Q4 2022 Meta Platforms Inc Earnings Call
Okay.
[music].
Good afternoon. My name is Dave and I will be your conference operator today at this time I would like to welcome everyone to the metals fourth quarter and full year 2022 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there.
There will be a question and answer session. If you would like to ask a question. Please press. The one then the number four on 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 fourth quarter 2022 earnings Conference call. Joining me today to discuss our results are Mark Zuckerberg, CEO and Susan Lee CFO Javier <unk> is also on the call and will join Mark and Susan 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 earnings press release, the press release and <unk>.
An accompanying investor presentation are available on our website at Investor Dot FB Dot com and now I'd like to turn the call over to Mark.
Alright, hey, everyone and thanks for joining us today.
2022 was a challenging year, but I think we ended up having made good progress on our main priorities and setting ourselves up to deliver better results. This year as long as we keep pushing on efficiency.
<unk> said last quarter that I thought our product trends look better than most of the commentary out. There suggests I think that's even more of the case now we've reached more than $3 7 billion people monthly across our family of apps on Facebook. We now reached 2 billion daily Actives and almost 3 billion monthly.
People daily using Facebook Instagram and Whatsapp is the highest its ever been.
Now before getting into our product priorities I wanted to discuss my management theme for 2023, which is the year of efficiency. When we closed last year with some difficult lay offs and restructuring some teams.
When we did this I said clearly that this is the beginning of our focus on efficiency and not the end and since then we've taken some additional steps like working with our infrastructure team on how to deliver a roadmap while spending less on capex.
Next we are working on flattening, our org structure and removing some layers of middle management to make decisions faster as well as deploying AI tools to help our engineers be more productive.
As part of this we're going to be more proactive about cutting projects that arent performing or may no longer be is crucial.
But my main focus is on increasing the efficiency of how we execute our top priorities.
So I think that theres going to be some more that we can do to improve our productivity speed and cost structure and by working on this over a sustained period I think will both build a stronger technology company and to become more profitable.
I am very focused on doing this in a way that helps us build better products.
Because of that even if our business outperformed our goals.
This will stay our management theme for the year. So I think it's going to make us a better company.
Now at the same time I'm also focused.
On delivering better financial results than what we've reported recently and on meeting the expectations that I outlined last year of delivering compounding earnings growth, even while investing aggressively in future technology.
Next I want to give some updates on our priority areas.
Our priorities haven't changed since last year of the two major technological waves driving a roadmap of our AI today and over the longer term the med averse.
So first let's talk about our AI discovery engine.
Facebook and Instagram are shifting from being organized solely around people and accounts you follow to increasingly showing more relevant content recommended by our AI systems in.
This covers every content format, which is something that makes our services unique.
But we're especially focused on short form video since Reals is growing so quickly.
And I'm really proud of our progress here and a real players across Facebook and Instagram have more than doubled over the last year.
While the social component of people re sharing reals has grown even faster and has more than doubled on both ops and just the last six months.
The next bottleneck that we're focused on to continue growing reals is improving monetization efficiency or the revenue that's generated per minute of reals watched.
Currently the monetization efficiency of Reals is much less in feed so the more of the reals grows even though it adds engagement to the system overall.
It takes some time away from feed and we actually lose money.
But people want to see more real so so.
The key to unlocking that is improving our monetization efficiencies that way, we can show more reals without losing increasing amounts of money.
We're making progress here and our monetization efficiency on Facebook has doubled in the past six months.
In terms of the revenue headwind, we're still on track to be roughly neutral by the end of this year. Maybe early next year and then after that we should be able to profitably grow reals.
While keeping up with the demand that we see.
In our broader ads business, we're continuing to invest in AI and we're seeing our efforts pay off here in the last quarter advertiser saw over 20% more conversions than in the year before and.
When combined with the decline in cost per acquisition. This has resulted in higher returns on ad spend.
We continue to be excited about the monetization opportunity with business messaging to the Facebook and Instagram are the first two pillars of our business and in the next few years, we hope to bring messaging online as the next pillar.
One way of doing this is click to messenger ads, which is now at a $10 billion run rate.
<unk> paid messaging is the other piece of this we're earlier here, but we continue to onboard more businesses to the Whatsapp business platform, where they can answer customer questions and updates and sell directly and Chad. So for example in air France started using whatsapp to share boarding passes and other information other flight information.
<unk> in 22 countries and four languages.
And our business is often tell us more people open their messages and they get better results on whatsapp than other channels.
AI.
It's the foundation of our discovery engine and our ads business.
And we also think that it is going to enable many new products and additional transformations in our apps.
Generative AI is an extremely exciting new area with.
With so many different applications and.
One of my goals for meta.
As to build on our research to become a leader in generative AI. In addition to our leading work in <unk>.
Recommendation AI.
And the last area that I want to talk about is the <unk>.
We shipped <unk> pro at the end of last year.
Really proud of it that's the first mainstream mixed reality device I mean, we are setting the standard for the industry with our meta reality system.
Now as always is the reason why we're focused on building. These platforms is to deliver better social experiences and whats possible today on phones.
The value of <unk> is that you can experience the immersion and presence of VR, while still being grounded in the physical world around you.
We are already seeing developers build out some impressive new experiences like non AUM for three D modeling molecules in drug development now marchio for architects and designers to create interiors.
Of course, a lot of great games.
The MLR ecosystem is relatively new but I think it's going to grow a lot over the next few years.
Later this year, we're going to launch our next generation consumer headset, which will feature meta reality as well.
And I expect that this is going to establish this technology as the baseline for all headsets going forward and eventually of course for AR glasses as well.
Beyond <unk> the broader <unk> ecosystem continues growing there are now over 200 apps on our VR devices that have made more than $1 million in.
In revenue.
We're also continuing to make progress with avatars.
Just launched avatars on Whatsapp last quarter and more than 100 million people have already created avatars in the App and of those about one in five are using their avatar is their whatsapp profile photo and I thought that that was an interesting example of how the family of apps and meta versus visions come together, because even though most of our reality labs investment is going towards <unk>.
Computing platforms glasses headsets in the software to run them.
As the technology develops.
Most people are going to experience net of <unk> for the first time on phones, and then start building up their digital identities across our apps.
Right. So so those are the areas, we're focused on AI, including our discovery engine ads business messaging and increasingly generative AI.
And the future platforms for the Metaverse and from an operating perspective, we are focused on efficiency and continuing to streamline the company and so we can execute these priorities as well as possible and build a better company, while improving our business performance and as always I'm grateful to our teams for your work on all of these important areas.
And to all of you for being on this journey with us and now over to Susan.
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.
Q4, total revenue was $32 2 billion down, 4% or up 2% year over year on a constant currency basis had foreign exchange rates remained constant with Q4 of last year total revenue would have been approximately $2 billion higher.
Q4, total expenses were $25 8 billion up 22% compared to last year.
In terms of the specific line items cost of revenue increased 31% driven mostly by a write down of certain data center assets as well as growth in infrastructure related costs.
R&D increased 39% marketing and sales increased 4% and G&A decreased 7%.
Operating lease impairments and employee related costs were the largest contributors to growth for all three expense lines. However growth in marketing and sales was partially offset by lower marketing spend and growth in G&A was more than fully offset by a decrease in legal related expenses.
We ended the fourth quarter with over 86400 employees, which includes a substantial majority of the approximately 11000 employees impacted by our previously announced layoffs, who remained on payroll as of December 31, due to applicable legal requirements.
We expect the vast majority of the impacted employees will no longer be captured in our reported headcount figures by the end of the first quarter of 2023.
Fourth quarter operating income was $6 4 billion, representing a 20% operating margin.
Our tax rate for the quarter was 24%.
Net income was $4 7 billion or $1 76 per share.
Capital expenditures, including principal payments on finance leases for $9 2 billion driven by investments in servers data centers and network infrastructure.
Free cash flow was $5 $3 billion and we ended the year with $47 billion in cash and marketable securities.
In the fourth quarter, we repurchased $6 9 billion of our class a common stock, bringing our total share repurchases for the full year to $27 9 billion.
We had $10 9 billion remaining on our prior authorization as of December 31, and today, we announced a $40 billion increase in our stock repurchase authorization.
Moving now to our segment results.
I'll begin with our family of that segment.
Our community across the family of apps continues to grow.
We estimate that approximately $2 96 billion people used at least one of our family of apps on a daily basis in December and then approximately $3 74 billion people used at least one on a monthly basis.
Facebook continues to grow globally and engagement remains strong we reached 2 billion Facebook daily active users for the first time in December .
4% or $71 million compared to last year.
<unk> represented approximately 67% of the $2 96 billion monthly active users in December .
May use grew by $51 million or 2% compared to last year.
Q4 total family of apps revenue was $31 4 billion down 4% year over year.
Q4 family of apps AD revenue was $31 3 billion down, 4%, but up 2% on a constant currency basis.
Consistent with our expectations Q4 revenue remained under pressure from weak advertising demand, which we believe continues to be impacted by the uncertain and volatile macroeconomic landscape.
The financial services, and technology verticals, where the largest negative contributors to the year over year decline in Q4, but both have relatively smaller shares of our revenue.
Growth remained negative in our largest verticals online commerce and CPP.
The pace of year over year decline in online commerce has slowed compared to last quarter.
The largest positive contributors to year over year growth in Q4, where the travel and healthcare verticals, though both are relatively smaller verticals and absolutely sure.
Foreign currency remained a significant headwind to advertising revenue growth in all international regions on.
On a user geography basis AD revenue growth was strongest in rest of world at 5% North America was flat, while Asia Pacific and Europe declined, 3% and 16% respectively.
In Q4, the total number of AD impressions served across our services increased 23% and the average price per AD decreased 22% and.
<unk> growth was primarily driven by the Asia Pacific and rest of world regions.
The year over year decline in pricing was primarily driven by strong impression growth, especially from lower monetizing surfaces and regions lower advertiser demand and foreign currency depreciation while overall pricing remains under pressure from these factors. We have continued to make improvements to our ads targeting and measurement.
That we believe are driving more conversions and better returns for advertisers.
Family of apps other revenue was $184 million in Q4 up 19% with strong business messaging revenue 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.
In Q4 family of apps expenses were $20 8 billion, representing 81% of our overall expenses family of apps expenses were up 23% due primarily to restructuring related expenses in growth and infrastructure related costs.
Family of apps operating income was $10 7 billion, representing a 34% operating margin.
Within our reality Labs segment, Q4 revenue was $727 million down 17% due to lower quest to sales.
Reality labs expenses were $5 billion up 20% due primarily to employee related costs and restructuring related expenses.
<unk> operating loss was $4 3 billion.
Before turning to the outlook I'd like to discuss our work to grow profitability by scaling monetization and improving our operational efficiency.
There are two primary levers to increasing monetization growing supply and growing demand.
Growing AD supply gives businesses more opportunities to get in front of people and we are focused on enabling that in a couple of ways.
First and foremost we remain focused on building engaging experiences for the people who use our apps.
We are coming into 2023 with a strong foundation as <unk> continues to scale and we're seeing in feed recommendations contribute to engagement as we help people discover new content in their fees.
We will continue to invest in making these experiences best in class.
The other side of growing supply comes from more effectively monetizing the surfaces within our apps, including those that have a lower level of ads today.
In the nearer term ramping reels monetization remains a primary focus over the longer term, we see opportunities to continue improving Facebook and Instagram monetization, while also scaling revenue contributions from our messaging platforms.
Growing advertiser demand as the other focus and a big effort here is around continuing to drive advertiser performance.
While we are still contending with the broader macro uncertainty and signals landscape weighing on advertiser demand in the near term, we're making good progress on our roadmap and are already seeing improvements to AD performance and measurement from the investments we've made.
We see opportunities for continued gains in the near and medium term with our AI investments powering a lot of this work as we continue to improve as ranking and enable increased automation for advertisers to make it easier for them to run campaigns and use our systems to optimize their performance.
Another opportunity we have is to further scale onsite conversions through products like click to message lead ads and shop ads click.
Click to messenger ads continue to grow quickly and we believe they are bringing incremental demand onto our platform with over half of click to message advertisers exclusively using click to messaging ads on our platform.
We see further opportunity as we continue to scale quick to Whatsapp ads and are investing in growing newer formats like shop ads.
Over the long term, we're investing heavily in AI to develop and deploy privacy enhancing technologies and continue building new tools that will make it easier for advertisers to create and deliver more relevant and engaging ads.
Moving now to our efficiency work.
We took significant actions in 2022 to operate more efficiently in.
In Q4, we made the difficult decision to lay off employees, while de prioritizing certain projects and curtailing non head count related expenses, we've applied the same scrutiny to our physical assets, we identified opportunities to consolidate our office facilities and we have streamlined our future data centers to a new.
Texture, which we believe will be more cost efficient and more flexible that provides us optionality to support both AI and non AI workloads.
In Q4, we recorded $4 2 billion of total restructuring costs in connection with all of these efforts and expect there to be some additional costs in 2023 in areas like office facilities impairments as we continue this work.
As Mark just said these actions are just the beginning of our efficiency efforts and we remain keenly focused on this in 2023, we are working across the company to de prioritize lower ROI work move faster increase productivity and reduce costs across the business.
As part of this we are carefully scrutinizing, our hiring needs actively reevaluating projects and reducing management layers I am confident that our companywide focus on efficiency will position us to be an even more productive organization going forward.
Turning now to the revenue outlook.
We expect first quarter 2023 total revenue to be in the range of 26 to $28 5 billion.
Our guidance assumes foreign currency will be an approximately 2% headwind to year over year total revenue growth in the first quarter based on current exchange rates.
Turning now to the expense outlook.
We anticipate our full year 2023 total expenses will be in the range of 89 to 95 billion.
Lowered from our prior outlook of <unk> 94 to 100 billion due to slower anticipated growth in payroll expenses and cost of revenue.
We now expect to record an estimated $1 billion in restructuring charges in 2023 related to consolidating our office facilities footprint.
This is down from our prior estimate of $2 billion as we recorded a portion of the charges in the fourth quarter of 2022.
We may incur additional restructuring charges as we progress further in our efficiency efforts.
Turning now to the Capex outlook for 2023, we expect capital expenditures to be in the range of 30% to 33 billion lowered from our prior estimate of $34 billion to $37 billion.
The reduced outlook reflects our updated plans for lower data center construction spend in 2023, as we shift to a new data center architecture that is more cost efficient and can support both AI and non AI workloads.
Substantially all of our capital expenditures continue to support the family of apps.
Onto tax absent any changes to U S tax law, we expect our full year 2023 tax rate percentage to be in the low twenties.
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 2022 was a challenging but pivotal year for our business. We made important progress on our priorities and have taken significant steps to improve our efficiency and productivity.
We are set up well to build on this work in 2023 as we continue investing for future growth, while remaining focused on delivering strong financial performance.
With that Dave, let's open up the call for questions.
Thank you we will now open the lines for a question and answer session to ask a question press one followed by the number four on your Touchtone phone. Please pickup your handset before asking your question to ensure clarity if you're screaming todays call. Please mute your computer speakers.
First question comes from line of Brian Nowak with Morgan Stanley . Your line is open.
Great. Thanks for taking my questions I have two one for one for Mark one for Susan Mark. The first one is on generative AI sort of wanted to dig a little more into how you think about your blue sky potential user and advertiser used cases of generative AI and how do you think about the timeline for it.
We see some glimpses of those on the platform and then the second one for Susan just any more color on the new data Center architecture, and how we should think about the long term capital intensity of the business, whether it's capex per minute capex for <unk>, how big of a long term benefit could this to this change to the overall cash flow.
Yes, I can start with generative AI.
I think this is a really exciting area and.
I would say.
The two biggest seems that.
Focused on for this year and one is efficiency and then that kind of a new product area is going to be is going to be degenerative AI work.
We have a bunch of different work streams across almost every single one of our products to use.
The new technologies, especially the large language models and diffusion models for generating.
Images and videos and avatars in <unk> assets and all kinds of different staff across all of the different work streams that we're working on.
As well as over the long term.
Working on things that could really empower creators to.
To be way more productive and creative across the ops and run a lot of different accounts.
I know there is some really exciting stuff here.
I want to be.
Careful not to kind of get too far ahead of the development of it. So I think you'll see us launch a number of different things.
And we'll talk about them and we will share updates on how theyre doing.
I do expect that the space will move quickly I think we'll learn a lot about what works and what doesn't.
A lot of the stuff is expensive right to kind of generate an image or video or.
Chat interaction.
These things we're talking about.
Okay.
Sensor a fraction of a cent. So one of the big interesting challenges here also is going to be how do we scale. This and make this work more efficient. So we can bring it to a much larger user base, but I think once we do that they're going to be a number of very exciting use cases I realize this.
The high level answer for now, but I think that we'll be able to share more details over the coming months.
Thanks, Brian on your questions about Capex. So your first question was about the new data center architecture that we talked about which is underpinning the lowered capex outlook. So we're shifting our data centers to a new architecture that can more efficiently support both AI and non AI workloads, and that's going to give us more.
<unk> as we better understand our demand for AI over time. Additionally, we are expecting that the new design will be cheaper and faster to build than previous data Center architecture.
Along with the New data center architecture, we're going to optimize our approach to building data centers. So we have a new phased approach that allows us to build base plans with less initial capacity and less initial capital outlay, but then flex up future capacity quickly if needed.
We're still planning to grow AI capacity significantly.
And that connects I think to a lot of the things that Mark was describing earlier in his question.
In terms of longer run capital intensity.
We certainly expect that the lower Capex outlook, we will have some incremental benefit to capex as a percent of revenue and that's still really something that we are focused on over the longer term. The current surge in capex is really due to the building out of AI infrastructure, which we really began last year and are continuing into this year, we will be measuring the ROI of these AI.
Investments and their returns will continue to inform our future spend.
Our intention is still to bring capex as a percent of revenue down but capital intensity in the nearest term is really going to depend in part on the revenue outlook and our needs to further build AI capacity for future demand.
Your next question comes from the line of Eric Sheridan with Goldman Sachs. Your line is open.
Thank you so much maybe I can ask a multi parter on coming back to some of your comments on real Mark you've always had this philosophy of letting the user sort of continue to grow engagement and monetization has always lagged sort of consumer adoption of new products. How do you think about going a little bit deeper on the mixture.
Of letting the engagement of short form video continue to build versus eventually sort of continuing to drive higher levels of monetization against that product.
Can you give us a little bit of color of how advertiser conversations continue to evolve around short form video and the adoption of the canvas and the utilization of that as a means to deliver a mixture of brand and Dr. Messages and then lastly would just be can you quantify at all the gap that still exists between the engagement.
Around short form video and the monetization and how that might close as we look out over the next couple of years. Thanks, So much.
Yes.
<unk> always looked at the second half of the first part of this is.
Is.
That.
For these consumer products, often building up and scaling the product use cases are somewhat different disciplined in working on the monetization. So its such a kind of hard problem to build these new types of products that you want to give the teams as much clarity as simple of goals as possible. So in the bigger.
<unk>.
Just saying, okay, let's make something that works for people and then once we get too many hundreds of millions of people or billions of people using it then we'll focus on on ramping up the monetization, which has been a formula that's worked for us.
That's the general approach now with Reals, we do have a lot of people are using it now.
So I think at this point. The question is is there any strategic advantage to letting it scale further.
Then we will be.
Then then would be profitable to do and I think at the scale that it's at right now it's not clear that there's much strategic advantage I mean, there are certain flywheels.
And you get you get certain more feedback or.
Data points from from a little bit more distribution, but.
But at this point, we're at pretty good scale. So I think for now the right thing to do is to work on monetization efficiency.
And we know that there is demand to see some more reals.
And as we naturally improve the monetization efficiency, which I have confidence in because the teams are doing good work and thats been working shared a stat about it the efficiency doubling over the last.
Six months on Facebook I think as we can continue some of those trends and will naturally just unlock the ability to show more and more real and it will continue to grow from there, but that's the overall approach I do think that our philosophy of <unk>.
Building these consumer products, focusing on getting them to hundreds of millions or billions of people and then focusing on monetization beyond that and bring that in as the balance is the right approach had served US well you can expect us to continue doing that on future things that we do including some.
Hopefully some of the new generative AI products or some of the new meta versus stuff that we're doing we're going to take the same approach there as well.
On the other types of directions.
We continue working on enabling more of it.
If I didn't feel that more formats more objective mobile tools to create them.
We've been making good progress.
Over 40% of our advertisers use.
As our apps.
In response.
Response versus <unk>.
Brian we're accessing programs with both.
<unk> continues to be what advertisers are focused.
This is an example.
The city, which is a German fashion retailer to develop creative specifically four wheels.
The conversions and the fund that we spoke to about 19, Thanks, Hi, Ross, 89% lower cost per purchase a nine times.
So overall very good results.
On your third question, Eric we are not quantifying the gap and monetization efficiency between wheels and other surfaces, we know it.
It took us several years to.
To bring the gap close between stories and feed ads and we expect that this will will take longer for <unk>, having said that we are still roughly on track to bring the overall <unk> revenue headwind to a neutral place by the end of this year or early next year and we're planning to do that through both improving <unk> monetization efficiency.
And growing incremental engagement from Reals.
Your next question comes from the line of Mark Shmulik with Bernstein. Your line is open.
Yes, thanks for taking my questions I've got a couple as well.
First of all I'd offer for Susan Javier.
As we think about I appreciate the color on the improving conversion rate.
Would it be fair to say that you are kind of through the other side of some of those <unk> headwinds we've been talking about the last year or so.
Any more color just kind of that journey of the AI driven AD engine would be appreciated.
Secondly, mark kind of dive into that annual theme of efficiency and following on Baas is both what's the right way to think about long term investment intensity in reality lab.
And kind of balancing that with the ambitions to build the next computing platform is this the right intensity.
Where youre at right now to think about are there any milestones we should be looking for thanks.
Thanks, Mark So on your first question.
We are continuing to make progress in mitigating the impact from the Atg change, but this is more generally just the reality of the online advertising environment that we operate in now so we're continuing to work on building tools that mitigate the impact of those changes and we see strong adoption of those tools.
Including towards we've talked about before like Kathy Kathy Gateway et cetera.
We're also investing in ways to bring.
Conversions on site and we have a lot of AD formats that have been instrumental in doing so across both click to messaging ads leads ads lead ads and shop ads being formats.
That that bring conversions on site and then over the longer run we're continuing to invest.
And our privacy enhancing technologies to more fundamentally enable us to deliver more performance and.
And privacy safe ads to advertisers Avi is there anything you want to add on that.
Yes. Thanks, I think you touched on most of it if you will.
Look at the.
Strategy on us it really has two parts, which is continuing investing in AI and that's where we're seeing a lot of improvement in us relevance.
One thing we saw over 20% more conversions than in the prior year, which combined with the decline in cost per acquisition results on higher ROI.
We also use it for ultimately the experiences for the advertisers improvements a measurement, which allow other than just to do a better budget decisions, but the.
The second body is bringing more conversions on the side, which are also obviously, helping offsetting this scene.
<unk> seen a loss into where reclaiming the column assessing our growth.
<unk> and.
One example will be leased.
Just to give another example.
Online marketing and sales automation agency in Italy.
Awesome results.
Who collect the higher volume of qualified leads at a lower cost politically compared to both sides leads I mean, the diesel side. They managed to achieve a two X more bookings with onsite.
Or it's more qualified leads with on site they've gone up to one seven times lower cost per lead with on site versus the alternative of sending.
I mean, the lead acquisition on site.
Alright, I can give some color on and I think there was a question about how we're thinking about this efficiency theme as it applies to reality labs over time.
Yes, I guess there are two ways that.
I think that the suppliers.
The first thing is I think it's important to not just think about reality labs is one thing right there.
The three major areas right. There's the augmented reality work long term, which is actually the biggest area, but it hasnt, but.
It's still a large research problem there was a lot of work there that.
We haven't actually ship the product yet VR, which is starting to ramp request to I think did quite well and we have multiple product lines there with the quest pro.
And then the smallest by by kind of budget size today is the matter of our software program and it doesn't reflect the importance of it I think the software and social platform might be the most critical part of what we're doing but software is just a lot of <unk>.
Less capital intensive to build the hardware. So it's the smallest part of the program and within each of those areas. There are a lot of different things that we're doing so just.
Just like any project that we would run.
We're constantly learning from how the products that we've shipped are doing how the market is evolving overall, how competitors are doing and what reaction theyre seeing different things than what experiments are being played out and where we're kind of constantly tuning the roadmap.
Obviously some of these are longer term things right. So you start planning out the hardware that youre going to ship.
Two three years in advance, but but we're kind of constantly looking at the signals in learning and and and making decisions about what it makes sense to do forward. So that's definitely going to continue.
We will even though I'm.
None of the signals that I've seen so far suggests that we should shift the reality lab strategy long term, we are constantly adjusting the specifics of how we adjust.
How we execute that so I think that that will certainly look at that as part of the.
The ongoing efficiency work the other pieces.
Just different tactics things like trying to flatten the org.
Things like that those are going to apply across the whole company. So we expect that within the roadmap that we're trying to execute both unreality labs and family of apps, we just want to focus on making all of our work more efficient and a lot of the time when people talk about efficiency.
There's a lot of focus on prioritization, and which big things can you cut but I actually think what makes you a better company over time is being able to execute and do more things because youre operating more efficiently and you can get things done with fewer resources. So I'd like to kind of get us to that mode, more which I guess it gets me to a higher level point.
And this which is I just think we're in we've entered somewhat of a phase change for the company, where we just grew so quickly for like the first 18 years of the company's growth and it's very hard to really crank on efficiency. While you are growing that quickly and I. Just think we're in a different environment now where we have a bunch of areas that I think we're still.
Extremely exciting and growing quickly for the future, where I think the right strategy will be to focus on kind of topline growth, but I think a lot of what we do it really just makes sense to really focus on on the efficiency a lot more than we had previously and making sure that we can do that work more effectively.
For what it's worth I think if we do that well it will be I think we'll be able to do better product work and I think it'll be a more fun place for people to work because I think theyre going to get more stuff done. So some pretty committed to this and it's going to go across all of the different things that we're doing.
Your next question comes from the line of Doug Anmuth with Jpmorgan. Your line is open.
Great. Thanks for taking the questions.
Susan I know the expense outlook came down by $5 billion, just hoping you could talk about some of the areas, where you may be able to get.
<unk> deficiency is still and then what is the new expense outlook suggest for hiring levels in 'twenty three and then separately. So hoping you could comment on the issues in Europe around that is use of first party data to target ads, how could this get resolved and how should we think about the risks of matter.
I'll start with the 2023.
The expense outlook so.
The primary components of the reduction in the 2023 expense outlook.
Across three areas. The first is slower payroll growth. So we are continuing to scrutinize, how we allocate resources across the company on this.
We have a broad hiring freeze in place right now and we continue to expect a slower pace of hiring in the year as we evaluate what roles we're going to open.
And the answer to your second question here, which is this is an ongoing process for us we don't presently have a hiring target to share for the end of the year.
The second component of the lower expense.
The lower expense outlook is on cost of revenue were expecting slower growth depreciation here is impacted by us extending the useful lives of non AI servers in Q4, and then the third component.
Is our outlook now reflects an estimated $1 billion in facilities consolidation charges, that's down from the prior $2 billion estimate.
That we gave in the last guidance range since a portion of the previously estimated charges were already recognized in Q4 of 2022. So those are really the big.
Those are really the primary issues as it pertains to the.
The lower expense outlook. Your second question was on.
The issues in.
Europe around meta using data to target ads.
So I think.
I think if you're referring to the EU DPC ruling.
We have to change our approach regarding our reliance on contractual necessity as legal basis for ads in Europe .
That's a decision we don't agree with it we believe that our current approach is GDP are compliant and we're appealing the substance of the rulings and the fines. We don't expect that those decisions are going to affect our ability to provide personalized advertising in the EU and that advertisers should be able to continue to use our platforms to reach customers and grow their business.
Yes.
Your next question comes from the line of Justin Post with Bank of America. Your line is open.
Great. Thank you maybe a follow up on the privacy and data use.
Are you still facing headwinds in the first quarter or are you kind of pass that from <unk> ATT and then as you look out over the next year anything on Android or in the EU.
Digital market sector or anything we should be thinking about or aware of thank you.
Yes.
Thanks, Justin.
On ATT.
I think what I would say is there is still certainly an absolute headwind to our revenue number you know that that is the impact of the ATT changes being in place having.
Having said that.
Lapping we are lapping its rollout and adoption and we're making progress in mitigating the impact due to a lot of the work that both Harvey and I, just talked about including the different advertiser tools, including AD formats that bring AD conversions onsite and including the longer term AI investments and privacy enhancing tech.
<unk>.
The second part of your question was on anything from Android and other headwinds.
On Android, it's too early to know where this will land.
I think Google is taking a approach that is collaborating with the industry, which we think is critical and we will have updates as as as.
More time elapses there.
And then your third the third part of your question I think was on regulatory issues in the EU I think this is arne.
On DSA.
We are expecting.
Have been preparing for some time to comply with DSA and meet the compliance deadlines that we expect to.
To come into effect. This year those are meaningful but manageable segment of costs, we've been preparing for a long time and those costs have been factored already into our entire total expense guidance.
Your next question comes from the line of use of Squali with twist. Your line is open.
Great. Thank you two questions from me. Please first maybe one for Susan just staying on the theme of <unk>.
Is it efficiency.
With all the adjustments to your cost basis.
Lee can you maybe just speak to the.
Relationship you're trying to build between revenue growth and Opex Capex group over time I think the last time, we saw them move in tandem.
Close to each other was back in 2017. So are you at a point, where you'd want them to grow much closer to each other.
Desman mode, and therefore potentially margin compression mode.
Just 2023, and then maybe Mark can you just.
Provide an update on.
The health of the broad digital AD space, especially for the SMB side and Dr. Just curious if.
Coming out of Q4 incrementally bullish or youre still as cautious.
Three or six months ago. Thank you.
First question, so certainly the lower expense outlook and Capex outlook puts us in a better position in terms of financial performance for this year.
We are I think still we're focused on the goal that mark outlined I think last quarter of delivering compounding earnings growth, while enabling aggressively.
The future technology that continues to be the principle by which we are.
But by which we're guiding our financial plans.
The second question is an update on the health of the broader digital ad space.
You don't.
I can take I can start with this and hobby you should feel free to jump in if you want to add more color.
Q4 for US we saw that our that the holiday season for us fall, mostly within our range of expectations trends in online commerce modestly improved for us, which is encouraging but again the growth was still negative year over year.
So overall I think this is still a pretty volatile macro environment. It's early in the year to know how this will shape up for 2023.
And if there's anything you'd like to add you can jump in.
No I think you covered it well system.
Your next question will come from the line of Ron Josey with Citi. Your line is open.
Great. Thanks for taking my question Mark I wanted to talk a little bit more around the progress on the AI discovery engine in real and we're seeing that in our own usage in terms of content categories, and just getting more and more insights and content that we'd like to see but can you just talk about the added signal that that is seeing in gaming youre to produces more relevant content.
Yes.
<unk> stories to feed and maybe even the messenger. Thank you.
I'm not exactly sure what.
It would be useful to share here, but.
Yes.
General a lot of the gains that we're seeing.
On the.
The discovery engine overall, which.
Which.
We basically used to refer to our AI recommendation system across Facebook and Instagram across all different content types of which really is sort of a special case and thats growing the fastest with short form video but.
A lot of this is I mean, there's not like one specific data type that's useful.
The trends that we're seeing here is.
We're using larger models.
Which require more computation.
Shifted the models from being more CPU base to being GPU based we've seen big improvements in the amount of time and engagement.
That we've that we've gotten and we.
It's a little bit hard for us to predict exactly how much.
We will be able to continue tuning those and improving but.
From the experience that we've had so far I would bet that there is still pretty significant upside there.
I know that you kind of asked about specific data points, but I think that that's really the theme that we're seeing in that that applies across <unk> and <unk>.
And the rest of the discovery engine.
One thing that I'd add it's a little bit separate from your question, but we do spend most of the time talking about reals.
It's worth giving some color on the rest of the discovery engine work, which is.
There's also been doing quite well and is much more incremental to the rest of the business because.
If people end up being able to discover additional photos or links or groups.
Things like that and Facebook or.
Just interesting content across Instagram, then, they're just more engaged in the product and we already know how to monetize that content. So that ends up being really helpful. Both for the overall engagement.
Not very cannibalistic at all and already profitable. So that's that we've spent less time talking about that because I get the real is the sort of the faster growing area, but.
We do still expect that as a percent of the overall feeds in Facebook and Instagram recommended content will continue growing I don't know if it will be a majority by the end of this year.
Maybe it'll be 30%, 40% something in that zone and continuing to grow because we can just find content that people are going to be interested in that may not be from accounts that they've followed directly. So hopefully that's some useful color on what we're seeing across those efforts.
Your next question comes from the line of John Blackledge with Cowen Your line is open.
Great. Thanks, two questions just to follow up on reality labs should we continue to expect accelerating losses that reality reality labs in 'twenty three and if so should we expect reality labs via peak op losses. This year and then second Susan mentioned shop adds in the bucket of early monetization just any color there.
On how we might see that scale. This year. Thank you yeah sorry.
Alright, I'll go ahead and take the first question about reality labs and Javier you can take the second question on shop ads.
On reality labs, we still expect our full year reality labs losses to increase in 2023, and we're going to continue to invest meaningfully in this area given the significant long term opportunities that we see it is a long duration investment and our investments here are underpinned by the accompanying need to drive over.
<unk> operating profit growth.
We're making these investments.
Turn it to hover on the shop ads.
Yes. So in Q4, we continued to test.
So that's in the U S. We're seeing an increase.
Please performance by helping consumers to the place where they're most likely to purchase.
Yeah.
So it's early to know, but we really finally, so broad markets it in the past.
It's off a small base, but.
And just to give you a sense, we saw triple digit growth in both revenue and adoption across Q4.
We expect this growth to normalize to a lower revenue.
And the shelf ups data as a revenue run rate in the one hundreds of Modesto program. So that gives us a small base is small revenue run rate, yet, but it's growing rapidly.
We expect to continue to normalize to more.
Sure.
Levels.
Yes.
Your next question comes from line of Mark Mahaney with Evercore ISI your lines.
Thanks, two questions. Please click to messaging it now about $10 billion revenue run rate, how do you think about.
The growth path for that going forwards and do you find that that's bringing in brand new advertisers too.
Two to matter that you hadn't seen before like who's coming in on that and does that give you a new growth path and then mark if I could just ask you this year of efficiency.
Almost like there has been a journey going on since early last year when you talked about.
Talking about driving the business for.
Growing operating profit I guess I just wanted to ask the why question I mean, it's the market's obviously like what they're hearing from you today and the changes, but but why the why the much greater focus on efficiency, not just tonight, but kind of over the last nine or 12 months with maybe a few hiccups like what is it just the maturity of the business is it just trying to take advantage of a crisis, but there is a.
Prices out there in terms of the economy, and maybe that forced minds to think this way.
A little bit more color on the Y. Thanks, a lot.
Thanks. This is Susan on the click to messaging ads. So we are this is one of our fastest growing AD products and we believe that there that they are bringing incremental demand onto our platform I mentioned in my script that over half of click to message advertisers exclusively use click to messenger ads on our platform.
In terms of you asked how are we going to scale and I think there are a couple of dimensions in terms of demand I think the biggest piece here is getting more businesses to adopt click to messaging ads, we are creating more entry points simplifying creation flows we're trying to integrate with partners who.
We can help smaller businesses scale. So there's a lot of work going on there.
On the performance side, we're continuing to focus on just driving up the ROI that advertisers get from click to messaging ads were.
Trying to give advertisers the ability to do more down funnel optimization create better in threat experiences and simplify flows that helping drive conversion and then ultimately we're always focused on growing supply and in this case growing the business mentioned messaging ecosystem by creating more ways for people and businesses to connect across our message.
King App. So I think an example of that would be something like business directory search on Whatsapp. So it's an opportunity we're very excited about and we've invested a lot in and we've seen very healthy growth.
Turn it to Mark on the efficiency question.
Yes, so on the efficiency point I think we come to it from a few places I mean, one is just the journey of the company for the first 18 years I think we grew it.
20%, 30% compound or a lot more every year right.
And then obviously that changed very dramatically in 2022, where our revenue was.
Negative for the growth for the first time.
In the company's history.
It is a pretty big step down.
And we don't anticipate that that's going to continue but I also don't think its going to necessarily go back to the way. It was before so do you think this was a pretty rapid.
Phase change there.
Then I think just forced us to.
Basically.
Take a step back and say, okay. We can't just treat everything like its hyper growth, they're going to be some areas that are going to.
Be very rapidly growing or is that a very kind of future investments that we want to make but we also have a lot of things now that are.
So just have are.
A lot of people using them in support large amounts of business in that we think we should operate.
Somewhat differently.
There is that piece of it but the other part of it I'd say.
As we started doing the work.
I actually think it makes us better right and that was somewhat unexpected.
I kind of historically would have thought that this would just occupy some amount of our mind space and that that would be more of a trade off against how we.
Are able to build products.
And get things done.
But at this point to are actually fairly optimistic that there are a pretty good roadmap of things that we can do.
That will just make us more efficient and actually better able to build the things that we want.
Not all of them will will help save money right. So for example, focusing on AI tools to help improve engineered productivity.
It's not necessarily going to.
Reduce costs, although over the long term, maybe it will make it so we can have fewer.
We just hire less right and stay stay a smaller company for longer.
But.
I do think things like reducing layers of management just make it so information flows better through the company and so you can make faster decisions and I think ultimately that will help us not only make better.
Better products, but I think it will it will help us attract and retain the best people, who want to work in a faster moving environment.
So I don't know that that honestly was a little bit surprising right that as we started digging into this that that the company would actually start to feel better to me.
And I don't know how long that will like how long. The roadmap is the things that we can continue to do where that'll be the case.
But I do think we have a good amount of things like that so that's why I'm really focused on this now and I do want to continue to emphasize the dual goals here of making the company a better technology company and increasing our profitability.
They are both important but I think it's also really important to focus on the first one I was just making it a better company because that way you would even if or even if we outperform our business goals. This year.
Just want to communicate especially the people inside the company that we're going to stick with this because I think it's just going to make us a better company over the long term.
So I think that's it for now.
Later, we have time for one last question.
Thank you that will come from the line of Brent Thill with Jefferies. Your line is open.
Thanks, Susan for your Q1 guidance can you just remind us all what you are.
The embedded expectations are for marketing conditions, how you think about seasonality.
What's embedded in that guidance.
Thanks Brent.
For I mean for Q1.
Our guidance range of 26 to $28 5 billion corresponds to negative 7% to plus 2% year over year growth and it reflects.
A wide range of uncertainty given the continuation of the general macro environment that we've been operating in.
Again, we are pleased with the core engagement trends that we've talked about and the performance improvements that we're delivering for advertisers with our monetization work and our investments in AI and we expect FX to be less of a headwind to year over year growth in Q1 than it was in Q4.
But again, we are keeping a close eye on advertising demand and on the ongoing macroeconomic volatility.
Great. Thank you 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.
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