Q2 2022 Meta Platforms Inc Earnings Call
Yeah.
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 Meadows second 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. Please press the one and then the number four on your telephone keypad. This call will be recorded. Thank you very much Ms. Deborah Crawford <unk> Vice president of <unk>.
First your relations you may begin.
Thank you good afternoon, and welcome to meta platform second 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 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.
Press release and in the accompanying Investor presentation are available on our website at Investor Dot FBA Dot com and now I'd like to turn the call over to Mark.
Alright, hey, everyone. Thanks for joining today.
Our family of apps continues to grow even as we navigate a challenging macro environment.
Now reached more than $3 6 billion people monthly across our services the.
The number of people using Facebook daily continues to grow including in the U S. Although we saw an expected decline in monthly actives due to internet blocks are related to the war in Ukraine.
<unk> trends on Facebook have generally been stronger than we anticipated and strong <unk> growth is continuing to drive engagement across Facebook and Instagram.
Third.
We seem to have entered a an economic downturn that will have a broad impact on the digital advertising business and it's always hard to predict how deep or how long these cycles will be.
But I'd say that the situation seems worse than it did a quarter ago.
In this environment.
We're focused on making the long term investments that will position us to be stronger coming out of this downturn, including.
Including our work on our discovery engine in Reals are new adds infrastructure and the meta versus.
We're also focused on being rigorous about measuring returns and sizing these investments correctly.
On our last call I discussed that based on the revenue growth. We were seeing in 2021 now we kicked off a number of multiyear projects to accelerate our business.
Still believe that these projects are important.
But given the more recent revenue trajectory that we're seeing.
We're slowing the pace of these investments and pushing some expenses that would have come in the next year or two off to a somewhat longer timeline.
Given the continued trends.
This is even more of a focus now than it was last quarter.
Our plan is to steadily reduce head count growth over the next year.
Many teams.
Are going to shrink so we can shift energy to two other areas inside the company.
And I want to give our leaders the ability to decide within their teams.
Where to double down where we're to backfill attrition and where to restructure teams, while minimizing thrash too.
Long term initiatives.
The fact that we hired a lot of people earlier this year.
Means that our reported year over year head count growth will still be the <unk>.
<unk> for the next few quarters, but it should continue to decline over time.
So this is a period that demands more intensity and I expect us to get more done with fewer resources.
We're currently going through the process of increasing the goals for many of our efforts.
Previously challenging periods have been transformational for our company and helped US develop our next generation of leaders and I expect this period to be no different I expect that we're going to find a way to keep investing in our top priority areas and I think we're going to come through this period as a stronger and more disciplined.
<unk>.
Now next I wanted to discuss how we're doing in our high priority areas.
To understand where we're going it's important to keep in mind that there are two major technological waves that we're writing in our business.
The first way of driving our business today is AI and then the second longer term wave is the emergence of the <unk>.
What are the main transformations in our business right now is that social feeds are going from being driven primarily by the people in accounts you follow to increasingly also being driven by AI recommending content youll find interesting from across Facebook or Instagram, even if you don't follow those creators.
Social content for people you know this is going to remain an important part of the experience and some of our most differentiated content, but increasingly we will also be able to supplement that with other interesting content from across our networks.
<unk> is one part of this trend that focuses on the growth of short form video as a content format, but this overall AI trend is much broader and covers all types of content, including text images links group content and more.
Building a recommendation system across all of these types of content.
It is something that we are uniquely focused on it.
Right now about 15% of content at a person's Facebook feed in a little more than that of their Instagram feed.
Recommended by our AI from people groups or accounts that you don't follow and we expect these numbers to more than double by the end of next year.
As our AI finds additional content that people will find interesting that increases engagement and the quality of our feeds and since were already efficient at monetizing most of these formats.
This should increase our business opportunity over that period as well.
Reals engagement.
Is also growing quickly I shared last quarter that <unk> already made up 20% of the time that people spend on Instagram. This quarter, we saw a more than 30% increase in the time that people spent engaging with reals across Facebook and Instagram.
AI advances are driving a lot of these improvements and one example is that after launching a new large AI model for recommendations, but we saw a 15% increase in watch time in the real video player on Facebook alone.
I think that there are many improvements like this that we're going to be able to to continue to make.
As we are building out our discovery engine, though.
I want to be clear that we are still ultimately a social company focused on helping people connect.
One social trends that we're seeing is that instead of people just interacting and comments in their feeds most people find interesting content in their feeds in the message.
And then the message that content to friends and interactive Air and this creates this flywheel of discovery and then social connection and then inspiring those people to create more content themselves.
Instagram for example, we see the Reals makes up more than half of content re shared into messages. So our strategy isn't about public versus social content and interaction.
It's really about enabling a flywheel that compounded with both.
Next onto ads.
We faced a number of challenges here in the near term, but the investments that we're making should give us a comparative advantage over the longer term.
One near term challenges the growth of short form video.
<unk> doesn't yet monetize at the same rate as feed or stories. So in the near term the faster that reels grows the more revenue that actually displaces from higher monetizing surfaces now in theory, we could mitigate the short term headwind by pushing less hard on growing reals, but.
But that would be worse for our products and business longer term since we're confident that <unk> will grow engagement overall.
Quality and will eventually monetize closer to feed.
Our work on ads monetization efficiency for Reals.
Is actually making faster progress than we'd expected. We've now crossed a $1 billion annual revenue run rate for Reals ads and Reals also has a higher revenue run rate than stories did at identical times post launch. So the bottom line is I think we're on track here and we just need to.
Through this one.
The second challenge that we face here is the signal loss from Apple's iOS changes and as I've discussed before our <unk>.
Cheers to grow first party understanding of People's interests by making it easier for people to engage with businesses in our own apps whether.
Whether that's through business messaging shops, or new ad products.
For example, click to messaging as part of our business messaging strategy, that's growing quickly with 40% of our advertisers already using this format.
The AI wave that we're writing is a tailwind for all of your solutions advances in AI enable us to deliver better personalized ads, while using less data.
It powers automated messaging and accretion tools that let businesses run better performing campaigns.
Which is particularly important for small businesses that don't have big marketing departments and that have been hit hard by Apple's policy changes. The overall, there's a lot of work to do here and a lot of the investment.
Is an AI compute capex.
I'm confident that if we invest in building the new infrastructure that we need.
So we're going to come out of this downturn with even more superior AD products and a meaningful technology advantage over other industry players.
Of course, the third challenge that we're facing here is the macro economy.
And we can't control the timing of when things will bounce back, but I'll note that periods like this are when marketers reevaluate their budgets.
There are even more focused on finding the highest performing advertising and in the last recession, we invested in our ads business through the downturn.
And came out stronger on the other side and I am focused on making sure that we do the same today.
No. If AI is the major technological wave that we're writing today than the last priority that I want to discuss is about the meta versus technological wave that is currently building and the meta versus a massive opportunity for a number of reasons. Most importantly.
It enables deeper social experiences.
Where do you feel a realistic sense of presence with other people no matter, where they are and whether you are playing games or working for hours at a time.
Or if youre just jumping in for just a minute at a time to say hi to a friend or collaborate on a project quickly.
Thereby helping to develop these platforms.
We're going to have the freedom to build these experiences the way that we and the overall industry believe will be best rather than being limited by the constraints that competitors placed on us.
Our on our community and on small businesses.
And so given some of the product and business constraints that we face now I feel even more strongly now that developing these platforms will unlock hundreds of billions of dollars if not trillions overtime. Okay.
This is obviously a very expensive undertaking over the next several years, but as the <unk> becomes more important in every part of how we live from our social platforms and entertainment to work and education on Commerce.
I'm confident that we're going to be glad that we played an important role in building. This.
The next milestones to look out for here.
The continued expansion of horizon or social media versus platform.
And the continued improvement of our avatars platform.
And how you express yourself and interact in the meta versus what is the commerce around that.
These are some of the areas that we're most focused on and we're going to be launching a web version of horizon that will be accessible on all platforms. Later, this year, which should dramatically increase the number of people who can use horizon.
And we also just launched our avatar store with digital close from a leading fashion houses and we're going to continue expanding that selection and the fidelity of our avatar system overall on the hardware front later this year, we'll release projects Cambria and the experience here is is getting pretty awesome.
Our high end device focused on professional users and work with high resolution color mixed reality.
I'm really looking forward to getting this one out. This is just one milestone in our long term path, but but I think people are going to be pretty blown away by this.
Alright so.
So those are the areas that are most focused on right now and that I think are going to have the greatest impact on our products and business over the next few years and.
And much longer.
Periods like this can be tough, but I really think that the additional focus and discipline.
We're going to make us stronger over time.
Now in addition to our business. This is also a period of transition for our leadership team and before I hand, it over to Cheryl for what will be her last earnings call.
I want to thank her for everything that she has done for meta for our community.
And for so many small businesses around the world. It is.
It's really hard to overstate, how big of an impact that.
Cheryl has had on so many different parts of what we do and on me personally.
At the same time Javier Marni, our talented leaders, who I've worked with closely for many years.
There is the type of people, whom I've kept giving more and more responsibility to and they just keep crushing. It. So the expanded roles are well deserved and I think that theyre going to do a great job carrying our business forward and.
And expanding it and some exciting new ways and.
And we also shared the news this afternoon.
Dave Wiener will be transitioning into a new role as our chief strategy officer, overseeing our strategy and corporate development teams. Dave has done great work as our CFO and I'm really looking forward to continuing to work with him in this new role.
And as part of this we're also promoting Susan Li to be met as new Chief Financial Officer. Starting later this year.
Susan is an incredibly talented executive and I think she'll be an excellent CFO .
Sure. He runs our financial planning process and plays an important role on our leadership team and this transition is something that we've been working on for years.
Alright, with that I'm going to hand, it over to Cheryl.
Thank you Mark for those kind words and for being a great leader and friend for the last 14 years.
It has been an enormous privilege to work for you to help build this remarkable company.
I'd like to focus on Q2 before making some lighter observations about the business.
Total revenue in Q2 was $28 8 billion, a decrease of 1% year over year.
Foreign exchange trends had a significant impact in Q2 in particular, the depreciation of the euro relative to the dollar on a constant currency basis, we would have seen 3% revenue growth year over year.
Similar to last quarter, we saw solid growth in APAC and other parts of the world outside of North America, and Europe , where it's been a more challenging environment.
These continued to be turbulent time for the global economy.
Many of the macro factors, having an impact on our revenue are continuations of things we've seen in previous quarters, such as the continued impact of the war in Ukraine, and the normalization of E. Commerce. After the pandemic peak peak, but there are also new challenges with rising inflation and uncertainty around a looming recession.
We know that recessions put pressure on marketers to make sure their AD budgets are spent in the smartest way possible.
We are focused on helping them run efficient marketing campaigns to get the best possible return on investment, including helping them shift their AD strategies on our platform in line with user trends and our own evolving ad solutions.
I wanted to pick up on some of the themes Marc just touched on that show how we're doing this wells monetization evolving our AD system and AI and machine learning.
First <unk> monetization.
We launched agile meals late last sorry, we launched <unk> last year. It is growing quickly and we see it as an area where there is significant potential for growth in the future.
We're going to take time, but we have a playbook from our experience with stories.
Focus right now is ramping up at mode, improving performance and making sure. The ads are easy for advertisers to create.
We're also using AI to better understand the content being published in Reals. So users can connect to the content that is most relevant to them and marketers can also show more relevant ads.
A good example of a brand seeing results with real dads as Wild Alaskan company.
Stable seafood delivery business that has consistently adopting and testing our latest on tools.
When they tested adding real to their campaign they saw a 36% increase in return on ad spend.
Similar uplift in new subscribers, and a 26% lower cost per new subscriber.
Second adapting our AD system to do more with less data.
In the short and medium term, we're working to improve and evolve our ad solutions.
Were helping advertisers improve the performance of their ads by growing onsite data conversions with products like lead ads, which make it easier for businesses to generate leads and with business messaging products like click to messenger ads when you click on an AD in your Facebook or Instagram feed and it opens a chat with the business and messenger Instagram or whatsapp.
Business messaging is an area, where we see big potential we estimate that 1 billion users our messaging with the business each week across Whatsapp messenger and Instagram.
Two messages already a multibillion dollar business for us and we continue to see strong double digit year over year aircrafts.
These ads are proving particularly popular with SMB is in emerging markets like Brazil and Mexico.
Many of whom are new advertisers to matter, who come to us to advertise solely in this format.
We're making it easier to create these ads directly from the Whatsapp business, App, which will help small businesses looking to find customers and grow and big brands are incorporating business messaging into their campaigns like Paramount Studios. He is click to messenger to promote their blockbuster movie top gun Maverick and drive ticket sales.
As more brands turn to messaging paid messaging provides new ways to sell support and market right on the chat thread.
We're also investing in privacy safe ways to improve targeting and measurement.
For example, we're continuing to invest improving our conversions API, which creates a direct reliable and privacy safe connection between advertisers' marketing data and meta.
And over the longer term, we're developing privacy enhancing technologies to help minimize the personal information, we process, while still allowing us to show relevant ads and measure performance.
One example is private left which we're currently beta testing with a large number of large advertisers.
This is a measurement solution, which helps advertisers understand how their campaigns are performing while adding extra layers of privacy to limit the information that can be learned by the advertiser or a matter.
While we develop these solutions, we're also collaborating across our industry on technologies and other standards that will support privacy safe personalized advertising over the long term.
Third on AI and machine learning.
I want to emphasize <unk> point that this is a really important part of how we improve our ads ranking and measurement capabilities.
AI driven products like advantaged detailed targeting an advantaged look alikes helped to increase the audience for an AD campaign, if its likely to improve performance.
AI is also an important part of how we continue to grow video monetization.
A moment ago I touched on how we're using it in meals.
We've also launched AI based tools to make it simpler to create video ads for Instagram stories, and we're continuing to test ways for advertisers to transform static images with music in motion. So they appear more like video.
Turning to the business more broadly there's no doubt that we're going through a transition period and doing so at a time of global economic uncertainty.
But despite the current challenges I'm very confident for the long term.
<unk> facing a cyclical downturn, but over the long run digital AD market will continue to grow.
Advertisers will go where they get the highest return on investment and ability to drive their business.
We believe we will continue to show up very favorably compared to other advertising options.
Okay.
Matt It is a company that has shown extraordinary resilience. We have demonstrated time and time again that we are prepared to move quickly and at scale to respond to changes in consumer behavior, the macroeconomic landscape and the needs of our advertising partners.
And we have demonstrated time and time again that when we build products they scale globally.
We've made big transitions like the shift from desktop to mobile or from feed to stories.
We innovate relentlessly and are always laser focused on execution delivering tools and products that help advertisers drive business results.
The investments, we're making in Reals, our discovery engine business messaging retooling, our AD system, and especially in helping to build the amount of earth represent enormous opportunities for our business and our partners.
I want to thank the teams that have helped us achieve remarkable success for our business and the millions of other businesses have grown using our tools and products.
I want to thank our partners large and small who we learn from every day.
I want to thank our Investor community Youre support has helped us to be the innovative and resilient business that we are.
I look forward to continuing to serve on Meadows Board, where I'll have a front row seat to <unk> success in the years ahead.
And now here's my amazing colleague 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 Q2 total revenue was $28 8 billion.
Down 1% were up 3% on a constant currency basis had foreign exchange rates remained constant with Q2 of last year total revenue would have been approximately $1 $3 billion higher.
Q2, total expenses were $20 5 billion up 22% compared to last year in terms of the specific line items cost of revenue decreased 4% as growth in core infrastructure investments in content related costs were more than offset by a reduction in reality labs loss reserves as a result of the announced price increase of <unk>.
<unk> II.
R&D increased 43%, mainly driven by hiring to support family of apps and reality labs.
Marketing and sales increased 10%, mainly driven by hiring in marketing spend lastly, G&A increased 53%, mainly driven by legal related and employee related costs.
We added over 5700 net new hires in Q2, the majority in technical functions. We ended the quarter with over 83500 full time employees up 32% compared to last year, our second quarter growth rate reflects our hiring progress earlier. This year. However, we anticipate head count growth will slow throughout the rest of the year due to the reduction.
And our hiring plans.
Second quarter operating income was $8 4 billion, representing a 29% operating margin our tax rate was 18% we recorded a loss of $172 million under interest and other expenses driven mainly by unrealized losses in equity investments.
Net income was $6 7 billion or $2 46 per share.
Capital expenditures, including principal payments on finance leases were $7 7 billion driven by investments in servers data centers and network infrastructure the.
The big step up in Capex, both year over year and sequentially related to server spend including for our AI infrastructure.
Sustainability remains a key focus of our infrastructure efforts and in June we published our third annual sustainability report. The report demonstrates continued progress on our sustainability initiatives.
Free cash flow was $4 5 billion, we repurchased $5 1 billion of our class a common stock in the second quarter and we ended the quarter with $40 5 billion in cash and marketable securities.
Moving now to our segment results I'll begin with the family of apps segment Q2 total family of apps revenue was $28 4 billion down 1% Q2 family of apps revenue was $28 2 billion down 1% or up 3% on a constant currency basis.
Advertising revenue growth slowed throughout the second quarter as advertiser demand softened the deceleration has been broad based across verticals and we believe businesses are lowering their advertising spend in response to the increased economic uncertainty.
Foreign currency headwinds also increased throughout the second quarter, while it wasn't a factor contributing to the deceleration in Q2, we're also continuing to face targeting and measurement headwinds such as Apple's iOS changes, which we believe are contributing to the growth challenges across the digital advertising industry.
On a user geography basis year over year AD revenue growth was strongest in Asia Pacific and rest of world at 13% and 11% respectively with both regions benefiting meaningfully from strong growth in click to messaging ads.
North America, and Europe declined, 4% and 12% respectively foreign currency was a headwind in all international regions with Europe , and Asia Pacific experiencing the largest impacts.
In Q2, the total number of AD impressions served across our services increased 15% and the average price per AD decreased 14%.
Impression growth was driven by Asia Pacific and rest of world the year over year decline in pricing was driven by a reduction in advertiser demand the mix shift in AD impressions towards lower monetizing services and regions and foreign currency depreciation.
Family of apps other revenue was $218 million up 14% driven by the Whatsapp business API.
Family of apps expenses were $17 2 billion up 23% driven mainly by employee related expenses legal costs and infrastructure costs.
Family of apps operating income was $11 2 billion, representing a 39% operating margin.
We estimate that approximately $2 9 billion people used at least one of our family of apps on a daily basis in June and that approximately $3 6 billion people used at least one on a monthly basis.
Facebook daily active users were $1 97 billion up 3% or $60 million compared to last year.
<unk> represented approximately 67% of the $2 93 billion monthly active users in June .
<unk> grew by $39 million or 1% compared to last year, Europe , <unk> and <unk> declined sequentially and were negatively impacted by the impacted by the loss of users in Russia and Ukraine.
Within our reality lab segment Q2 revenue was $452 million up 48% driven primarily by quest to sales.
Reality labs expenses were $3 3 billion up 19% due to growth in employee related costs in R&D operating expenses that were partially offset by the previously mentioned previously mentioned reduction in loss reserves.
Reality labs operating loss was $2 8 billion in the second quarter.
Turning now to the outlook, we expect third quarter 2022 total revenue to be in the range of 26 to $28 5 billion.
This outlook reflects a continuation of the weak advertising demand environment, we experienced throughout the second quarter, which we believe is being driven by broader macroeconomic uncertainty.
We also anticipate third quarter reality labs revenue to be lower than second quarter revenue.
Our guidance assumes foreign currency will be an approximately 6% headwind to year over year total revenue growth in the third quarter based on current exchange rates.
In addition, as noticed noted on previous calls we continue to monitor developments regarding the viability of transatlantic data transfers and their potential impact on our European operations.
Turning now to the expense outlook, we expect 2022 total expenses to be in the range of $85 to $88 billion.
Lowered from our prior outlook of 87 to 92 billion.
We've reduced our hiring and overall expense growth plan. This year to account for the more challenging operating environment, while continuing to direct resources towards our company priorities.
We expect 2022 capital expenditures, including principal payments on finance leases to be in the range of 30 to 34 billion narrowed from a prior range of 29% to $34 billion.
Absent any changes to U S tax law, we expect our full year 2022 tax rate to be above the Q2 rate and in the high teens.
In closing we are in the midst of an economic cycle that is having a broad impact on the digital advertising business, we're being disciplined on spending while still investing in those areas that will position to drive growth as the economic environment improves.
For opening up the call for questions I want to say, how pleased I am that Susan Lee will serve as our next CFO when I step into my new role in November Susan and I have worked side by side for the last 10 years and she is an outstanding leader for the team.
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. The one followed by thus far on your Touchtone phone. Please pickup your handset before asking your question to ensure clarity.
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Our first question is from the line of Brian Nowak with Morgan Stanley . Please go ahead with your question.
Yeah.
The first one around engagement and overall time spent among users Mark you guys are making a lot of changes around AI in reals et cetera, it's encouraging to hear the stats about 30% increase in time spent with real across Facebook and Instagram.
Youre studying those users that are using more reels are you seeing total time among those users grow so said another way all of these changes is proving to be incremental that's the first one and the second one on head count growth understanding we're expecting a slowing of head count in the back half, but mark to kind of go your points about at some point you see head count.
Decline should we think about 'twenty, three as being a year in which head count declines for the company.
Yeah, Brian I can take both of those and then Mark can add any color if he would like.
Reals is additive to time spent but obviously it does have a cannibalistic.
Cannibalistic impact as well, but the net impact is positive there is some engagement that we think is coming out of <unk>.
Out of.
Surfaces like feed and stories and we're getting that engagement on Reals and that's been part of our explicit strategy to get really in front of more users, but overall it is incremental incrementally benefited beneficial to time spent and then on head count growth, we're not we're not putting any markers yet out for 2023.
But were as Mark said, we're reducing our head count growth rates and we plan to be more.
More focused on.
Maintaining a lot of discipline on head count growth as we as we go into 2023, so as we get closer to that in the setting of the budget will be getting more explicit guidance on that Brian .
Perhaps you can go to the next question.
Our next question is from Justin Post with Bank of America. Please go ahead.
Great. Thanks for taking my questions and the headwinds you Didnt mentioned tick talk are you seeing any dollars or advertisers pulled that could be moving over there or it may be lower CPM and any thoughts on competitive headwinds and then second just a quick question on that.
Is there a contemplated pressure on quarter revenue in <unk> versus Q2 because of the real.
Usage increases thank you.
Okay.
I'll take the first question.
We exist in a really competitive advertising market, where advertisers have broad opportunities to advertise both offline and online and there are almost endless options. So we know we have to earn our share and continue to deliver great ROI and be able to measure results and that's why we're focused on the continuum of product improvements that we talk about in these calls.
Quarter over quarter, and we'll continue to do going forward.
And Justin let me make sure I got that question I.
I think you were asking about Q3 and just pressure.
On Q3, because of Reals usage, Mark mentioned that we are really excited that the run rate on <unk> crossed the $1 billion, but it is overall because engagement is shifting to reals. It is an overall headwind on the business, we haven't specifically quantified that but there is a headwind on the business as <unk> as <unk> grows in the.
A long run we of course believe that this will be a tailwind on revenue but.
That's not happening in 2022, we're optimistic that it can be in the long run.
But in general the pressure that we're seeing on Q3 is overwhelmingly a macro one where we're seeing sort of broad based.
Weakness across most of the verticals.
Our next question is from Eric Sheridan with Goldman Sachs. Please go ahead.
Thanks, so much for taking the questions two if I could one in terms of holding the focus on investments inside the company and we re examining the cost side, how should we think about the mix between reality labs and family of apps and what the impact might be on relative loss or margin structure of the two segments.
<unk> says you home the cost structure of the company and think about that investment cycle in both areas of the business that would be number one and number two maybe just following up on Justin's question and broadening out a little bit is there any way to unpack some of the impact of macro which is clearly out running some of the easier comp should be facing in Q3, because we're <unk>.
Lapping <unk> from a year ago, there was an easier comp on top of just IBSA and yet.
Implied is that the rate of growth continues to sort of weaken in Q3 versus Q2, So maybe unpacking a little bit some of the headwinds versus tailwind in Q3 to Q2 would be helpful. Thank you.
Yes, Eric I can I can take those and again if anybody has color. They can add on the investment focus I would say.
Broad broad base, we're really focusing the investments that the company is making on the key priorities now one of those key priorities is clearly the effort that we have behind the meta versus in reality labs. So.
It remains a an area in which we are going to be increasing investment, but we do plan to have discipline across the entire operating posture of the company.
When looking at the Q3 comp so I think youre, making an important point as we headed into the back half of this year, we do get the benefit in our year over year growth rates from lapping the Apple iOS rollout, which happened was largely complete by Q3 and Q4 of last year.
So we are getting the benefit of a more favorable comps on the signals headwinds, but that is being offset by the macro environment and the challenges. We're seeing there now of course, there are some hard to unpack factors that is at the first order but of course, we're seeing just generally challenging environment for digital.
Advertising.
And there's there's several compounding factors of course, there is just the overall economic uncertainty.
As reflected in the markets. There is the fact that we're lapping periods in which there was still a benefit from COVID-19 and some of the sectors that are important to us like E. Commerce and then finally just.
The signals headwinds and the challenges that advertisers are facing on a second order basis may be affecting some spend so but it at least.
On the first order, we think it's largely a macro environment that is offsetting the benefit that we would otherwise be getting from lapping the iOS 14 rollout last year.
Our next question is from Mark Shmulik with Bernstein. Please go ahead.
Yes, hi, two questions if I may.
First of all Mark back to the the discovery engine pivot.
Really a big change.
For the platform and certainly understand users hesitancy on kind of any changes, but beyond the flywheel effect of sharing any more color you can share on kind of what would differentiate the discovery platform here on Facebook and Instagram versus some other platforms will be much appreciated.
And then secondly on the <unk>.
Buyback cadence.
Is there any way to think about that I know the buyback kind of went down a little bit.
This quarter.
And I have also noticed that kind of seem to trend along with free cash flow generation is that the right way to think about the buyback strategy going forward. Thank you.
You want to take buybacks. The product question do you want to go first of all I can do buybacks.
So thanks Mark.
Obviously, we look at a lot of factors when it comes to our buyback program. We are we still have.
A substantial amount remaining in the buyback program and we expect to continue to have buybacks as part of our capital allocation strategy.
Going forward, so no real change in posture to announce there will continue to be looking at capital return opportunities overtime.
Great Yes no.
The discovery engine thing.
Yes.
There are few.
Different piece of context that I think are important here one is.
The social content for the people you know is going to continue being very important and obviously following people is an important signal.
If you go back 10 years ago, the AI to basically figure out what types of things you were interested in other than having a signal of what youre directly follow it didn't really exist. It wasn't good enough. So who you followed or who you're friends with with this sort of amazing signal.
It was it was more unique and away, whereas now increasingly AI is able to identify.
Things that you're interested in that might be from from accounts that you're not following or might even be.
A whole topics that you are not following anyone in that topic and not just unlocks a bigger corpus of content that you're going to be.
Interested in so the social parts of what we do well.
We will always remain and I think that that will be a very kind of differentiator and an important part of what we're doing.
On the discovery engine piece I, just think we're taking a different approach than some competitors and that we have a lot of different types of content formats.
So I talked about this a little bit upfront in.
In my opening remarks, but.
The AI that we're that we're building here it doesn't just apply to videos right. Its certainly not just short form video as it. It also works with text and links and photos and.
Content in groups and discussions on comments and all of these different things and it actually one of the really fascinating AI problems has to produce.
Just like basically a very large model.
AI researchers call it an embedding that's basically trying to unpack.
Basically like meaning or symantec or kind of what a what a post is about into this very high dimensional mathematical space.
But that can work across all different content types and they are being able to do that well I think we'll end up producing a different experience on Facebook and Instagram compared to some of other competitors that are just focused on one content format and I think in that sense. What we're doing is going to be pretty unique and is going to.
Create a lot of value I don't think people are going to want to be constrained to just one format.
And I certainly think that people are going to always continue carrying about what's going on with their friends and family and people. They know as well. So this is all going to be kind of a growing thing that that makes it so theres more interesting content available in and.
And basically it makes the service more.
It is just better for people to engage with them than other things and then part of the business challenges just we need to make sure we can monetize real as well like I said in my opening remarks, that's sort of on track, but less than the rest of feed.
Today, but we're optimistic that we'll get it there so that way as.
As the center, increasing the overall engagement on the platform it'll also end up being a tailwind for the business too.
Our next question is from Doug Anmuth with Jpmorgan. Please go ahead.
Thanks for taking the questions one for Sheryl and one.
Sheryl I was hoping you could just talk about what inning, you think you're in in building out and implementing the.
And to do more with less data for advertising and do you expect that over time, you will ever be able to return to the levels of targeting and measurement from before the platform changes.
Dave it's macro slows down more.
Into perhaps next year and even beyond or your revenue growth.
Flattens, even for other reasons are you prepared down overall expense growth to a similar level to preserve margins and profitability.
I can take the first.
So I don't know if you know the baseball, especially in auto I can do I can't do any exact inning and I'm.
I'm kind of hoping you mean as baseball is that right. Some are not yes, yes. It is.
It is there are nine of them, but I don't know exactly which one we are but I will say that we're that we're really we think I think we're pretty early on this.
I think in many ways.
We use data very effectively and in a very privacy Safeway all along to build out very measurable results and very measurable personalized targeting for advertisers and I think we led there and now we're in a new era, where we have to do that same form of targeting that same form of measurement using loss data and I think it's pretty early.
As in our ability to do that we're going to do it by investing on our own investing in AI investing in machine learning, we're going to do it in rolling out products like we have recently.
That helped us and advertisers measure, where we're sharing less data between as I talked about in my remarks, but we're also going to do it with our industry because it's worth noting that this is not a challenge we face alone. This is a challenge that anyone that's running on the Apple iOS platform has and the industry has is working together.
I think pretty collaboratively and not every player but in a lot of players many ways too.
To get solutions.
Yes, Doug I just wanted to.
First kind of hit the premise of the question, which is if we continue to see macroeconomic challenges.
Just historically macroeconomic challenges are often linked to some sort of cyclical effects and we do know theres lots of things going on in the broader economy that point in that direction, including rate hikes and the like so we do think there is a cyclical component of this we know that advertising can be especially.
Subject to these cyclical pressures.
We do think that long term digital within advertising.
Continues to have a very.
Positive future and we think that we are positioned to continue to grow engagement nicely and build the best products in digital.
In the market so we're.
We're quite confident that as the market conditions improve we will continue to be able to return to nice levels of growth, but we also I think have demonstrated that we're willing to take into account the market environment as we plan, our overall expense and capital.
Base. So we'll continue to monitor that as we go into future budget and planning cycles.
Our next question is from Michael Nathanson with Moffett Nathanson. Please go ahead.
Thanks, I have two maybe one for Sheryl and one for Mark.
Sheryl I'm using soon in Chuck's positioned.
<unk> grew faster than stores that reached $1 billion.
Yet at the same time, you are saying that it's a harder.
Monetize so what drove what do you think that.
The adoption was faster and then turn the sticking points. When you talk to advertisers what are the things that they need to solve for in order to move fast.
And Mark I think go into one of the earlier questions about your advantages and Facebook.
Previous.
We would argue is just the social graph with billions of people families and friends do you think what Youre building now with AI and.
The content is.
Even though it was a better mode is a better business than the one you had before which was a pretty high barrier to entry because given the social network.
Network.
So those are my questions.
So I'll take the <unk> one.
Wheels, we have a playbook, where we I think do a very good job building products that consumers love to use and then.
Building AD formats, which match those products. So they can integrate nicely into the consumer experience.
We learned from stories, how to do that and I think part of that faster adoption of all of that does that.
We are getting better at this we know we need to make it really easy for advertisers to create that content. We know we need to create the AD formats. We know we need to give them measureable tools and we've gotten better at selling the next product and I think we will continue to get better at that going forward, but as you do say there are still some challenges video is.
Harder and.
Photos than static photos.
Small businesses are better at static photos, then they arent videos. So this is a new format that we have to help them is I think we have a number of tools that are working we have a number of tools in development, but the idea is to help businesses really easily create those real estate wheels ads really easily test them that so they.
Can iterate and keep improving as we do this so I think it's very promising but we've got some hard work ahead of us.
Yeah and in terms of building sustainable competitive advantages.
Uh huh.
In terms of the social graph right, which you cited from before you know people have been able to get that from phones for more than a decade now right. So I don't really think that that that's been the the the thing for US I think it is.
We're a serious technology company, we invest a lot in building infrastructure and culturally we focus on moving and learning faster than everyone else and I think that those are sustainable advantages.
And so certainly I think that the AI technology and infrastructure that we're building.
I think it can compound and be better than than others in the industry and.
And that will be an advantage and make the product better over time, but I think at the end of the day, what that really comes down to is just.
I tried to push the company to be one that learns faster and just keeps iterating and moving faster than than then.
Then we did in the past and then others in the industry do and I think if we can do that well.
Then, we'll we'll continue to succeed.
But I think the moment that we stopped doing that then then.
And then will basically fall behind it so it's a very competitive field.
Field, and we need to to keep on pushing ahead, but I think the reason why we.
Have have succeeded and seen so.
Good results with Facebook, and Instagram and other social apps, because we basically focused pretty relentlessly on on just pushing to constantly improve them and we're going to do that with AI too and I feel pretty good about the internal results that we've gotten on this.
It's a big effort at this point, we have multi year roadmaps in place. So it's not like back when I was in a dorm room and they're just shipping code. Every every week I mean sort of user we're touching billions of People's lives and building really deep technology. These are long term things, but I think the same principles basically still apply for how you want to you want to build a company and stay ahead.
I think that that's going to be the sustainable advantage, but yeah I do think AI. If we can do this better in terms of recommendation systems, that's going to make Facebook better it's gonna make Instagram better it's going to make the ads better.
Which is why in my opening remarks, I talked about AI is one of the big technology waves that we're writing I think it's it's certainly I.
I think that Thats the truth, its a kind of a big underlying factor for our business, but we need to execute on that well and I think we're starting to see a bunch of good results on that.
Our next question is from Youssef Squali with <unk> Securities. Please go ahead.
Great. Thank you very much just I guess, a follow up on Unreal and thank you for the $1 billion run rate commentary.
Just kind of stepping back how far behind is the monetization of <unk> versus maybe Instagram stories right. Now I think you mentioned earlier that is already tracking ahead.
Ah versus Instagram Instagram stories of our launch just trying to get a sense of how long before we get to parity is it matter of several quarters or several years and maybe how quickly the stories get to parity with news feed back in 2018 and Mark how important is M&A to you accomplish in your vision of the meta versus and I asked.
Because one of the regulatory agencies, just today announced the lawsuit to block your acquisition of within a seemingly pretty small VR fitness app. Thank you.
Yes.
Yes.
I'll take I'll take those so.
In terms of real monetization and the stories journey that we went on.
Story has really started rolling out interest in.
Yes, I think it was 2018.
It really wasn't until this.
This year that we at least in the developed markets got to parity on a monetization basis.
On a time spent basis with feed so it was a multiyear journey.
I think we're still very early in that multiyear journey with with real so there.
Though we're proud of where we've gotten on a run rate basis, we're still very early in the trajectory of monetization and.
We'll have to see we were able to do a great job of closing that gap with stories I think there's always unique features in each different format.
That make inexact enel.
Analogy imperfect, but we're optimistic on our ability to at least.
Get a good ways on that journey towards closing the gap.
In terms of.
M&A theirs.
The M&A is definitely a component of our strategy.
And we'll continue to we'll continue to look at acquisitions going forward.
In terms of the specific announcement.
About the FTC looking to block the within acquisition I would refer you to our statement in the newsroom, but we believe that the acquisition of within would be good for competition and expand the VR ecosystem.
And would attract new users to VR and make it a more productive space for new and existing developer. So we definitely take odds with the with the FTC's position on that.
Our next question is from Brent Thill with Jefferies. Please go ahead.
Thanks, Dave just when you think about this downturn that you're in now and comparing to past downturns. Many are asking do you feel this is shallow or is it more is there a longer duration of this is there is there any.
Since you have and how you think about the duration of of what we're all seeing right now.
Thanks Brent.
And you get the prize for asking just one question.
The the I think it's really theirs.
There's a lot of unique factors in the place we are in right. Now one is that we're also comping against these very strong periods for online advertising during.
During the pandemic that make the the downturn sort of coincide with some reversion to offline behavior that exacerbates the impact of I think what is a cyclical sort of finance driven downturn with the reversion to sort of more offline behavior. So I think you've got some of the unique things.
Going on in the online ecosystem that do sort of exacerbate some of the cyclical effects because of the tough comps and we've seen obviously, not just us, but others kind of experience that.
I think in terms of prognosticating on.
<unk>.
The cycle itself and the duration.
I'll leave that for better better economist than I to understand how that how that may play out, but obviously the continued difficult environment is factored into our Q3 guidance.
Our next question is from Ross Sandler with Barclays. Please go ahead.
Great.
Something others have already asked on this call, but maybe you could flush it out a little bit better, but you talk about medium term.
<unk> competitive advantage and gaining back market share on the revenue side.
But I think some folks on this call are doubting that looking at the <unk> numbers, which obviously have like our DSA in Reals and there wasn't.
<unk> guide.
Compared to the likes of Google Amazon tick Tock.
And the numbers Theyre, putting up and if you look at previous times, where you gain competitive advantage. You also had a big data advantage. It seemingly you may not enjoy post I'd Esa anymore versus those other companies. So can you maybe flush out.
Either.
Specific products that you are working on that you are pumped up about that.
Drive that competitive advantage on the revenue side.
And when that might happen or is this a 2023 event or is this more kind of like long term that we think we'll claw that back. Thank you.
Yeah. Thanks, Thanks, Ross I think Theres a lot in there.
So why don't I at least just take the components of it that I think that we can kind of address.
I think Sheryl and Mark both outlined some of the areas that we're really focused on on the revenue side.
Reels as obviously right now.
A tailwind to revenue, but we're excited about continuing to grow engagement on rails, and then grow monetization on that over time.
So we think that's a very interesting.
Venue for our clients to explore and advertise on and Thats going to create some real opportunities for them and us over time, and we're also investing in AI to make our ads products better and we're excited about what we can do there and Sheryl talked about some of the different products.
Products. There. So we think that that will those are a couple of examples of things that will position us well.
As it relates to kind of competitive dynamics, I think theres a lot of different.
Different things going on in the industry different companies are affected differently or not at all or not as significantly by things like the <unk>.
Headwinds related to the iOS changes.
There's also just different mixes of vertical businesses that effect.
The effect how different companies are affected by.
By the current the current economic climate and the Covid Lockdown, So you've got a lot going on but we're confident in our ability to continue to build the best products.
For users to be engaged as well as building great advertising products for businesses, who want to reach those consumers.
Alright, we have time for thank.
Thank you last question.
Thank you our last question will be from Mark Mahaney with Evercore ISI. Please go ahead.
A couple of things.
David Cheryl just still wanted to wish you best of luck going forwards and Cheryl and particularly want to congratulate you I think $5 billion to $120 billion over 14 years, that's pretty damn impressive. So congratulations wish you all the best going forwards to two two questions. One on AI Mark you talked about the advantages of AI any update on how how AI is done in terms of.
<unk>.
Tackling content moderation issues do you feel like you've made some breakthroughs there and then Sheryl you talked about this click to message marketing opportunity and you've mentioned a couple of times.
For the last couple of calls it it's a couple of billion in revenue, but particularly strong I think in Latin America, and the rest of world any thoughts on the opportunity for that as a business within North America and Western Europe as it just culturally different or are there certain things that can be done to make it just as good strong in these in those markets as it is in the others. Thank you.
Yeah.
Yes, I can take the first question on AI.
Yeah on content moderation.
Most of this is done through AI today in every quarter, we released a community standards enforcement of report where basically the main metric is what percent of the harmful content to our systems identifying and taken action on.
Before someone has to report it to us and.
Those metrics are generally moving in the right direction and do different things going on in the world make them sometimes fluctuate.
But in general we've made a lot of progress there over the last few years and I'm quite proud of that we focused a lot of AI efforts there.
And at this point a lot of the newer AI efforts that we have and we're obviously going to continue that work as well, but a lot of the new efforts are focused on our recommendations of of of content in.
And these large sparse models that can do better content and ads recommendations with a much larger model with.
Even even sparse data so yeah pretty optimistic about about that overall alright.
All right Sheryl.
Mark. Thank you for those kind words and also thank you for this question because this will be the last one I taken it's exactly the note I'd like to add on and on because it's a part of our business. We're so excited about click to messaging ads is one of our fastest growing AD formats, it's already a multibillion dollar business for us growing at double digits.
And that's because again I think it follows the playbook, we've had of building a consumer engagement that businesses can be part of having that consumer behavior happen first and then being able to work with businesses. So messaging is hugely sorry growing hugely quickly everywhere in the world and we have.
<unk> engaged broad very well used messaging platforms and many of them. So when you think about consumers using it we already know that we already know that's happening and then businesses are increasingly using it and youre right that we've seen a lot of that behavior start in other parts of the world, but we are seeing that behavior in North America, and Europe as well and.
We are deep believers that that that behavior will continue to grow all over the world. So that means the click to messaging ads.
Become the perfect opportunity they help us move people from discovery to a direct relationship with the business.
In a world, where we're trying to do more with less data they give businesses and consumers are direct connections and it's much easier to measure ROI and so we're investing heavily you can message a business from Facebook and Instagram feed from Facebook Instagram Messenger stories to Whatsapp Messenger and Instagram direct you can see how many entry points we.
Have to drive real engagement and real demand and al al and with the case study room, how creative there are small business consultancy. They used click to messaging ads for lead generation and then may compared those to their normal ads, which were driving website conversions and click to messenger ads resulted in $2 three times more.
<unk> leads and this is important a 57% lower cost per lead and that doesn't even take into account. The fact that it was measurable that even if that return had been the same they would've been able to measure and attribute it more directly to our platforms. So we are hugely optimistic about this area of our business and I am very convinced it will work and is already.
Working everywhere in the world.
Great. Thank you everybody for joining us today, we appreciate your time and we look forward to speaking with you again.
This concludes today's conference call. Thank you for joining US you may now disconnect your lines.