Q2 2023 Meta Platforms Inc Earnings Call
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 meta second quarter earnings Conference call.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question. Please press. One then the number four on your telephone keypad.
This call will be recorded thank you very much Ken Darrelle, Mendez director and Investor Relations you may begin.
Thank you good afternoon and welcome it's not a platform second quarter 2023 earnings Conference call. Joining me today to discuss our results are Mark Zuckerberg, CEO and Susan Li CFO before we get started I would like to take this opportunity to remind you that our remarks. Today will include forward looking statements actual results may differ materially.
From those contemplated by these forward looking statements.
<unk> 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 will present, both GAAP and certain non-GAAP financial measures a reconciliation of GAAP to non-GAAP measures is included in today's earnings press release, the press release and accompanying Investor presentation are available on our website at Investor Dot <unk> Dot com and now I'd like to turn the call over to Mark.
Thanks, Ken Thanks, everyone for joining.
This was a good quarter for our business, we're seeing strong engagement trends across our apps.
There are now more than $3 8 billion people, who use at least one of our apps every month Facebook now has more than 3 billion monthly actives with daily actives continuing to grow around the world, including in the U S and Canada.
In addition to our core products performing well I think we have the most exciting roadmap ahead that I've seen in a while we've got continued progress on threads Reals Lama too.
And some groundbreaking AI products in the pipeline as well as the quest three launch coming up this fall.
We're heads down executing on all of this right now.
It's really good to see the decisions and investments we have made start to play out.
Threads briefly.
I'm quite optimistic about our trajectory here, we saw unprecedented growth out of the gate and more importantly, we are seeing more people coming back daily than I'd expected.
And now we're focused on retention and improving the basics and then after that we will focus on growing the community to the scale that we think is going to be possible.
Only after that are we going to focus on monetization. We've run this playbook many times before with Facebook Instagram Whatsapp stories, Reals and more.
And this is as good a start as we could have hoped for so I'm really happy with the path that we're on here.
One note I want to mention about the threads launch related to our year of efficiency is that the product was built by a relatively small team on a tight timeline we've.
We've already seen a number of examples of how our leaner organization and some of the cultural changes that we've made can build higher quality products faster and this is probably the biggest examples so far.
Year of efficiency was always about two different goals, becoming an even stronger technology company and improving our financial results. So we can invest aggressively in our ambitious long term roadmap.
Now that we've gotten through the major layoffs. The rest of 2023 will be about creating stability for employees are removing barriers that slow us down introducing new AI powered tools to speed us up and so on.
Over the next few months, we're going to start planning for 2024.
And I'm going to be focused on continuing to run the company as lean as possible for these cultural reasons, even though our financial results have improved I expect that we're still going higher in key areas, but newly budgeted head count growth is going to be relatively low.
Said as part of this year's layoffs. Many teams chose to let people go in order to hire different people with different skills that they need.
Much of that hiring is going to spill into 2024.
Other major budget point that we're working through is what the right level of AI Capex is to support our roadmap since we don't know how quickly our new AI products will grow we may not have a clear handle on this until later in the year.
Now moving onto our product roadmap I've said on a number of these calls that the two technological waves that we're riding our AI in the near term and the meta versus over the longer term investments that we've made over the years and AI, including the billions of dollars being spent on AI infrastructure are clearly paying off across our ranking and recommendation systems and improving <unk>.
<unk> and monetization.
AI recommended content from accounts you you don't follow is now the fastest growing category of content on Facebook feed now since introducing these recommendations they've driven a 7% increase in overall time spent on the platform. This improves the experience because you can now discover things that you might not.
If otherwise followed or come across Reals.
<unk> is a key part of this discovery engine and real players exceed 200 billion per day across Facebook and Instagram.
We're seeing good progress on the <unk> monetization as well with the annual revenue run rate across our apps now exceeding $10 billion.
From $3 billion last fall.
Beyond Reals AI is driving results across our monetization tools through our automated ads product, which we call <unk> advantage.
Most all our advertisers are using at least one of our AI driven products that we've also deployed meta allowed us a new model architecture that learns to predict an ads performance across a variety of datasets and optimization goals and we introduced AI sandbox a testing playground for generative AI powered tools like automatic <unk> Bakker.
And generation and image outcropping.
Business messaging is another key piece of our monetization strategy and we recently announced that the 200 million users of our Whatsapp business App will now be able to create click to whatsapp ads for Facebook and Instagram without needing a Facebook account.
There's a pretty big unlock particularly in countries, where whatsapp as is often the first step to bring our business online.
Messaging is a bit earlier, but it's also showing good adoption the number of businesses using our paid messaging products has doubled year over year.
While we're on messaging I'll.
I'll mention that we started rolling out channels on Whatsapp last month, it's a simple reliable and private way to receive important updates from people and organizations.
And I am quite excited for more people to try it as we bring the product to more countries.
Through the rest of this year.
Beyond the recommendations and ranking systems across our products. We're also building.
Leading foundation models to support.
A new generation of AI products, we partnered with Microsoft to open source of Lama to the latest version of our large language model and to make it available for both research and commercial use we.
We have a long history of open sourcing our infrastructure and AI work from from Pi Torch, which is the leading machine learning framework to models like segment anything image bind and Dino two basic infrastructure as part of the open compute project and we found that open sourcing our work allows the industry, including us to benefit from.
Innovations that come from from everywhere and these are often improvements in safety and security since open source software is more scrutinized and more people can find and identify fixes for issues.
The improvements also often come in the form of efficiency gains, which should hopefully allow us and others to run these models with less infrastructure investment going forward. So I'm really looking forward to seeing the improvements that the community makes two lama too.
We are also building a number of new products ourselves using Lama that will work across our services I'm going to share more details on that later this year, but you can imagine lots of ways that AI can help people connect and express themselves in our apps creative tools that make it easier and more fun to share content.
Agents that access assistance coaches or that can help your interactive businesses and creators and more.
And these new products will improve everything that we do across both mobile apps and the meta versus helping people create worlds and the avatars and objects that inhabit them as.
As well.
Our investments in AI continue we remain fully committed to to the meta versus vision as well we've been working on on both of these two major priorities for many years in parallel now and in many ways. The two areas are overlapping and complementary.
The next big thing on the reality labs side is the launch of our quest three mixed reality headset at connect.
It's our most powerful headset, yet with better displays and resolution and Nextgen Qualcomm chipset with.
Twice the graphics performance it.
It will also have the best immersive content library out there and its 40% thinner than quest too.
It's mixed reality seamlessly blends your physical world and the virtual one by intelligently understanding the physical space around you.
We pioneered mixed reality with our quest pro headset and quest three takes that to the next level now.
Now others in the industry are of course, working on bringing mixed reality to the market too, but quest three is going to be the first mainstream accessible device that we expect many millions of people will get to experience this technology with.
The <unk> content and software vision continues coming together as well, we recently announced that roadblocks as coming to quest with an open beta on App lab for horizon. The team is focused on retention right now and we're making good progress on that we made big improvements on avatars as well and that's going to be a bridge between our mobile apps and our VR and mixture.
<unk> experiences.
A lot more to share on on both our <unk> and AI work coming up at our connect conference, which we're gonna be hosting and hacker square at our headquarters on September 27th.
It's going to be a good one so I hope you tune in alright to wrap up.
Just want to say that.
I'm really proud of our teams for everything that we've accomplished so far this year.
It's been a tough year and a lot of ways, but it's also been an impactful one.
I am quite optimistic about the road ahead and I am grateful to all of you for being on this journey with us and now going ahead it 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.
Q2, total revenue was $32 billion up 11% or 12% on a constant currency basis.
Q2, total expenses were $22 6 billion up 10% compared to last year.
In terms of the specific line items cost of revenue increased 15% driven primarily by infrastructure related costs.
R&D increased 8% driven mainly by head count related costs from our reality labs and family of apps segments as well as restructuring costs.
Marketing and sales decreased 12% due mostly to lower marketing spend and payroll related costs.
And G&A increased 39% due primarily to an increase in legal accruals, which was partially offset by lower payroll related costs.
We ended the second quarter with over 71400 employees down 7% from the first quarter.
Our second quarter head count still included roughly half of the approximately 10000 employees impacted by the 2023 layoffs.
We expect that our third quarter head count will no longer include the vast majority of impacted employees.
Second quarter operating income was $9 4 billion, representing a 29% operating margin.
Our tax rate for the quarter was 16% this is lower than our previous full year outlook as our higher share price provided a higher tax deduction and lowered our taxes.
Net income was $7 8 billion or $2 98 per share.
Capital expenditures, including principal payments on finance leases were $6 4 billion drill.
Driven by investments in data centers servers and network infrastructure.
Free cash flow was $11 billion significantly benefiting from a deferral of income taxes that we expect will be paid in the fourth quarter.
We repurchased $793 million of our class a common stock in the second quarter and ended the quarter with $53 $4 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 3.07 billion people used at least one of our family of apps on a daily basis in June and that approximately $3. Eight 8 billion people used at least one on a monthly basis.
Facebook continues to grow globally and engagement remains strong for the first time, we crossed 3 billion monthly active users with Facebook Miu ending at 3.03 billion in June up.
3% or $96 million compared to last year.
Facebook daily active users were 2.06 billion up 5% or $96 million.
Do you use represented approximately 68% of Maa's.
Q2 total family of apps revenue was $31 7 billion up 12% year over year.
Q2 family of apps AD revenue with $31 5 billion up 12% or 13% on a constant currency basis.
Within AD revenue the online commerce vertical was the largest contributor to year over year growth, followed by entertainment and media and CPG.
Online commerce benefitted from strong spend among advertisers in China, reaching customers in other markets.
On a user geography basis AD revenue growth was strongest in rest of world at 16%, followed by Europe , North America, and Asia Pacific at 14%, 11% and 10% respectively.
Foreign currency was a headwind to advertising revenue growth in all international regions.
In Q2, the total number of AD impressions served across our services increased 34% and the average price per AD decreased 16%.
Impression growth was primarily driven by Asia Pacific and rest of world.
The year over year decline in pricing was driven by strong impression growth, especially from lower monetizing surfaces and regions.
While overall pricing remains under pressure from these factors, we believe our ongoing improvements to AD targeting and measurement are continuing to drive improved results for advertisers.
Family of apps other revenue was $225 million in Q2.
Up 3% as strong business messaging revenue growth from our Whatsapp business platform was partially offset by a decline in other line items.
We continue to direct the majority of our investments toward the development and operation of our family of apps in Q2 family of apps expenses were $18 $6 billion, representing approximately 82% of our overall expenses.
<unk> expenses were up 8% due primarily to legal related expenses and restructuring charges, partially offset by a decrease in non head count related operating expenses, including marketing.
Family of apps operating income was $13 $1 billion.
Representing a 41% operating margin.
Within our reality lab segment Q2 revenue was $276 million down 39% due to lower quest to sales.
Reality labs expenses were $4 billion up 23% due to lapping a reduction in reality labs loss reserves in Q2 of last year.
As well as growth in employee related costs.
Reality labs operating loss was $3 7 billion.
Turning now to the business outlook there.
There are two primary factors that drive our revenue performance, our ability to deliver engaging experiences for our community and our effectiveness at monetizing that engagement over time.
On the first overall engagement within Facebook and Instagram remains strong.
<unk> continues to grow and drive incremental engagement.
On Facebook feed in particular recommended content from accounts you don't follow has increased significantly over the past year, while also becoming more incremental to engagement demonstrating that people are getting added value from discovering content from unconnected accounts.
Looking forward, we are optimistic about our ability to increase that value even further by leveraging advanced AI techniques to improve recommendations.
In addition to improving the value people get within our family of apps today.
We're also investing in entirely new experiences for the future.
We're standing up infrastructure to support new AI powered products across our services, which will give people more tools to express themselves and connect.
And we've been pleased with the initial reception of our new Standalone apps threads since its launch earlier. This month. Our focus now is on further developing this into a product that will be valuable for a large set of people over time.
Moving to the other driver of revenue improving monetization here.
Here, we're focused on improving monetization efficiency of products that monetize at lower rates today like reals in our messaging services and more broadly driving measurable performance and returns for our advertisers.
On <unk>, we are making good progress on monetization with more than three quarters of our advertisers now using <unk> ads.
We remain focused on further reducing the <unk> revenue headwind and narrowing the monetization efficiency gap with our more mature surfaces. However, we continue to expect time on rails will monetize at a lower rate than stories and feed for the foreseeable future since people squirrel more slowly through video content.
Within messaging.
<unk> of people and millions of businesses use our messaging services every day to connect we see significant opportunity to build tools and functionality for businesses to help facilitate those interactions and are seeing early but promising progress with whatsapp paid messaging solution today.
In terms of our work to drive measurable performance for advertisers, it's concentrated in two primary areas.
Hi, and onsite conversions.
We're leveraging AI to move our systems towards using fewer larger models that enable us to leverage learnings across product surfaces and deploy improvements more quickly broadly and efficiently.
We're also leveraging AI to power advanced ads products like advantage, plus shopping which continues to gain adoption.
We're seeing this work translate into results for advertisers as conversion growth remained strong in Q2.
In terms of driving onsite conversions, we continue to see strong results with click to messaging ads and are well positioned given our suite of messaging applications.
Daily click to Whatsapp ads revenue continues to grow very quickly at over 80% year over year.
We also recently started testing the ability to buy click to whatsapp ads directly from the Whatsapp business App, which now has more than 200 million monthly users.
Looking ahead, we're focused on enabling businesses to optimize for conversions further down the funnel and our messaging applications.
We're also investing in scaling other onsite objectives like lead generation and shop that.
Before turning to our revenue outlook I'd also like to talk about our investment philosophy.
We expect to bring the discipline and habits that we built during this year of efficiency with us as we plan for the future.
At the same time, we remain focused on investing in the significant opportunities ahead.
Part of supporting these initiatives will come from prioritizing them against other areas of work and shifting resources.
However, in some cases, they will require incremental investment.
This is particularly true in the areas, we see the most significant opportunity which include AI and <unk>.
As I mentioned last quarter. We also remain focused on modestly evolving our capital structure over time, we were pleased to execute our second bond offering in may and expect a measured pace of future debt raises as we work toward improving our overall cost of capital, while maintaining a positive or neutral net cash balance.
In addition, we continue to monitor the active regulatory landscape.
With respect to EU U S data transfers, we saw a positive development with the European Commission's adoption of a final adequacy decision, which allows us to continue to provide our services in Europe .
This is good news so broadly speaking, we continue to see increasing legal and regulatory headwinds in the EU and the U S that could significantly impact our business and our financial results.
Turning now to the revenue outlook.
We expect third quarter 2023, total revenue to be in the range of 32 to $34 5 billion.
Our guidance assumes a foreign currency tailwind of approximately 3% to year over year total revenue growth in the third quarter based on current exchange rates.
Turning now to the expense outlook.
We anticipate that our full year 2023 total expenses will be in the range of 88 to 91 billion increased from our prior range of $86 billion to $90 billion due to legal related expenses recorded in Q2.
This outlook includes approximately $4 billion of restructuring costs related to facilities consolidation charges and severance and other personnel costs.
We expect reality labs operating losses to increase year over year in 2023.
While we are not providing a quantitative outlook beyond 2023 at this point, we expect a few factors to be drivers of total expense growth in 2024, as we continue to invest in our most compelling opportunities, including AI and the meta versus.
First we expect higher infrastructure related costs next year.
Given our increased capital investments in recent years, we expect depreciation expenses in 2024 to increase by a larger amount than in 2023.
We also expect to incur higher operating costs from running a larger infrastructure footprint.
Second we anticipate growth in payroll expenses as we evolve our workforce composition toward higher cost technical roles.
Finally for reality labs, we expect operating losses to increase meaningfully year over year due to our ongoing product development efforts in AR VR and our investments to further scale our ecosystem.
Turning now to the Capex outlook.
We expect capital expenditures to be in the range of 27% to $30 billion.
Lowered from our prior estimate of $30 billion to $33 billion.
The reduced forecast is due to both cost savings, particularly on non AI servers as.
As well as shifts in Capex into 2024 from delays in projects and equipment deliveries rather than a reduction in overall investment plans.
Looking ahead, while we continue to refine our plans as we progress throughout the year. We currently expect total capital expenditures to grow in 2024, driven by our investments across both debt Datacenters and servers, particularly in support of our AI work.
Onto tax absent any changes to U S tax law, we expect the tax rate for the rest of the year to be similar to Q2 2023.
In closing Q2 was a good quarter for our business, we're executing well across our core priorities and are continuing to make progress on delivering exciting new experiences for our community with that Dave Let's open up the call for questions.
Certainly and thank you very much 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. Your first question comes from the line of Brian Nowak with Morgan Stanley . Your line is open.
Thanks for taking my questions, maybe a two parter for Mark Mark you've spoken a few times over the last few months on AI agent certain building different types of assistance through the law I guess the two part question can you sort of talk to us a little bit about some of the use cases are consumer advertiser offerings you most.
Excited about enabling for some of these agents and then the second one just to sort of level set on timing, but can you just help us understand some of the larger technological barriers in your mind. The teams we need to overcome to really scale. These types of agent products across the ecosystem.
Sure so.
I think the main thing that I'll say on this for now.
Tuned into connect coming up in September we're going to have a lot more to talk about on the roadmap and products that we're launching we wanted to get.
The Lama to model out now that is going to be that's going to underpin a lot of the new things that we're building and now we're nailing down a bunch of these additional products and this is going to be stuff that we're working on for years, but I think a lot of the journey will will kind of start later this year when we start rolling out.
Some of these things but.
Overall, I think that there are three basic categories of Av.
Products or technologies that we're planning on building with generative AI one are around different kinds of agents, which I'll talk about in a second two or just kind of.
Generative AI powered features so.
The canonical examples of that are things like in advertising, helping advertisers.
We run ads without needing to supply as much creative for if they have an image, but it doesn't fit the format to be able to fill in the image for them. So I talked about that a little bit upfront in my comments, but their stuff like that across every app.
And then the third category of things.
They are broadly focused on productivity and efficiency internally, so everything from helping engineers write code faster to helping people internally understand the overall knowledge base.
At the company and things like that so there's there's a lot to do on each of those zones.
Four four.
For AI agent, specifically I guess, what I'd say is.
One of the things Thats different about how we think about this compare to some others in the industry is.
We don't think that theres going to be one single AI that people interact with.
Just because there are all these different entities on a day to day basis that that people come across whether they are different creators are different businesses or.
Different apps or things that you use so I think theyre going to be a handful of things that are that are just sort of focused on helping people connect around expression and creativity and facilitating connections.
I think theyre going to be a handful of of experiences around helping people connect with creators who they care about and helping creators foster their communities and then the one that I think is going to have to.
The fastest direct business loop is going to be around helping people interact with businesses.
You can imagine a world on this where over time every business has.
Peasant AI agent.
That basically people can can message in.
And interact with and it's going to take some time to get there right at 70%. This is gonna be a long road to build that out.
But I think that that's going to kind of improve a lot of interactions that people have with businesses as.
As well as if that does work it should alleviate one of the biggest issues that we're currently having around messaging and monetization is that in order to for a person to interact with a business, it's quite human labor intensive for a person to be on the other side of that interaction, which is one of the reasons why we've seen this take off in some countries where the cost of labor.
Relatively low but.
You can imagine in a world where every business has an AI agent.
We can see the kind of success that we're seeing in <unk>.
<unk>, Vietnam with with business messaging could kind of spread everyone I think thats quite exciting, but overall I think we're going to follow.
Playbook, that's similar to what we normally do on product.
In terms of how quickly some of these new product scale, that's one of the big unknowns for the business and.
One of the things that we're debating heavily when thinking through the amount of capex to bring online because the reality is we just don't know how quickly. These will scale and we want to have the capacity in place in case, they scale very quickly.
But because they're kind of brand new things there arent that many precedents for things like this it's actually quite hard to forecast.
I don't know if Susan if theres anything on that last point that you want to jump in on but I think.
That's probably all I'll say on this for now, but I'm really excited about the second if this is just going to be.
Fits into all the different products that we're building really well I think that this is going to both complement and touch and transform every single thing that we're doing.
And I'm really excited for it so.
Tune in to connect.
Your next question comes from line of Eric Sheridan with Goldman Sachs. Your line is open.
Thanks, so much for taking the questions maybe one for Mark one for Susan Mark just following up on Brian's question I did want to ask.
Just to draw that out a little bit more how you think about the extensions of the developer community sort of growing up around a platform like Lama too and we were intrigued by the Microsoft announcement, you've traditionally been more of a consumer facing company was product could this provide you an avenue to be more of an enterprise.
And company over the long term and is there a strategy there maybe we haven't seen from you in the past I'd love to flush that out a little bit and then Susan just one for you David.
<unk> losses, just continue to build and I think we continue to struggle a little bit of what the drivers of those losses are and how should we think about some of the components driving the losses versus elements of earning a return on those losses over the medium to long term.
As mark sort of frame the timeframe around meta versus so let me color there about sort of rate of change or components of the losses in BRL I think will be super helpful. Thanks, So much Steve.
Yes, sure I'll take a cut at both of those and Susan can jump into the second one if there's any if theres anything that she wants to add there as well.
Alright, so llama is.
And open source project, which is a little bit different from building out a developer platform, although there will be an ecosystem around this.
What we've seen around open source work that we've done which we've done a lot of our core infrastructure work design of servers, and Datacenters and and basic infrastructure as well as in AI and I pointed out some of these in my remarks upfront like pie torch and and just a bunch of other models that we've released recently.
One of the things that we've seen is that when you release. These these.
These projects publicly and open source there.
There tend to be a few categories of innovations that the community mix. So on the one hand, it's I think it's just good to get the community standardized on on the work that we're doing.
That helps with recruiting because a lot of the best people want to come in and work at the place that is building the things that everyone else uses it makes it that people are used to these tools from wherever else. They are working that can come here and built here.
In terms of improvements that we expect to see from the community.
There were really a few different types.
One is specific around safety and security, it's a very important issue and AI.
And open source software overall, we've just seen through the history here that open source software gets scrutinized more and therefore ends up being more secure and safer and we think that there is a.
A very good chance that as the likely outcome here and whatever improvements that people make to harden it and the community will be able to roll that in to our work both for the first party products that will launch as well as making it easy to propagate that across the industry and make the AI that everyone uses safer.
I would also hope to see efficiency improvements I mean, even from the initial Lama that was just released as a research project. Some of the improvements were around things like quantization and being able to run the model.
More efficiently now we're spending so much on AI capex that all the help that we can get from the community to make this stuff more efficient to run will be helpful. Not just for individuals to build to run powerful models on their laptop or locally or without a huge amount of compute.
Individuals can afford it but that should hopefully translate over time into.
Just a more efficient infrastructure for us, which hopefully could be quite a big savings.
So that's more of what we're seeing there.
We partnered with Microsoft specifically, because we don't have a public cloud offerings. So this isn't about us getting into that it's actually the opposite.
We wanted to work with them because they they have that and others have that and that was the thing that we did we arent planning on building out, but one of the things that you might have noticed.
Is.
In addition to making this open through the open source license. We did include a term that for the largest companies specifically ones that are going to have public cloud offerings that.
They don't just get a free license to use this they they'll need to come in and make a business arrangement with us and our intent there is no.
We want everyone to be using this we want this to be open, but if you're if you're someone like Microsoft or Amazon or Google and Youre going to basically be reselling. These services.
Something that that we think we should get some portion of the revenue for so those are the deals that we intend to be making and we've started doing that a little bit I don't think that thats going to be a large amount of revenue in the near term, but over the long term hopefully that can that can be something.
I'm not sure if there's anything else to add on that but Susan you can jump in if you want on <unk>, Let me just jump over to that for a second.
I don't think we're going to break out numbers right now, but I'll defer to Susan on that I mean, one big thing for the next year is that it's a long story right and basically this is going to be the biggest.
Headset that we've released since 2020.
When we came out with quest.
Quest too.
And there are just a lot of expenses related to bringing that to market and I think that's at least in the in the near term going to be one of the one of the major drivers of this.
So I think that's probably the main thing that I would point to there.
We're continuing to two.
I continue to think looking at the VR work that we're doing in the artwork.
Some of the neural interfaces work I think we are leading in these areas.
It's been good to see what others in the industry have done because to some degree it it gives us more confidence that we're on the right track.
And even though I know from an investor standpoint, most people aren't investing on quite as long of a time horizon. As we are here. So I kind of get that a lot of investors might want us might want to see us spending less here in the near term. My view is that we are leading in these areas I believe that theyre going to be big.
Over time.
Where I think we've shown that we can deliver good business results in the near term while investing ambitiously in the long term. So I'm planning on continuing to do that and I do continue to believe that over time, we will be happy that we did that so I don't know if Susan if there's anything you want to either sure. Let me just add a couple of things very quickly on the first question I just wanted to.
Clarify that we don't expect that Lama is going to result in a separate topline enterprise revenue lines. So just making sure we're totally clear.
On the second question about the growth and reality labs operating losses in 2024, Mark alluded to the fact that this is an ambitious long term horizon multifaceted roadmap there.
There are lots of components to the reality labs portfolio across VR, AR meta versus social platforms neural interfaces.
And we really have a long term time horizon for evaluating the return on our investments here. So in the near term we're focused on growing adoption of the existing products and we're constantly learning more about demand and use cases that inform our future plans, but a lot of the investment that's driving the growth here is around conducting the fundamental R&D too.
<unk>.
Car technology problems that are going to enable our vision here alive is around clearing technical hurdles that will make.
Meg subsequent devices smaller cost less way less.
Et cetera, So that's really on the reality lab side.
Again, as we said, we expect operating losses to increase meaningfully year over year in 2024, and 2024, specifically I think that will be driven by a combination of both head count related and operating costs, but again, our ambitions in reality labs Havent changed and it continues to be a significant long term opportunity for us.
Your next question comes from the line of Mark Shmulik with Bernstein. Your line is open.
Great. Thanks for taking my question.
Yes.
Like a month ago, we werent talking about real quarter ago, we were talking about labor and start of the year. We were barely talking about AI well. If you think back to kind of just how you are prioritizing your time at the start of the year kind of where you are today and how that kind of change would love to just get some color on kind of the changing priorities.
Where youre spending your time.
And then the second question really impressive obviously acceleration growth in kind of the core ad business.
Let me just get some color kind of be on the vertical contribution what are you seeing in terms of kind of adoption of advantaged products really driving some of that.
Improved growth, especially what we've seen relative to the rest of the sector. Thank you.
Yes, I can I can start with the first and then Susan can take the second.
I actually think our priorities have been pretty consistent for a few years now.
I think the way that people here that might be different.
But.
For example, last year I think we were getting quite a bit of critique for the volume of AI Capex spending that we were doing and now.
Obviously people want to understand where that's going and where we think that trajectory is going and want to make it as efficient as possible, but I think at this point.
It's more well understood that that.
I think that was a good investment and it's driving results in the near term and enabling us to build some of the new experiences that I think we all think or are pretty fundamental I don't think reels as new although maybe you meant threads. When you said that threads I would say it.
It's not that threads is like it.
It's not a massive projects it was.
I've thought for a while that there.
Uh huh.
That.
The opportunity around public conversations and kind of a tech space product was bigger than what had been executed yet in the market. So we had a relatively small team work on that and this year I think there have been two things that have been that are just vastly exceeded my expectations one was llama.
The initial model.
We thought it was interesting, but the scale of adoption, even just for the research version really spurred us to go do Lama too and that was vastly more than we expected in the second as threads has been.
Dramatically more than we expected in terms of the adoption and the rate of that we thought this was going to be kind of a project that we just we.
We had a small team working on for a while but it really kind of blew up and created a big opportunity immediately.
But no I mean, I think overtime you should expect that we're going to focus on AI and the meta versus AI includes both all of the ranking and recommendation systems that power. The core apps. So all the content that youre seeing in Facebook and Instagram all the ads content that you are seeing it's also underpins all the safety systems that we build.
And increasingly it's all of the generative AI stuff. So all the agents all the generative features that we're going to be rolling out in a lot of the other work that's going to underlie some of the efficiency stuff that we're doing internally and then the metaphor stuff I think we've talked about for a while so I don't think theres much change there except that I'd say the signals that we're getting from the market are.
It's certainly not.
Getting adopted a lot faster than we expected.
Sort of the somewhat.
So bring signal, but on the other side I think a lot of companies that otherwise are doing.
We respect and do great work, we don't necessarily view is building things that are ahead of where we are which gives us confidence that we think that the long term thesis still will hold there.
Think that we're going to be the leaders in it.
Nothing that we're seeing from the market makes us rethink that in a fundamental way. So I think we're going to we're going to continue focusing on AI and the meta versus the two big thrust of what we're doing and all the other things in our kind of fall out of it.
And Mark I'll take the second question that you asked around the Q2 revenue acceleration. So I think there were a couple of parts one was around the acceleration in the core ads business. The second was on the advantaged plus products.
Terms of the Q2 revenue acceleration I'd highlight there are a few factors driving that the first is frankly, we are lapping a weaker demand period, including the first full quarter of the war on Ukraine, and the suspension of our services in Russia.
Second we saw increased supply and improvements to add performance, including improved wheels monetization as we continue to work down the <unk> revenue headwind and third there were lower FX headwinds for us on this corner. So those were all three things that that helps drive the revenue acceleration in Q2.
In terms of the question about advantage plus.
Advantaged plus specifically.
Advantage plus is one of multiple AI powered AD products that we have right now in the market with.
With advantage plus specifically, we're seeing strong adoption in particular success with the E Commerce and retail verticals and then we've seen good traction with other verticals like CPG, especially DTC brands and we're continuing to launch features to unlock use cases for advertisers and make it easier for them to adopt advantaged plus campaigns and measure.
Their performance gains so we've got a lot in the pipeline there that we're excited about.
For both the advantage plus shopping campaigns, specifically, which were our first sort of foray into this this area, but then the advantage plus portfolio more broadly that basically enables us to take that same playbook of helping advertisers iterate and test very quickly and apply it to many different steps of the <unk>.
<unk> AD buying experience so the feedback and results that we've seen from advertisers is good.
We think it's a really promising area that we're continuing to invest in but it's one of many ways that we're using AI to continue to sort of help make our ads on systems and recommendations and ranking engines more performance to deliver better measurement and results to advertisers.
Your next question comes from the line of Justin Post with Bank of America Merrill Lynch. Your line is open.
Great. Thank you for taking my question I guess I wanted to follow up on reality labs, passing $40 billion in losses and increasing annually next year, just think about maybe help us understand the ROI on the business. How you are thinking about that investment either on a standalone basis or as a complement to the family.
We have apps.
If you were thinking about from an investor perspective. Thank you.
Well I think it's both overtime.
The primary way that I think about this is that we've been able to show that we can.
I think been quite successful at building large scale social experiences.
Within the constraints of platforms that often our competitors are defining.
Yes, I think we're gonna be able to do even better work and.
There's a lot of things that I would like to see us build that we just can't because of the ways that we're constrained by the competitors who build these platforms.
And over time, the main way that I think about this as from a product admission perspective is we're here to build awesome experiences that help people connect I think helping to shape. The next platform is going to unlock that in a profound way for decades to come and that's what I'm here to do and I think what a lot of people are here to do.
So that's kind of the first principles part of us from a business perspective, I think that there was going to end up being.
A large business component of this that is reality labs specific.
Directly the products that we're building there and having that be a good business.
But I also think that a lot of this is going to be that it unlocks a lot of value for the other experiences. The current apps that we have when you think of as the family of apps.
Where we are.
Currently just a lot of the potential value whether it's just engagement that could be created features that we would love to build that were not allowed to because apple or others, just don't allow us to build those things.
And I think that that's really unfortunate for the industry.
I think that Theres a lot of lost engagement that would have happened.
A lot of the monetization and value that gets created I mean, just look at what happened with that App trucking transparency.
Massive value destruction for small businesses.
Because of the rules that were set by another platform and that's not.
That's not.
And in a future version of the World It's not.
That would be recognized not by device sales or some new like experience that we're building in reality labs, you would you would basically see that accrue through.
More efficient monetization of the apps and experiences that we're that we're building in other places. So I think it's going to be both but I think this is just a very fundamental thing. This is a very long term bet.
At a deep level I understand the discomfort that a lot of investors have with it because it's just outside of the model of.
But I think even the most long term investors how you would think about this.
And look I mean, I can't guarantee you that I'm gonna be right about about about this debt.
I do think that this is the direction that the world is going in.
1 billion or 2 billion people, who have glasses today I think in the future, they're all going to be smart glasses and like and.
All the the time that we spend on Tvs and computers, I think that's going to get a more immersive and look something more like VR in the future.
And I think that what we're seeing is richer ways for people to communicate across even the mobile apps that we have going from text to photos to video is just continual trend towards being more immersive.
Like all of these trends lineup to make me think that this is the right thing.
I think we're going to be happy that we did this.
So that's kind of how I think about it both from kind of a mission and product perspective, a business perspective and investment timeframe perspective.
But I also understand the.
The discomfort that some folks have with something that I can't put exact numbers on a near term time horizon around.
Your next question comes from the line of Doug Anmuth with Jpmorgan. Your line is open.
Thanks for taking the questions one for Mark one for Susan Mark you touched on it a bit but can you just talk a little bit more about what you've learned some threads early on not just for that product specifically, but also as we look to leverage the family of apps platform to launch additional products overtime.
And then Susan you lowered the Capex outlook. This year by $3 billion can you just provide more color on the delays in projects.
And then in 'twenty, three and is there any way to frame how meaningful the capex increase could be in 24. Thank you.
Yeah on threads.
Okay.
It's maybe too early to.
Due to this kind of analysis.
Yeah.
On the one hand, we've tried a bunch of standalone experiences over time and in general.
We haven't had a lot of success with building kind of Standalone apps.
The biggest exception to that of course is messenger, but that started office functionality inside Facebook and was spun out.
So pardon me wonders if this is just a kind of classic.
Venture capital portfolio question, where you try a bunch of things in a bunch of them don't work in.
And then every once in a while one hits in is a much bigger success.
It could be that.
Or it could just be that this is such an idiosyncratic case because of all the factors that are happening around.
Twitter.
Or.
I guess, it's called now.
<unk>.
So it's hard it's hard to say, but I think when something works or doesn't that you can often point to the reason why it did or didn't in there I think is an interesting intellectual question of whether you could have known that.
A priori.
Was actually going to be the case.
But so.
So I'm not sure but also.
Other than trying to kind of analyze that I'd say, we have a lot of work to do to really make threads reach its full potential that's not a foregone conclusion, yet even though I think we're off to a.
Great start and I'm optimistic that over time this could be a fifth.
Great off in the family of apps, but.
But we have a lot of we have a lot of basic work to do and we have.
Our basic playbook here, which is build an experience it's got to be something that people like so it has to have product market fit once you get that.
It's not always retentive, so a lot of people might might like.
Like an experience, but you need to kind of tune it that way the numbers work so that people who use it or are continuing we feel like we're getting to a good place on that with threads are there's still a lot of basic functionality to build once we feel like we're in a very good place on that then I'm highly confident that we're going to be poor.
You don't know if gasoline on this to help it grow once we get to the point where.
We're we feel good that that everyone who is using it is going to continue using it at a high rate.
Then.
Okay.
A few years once we get to the point, where it's at hundreds of millions of people. If assuming we can get there then we'll worry about monetization, but that's basically the playbooks that that I'm.
That we're focused on and so rather than thinking about right now like what does this mean for other things like it that we can build I'd say, we're really just focused on taking this opportunity which is.
And then also one that we didn't expect to this the scale.
And making sure we make the most of this and executed but I do think it has been sort of this weird anomalous thing in the tech industry that.
There hasnt been an app for public discussions like this that has reached 1 billion people when I look at all the different social experiences. It just seems like there should be one like this.
I think there were a lot of reasons that you can point to why that might have not been the case historically, but.
It's awesome that we get a chance to work on this and I'm really optimistic about where we are but it's gonna be a long road ahead.
And Doug on your second question about our 2023, Capex forecast and the impact on 24, So I'll start with 2023, the reduced forecast that we gave for 'twenty three I mentioned on the call is driven both by some cost savings.
Particularly on non AI servers, where.
We previously had some underutilized capacity and we've been identifying ways to be more efficient in the way that we allocate that capacity towards all of our various needs.
As well as shifts in Capex into 2024, that's coming from delays in data center projects in server deliveries and that'll just push that associated Capex, which we were planning for in 'twenty three into 'twenty four.
We're still working on our 2000 and for Capex plans, we haven't yet finalized that and we'll be working on that through the course of this year, but I mentioned that we expect that capex in 'twenty four will be higher than in 'twenty. Three we expect both data center spend to grow in 'twenty four as we ramp up construction on sites with the New data Center architecture that we announced late last year.
And then we certainly also expect to invest more in servers in 2024 for both AI workloads to support all of the AI work that we've talked about across the core AI ranking recommendation work along with the Nexgen AI efforts and then of course also our non AI workloads as we refresh some of our servers and add capacity just to support <unk>.
<unk> growth across the site.
Your next question comes from the line of Youssef Squali with twist. Your line is open.
Great. Thank you very much for taking the question one for Mark and one for Susan maybe Mark you touched on this earlier, but there is this.
We will control this debate going on as one of the companies on one side of it.
And two how do you see this market evolving over time.
One approach.
Potentially superior to the other and therefore may be likely to garner greater adoption or is this really a win win situation just considering how early we are.
This process and how long is the potential.
And then your guidance for Q3.
At the midpoint about a 20% growth.
Steep acceleration from Q2 of 11 or 12% could you maybe just help us understand the drivers of that acceleration and as we look into Q4, the comps remain pretty.
Is that sustainable into Darren Thank you.
Yes, I can speak briefly to the first one I do think that there will continue to be both open and closed.
AI models.
And there were a bunch of reasons for this.
There are obviously a lot of companies that their business model is to build a model and then sell access to it so for them, making it open would undermine their business model that.
That is not our business model, we want to have to look we view the model that we're building.
The foundation for building products. So if by sharing it we can improve the quality of the model and improve the quality of the team that we have.
That is working on that.
That's a win for our business.
Basically building building better products.
So I think that you'll see both of those models.
There are also some important safety questions that I think we will need to continue thinking about over time.
There are a number of people who are out there saying.
That you know once the AI models get past a certain level of capability. It can become dangerous for them to become just in the hands of everyone openly.
I think it.
What I think is pretty clear is that we're not at that point today I think that theres consensus generally among people who are working on this in the industry and policy folks that were not at that point today and it's not exactly clear at what point do you reach that so I think there are people, who are kind of making that argument and good faith, who are actually concerned about.
The safety risks I think that there are probably some.
Businesses that are out there, making that argument because they want it to be more close because that's their business. So I think we need to be wary of that.
But I think for both of those reasons the business reasons and the safety reasons I think there will be continue to be.
Mix of of opened and closed models and it's not just going be that like one thing.
As whatever and uses I think different businesses will use different things for different reasons.
Bye Bye open sourcing walnut now.
Not on the second question around safety, where we intentionally did not go out there and say we're going to open source every single thing in the future because we do want to have the space to be able to look at it how the safety landscape evolves.
We think that we do cross some some kind of critical thresholds in the future. It may not be the right thing to open source it in the future, but for our business model at least.
Since we're not selling access to this stuff, it's a lot easier for us to to share this with the community because it just makes our products better and in other People's nuts.
Got it because it really healthy dynamic for the industry.
And thank you for your second question, which I'll take you asked about our Q3 revenue outlook and maybe also what that implies looking forward into Q4. So on the further acceleration that we've.
Although we have guided to in Q3 first of all I just point out that Q3 'twenty two revenue declined four 5% year over year. So were really lapping a much weaker demand period, a year ago, and we've certainly seen demand this year stabilize and so it's really a much easier compare we also are expecting that currency is going to.
Flip to a three point tailwind from a one point headwind last quarter and finally.
As I've mentioned earlier.
Earlier on this call we've been investing for a long time, and I think executing really well.
Across our core monetization work in continuing to grow engagement and I think we're going to benefit from all of the investments that we've made in those historical and key priorities for us.
In terms of what this means for Q4, we're not sharing a Q4 revenue outlook yet there are obviously some tailwind to you every year growth in Q4 again, the same point about a weaker compare applies and at current rates FX would be a larger tailwind in Q4 than we're expecting it to be in Q3.
But we've had sizable fluctuations in advertiser demand over the last year, it's been a pretty volatile period. So while we're seeing strong advertiser demand now and Thats certainly informing our outlook.
It's harder to predict as we look further forward and there are a wide range of possible outcomes in Q4.
We have time for one last question.
Thank you Ken that will come from the line of Brad Erickson with RBC capital markets. Your line is open.
Yes. Thanks, I just had a follow up I guess on the Capex just in that planning process, you keep alluding to for the 'twenty four Capex outlook I think a lot of your commentary implies that new product. It sounds like youre going to be really central to instructing that number just curious how dependent it also means based on just the revenue.
Growth in 'twenty, four and the relationship there.
Yeah. Thank you Brad I can go ahead and take that one so our growth in AI investments is really the thing that is driving the growth in our 2024, our capex outlook and I think there are a couple of components to that you know there is both a core AI work, which powers, our ranking and recommendation.
<unk> systems, which underpins both a lot of our content ranking and engagement growth as well as the monetization work and Thats an area, where we're able to measure the ROI of our investments there and we feel good about the ROI of those investments and we want to continue investing appropriately to drive revenue growth at the.
Same time being mindful of our desire to over the long term decrease capital intensity.
There's also another component, which is the next generation AI efforts that we've talked about around advanced research and Jen AI and that's a place where we're already standing up training clusters and inference capacity, but we don't know exactly what will need in 2024 since we don't have any at scale deployments yet.
Consumer business facing features and the scale of the adoption of those products is ultimately going to inform how much capacity. We need. We think these are both going to be a compelling investment opportunities and some of the AI capacity is fungible. So if we don't need end up meeting some of the some of the capacity for our Gen. AI work, we'll be able to allocate it to our core AI.
Work supporting adds and engagement.
But we're really still working on our 24 plans, we will have a clearer and more quantitative outlook.
As those plans shape up but we are mindful of our our intention to reduce the capital intensity of these investments over time.
Thank you for joining us today, we appreciate your time and we look forward to speaking again soon.
And this concludes today's conference call. Thank you for joining US you may now disconnect your lines.
And this concludes today's conference call. Thank you for joining US you may now disconnect your lines.