Q3 2022 Meta Platforms Inc Earnings Call
Good afternoon.
My name is Martin and I will be your conference operator today at this time I would like to welcome everyone to the third 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'd like to ask a question. Please press. The one then the number four and your telephone keypad.
This call will be recorded thank you very much Ms. Deborah Crawford <unk>, Vice President of Investor Relations you may begin.
Thank you good afternoon, and welcome to meta platforms third quarter 2022 earnings Conference call. Joining me today to discuss our results are Mark Zuckerberg, CEO and Dave Wehner, CFO , Susan Lee VP of finance and our incoming CFO and Marnie Levine Chief business Officer are also on the call and will join Mark.
And Dave for the Q&A portion 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.
Our 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.
Hey, everyone. Thanks for joining today.
Our community continued to grow this quarter, we now reached more than $3 7 billion people monthly across our family of apps.
And while we continue to navigate some challenging dynamics of volatile macro economy, increasing competition.
Add signal loss in growing costs from our long term investments I have to say that our product trends look better from what I see then some of the commentary I've seen suggests.
There's been a bunch of speculation about engagement on our apps and what we're seeing is more positive on Facebook specifically the number of people using the service. Each day is the highest its ever been nearly $2 billion.
And engagement trends are strong.
Graham has more than 2 billion monthly actives Whatsapp has more than 2 billion daily Actives and also with the exciting trend that North America is now our fastest growing region.
Cross the family.
Some apps may be saturated in some countries. There are some demographics, but overall our apps continue to grow from a large base and.
We're also seeing engagement growth, especially strong growth in reals.
And I'll share more details about that when I discuss our product priorities shortly in terms of our business.
Total revenue grew slightly this quarter on a constant currency basis, we are still behind where I think we should be but we believe that we will return to healthier revenue growth trends next year.
It said it is not clear that the economy has stabilized yet so we're planning our budget somewhat more conservatively and.
In 2023, we're going to focus our investments on a small number of high priority growth areas. So that means that some teams will grow meaningfully but most other teams will stay flat or shrink over the next year in aggregate, we expect to end 2023.
As either roughly the same size or even a slightly smaller organization than we are today.
Three of the primary areas, we're going to focus on our our AI discovery engine that is powering reals another recommendation experiences our ads and business messaging platforms and our future vision for the meta versus the internal indicators.
<unk> I've seen suggest we're doing leading work and are on the right track with these investments. So I think that we should keep investing heavily in these areas.
As I've shared before our goal is to grow family of apps operating income such that even with our AI infrastructure and reality labs investments.
We can still meaningfully grow our overall company operating income in the long term.
Our current surge in Capex is largely due to building out our AI infrastructure, and we would expect capex to come down as a percent of revenue over the long term, we expect reality labs expenses will increase meaningfully again in 2023.
With the biggest drivers of that being the launch of the next generation of our consumer Quest headset.
Hiring that has been done in 2022, but for which we're going to be paying the first full year of salaries.
Next year.
More broadly beyond 2023, we expect to pace reality labs investments to ensure that we can achieve our goal of growing overall company operating income.
Our capital allocation philosophy over the long term is to allocate a portion of the profits generated from the family of apps towards these future focused areas while enabling.
Greater return of capital to shareholders.
Alright, now I'd like to share some updates on the progress that we're seeing in these product areas.
Our AI discovery engine is playing an increasingly important role across our products, especially.
As advances enable us to recommend more interesting content from across our networks and feeds they used to be primarily driven just by the people in accounts you follow.
This of course includes <unk>, which continues to grow quickly across our apps both in production and consumption. There are now more than a 140 billion reals plays across Facebook and Instagram.
Each day, that's a 50% increase from six months ago.
<unk> is incremental to time spent on our apps.
Trends look good here and we believe that we are gaining time spent share on competitors like tictoc.
Over time, I expect a few things to set our products. Apart here first is that our discovery engine work allows us to recommend all types of content beyond <unk> as well, including photos text links communities short and long form videos and more.
Is that we can mix this content along posts from alongside posts from your family and friends.
It can't be generated by AI alone.
Third is more social interactions move to messaging, we are developing a flywheel between discovery and messaging that are going to make these app stronger.
On Instagram alone people already re share Reals, a 1 billion times a day through Dms.
Moving to monetization I've discussed in the past how the growth of short form video creates near term challenges since reals doesn't monetize at the rate of feed or stories yet.
That means that as <unk> grows we're displacing revenue from higher monetizing surfaces and I think this is clearly the right thing to do.
So we really can grow with the demand that we're seeing but closing this gap is also a high priority.
Even with the progress we've made.
Still choosing to take a more than $500 million quarterly revenue headwind with this shift, but we expect to get to a more neutral place over the next 10 or 12 to 18 months.
I mentioned last quarter that Instagram Reals had crossed a $1 billion annual revenue run rate.
We continue scaling monetization across both Instagram and Facebook and and the combined run rate across these.
These apps is now $3 billion.
<unk> messaging is another major monetization opportunity.
<unk> of people in millions of businesses use Whatsapp and messenger every day and we're confident that we can connect them in ways that that create valuable experiences.
Started with click to messaging ads, which led businesses run ads on Facebook and Instagram that started threat on messenger or whatsapp or Instagram direct so we they can communicate with customers directly and this is one of our fastest growing ads product with a 9 billion dollar annual run rate.
And this revenue is mostly on click to messenger today since we started their first but click to Whatsapp just passed a $1 5 billion run rate and growing more than 80% year over year.
Paid messaging.
Another opportunity that we're starting to tap into and it continues to grow quickly, but from a smaller base.
We're putting the foundation in place now to scale. This.
With key partnerships like Salesforce, which lets all businesses on their platform use Whatsapp is the main messaging service to answer customer questions and updates and sell directly and shot.
And we also launched a Geo Mart on Whatsapp in India.
And it's our first end to end shopping experience that shows the potential for chat based commerce through messaging.
Between click to messaging and then paid messaging.
I'm confident that this is going to be a big opportunity.
The last area that I want to discuss today is the matter of hers.
We just had our connect conference and.
And announced quest pro which we just started shipping our new high end VR headset that delivers high resolution mixed reality. So you can blend virtual objects into the physical environment around you.
Amazing when you see it and it's going to enable all kinds of new experiences and socializing gaming fitness and work.
And I'm really looking forward to seeing what people build with this new capability.
Work in the meta versus it was a big theme for Quest Pro there are.
Our 200 million people, who get new Pcs every year, mostly for work and our goal for the Quest Pro line over the next several years is to enable more and more of these people to get their work done in virtual and mixed reality.
Eventually even better than they could on Pcs and.
And to deliver a great work and productivity experience I'm excited about the partnerships that we announced with Microsoft bringing their suite of productivity in enterprise management services to quest.
Toby and autodesk, bringing their creative tools zoom, bringing their communication platform that Accenture building solutions for enterprises and more.
There's still a long road ahead to build the next computing platform, but we are clearly doing leading work here. This is a massive undertaking and it's often going to take a few versions of each product before they become mainstream.
But I think that our work here is going to be of historic importance and create the foundation for an entirely new way that we will interact with each other and blend technology into our lives.
As well as the foundation for the long term of our business.
So between the AI discovery engine, our ads and business messaging platforms, and our future vision for the meta versus.
Those are three of the areas that we're that we're focused on.
I believe that the tougher prioritization discipline and efficiency that we're driving across the organization will help us navigate the current environment.
And emerge an even stronger company.
As always I'm grateful to everyone at better for your hard work.
And to all of you for being on this journey with us and with that I'm going to turn it over to Dave.
Thanks, Mark and good afternoon, everyone, let's begin with our consolidated results all comparisons are on a year over year basis, unless otherwise noted Q.
Q3, total revenue was $27 7 billion down 4% or up 2% on a constant currency basis had foreign exchange rates remained constant with Q3 of last year total revenue would have been approximately $1 $8 million higher.
Q3, total expenses were $22 1 billion up 19% compared to last year. This includes a $413 million impairment of certain operating leases as part of our ongoing work to align our office facilities put footprint with our anticipated operating needs in.
In terms of the specific line items cost of revenue decreased 1% as a reduction in reality labs hardware costs was offset by growth in infrastructure and content related expenses.
R&D increased 45%, mainly driven by hiring within our family of apps and reality labs segments as well as reality labs technology development costs.
Lastly, marketing and sales and G&A increased 6% and 15%, respectively, mainly driven by head count related costs.
Our pace of hiring slowed in the third quarter consistent with our previously stated plans.
We added 3700 net new hires in Q3 down from our Q2 net additions of 5700, despite Q3, typically being a seasonally stronger hiring period, we expect hiring to slow dramatically going forward and to hold head count roughly flat next year relative to current levels, which I'll cover in my outlook section.
Third quarter operating income was $5 7 billion, representing a 20% operating margin our tax rate was 21% net income was $4 4 billion or $1 64 per share capital.
Capital expenditures, including principal payments on finance leases were $9 5 billion driven by investments in servers data centers.
Network infrastructure.
Free cash flow was $173 million, we repurchased $6 5 billion of our class a common stock in the third quarter and completed an inaugural debt offering of $10 billion.
We ended the quarter with $41 8 billion in cash and marketable securities.
Moving now to our segment results I'll begin with our family of apps segment, our community across the family of apps continues to grow we estimate that approximately $2 9 billion people used at least one of our family of apps on a daily basis in September and then approximately $3 7 billion people used at least one on a monthly basis.
Facebook continues to grow globally and engagement remains strong.
<unk> daily active users were $1 98 billion up 3% or $54 million compared to last year.
<unk> represented approximately 67% of the $2 96 billion monthly active users in September meus grew $48 million or 2% compared to last year.
Q3 total family of apps revenue was $27 4 billion down 4% Q.
Q3 family of apps AD revenue was $27 2 billion down, 4%, but up 3% on a constant currency basis.
Consistent with our expectations the headwind to year over year growth from Apple's ATT changes diminished in Q3, as we lapped the first full quarter post the launch of iOS 14 five.
However, this was offset by weak advertising demand, which we believe continues to be impacted by the uncertain and volatile macroeconomic landscape.
As a result, our Q3 constant currency growth rate was in line with our Q2 rate.
The health care and travel verticals were the largest positive contributors to growth in Q3. However, this was offset by continued softness in other verticals, including online Commerce gaming financial services and CPG.
On an advertiser size basis revenue growth from large advertisers remains challenge challenged while we've seen more resilience among smaller advertisers.
Foreign currency was a significant headwind to advertising revenue growth in all international regions.
On the user geography basis year over year AD revenue growth was strongest in Asia Pacific and rest of world at 6% and 3% respectively with both regions continuing to benefit meaningfully from strong growth in click to messaging ads, North America, and Europe declined, 3% and 16% respectively.
In Q3, the total number of AD impressions served across our services increased 17% and the average price per AD decreased 18%.
Impression growth was driven by Asia Pacific and rest of world the year over year decline in pricing was primarily driven by strong impression growth, especially from lower monetizing surfaces and regions foreign currency depreciation and lower advertiser demand.
Our family of apps other revenue was $192 million up 9% driven by strong business messaging growth from our Whatsapp business platform, partially offset by a decline in other line items.
We continue to direct the majority of our investments towards the development and operation of our family of apps in Q3 family of apps expenses were $18 $1 billion.
Representing 82% of our total overall expenses.
<unk> expenses grew 18% driven mostly by employee related costs and for restructure related costs and the impairment of certain operating leases for office facilities that we plan to exit.
Family of apps operating income was $9 3 billion, representing a 34% operating margin.
Within our reality lab segment Q3 revenue was $285 million down 49% due to lower quest to sales reality labs expenses were $4 billion up 24% due primarily to employee related costs and technology development expenses.
Reality labs operating loss was $3 7 billion.
Turning now to the outlook, we expect fourth quarter total revenue to be in the range of 30 to $32 5 billion.
Our guidance assumes foreign currency will be an approximately 7% headwind to year over year total revenue growth in the fourth quarter based on current exchange rates.
Before turning to the expense outlook I wanted to provide some context on the approach we are taking towards setting. Our 2023 budget, we are making significant changes across the board to operate more efficiently. We are holding some teams flat in terms of head count shrinking others in investing head count growth only in our highest priorities as a result, we expect head count at the end of.
2023 will be approximately in line with third quarter 2022 levels.
We've increased scrutiny on all areas of operating expenses. However, these moves follow a substantial investment cycle. So they will take time to play out in terms of our overall expense trajectory.
Some steps like the ongoing rationalization of our office footprint will lead to incremental costs in the near term.
This should set us up well for future years, when we expect to return to higher rates of revenue growth.
Turning now to the specific expense outlook for 'twenty, two and 'twenty three.
We expect 2022 total expenses to be in the range of $85 billion to $87 billion updated from our prior outlook of $85 to $88 million.
This includes an estimated $900 million in additional charges in Q4 related to consolidating our office facilities footprint that we expect to record in the fourth quarter of 2022.
We anticipate our full year 2023 total expenses will be in the range of $96 billion to $101 billion. This.
This includes an estimated $2 billion in charges related to consolidating our <unk>.
Office facilities footprint.
We expect the slight majority of our 2023 expense dollar growth to be driven by operating expenses with the remaining growth coming from cost of revenue. We expect the percentage growth rate of 2023 operating expenses to decelerate meaningfully as we curtail non head count related expense growth and keep 2023 head.
Roughly flat with current levels.
Conversely, our growth and cost of revenue is expected to accelerate driven by infrastructure related expenses and to a lesser extent reality labs hardware costs driven by the launch of our next generation of our consumer Quest headset later next year.
Reality labs expenses are included in our total expense guidance, we do anticipate that reality labs operating losses in 2023 will grow significantly year over year beyond 2023, we expect to pace reality labs investments such that we can achieve our goal of growing overall company operating income in the long run.
Before turning to our Capex outlook I'd like to provide some context on our infrastructure investment approach. We are currently going through an investment cycle, which is being driven.
Which is primarily driven by two large areas of investment.
First we are significantly expanding our AI capacity. These investments are driving substantially all of our capital expenditure growth in 2023.
Some increased capital intensity that comes with moving more of our infrastructure to AI. It requires more expensive servers and networking equipment and we are building new data centers, specifically equipped to support next generation AI hardware. We expect these investments to provide us a technology advantage and unlock meaningful improvements across many of our key initiatives, including feed <unk>.
And that's we are careful carefully evaluating the return we achieved we achieved from these investments which will inform the scale of our AI investment beyond 2023.
Second we are making ongoing investments in our data center footprint in recent years, we have stepped up our investment in bringing more data center capacity online and that work is ongoing in 2023, we believe the additional data center capacity will provide us greater flexibility with the types of servers, we purchase and allow us to use them for longer which we expect to generate greater cost efficiencies over time.
These these investments along with revenue headwinds are contributing to higher capital expenditures as a percentage of revenue in 2022, and 2023 and we expect over the long term.
Turning now to the specific capex outlook for 'twenty two 'twenty three.
We expect 2022 capital expenditures, including principal payments on finance leases to be in the range of $32 billion to $33 billion updated from our prior range of 30% to 34 billion.
For 2023, we expect capital expenditures to be in the range of 34% to $39 billion.
Driven by our investments in data center servers network infrastructure and increase and add capacity is driving substantially all of our capital expenditure growth in 2023.
Turning to tax absent any changes to U S tax law, we expect our fourth quarter 2022, and our full year 2023 tax rate to be similar to the third quarter 2022 right.
In addition, as noted on previous calls we continue to monitor developments regarding the viability of Trans Atlantic data transfers and their potential impact on our European operations.
In closing we are pleased with the growth of the community using our family of apps and the engagement improvements we are driving with efforts such as <unk> and our AI powered content recommendations while we.
We are facing near term headwinds on revenue. The fundamentals are there for a return to stronger topline growth. We are approaching 2023 with a focus on efficiency and spending discipline and I'm optimistic that these moves will set us up well to achieve our goal of driving operating income growth over the long term, while investing for future growth.
On a personal note I'll be closing out a decade at <unk> in the next couple of weeks, including the last eight years as CFO in my new role I am looking forward to continuing to help the company achieve its long term mission and execute on its financial plan I couldnt be happier to hand off the CFO role to Susan Lee who is one of the most talented executives that I've had a chance to work with in my long career in finance and Tech.
And with that Martin, Let me open up the call for questions.
Thank you we will now open the lines for a question and answer session to ask a question press one followed by the number four on your Touchtone phone. Please pickup your handset before asking your question to ensure clarity if you're streaming today's call. Please mute your computer speakers and your first question comes from the line of Brian Nowak with Morgan.
Stan.
Thanks for taking my questions. If I can squeeze into the first one is on Capex and return on invested capital the Capex spend and forward expectations are remaining somewhat higher than investors expected. So mark can you maybe just give us. Some examples of what these new AI investments are going to enable you to do differently going forward.
In the past and what's a reasonable purion, which investors should expect to see material incremental engagement or our revenue from these.
And then the second one is on engagement I thought your comments about incremental time spent from Reals were interesting, but maybe just to sort of address the big topic or on time spent can you give us any update on what U S. Time spent trends look like just to sort of give investors some incremental confidence in the durability of the platform.
Your oldest market. Thanks.
Hey, Brian why don't I take the time spent question first and then I'll hand, it off to Susan on the Capex question.
So.
On time spent we are really pleased with what we're seeing on engagement and as Mark mentioned <unk> is incremental to time spent specifically in terms of aggregate time spent on Instagram and Facebook.
Both are up year over year and in both the U S and globally. So while we're not specifically optimizing for time spent.
Those trends are positive and we aren't specifically optimizing for time spent is that would tend to tilt us towards longer form video and we're actually focus more on short form and other types of content. So just some color on time spent and Susan you want take the Capex question, yes. Thanks, Bryan So as Dave mentioned in his script, we expect 2020.
<unk> capex to be in the range of 34 to 39 billion with our investments in AI driving all of that growth.
Very focused on evaluating the ROI of our AI investments and that will inform our level of features then but so far we've seen continued strong impact on our recommendations products from advancing developments in our AI work in the Q2 call. We had shared that a single AI advancement in scaling our recommendations models had led to a <unk>.
Percent watch time gain for Facebook wheels, and that gain has continued to grow and we expect that there will be additional watch time improvements coming from that work.
On the AD side, we're also continuing to roll out more AI and ml improvements in some of the new ads offerings and we're encouraged by all of the early examples that we've seen so this is something that we'll be watching very closely. We think we're early in this journey, but our level of Capex investment will depend on the returns that we generate.
Through these investments in AI, and if we generate significant engagement and revenue gains we will continue investing here and if we don't we'll pace our spending accordingly.
Your next question comes from the line of Mark Shmulik with Bernstein.
Yes, hi, Thanks for taking my question a couple if I may.
Mark the first one you kind of mentioned in your opening remarks that you expect to get back to kind of revenue growth in 2023 any color you can share on kind of the key drivers behind that and how much of that is excuse.
Excuse me macro driven versus some of these initiatives that you guys are working on.
And then secondly for Susan as we think about kind of the operating expense guidance.
2023, I know historically those numbers have tended to skew a bit conservative how.
How much conservatism is baked in there and how much flexibility is there to kind of talk.
Toggle some of those expenses, depending on the health of course, thank you.
So mark it's Dave I'll take the I'll take the first question, obviously, we're continuing to see.
Macro headwinds in the business, we do think Theres, a big cyclical factor here. So some of it is just going to depend on the.
The broader economy and recovery that we see.
But we're continuing to make progress in a number of areas in terms of growth and Mark cited one of those which is a click to messaging ads, which has been a.
Solid grower, it's a $9 billion revenue run rate today, and we're continuing to make.
Good progress on click to messaging ads as a driver that's especially important in some of the developing markets.
And overall, we're focusing on a number of areas too.
Grow revenue.
We get through this tough cycle.
And we're seeing we're seeing progress on a number of fronts, but it's going to depend to some extent on what the overall macro climate is like we're not going to be facing as significant.
Headwinds next year from the signals point of view as we are now lapping the big changes that were made on.
On the iOS platform. So that's going to also not factor in as strongly in our growth rates next year.
And I'll take that second question on next year's Opex Guide.
One thing I'd point out first is just next year's guide includes an estimated $2 billion in 2023 expenses that are one time charges as part of our office facilities consolidation as we continued to.
To rationalize our real estate footprint.
We also expect a little over half of our expense dollar growth in 2023 to come from Opex with the rest coming from cost of revenue.
On the Opex side the growth in 2023, Opex is primarily driven by head count related costs from employees that we've already hired 302022 and those.
Hires have primarily been concentrated in technical and more senior senior roles. So we expect the slowdown in payroll growth in 2023 will be the result of the.
The slow down in head count growth overall, as we mentioned we expect to end 2023, you know with head count roughly flat to where we are now and on the cost of revenue side, we expect the growth rate of cost of revenue to accelerate in 'twenty three driven by the increased depreciation that we're seeing play through from the big Capex investments that we've made.
So far.
Then as well as from reality labs with the launch of the next generation of the consumer Quest headset later next year.
Your next question comes from line of Justin Post with Bank of America.
Great a couple questions on the real transition.
When you think about that business.
And people coming to the site do you think.
How does it compare to the news feed as far as repeat rates or retention and are you a little worried that it's a little less proprietary than your prior content and then second I think there are a lot of questions on capex.
Wondering if the if the build here for this year and next as one time to kind of get your capabilities in place and then maybe you can go back to.
The mid teens level as a percentage of revenue or is just the transition of the business just higher capital intensity business. Thank you.
So Justin on on a real transition as Mark noted it is incremental to time spent so we are seeing a benefit from from from Reals to contributing to overall engagement on the on the platform.
And it's contributing to healthy engagement dynamics, and I'd say that coupled with our recommendation engine, which is also.
Increasing engagement on the platform are both promising trends on the engagement front from a monetization perspective.
We are still working to close the gap between reels and feeds and stories, but it's going to take.
Before it really becomes a tailwind to revenue as Mark mentioned, we're on about a $3 billion run rate today, but <unk> was still negative overall to revenue by about $500 million in the quarter. So.
We expect that it should be a tailwind to the business eventually and we're sort of saying that's probably in the 12 to 18 month timeframe.
But overall, we're pleased with the impact that <unk> has on the on the business specifically on the engagement front.
And on your second question about the Capex Guide I would really think about our capex.
Investment is kind of the AI and non AI components on the AI side, which really is driving all of the capex growth in 2023, we will be pacing that future investment on the basis of the returns that we're able to see and measure. So frankly, we're hopeful that there will be a big opportunity to invest more.
Here, because we expect that this will be a high ROI area of investment for us on the non AI side a lot of that spend is in ongoing investments on our data center footprint, where we had stepped up our investment in recent years to build sort of ahead of our anticipated capacity needs and that work continues in 2023, we do.
Expect this this component of our capex spend to become more efficient more efficient over time, and we're actively looking for more efficiencies. There. So I don't know that we are benchmarking to an exact number on the combination of those two things the future intensity I think is going to depend on the returns that we <unk>.
<unk> increased AI investments.
Yeah, and maybe maybe I'll just add some color on how I'm seeing this too just because they're real and discovery engine work is such a big part of what we're spending our time and energy on right now.
I think if there were to comparisons to the things that we've done in the past year that are they're worth.
Hi, growing on for Reals monetization specifically.
Anytime we've had a new format like when we added stories.
Or even before that when we were primarily on desktop and we shifted to mobile feed we sort about this dynamic where we focused on increasing engagement and growing demand for the product, but while that was happening monetization efficiency for the new format.
<unk> behind kind of the news feed or mobile newsfeed compared to stories for some period, while there was ramping up and.
Well, it's really hard for us to answer questions. Now that are like what is the eventual monetization efficiency going to be it's really hard to predict that in advance what I can say.
So I think on stories, we've ended up achieving something that was way greater than what we even hope to achieve at the time right in terms of where we are.
Where we thought that stories could net out and a lot of the progress that we've been making on on real monetization. So far has been at a clip that we've been pretty happy with so obviously, we want to close the monetization gap as quickly as possible. We want this to be a tailwind not a headwind.
I think we're going to get there, but I think we've gone through a few of these transitions and I think that that's.
But that will just take some some some time on the engagement side in terms of how incremental this is.
The basic way to think about this is you have a set amount of inventory across the system. There is <unk>.
<unk> from family and friends.
Which is quite differentiated and valuable.
Accounts that you follow but now there's this whole larger corpus that we can use AI to effectively understand what the content means and understand individually what you might be interested in just have access to a much bigger corpus of content to put into your feeds and increase engagement and we're seeing that start to work already in the increments.
In terms of.
We're having more people use the services, having them spend more time, having them spend.
Just engage more in feeds overall so.
That part of things, we think is going well.
Think we'll we should be able to continue driving results some.
Some of the results already have been due to some of the AI investments in infrastructure that we've made if our bets are correct. Then then the AI capex that we're bringing online should be able to drive incremental engagement.
It's pretty meaningful there, but we think qualitatively that that investment mix makes just a lot of sense given the direction that that that the world seems to be going in and I do think that our are somewhat unique mix of both having the kind of social friends and family content and the ability to drive recommendations, which.
I agree with some.
The premise of the question there and that the creators do want their content to be on multiple platforms, which I think is a little bit different from friends content, where you want to for the most part share where your friends are and youre not trying to have it be everywhere.
I think we should be able to do pretty well on both of those and that should that should grow over time, but that's it.
It's hard for us to be more specific than that now.
But I do think that these these trends.
I get that this is this it takes a little longer to play out then.
Then you would want but we've been through a couple of your cycles before already.
I'm pretty confident this is going in a good direction.
Your next question comes from line of Doug Anmuth with Jpmorgan.
Thanks for taking the questions I have two.
Dave you talked about the TCE impact diminishing in <unk>. So as you lap the rollout I'm curious if you're seeing any meaningful improvements around EQT or is this just a function of the year over year comp dynamic and then second can you just talk about your efforts to attract content creators to reals and just revenue sharing.
Impacts your margin structure versus the current AD formats and surfaces.
So in terms of ATT impact.
We're we're.
The primary factor is the lapping factor.
Relative to Q2, so in Q2 of 2021 ATT had not been fully rolled out it was largely rolled out by Q3.
'twenty one so the fact that we were lapping that period in the third quarter, we got.
Benefit relative to the second quarter, but that was offset by continued macro weakness.
In terms of the efforts to attract content creators and specifically as it relates to the overall cost structure, we don't anticipate that that's going to.
It had a meaningful impact to the cost structure and.
And obviously, it's factored into our expense guidance.
Okay.
Your next question comes from the line of Eric Sheridan with Goldman Sachs.
Thanks for taking the question maybe two if I can mark.
Obviously, the company has faced a lot of headwinds from upward changes competitive dynamics and broader macro impact as we've talked about over the last.
24 months.
This investment cycle is informed by your views around future proofing.
Platform. So there were less externality.
Impacted you're in control more of your own destiny versus elements of curve balls that can be thrown into that can cause volatility in the business in the medium to long term and then I'd love to ask one on the net averse.
Understood on the investment.
With the anniversary of the next three years, even if qualitatively.
If you think about the revenue opportunity over the next three to five years splits between the hardware opportunity in the non hardware opportunity as you see yet.
The University of all.
Sure.
I can take the first one and then I guess I.
Could take the second one too.
So.
The first question was.
What was this.
Okay.
Yeah right Okay. So.
I think that that's a factor, but it's not the primary thing that's driving it so on the on the business side I think certainly you see dynamics.
Like what Apple has done with AT&T and continues to do in some ways with the policy that they announced yesterday, which are.
Obviously big risks and.
And we see as issues.
But there are also other things that like.
We just believe that and we've invested so much in measurement over time because.
Since our ads help people higher up in the funnel than search ads. For example, we think that often less of the value of sales is attributed to us than it should be so for all these reasons, having a funnel that's more integrated where we do more commerce internally and this is a big part of what what we hope to achieve with <unk>.
Business messaging and the fact that you can.
Find a customer.
Have a thread directly with them and a business chat.
And be able to sell a product directly or to be able to do customer support and then help people out with a product and then maybe sell them something else.
That kind of integration I think is going to be valuable very broadly.
In terms of making sure that the value that we're creating for businesses and consumers can be more efficiently.
Measured.
And attributed to our services.
A lot of US, though is it's not just about.
Fortifying against outside.
Threat. So a lot of this is just you can build new and innovative things by when you control more of the stock yourself. So I mean in the in the <unk>.
A lot of the things that we're trying to to enable whereas this feeling of presence which.
Which is a lot of ways to sort of the ultimate social experience.
And when you do it physically or eventually as youre doing it virtually being able to design the hardware that where you can.
We have sensors that can can help map your facial expressions and emotions too to the avatar that you have virtually I think there's going to be just a very profound experience and you can start to experience that with quest pro which is which is out now.
Not clear if we weren't driving this forward that anyone else would be something that that sort of integration and innovation is really helpful. Similarly, I think the fact that we can create.
A lot of the business and commerce platform around our messaging platform product, but then linked to them from Facebook and Instagram creates some unique experiences that I think would be very hard to create otherwise as well.
In terms of having that that.
That kind of full loop in the product. So I think that that like enabling more experiences I think it was really the primary driver and then the.
The sort of fortification against external risks is.
It's certainly a strategic advantage over the long term, but probably not.
The only reason why we're doing this.
Okay.
Your next question comes from the line of Youssef Squali with twist.
Great. Thank you very much.
Maybe one question for Dave or Susan and then one for Mark.
What kind of base case assumptions for macro or are you guys baking in for 2023 with.
Against that 12% to 15% increase in Opex and Capex Guide and can you talk about maybe the fixed versus variable component and the expense guide that.
Could give you the flexibility to address any material macro changes next year and mark relative to your own expectations. When you decided to pursue the meta versus strategy. A couple of years ago. How would you read the company's performance to date in terms of product rollout engagement with things like horizon world et cetera, and as the opportunity evolving.
In line with your expectations and if not what are the key gating factors. Thank you.
Hi, it's Susan on the first question.
Haven't given revenue guidance, yet for 2023, but.
Our Q4 2022 guide is a range and that range certainly encompasses a wide variety of Max of macro expectations. We're certainly in a period right now where we are seeing a slowdown in advertising demand and you know that correlates with a lot of things that we're seeing outside of just our sector here, including you know rising inflation and.
And supply chain issues sort of more broadly across the economy. So with that in mind, we have undertaken a 2023 budget process that is applied higher scrutiny to almost all of the areas of our of our.
Very broad investment portfolio and we have taken what is an intentionally more conservative approach to to our budget and our anticipated growth.
You asked about the sort of fixed versus variable components of the 2023 Opex guide.
I had mentioned that you know over half.
A little over half of that is coming from Opex. The rest from cost of revenue. So the cost of revenue piece that has the sort of the growth in depreciation we can certainly fixed and is just playing through from prior year Capex growth.
You know part of that is coming from reality labs, and the launch of the Nexgen consumer requests headset, so that sort of correspond to the product launch.
And then on the Opex side we.
A lot of the growth in 2023, Opex is coming from from employees, who we've already hired we expect that we're going to have the same number of employees and of 2023. So that's an area, where we're pretty focused on.
On being disciplined.
Disciplined also and then finally I just mentioned again, there's that $2 billion office facilities.
Consolidation charge. That's also included in the 23 Opex guidance.
Sure and in terms of.
The meta versus efforts and kind of how we're doing compared to what I expected.
It's a pretty wide portfolio of things that we're that we're working on which I think is important to internalize because the.
What I think most people see or the VR headsets right because that's the that's sort of the first thing that we launched a request to us the first mainstream VR headset.
I kind of think about what we're doing there is four major platforms that we're focused on developing.
One is the kind of social media versus platform.
Where you see an early version of that with horizon with the Avatar system.
And Thats an area, where we're really we're iterating out in the open right, it's a kind of alive.
Early product platform.
And that's evolving quickly.
But obviously, there's a long way to go before it's going to be what we what we aspire for it to be but that's one important area. That's given what we what we do is sort of the social company. That's about people interacting how you Express yourself.
And in all forms the do you kind of expressive avatars photo realistic avatars.
We think we are doing some some leading work there.
But obviously, we need to get that into into the product and.
And continuing on that VR is the second major platform.
And there I think that theres going to be.
<unk>.
Consumer focused product.
That probably will reach very large scale.
But there is also I think going to be at work focused product that you you don't do most of your work on a 500 dollar device. We have we have computers and workstations that are much more powerful and have more technology in them and I think that that's going end up being similar here as well.
So we started that with quest pro and we're sort of at the start of the journey there.
The two other areas, which.
Which are mostly.
But there's still internal.
A lot of the work on augmented reality, which is a.
Quite a large effort, but we think is going to be just a huge part of the value that gets created over time.
And there we.
But a lot of what I'm judging is how well are the R&D efforts going there or some kind of basic things that we need to get right. Some integration of things some figuring out how to manufacture things and where we're making progress on that and I'd.
Say a bunch of that is that there are some things that are going better than I expected some things that seem like they might take a bit longer but overall I mean there is.
None of the none of the indications that I have would suggest that.
That anyone else in the World is doing leading work ahead of us in those areas, even though we haven't we haven't obviously shipped.
Our glasses, yet and then the fourth platform.
After the kind of social platforms, VR and AR is.
His neuro interfaces, which I think you kind of risk based.
MG interface, which is for all of your computing platforms. There is going to end up being.
Input is a really important part how do you how do you basically control the computing platform and.
We think by the time that you have glasses, and youre kind of walking down the street with glasses, you're you're not gonna have controllers with that you're not going to want to have your hands, it's kind of like hovering in the air and you're not always going to want to talk to the thing even though that is going to be one way that we use them a bunch of time, sometimes you're going to want something thats more private.
So we think that having a discrete way to basically communicate with the device is going to be critical and that's also an area where as far as I can see the research that were doing is really.
Leading here, so it's a pretty big surface.
I know that sometimes when we ship a product there was a meme where people say hey, you're spending all this money and you produce this thing in it.
I think that that's not really the right way to think about it I think.
There's a number of different products and platforms that we're building, where we think we're doing leading work that will become.
Launching consumer products, and then eventually mature products at different cadences.
In different periods of time over the next five to 10 years.
And all of these areas I think the teams are making very good progress.
I think that this will be fundamentally important for the future nothing that we're seeing suggests that that's not going to be the case.
We are pacing a bunch of the investments given the macroeconomic environment and the rest of the business performance, but ultimately I mean look I get that a lot of people might disagree with this with this investment but from what we're what I can tell I think that this is going to be a very important thing and I think it would be a mistake for us too.
<unk> not focused on any of these areas, which I think are going to be fundamentally important to the future. So.
Try to do this in a way that that is responsible and matches the.
The way that the rest of the business is growing over time.
I think we've built up the team to a point now where we're where I think we'll be able to kind of match that growth with the rest of the business more going forward.
But over time I think that these are going to end up being very important investments for the future of all of our business and.
I think as some of the most historic work that we're doing that I think people are going to look back on decades from now.
And talk about the importance of the work that was done here.
Your next question comes from the line of Mark Mahaney with Evercore ISI.
Okay.
I wanted to follow up on a prior question, it's back on the AD tools and.
Trying to figure out how much of a priority is for the company and how long the company thinks it can take to kind of recover or to create a new I don't know probabilistic attribution model probabilistic based ad.
Targeting model.
Something that took $10 billion, maybe out of your business I mean, it had a material financial impact and listening to the call I just don't hear it as a major investment priority. So the challenge. The question is is it a major investment priority or is it that that goal is just elusive and it's better to focus on other things. Thanks a lot.
Hi, Mark I'll take this question.
We have continued our broader work to rebuild meaningful elements of our AD tax our system can improve performance and measurement with it and we've been making investments in the short and medium term and over the long term and a shortened the medium term what we've been very focused on is evolving our AD system by growing onsite conversions with products like lead ads and add to that.
Click to message and we're continuing to make investments in AI and machine learning to improve measurement targeting and delivery.
We have been pleased with our progress that we've made this quarter to help advertisers improved performance targeting and measurement I would be remiss if I didn't talk about how AI and ml is really helping advertisers. One example of this is advantaged plus shopping we launched it and I guess, it's a product that's enabled by machine learning that helps clients test learn and.
Optimize their campaigns faster, it's early but our recent past across.
The cross section of advertisers found that those using advantaged plus shopping campaigns saw 32% increase in return on ad spend.
Over the longer term, we're focused on investing in privacy enhancing technologies, both our own portfolio of solutions, but also working with the industry to do that and all of this is in the spirit of.
Investing in this technology to help advertisers get more value.
Great. Thanks, Marni, we have operator, we have time for one last question.
Thank you that will come from the line of Brent Thill with Jefferies.
I think kind of summing up how investors are feeling right. Now is that there are just too many experimental beds versus proven bad some of the core and I'm curious if you can just add more color why.
Don't feel these are expense experimentally you feel like they pay off there is there's obviously a lot of focus on on the investment side I think everyone would love to hear why you think this pays off.
Yes, let me take at least part of that I mean, we're making a number of investments across the portfolio Marnie outlined some that were making in the AD space. Obviously, the investments that we're making in product areas like reels and the.
Business messaging platform it whatsapp or are ones that we think will have a.
A significant.
Pay off for the business both in terms of engagement and monetization. So we're making a wide portfolio of bets still.
Still.
The majority of our spending is directed towards our family of apps investment.
And those are across.
Both engagement and monetization.
Leveraging AI in many cases, and we're making good progress on those fronts.
And then leveraging as well what is today a.
Fairly under monetize resource in terms of our messaging platforms building more scale around those as being a source of future revenue growth, we've already proven it out with our business our click to.
Click to messenger ads with a 9 billion dollar business today, but we think we can build a substantial sized business around paid messaging, which will complement that as well. So I think we've got a lot of that's across the family of apps portfolio and.
In addition to the work that we're doing on reality labs in the meta versus.
Yeah, I mean, I would just say that there's a difference between something being experimental and not knowing how good it's going to end up being but I think a lot of the things that we're working on across the family of apps are we're quite confident that theyre going to work and be good.
The real work the discovery engine work all the ads work on on on signals. The the business messaging work I can't tell you right now how much how big they are going to scale to be.
But I think that each of these things are kind of going in the right direction.
Obviously, the meta versus work as a longer term.
Set of.
Of efforts that we're working on.
But.
I don't know I think I think that that is that is going to end up working too. So.
Yeah.
I think that look we there are a number of different.
There are a lot of things going on right now and in the business and in the world and so it's it's hard to have like a simple.
We're going to do this one thing and that's going to going to solve all the issues that I mean theres macroeconomic issues. There is theres a lot of competition there's.
Ads challenges, especially coming from Apple and then there's some of the longer term things that we're taking on expenses because we believe that they're going to provide greater returns over time and I think we're going to resolve each of these things over different periods of time.
Ken.
I appreciate the patience and I think that those who are patient and invest with us will end up being rewarded.
Just adding to what Mark just said.
It is a challenging time for advertisers and what they are focused on given the economic uncertainty is getting a strong return on investment going back to the family of apps and services really continues to be the fastest growing format on Instagram and Facebook and it is a great way for people to discover new interest creators.
And connect with businesses, what we're focused on is making sure that.
That business has got a strong ROI unreal and one example that shows that we're delivering on this in terms of our investments is <unk>, which is the insulated drink wear brand that added <unk> two it's business as usual strategy and saw a 34% higher return on AD spend and a 34% higher sales.
We are making progress with our investments and and helping advertisers find that ROI that they're looking for.
Great. Thank you everybody for joining us today, we appreciate your time and we look forward to speaking with you again.
And this concludes today's conference call. Thank you for joining US you may now disconnect your lines.