre seeing on total time spent on both core Facebook as well as Instagram in the U S. As youre seeing in this.

Strong <unk> engagement moving through the overall user base and then the second one David wanted to ask you about Capex. Your understanding this year, there's investments in AI and machine learning et cetera, how should we think about how much of this year's Capex is sort of one time ish. They may not persist on a multiyear basis or is it better to think of it as maybe the capital.

The intensity of the business could just be structurally higher going forward. Thanks.

Hey, Brian I'll take a crack at both of those and then Mark can add any color if he wants.

Terms of cannibalization real does pull time away from other surfaces, but we do believe it's additive to overall engagement and we've seen that in the past with with other products like stories and so we're seeing a similar a similar pattern there in terms of overall engagement for both Facebook and Instagram.

There's a lot of complexity with kind of looking through the period of Covid.

That tends to create a lot of different peaks and troughs in an engagement, but if you'd look back engagement for both Facebook and Instagram remain above the levels. They were at pre pandemic and that's true both globally and in the U S.

So I think we.

We're pleased with that on the Capex front.

Let me, let me just sort of address the overall the overall ramp it's true we are investing significantly in AI and machine learning investments.

Power ranking and recommendations for things like ads Reals and feed.

And so that that does that does add to the capex intensity of the business and we do think there is additional capital intensity of the business as we make <unk>.

<unk> investments in AI and machine learning on top of just additional capacity growth.

No we're not sharing an outlook beyond 2022 at this point.

Perhaps you can go to the next question.

Our next question is Eric Sheridan with Goldman Sachs. Please go ahead.

Thank you so much for taking the questions maybe one big picture and one more micro question Mark I think one of the questions. We get the most from investors is when you think about where you are trying to go with the meta versus longer term. How do you think about the investment cycle versus the monetization cycle. When you think about creating hardware both on the physical side of it.

The distribution layer for hardware versus the content and the creators cycle you need to solve for on the meta versus over the medium to long term.

Yes.

I don't know if I missed it or not but I think last quarter you called out on the Apple privacy changes that the headwind might get worse in Q1 than it was in Q4 can you give us an update of how those headwinds continue to evolve and whether what you've built over the last couple of years of somewhat future proofed against future changes that Apple might make.

In the iOS ecosystem. Thanks, so much.

Yes, I can give some context on the first one and then and then Dave can can speak to the second question.

I think that the cycle here between investment.

<unk>.

No meaningful enough revenue growth to be near her very profitable is going to be there's going to be long and I think it's going to be longer for reality labs, then for a lot of the traditional software that we've built I mean, if you think about just a bit of context that may be useful in why we've ramped expenses. So much is.

Especially with the success that we've seen with quest to where now.

Acyclic funding product teams to be building, our future products, two or three versions into the future because you know when you're designing hardware. It's these are multiyear plans that you're building and kind of figuring out all the pieces that are going to go into that so we have multiple teams in parallel that we've sort of now spun off this.

As for VR, as well as augmented reality and a bunch and the other work that we're doing.

This is sort of driven by the success that we feel like we're seeing.

And the markets in the technology.

Starting to be ready to really ramp up.

So those expenses, we are experiencing today, Brian having having those teams operating as something that.

You see way on the on the results and.

One of the reasons why I think the growth rates and expenses have been so high and I think we'll continue investing Moreover over some period, but at some point, we will have all of those product teams fully staffed for a few versions into the future and then the growth rates there will come down.

But.

It's not going to be until those products really hit the market in scale in a meaningful way.

In this market ends up being big that this will be a.

Big revenue or profit contributor to the business. So that's why I've given the color on past calls that I expect us to be later this decade right maybe primarily this is a.

Laying the groundwork for what I, what I expect to be a very exciting 2030 is when this is like.

When this is sort of more established as the.

The primary computing platform at that point I think that there will be results along the way for that too.

But I do think that this is going to be there's.

Theres going to be a longer cycle some of the software parts of what we're doing in the meta versus.

Will I think have near term opportunities to monetize and I think what we'll see how that goes.

Certainly horizon will rollout across all platforms and there will be a number of things that we can do there that that will have shorter cycles that might resemble a little bit more of what we're used to with apps.

But overall I think that that's that's kind of the context that I want everyone to have on that.

Eric I'll take the second part the second question that you had we expect we've expected.

Ongoing privacy headwinds from the iOS changes and we continue to see them.

Those are obviously factored into our Q2 outlook along with the impact on demand that we're seeing from things like the war in Ukraine.

More specifically ATT continues to be a headwind, but we're also seeing incremental headwinds from iOS 15, and other regulatory changes and again, we factored all of those headwinds into our Q2 outlook.

Of course, any any outlook on platform headwinds depends in part on the platforms themselves and how they write and enforce their policies. So I'd sort of put that caveat in as well.

When you look at what we're doing to mitigate those near term working on improvements to our current solutions and Sheryl talked about some of those like privacy enhanced technologies medium term, we see the opportunity to move clients more towards onsite conversions.

A lot of success in things like click to messaging ads lead Gen adds and then.

Nascent effort in shop ads, and then longer term, we're rebuilding our AD stack to employ more machine learning and AI to be more effective at ads with less data. So we think we've got a response that we're building into the new environment and we're optimistic about the future.

Our next question is from Justin Post with Bank of America. Please go ahead.

Great. Thanks, maybe I can follow on you gave the outlook for maybe $10 billion headwind this year.

Is it fair to assume a decent chunk of that in Q1, and when you lap that in Q4.

Could see progress and then I think there is a lot of concern for the social companies on.

Apple 16 potential changes with IP addresses and other factors.

<unk> been able to call out potential headwinds.

I'm wondering if you have you can say anything about iOS 16, or how you're thinking about potential future Apple changes. Thank you.

Yes sure.

The $10 billion impact we shared our estimated 10 billion impact on ATT last quarter to get them.

Of the order of.

Magnitude and we believe it.

It's still to be that order of magnitude on the expected impact.

It's it's not a precise point estimate and we don't plan to update it also worth noting is that that's not a it's not a lapping there was an impact from AT&T in the second half of last year as well so that's not a all in the increment.

There was an impact last year.

Also beyond ATT, we expect to see additional targeting and measurement headwinds from ILS 15, and other regulatory changes I don't think we have anything at this point.

To share about about 16.

And then I think also just and you asked about sort of the second half we would expect the growth rate in Q3 to be modestly higher than the Q2 rates since we will be lapping.

The first full quarter impact of ATT in Q3, but there's obviously a lot of uncertainty baked into our Q2 outlook.

And that implies uncertainty in the second half as well.

Our next question is from Doug Anmuth with J P. Morgan. Please go ahead.

Thanks for taking the questions first.

First for Mark just curious as AI curation of content takes over from social cues, just hoping you could talk about what some of the biggest changes will be to the user experience and then perhaps monetization as well long term and then second in terms of rules. How do you think about the timing for turning on adds more.

And what needs to happen and the product for that to happen.

Yes, so I can talk about the AI driven recommendations and discovery engine part and maybe I can start to give some context on the adds to and then someone else can jump in there.

I think that the biggest.

Shift here is that now the universe of content that are candidates to show in a person's feed is way bigger than it used to just be okay. Here are the people who are the friends or businesses or pages that you follow me.

Or maybe it was on the order of.

That was under a few thousand potential posted today that we could show and we built a newsfeed system that can help rank those to show the most interesting ones to you with the at the top.

But fundamentally that was more a.

You know a challenge of of ranking a relatively small number of posts in the order that would be optimal now it's a much more open ended thing there are millions of pieces of content that we could potentially show a person.

And as our understanding of people and our understanding of content gets better through AI.

We are now better able to across all different content types text links photos short form videos long form videos.

Things are basically built to understand what the content is about <unk>.

And that should more with what people are interested in we're just means that there's a lot more candidates to show people.

The social content from your friends I think will continue being you know.

A lot of the most unique and valuable content into the system.

So that will still be there, but in addition to that you will now have a lot of other interesting content. So overall, what does that mean.

I think it will this will be a.

It will make the services more interesting it will mean that there is more interesting.

Start to consume and interact with both in Facebook and Instagram.

Which should contribute to engagement over time.

The parts of this that are about Reals I think have some.

Some specific monetization questions, where we need to ramp up that format.

But the parts of the switch or just about showing better content and feed.

Should actually monetize quite naturally and that's something that I think we're going to and we're starting to see that that kind of ramp up in Facebook and Instagram already as a part of the experience.

On the real monetization side I mean, I think the main question here is there is the cycle, which I mean shareholders probably jump in and talk a little bit more about this as just you know it takes some time for all the advertisers to optimize the creative right. It's like when we started doing stories ads.

Ads that were designed for news feed in.

And.

It just took some time for them to create effective content for stories and I think we're going to see the same thing for Reals and the way we think about the pacing of this is that we do show ads with with Reals.

But.

We're going to show more as the content gets better.

As that ramps up to not be a big.

Kind of pinpoint in the user experience right, we basically match that so that way as the ads get better across all of these different formats, we were willing to show more of them.

And Thats why improving the quality of ads has also been really important for our business I'm not sure. If there's anything else do you want to add on that though Sheryl.

It's a really important thing to think about because it's something we're very optimistic about we have great consumer engagement on reality, we have fast growth and we have a playbook for taking that kind of consumer engagement and rolling out ads into the experience. This is going to be a multiyear journey like stories, but it's one we're very optimistic about and as Mark said, it's about helping.

Kaiser's create.

Format of the ads that matches the content now what we've learned over time is the more we do for our advertisers the better off we are the more we automate it the more we can help them target the more we can help them.

The creative and the experience we have putting ads in stories as to black directly applicable, but the other reason we're really optimistic is we think this can create great results for advertisers and at the end of the day advertisers are chasing RLI theyre going to go where they get a return on their investment and while there's still monetize at a lower rate versus fee.

And stories advertisers, who are using it are seeing really promising results I'll share. An example, pros is a direct to consumer hair care brand and AAV tested, adding a real that placement to their usual campaign. They saw a 23% lower cost per purchase of 52% higher unique audience reach and three times higher.

Our video completion, so what that says is that this format works not just for this advertiser, but we're hearing this from many across the board and we think we can help a lot of advertisers adapt this in the coming years.

Our next question is from Youssef Squali from <unk> Securities. Please go ahead.

Great. Thank you for taking the questions I have two first mark on the regulatory front it looks like European and U S. Regulators are getting more aligned on how to proceed to address issues like antitrust.

Our ability the news on the Trans Atlantic data transfer seems pretty positive just stepping back and looking at the new environment.

That seems to be formed particularly between European and U S. Regulators do you see this as being more favorable or less favorable to Facebook.

And then maybe maybe this is for Dave with the stock down. So much can you maybe talk about employee retention and how you think about cash com versus stock based comp in the current environment. Thank you.

I will take the regulatory question.

Now is a really critical an interesting time in regulation for our industry because the rules that are governing the internet are being rethought and rewritten certainly in Europe , but increasingly around the world.

Spoke about the <unk>.

We expect DNA to have significant challenges for our industry.

We're working with European regulators on these rules.

Are largely in the range of what we were expecting but the final tax has not been released yet and the details on this will matter, but overall the regulatory environment is a real challenge for our industry. One we think we are well set up to meet working closely with regulators and doing things in our technology like privacy and how.

<unk> technologies to do more with less with less data, but we expect this to can be this to continue to be a significantly challenging time, not just for us but across our whole industry.

Yes.

If it's Dave so on the on the.

Retention and recruiting front I mean I'd say.

We continue to have success in recruiting as demonstrated by the 5800 net new hires this quarter. So we're pleased with our ability to do that also.

<unk>.

On the retention front attrition, which has stepped up since since what we experienced during the pandemic is really still broadly consistent with levels that we had seen pre pandemic. So.

It's definitely something that we're tracking and obviously.

The stock price is something that we that we watch but.

The trends are.

Relatively in line with expectations, so from that sense.

We feel like we're doing we're doing okay.

Our next question is from the line of Mark Shmulik with Bernstein. Please go ahead.

Yes, hi, thanks for taking the question first.

Yes, just on that.

Thank you.

And in APAC and rest of the world.

Just some color is that just less exposure to the macro is it the new users or something else.

And then the second question Mark last quarter, you gave us your priorities for the year.

And what the operating expense guidance down a little bit.

Any color you can share on how that's affected prioritizing for any changes in kind of spending intensity on some of the longer term initiatives like the meta versus versus some of the near term stuff like business Mexico. Thank you.

So I'll take the first question sort of in terms of the regional.

Regional growth so growth slowed in all regions due to pricing headwinds.

Currency was obviously a headwind in all the international regions Europe , decelerated very meaningfully and the existing headwinds were compounded by the effects of obviously, the Ukraine War.

In North America, we have a relatively higher exposure to offsite objective, so the targeting and measurement challenges.

To impact growth in in that region.

<unk>.

I'd note that in North America impressions were down year over year in Q1, So AD impressions were down year over year, though the rate improved from Q4. So it was primarily a demand driven deceleration when we look at APAC and the rest of world.

It benefited from strong demand in products like click to messaging ads.

In rest of world.

Growth decelerated least of all regions.

Macro conditions in Brazil improved a bit after softness in the second half of 2021.

And then in APAC it was.

Relative strength was pretty broad based but I'd call out particular strength in.

In India, and that's benefiting from good supply tailwind in terms of impression growth.

Yes in terms of priorities.

Our priorities are broadly consistent with what I outlined on the last call.

At the beginning of the year so.

Yeah.

Outlined a lot of the basic focus areas for the company.

Whereas on most earnings calls I'll talk about a few areas that are that have been particularly focused on.

Yes, I think.

We're pacing some of the investments across.

Each of these areas, but I think more importantly, we're shifting the bulk of the energy inside the company towards those high priority areas.

Oh away from other areas. So we're a big company at this point, it's not just all about recruiting and adding new people from the outside a lot of it is you know we have a lot of awesome people here and a lot of the decisions that we get to make on a day to day basis or how.

How do we direct our really talented people who are already at the company and we want to make sure that rather than just always relying on on just getting more and more new people from the outside which we're going to keep on doing we're recruiting a lot.

I want to make sure that our teams are disciplined about re prioritizing internally.

One thing that I want to add just as a bit of cultural.

Commentary on the attrition question is.

I don't think that this sort of volatility that companies face is always that unhealthy for making sure that you have the right people at companies.

During during Covid, we saw the attrition levels go down a lot because people didn't want to get new jobs, which probably meant that there were people who are staying at the company who didn't care that much about what we were doing as compared to what we would have wanted.

And.

I'm just trying to lead the company in a way, where we're positioning ourselves as the Premier company for building the future of social interaction and the meta versus if you care about those things I think we're getting the best people to come work here. If you care about doing awesome AI work on stuff like the discovery engine.

Cross all of these different types of formats, we're the only place that's doing that.

That's a great problem and.

That we're just seeing attract a lot of a lot of talent and I know that sometimes people are critical of the ads model, but it drives a lot of value for businesses and people around the world and I think the people who believe in that.

And want to see that continue to grow I want them here too.

Yeah, I mean, I think what we will see attrition go up and down over time.

I think we're doing okay now as Dave says, but I don't necessarily think that periods like this.

We're prioritizing a little bit more where we're focusing and growing.

Is gonna be unhealthy over the long term I actually think it's going to make us a better company.

Yeah.

Our next question is from Michael Nathanson with Moffett Nathanson. Please go ahead.

Thanks, I have one for Sheryl and one for Dave.

Sheryl in the past you've been pretty clear that idea.

Two part problem measurement and targeting.

As an update on how close you are closing the gap on measurement before and then targeting which you said is a longer term issue can you give us a sense of how quickly do you think the AI solutions, maybe speed that up and any updates on some of the consortiums that you've been talking about and then Dave just quickly on real.

It's clear the huge product consumption can you give us some quantification if you could on the impact of revenue from not from having more wheels.

Not monetizing at the same rate or where speed of personal news theater stories.

Thanks.

So.

On the mitigation timeline, we've talked before and I talked before about two key challenges from the iOS, which is like you mentioned targeting and measuring performance.

We're working through mitigation on both they're both a multifaceted challenge and Theyre interconnected because better measurement it leads to better targeting for advertisers.

On the first we are improving our systems as we test and learn and supporting advertisers with best practices and we're working on automating tools that will help advertisers target.

Target better and we have to do it with less data we have to do more with more aggregated an anonymous data.

Measurement, we've been able to close a good part of the underreporting GAAP and share that with advertisers, but the rest of the gap will take us longer to close this is a particularly big challenge for small businesses, because we have to work with them we have to work with them obviously.

Longer tail and more.

More resource intensive way.

Yes.

I can address the <unk> question I think we've touched on it a few times. So I don't know if I have a whole lot that's additive, but it now makes up a meaningful portion of peoples time on Instagram Mark gave the stat, but it's over 20% of People's time on Instagram.

So that speaks to there being a good opportunity as we ramp ads in.

In Reals, but it's very early days in terms of adds in reals, but but that being said, it's going to take it's going be as Sheryl said, a multiyear journey. If you look at stories.

Stories, we really began ramping in 2018 and at the end of last year, we mentioned that in developed markets stories on a sort of per time basis was monetizing.

At a similar rate as feed so it took many years for that gap to close and there's still work to be done across the world on that front, but really is going to be a similar opportunity, but also that will take time for us to close that to close that gap, but given that it's a good amount of time that people are spending in rail that is that as a good opportunity for us over that.

<unk> time period.

Our next question is from Ross Sandler with Barclays. Please go ahead.

Yes, just one follow up for sure all kind of related to that last question.

So now that we're in this world with no one can use.

Mobile Ids for targeting there seems like there's a lot of interesting new ideas kicking around the industry around like cohort based targeting.

Actual or other kind of I D free privacy centric targeting techniques.

My question is given the size of Facebook and all the first party data that you have how do you think some of these.

New techniques are going to perform relative to the rest of the industry.

And when do you expect them to kind of show up in a more meaningful revenue way.

What I'm asking is is the opportunity here.

To claw back some of that $10 billion of lost revenue or do you think looking forward your competitive advantage, maybe even broader.

You might be able to open up more AD dollars to Facebook with these new techniques any follow on that thanks a lot.

Yeah.

Yeah.

Sorry, David.

When you think about how we mitigate some of these challenges. There's a couple of things to think about one or what are the solutions. We have that can be onsite. So as we develop some of our commerce commerce.

Products as people aren't using things like click to messaging ads click to messaging ads are a good example of.

To close the loop at least to the point, where you're connecting directly with our customer happens on our service if our commerce.

If our commerce efforts are successful over the longer term, we will be able to close that loop directly on our own service. The other thing that was interesting in your question is youre right that this is about.

Relative comparative advantage in a very highly competitive space.

We have been able to use data I think in a privacy safe, but a very efficiently. Some of the data we have relied on we've relied on has changed that's causing some near term near term challenges and headwinds for us but over the long run once that settles out advertisers are going to go where they get the best return. So we have highly engaged.

We still have very important data that is first party that we are able to use to target. We're working on measurement solutions and we're also working on things without the industry. So we think while these times are challenging over the long run we do have a very strong competitive advantage. When you look across the opportunities advertisers have to advair.

It has both offline and online.

Okay.

Our next question is from Brent Thill with Jefferies. Please go ahead.

I know, it's early unreal monetization, but are there early learnings that.

You've learned and taken away so far that you could share and then the second question. We get is just unreal budgets or are they incremental silver overall spent or are you seeing advertisers.

Business from storage and feeds into <unk>. Thanks.

I can take those so on the first it is the process I've described which is that.

We know that if there's a consumer product that consumers are enjoying we are able to move advertisers into that product. If a couple of things are true as mark talked about the format of the ads fixed and fits into the format of the product.

Which is short form video, which is taxed with kids pictures.

Is a great format for us because those are all things we've already done well both on the consumer front, but importantly on the ads front. So we are able to create the format of the ads and offer that to advertisers than we need to help advertisers create compelling ads and we need to help them placed across our different properties, we have a lot of place.

Since you can place that we have a lot of experience in this and we are on a ramp it is a multi year ramp, but we've learned things make it as automated as possible for example, rather than ask advertisers create the perfect that the more you can ask advertisers to give you the components of that AD and create it for them the better things will work on over time.

On targeting try to figure out what are the advertisers real ankles and then we can suggest the products that fit for those angles. So if you'd tell us youre trying to get on site conversion. So can you tell us you're trying to get people to messaging. We can then put you into different placements across our AD offerings and we all do.

It's a very compelling.

Part of that on the increments of budgets, it's always better.

When we rollout a new product there's always some of the budgets, which are just being reallocated from other parts of our own platform. Because there are people, who will have a met a budget or a facebook budget or an Instagram budget.

Over time, our goal is to grow those budgets and we do that the same way. It is are you know.

Large teams feet on the street working with our global advertisers in our largest clients and it's our online our online ability to sell and monetize and grow other than that I think we are industry, leading on working with SMB is where we have to show them the returns and when their budgets and when we rollout new products and partially I think.

Mental as long as we're really delivering great ROI compared to what they can get off of our platforms overtime those budgets can continue to grow.

Great operator, we have time for one last question.

Very good our last question then will be from Alan Gould with loop capital. Please go ahead.

Yeah.

Mr. <unk>. Your line is open. Please go ahead.

Hi.

Thank you for taking the question two.

Two questions just to confirm did you say I may use would be down sequentially into Q and mark.

Last quarter you spoke you were quite open about the competitive issues on Tic Toc, we seem to be impacting the whole industry now any way of quantifying how much you think tictoc is that impacting Facebook. Thank you.

Yes, Alan because of the loss of users in in in in Russia, We do expect there to be a sequential decline in MAA is in.

In Europe .

And the <unk>.

We think that will feed over into overall.

They're all global because I think that will tip it to be flat to down it just as a reminder, government restrictions on Facebook access in Russia were implemented in late February through early March. So some Russian users were still on our service is active users during our Q1 calculation. So part of that is just the way, we calculate and MAA as the.

Last month of the quarter, and so thats going to spill over into Q2.

Yes.

Oh.

I think it's it's clear that short form video is.

Massive opportunity.

For the industry broadly and we're very.

Pleased about that.

The offering that we have with <unk> and the opportunity for us to compete for.

For sure in time in the market.

Obviously other other competitors are have strong offerings like tick talk but we're pleased with.

With what we've got with <unk> and the efforts that we're making to grow that important product.

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

Okay.

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

Hum.

Sure.

Yes.

Yes.

Okay.

Okay.

Yeah.