Q2 2019 Earnings Call
Good afternoon, My name is Mike and I will be your conference operator today.
At this time I would like to welcome everyone to the Facebook second quarter 2019 earnings call.
All lines have been placed on mute to prevent any background noise.
After the speakers remarks, there will be a question and answer session. If you would like to ask a question during that time. Please press Star then the number one on your telephone keypad. This call will be recorded. Thank you very much ms., Deborah Crawford Facebooks, Vice President Investor Relations you may begin.
Thank you good afternoon, and welcome to Facebook second quarter 2019 earnings Conference call.
Joining me today to discuss our results are Mark Zuckerberg, CEO , Sheryl Sandberg, COO and Dave Rayner CFO .
Before we get started I would like to take this opportunity to remind you that our remarks today will include forward looking statements.
Actual results may differ materially from those contemplated by these forward looking statements.
Factors that could cause these results to differ materially are set forth in today's press release and in our quarterly report on Form 10-Q filed with the SEC.
Any forward looking statements that we make on this call are based on assumptions as of today and we undertake no obligation to update these statements as a result of new information or future events.
During this call we may present, both GAAP and non-GAAP financial measures.
A reconciliation of GAAP to non-GAAP measures is included in todays earnings press release.
The press release and an accompanying investor presentation are available on our website at Investor Day, SB Dotcom and now I would like to turn the call over to Mark.
Thanks, Deborah and thank you all for joining today.
This was an important quarter for us our community in business continue to grow and there are now more than 2.7 billion people using Facebook Instagram Whatsapp and messenger each month.
More than 2.1 billion people for use at least one of our services each day.
We continue to focus on our four priorities for the year.
Making progress on the major social issues building qualitatively new experiences building, our business and communicating what we stand for and more transparently.
I'm going to focus on the first two priorities today, but first I want to talk about the recent news that we reached a settlement with the FTC over privacy concerns.
As part of this we've agreed to pay a 5 billion dollar fine, but even more importantly, we're making some major changes to how we build our services and run this company.
This will require investing a significant amount of our engineering resources and building tools to review our products and the ways we use data.
We will also significantly increase our accountability by bringing the process for auditing our privacy controls more in line with how financial controls work at public company as its Sarbanes Oxley.
We'll have to certify quarterly there were meeting all our privacy commitments.
Just as we have an audit committee of our board overseeing our financial controls. We will now also having new privacy committee of our board that will oversee our privacy program and work with an independent privacy Auditor. They will report to this new committee and to the FTC.
We're asking one of our most experienced leaders and product to take on the role of Chief Privacy officer for product reporting to me and managing our privacy program will also be more rigorous and monitoring developers to access data through our platform together. We expect these changes will set a new standard for our industry.
This is a major shift for us.
We build services billions of people trust everyday to communicate with the people they care about.
Privacy has always been important to the services, we provide and now it's even more central to our future vision for social networking.
Critical that we get this right and we're going to build it into all of our systems.
It's going to take time to do this properly and I expect it will take us longer to ship new products, especially while we're getting this up and running.
I also expect that just as with the work we've been doing on safety and integrity, we're going to continue to identify and fix issues as we develop our systems.
But our goal is to build privacy protections that are as strong as the best services, we provide and this settlement gives us clear requirements moving forward.
Now.
Turning to our company priorities.
Our top priority is making progress on the major social issues facing the internet, including privacy and also elections harmful content data portability and more in all these areas Ive advocated that I believe that the internet would benefit from governance setting clear rules.
I don't believe it's sustainable for private companies to be making so many decisions on social issues without a robust democratic process.
Either the REIT regulations will get put into place or we expect frustration with our industry will continue to grow.
This quarter I spent time in Europe talking with policymakers about how this could work.
I met with President Macron to discuss a framework for harmful content. This is an area where I believe there could be an effective public process led by democratically elected governance in Europe .
And perhaps in the U.S. a process for industry standards and self regulation.
But we're not waiting for regulation to increase independent oversight.
We just released our third transparency report, which shows the progress we're making on many categories of harmful content, including hate speech and graphic violence.
But also the areas, where we still need to do better like bullying and harassment.
I believe more companies should release transparency reports that enumerate the prevalence of harmful content on their services.
This would help companies and governments design better systems for dealing with it.
After next year, we're going to publish these reports quarterly so people can hold us accountable at the same cadence as these earnings calls.
We're also moving forward with our plans for an independent oversight board for decisions on content.
I believe it's important that people can appeal the decisions that were creating systems that are transparent and that people can trust.
We've been working with experts on freedom of expression around the world and we've gotten a lot of public input on how this could work, which we published a report last month.
We expect to form this oversight board by the end of this year.
We also continue to invest heavily in protecting elections, including more advanced efforts to stop coordinated in an authentic behavior, new adds transparency tool and more fact checking partnerships.
Our adversaries are continually getting more sophisticated recent elections in the EU and India showed that our efforts are working.
After the recent you elections, the former president of the EU Parliament said, we met the commitments to fight election interference that I made in my testimony to the EU Parliament and that thanks to our efforts the elections were much cleaner online.
We'll continue building on these efforts as we approach the 2020 us elections to make sure that we stay ahead.
Next I know, there's a lot to discuss in terms of policy, but I also want to discuss our second priority delivering qualitatively new experiences for our community and there are few efforts here that I'm, particularly excited about.
The first is our privacy focused vision for the future of social networking, starting with secure private an interoperable messaging.
We're very focused on delivering this over the next five years building on the foundation that we have with messenger and Whatsapp.
With messenger, we're rewriting the app from scratch to make at the fastest and most secure major messaging platform in the world and we're working towards making antennas encryption and reduced permanence the default for all conversation.
With that foundation, we are starting to explore our private social platform could become the center of your social experience for example by bringing together all of your femoral stories from your different apps into one place.
We're also building things like the ability to co watch videos together. This shows have something like video chat, which is growing quickly as a basic way that we all communicate can become more of a platform for more ways, we want to interact privately in the future.
With Whatsapp, which already has incredibly strong privacy and performance.
We're more focused on building out all the way you'd want to interact in this digital living room.
What's up status is already the most popular ephemeral stories product in the world and we continue to see good momentum there with millions of small businesses using what that business. We're also building new tools like product catalogs that entrepreneurs around the world can use for free.
This matters, especially for the growing number of small businesses that don't have a web presence or that use private messaging platforms like whats app as their main way of interacting with customers.
This connects to the next product area I'm very excited about which is commerce and payments.
These are huge and important spaces and we have efforts in several major areas to deliver qualitatively better experiences than what exists today from Instagram shopping Facebook marketplace to payments across our apps. It's the new Libra project that we announced a 27 other companies recently.
These efforts are important both for our product experience and for our business.
Once people connected to their networks on social platforms. One of the biggest questions is how can we help them use those networks that theyve created to create opportunity and what are the best ways that we can do that is through commerce.
Instagram shopping will improve the experience of browsing and shopping from your favorite brands and creators, while also giving emerging creators a powerful new way to build a business and sustain their community.
Facebook marketplace gives people a way to buy and sell goods and a trusted network with real identities.
Hundreds of millions of people, who are already using marketplace monthly.
We're also building ways for people to interact with businesses through messaging like what's that business.
These people don't like having to call businesses and would rather engage asynchronously over messaging as possible.
Payments as a part of this that I'm, particularly excited about.
When I look at the kinds of private interactions that we can make easier payments may be the most important for the long term, we're continuing to test payments on whats happened India.
And our close to launching and other countries as well.
In the future will enable people to use the same payments account to send money to friends and businesses on what that shop on Instagram or make transactions on Facebook being able to send money as easily as you consider photo will open up new opportunities for businesses.
More broadly.
I believe that there is an opportunity to help a lot more businesses access financial tools.
Last month, we announced that we were working with 27 other organizations to form the Libra Association. The association will create a new currency called Libra, which we powered by block chain technology. The Libra Association will be independent to Facebook or any other member.
We plan to support this currency across our services.
The goal is to empower billions of people around the world, who use services like with that but might be excluded from banking services with access to a safe stable and well regulated crypto currency.
There were a lot of possibilities here and both Facebook and the association plan to work with regulators to help address all of their concerns before libra will be ready to launch.
We worked with other prospective members of the association to release, a white paper outlining the LIBOR concept in advance specifically so that we could address these important questions out in the open and we're committed to working with policymakers to get this right.
The third product area I want to highlight where we're focused on delivering a qualitatively better experience than what exists today isn't the future computing platforms have augmented and virtual reality.
This quarter, we shipped Oculus quest, our first all in one headset with no wires and full freedom of movement.
It has gotten great reviews, and we're selling them as fast as we can make them.
More importantly, we have delivered an experience that people keep using week after week and buying more content.
There's still a lot more work ahead to develop this ecosystem and deliver the future VR and AR products that we dream of but this is an important milestone in a few years, we've improved the state of the art from the original rift, which cost $600 and required to be tethered to a $1000 PC to now quest, which costs $400. All in and is a superior experience in many ways.
There's going to be even more innovation over the next few years and we now have the platform that we're going to build on going forward.
The reason augmented and virtual reality will deliver a qualitatively better experience than traditional computing platforms that they deliver the feeling of presence that you're actually there with another person or in another place.
The feeling of presence is so important to social interactions and how we're wired to interact as people.
So even if it is taking longer than we expected to deliver this at scale.
I continue to believe that this will be one of the most important contributions we make the way we all use technology over the long term.
So that's my update on our work on the major social issues, we face and building new product experiences. We've made a lot of progress this quarter and I have a lot more ahead, our business continues to perform well and Sheryl is going to talk about that more in a minute.
But this was also an important quarter because now we have a clear path forward.
Not just in terms of product and business, but in terms of guidance from regulators, which set clear expectations and gives US a foundation to build on.
As always thanks for being on this journey with us and now here is share.
Thanks, Mark and hi, everyone.
It was a strong quarter for our business.
AD revenue grew 28% year over year, and we saw strong growth across all regions and on both Facebook and Instagram Mobile AD revenue was 15.6 billion contributing approximately 94% of total AD revenue.
As we've been discussing we're making significant investments in safety security and privacy, while continuing to grow our community and our business.
We know we still have a lot of hard work ahead of us.
But this quarter once again shows that we can do better.
We are committed to earning back trust through the actions we take.
In the lead up to elections around the world. We're doing all we can to get ahead of Fracs and developed smarter technology.
The European Parliament elections in May were important task for us.
We created an operation center in Dublin to bring our experts together and make decisions quickly.
We also work closely with third parties across the EU, including 21 fact hacking organizations.
As Mark shared these investments are starting to pay off and we remain committed to doing everything we can to stop bad actors.
We are also focused on increasing transparency.
At the end of June we made our transparency tools available globally for adds about social issues elections or politics.
These tools show, who paid for an AD how much they sense and you saw the AD.
Helping people understand his trying to influence there that will help us better defend against foreign interference and other abuse.
We're going to continue to make investments to protect our platform because it's the right thing to do and it's good for our business over the long term.
At the same time, we are focused on growing our business by helping advertisers grew theirs.
Consumers often adopt new technologies first and our competitive advantage is helping advertisers reach people where they are.
We help businesses make the shift to mobile and now we're helping them shift to stories video and eventually messaging.
We know that it's not enough to make these new formats available.
We also need to make it easy for advertisers to create effect that.
We do this by launching new AD products and by improving our existing ones to deliver more value for people and advertisers.
One of our goals is to level, the playing field for businesses of all sizes.
We give small businesses free tools that previously only the largest companies could access.
During national small business week in May we introduced automated adds to take the guesswork out of creating effect to that.
Advertisers answer a few questions and get a customized marketing plan with up to six creative options targeting suggestions on a recommended budgets.
We also launched new video editing tools to help Smbs quickly create eyecatching video with images they already have.
Burn wood fitness chain of women's health clubs and Australia use these tools.
To build a mobile first campaign.
Hey targeted women interested in fitness and as a result, nearly doubled their conversion to new membership.
We're also focused on improving our existing on products.
We often get feedback from advertisers about how we can make small adjustments to our tools to better serve them.
These basis point improvements allow us to create more value for businesses overtime.
For example, we first rolled out our dynamic ads format four years ago and since then we have adapted the format to the needs of different verticals and surfaces.
Frontier Airlines use dynamic ads to connect with travelers, who recently looked at sites online budgeting Buck.
This contributed to a nearly 3.5% increase in AD related bookings and a 2.5 times increase in AD related revenue.
This quarter, we launched our latest variation dynamic ads on Instagram stories, which show people ads for products, they've already brands on a retailer's website or at <unk>.
We're constantly making incremental improvements to Facebook feed ads.
This quarter, we improved how quickly we refreshed the ads people see.
In the past these ads were pre selected at the beginning of a feed section.
<unk> session.
Now the ads are refreshed while people are scrolling through their feet.
This means people get more relevant ads, which improves engagement and delivers a better return on investment for advertisers.
In addition to improving our AD tools, we're investing in new ways for people to discover product engage with brands and sharpen our platforms.
On discovery more than 50% of accounts on Instagram use explore every month to discover photos and videos related to their interest.
This quarter, we started rolling out ads and explore on Instagram.
This will give us businesses chance to reach new audiences in a place where they are already spending their time and learning about new products.
On engagement, we're making it easier for people to connect with the brands and Influencers They love.
Last month, we launched branded content ads on Instagram, which allow businesses to promote creators posted CDAD.
Brands like old Navy Sephora and Jack in the box are reaching new audiences at these ads.
Soon will expand this option to that advertisers can do the same in stories.
On shopping we're building new ways for people to shop directly on our App.
We're continuing our closed beta of checkout on Instagram and we launched a new feature this quarter that enables creators to tag products and their post.
This gives people an easy way to shop from their favorite creators without leaving the app.
It's early days for shopping on Instagram, but we're excited about this over the long run.
I want to close by saying, how grateful I am to our partners around the world.
Everyday they give us valuable feedback on how to improve our products. So we can help them grow their businesses.
I also want to thank the Facebook team to drive that growth and are making progress on the major social issues facing the internet and our company.
I am grateful for our team's tireless work indeed commitment.
Thanks, everyone and here's Dave.
Thanks, Sheryl and good afternoon, everyone, let's begin with our community metrics Facebook daily active users reached 1.59 billion, that's up 8% compared to last year led by growth in India, Indonesia, and the Philippines. This represents approximately 66% of the 2.41 billion monthly active users in Jan and they use grew a $180 million or 8% compared to last year.
In terms of our family metrics, we continue to grow and estimate that on average more than 2.1 billion people used at least one of our apps on a daily basis in June and more than 2.7 billion people were active on a monthly basis.
Turning now to the financials all comparisons are on a year over year basis, unless otherwise noted.
Q2, total revenue was $16.9 billion up 28% or 32% on a constant currency basis had foreign exchange rates remain constant with the second quarter of 2018 total revenue would have been approximately $574 million higher.
Q2, total AD revenue was $16.6 billion up 28% or 32% on a constant currency basis.
In terms of regional AD revenue growth North America, and Asia Pacific were strongest in both grew 30% followed by Europe at 25%.
Rest of World grew more slowly at 21% and was impacted by currency headwinds.
In Q2, the average price per AD decreased 4% and the number of AD impressions served across our services increased 33% similar to last quarter impression growth was primarily driven by ads on Instagram stories, Instagram feed and Facebook newsfeed.
The year over year decline in average price per AD reflects an ongoing this mix shift towards stories ads and geography geography is that monetize at lower rates.
Payments and other fees revenue was $262 million up 36%. This year over year growth was primarily driven by sales of new products, notably Oculus quest and the rest of us.
Turning now to expenses total expenses were $12.3 billion up 66%.
This includes an additional 2 billion dollar expense accrued in connection with our $5 billion settlement with the Federal Trade Commission.
Absent this charge our total expense growth rate would have been 27 percentage points lower.
We ended Q2 with approximately 39700 full time employees up 31%.
Operating income was $4.6 billion, representing a 27% operating margin absent the FTC accrual operating margin would have been approximately 12 percentage points higher.
Our Q2 tax rate was 46% and was higher than expected due to the tax treatment of the FTC accrual and a court ruling in the IRS versus Altera case.
In that case, the ninth circuit reversed a prior tax court decision addressing the tax treatment of certain share based compensation expenses, we changed our treatment this quarter to reflect the ninth circuit opinion, which resulted in a one time income tax charge of $1.1 billion.
Net income was $2.6 billion or 91 cents per share.
Absent the impact of the FTC accrual and the Alterra ruling our EPS would have been approximately one dollar an eight cents higher.
Capital expenditures were $3.8 billion, driven by investments in Datacenters servers office facilities and network infrastructure.
We generated $4.8 billion in free cash flow and ended the quarter with approximately $48.6 billion in cash and investments.
In Q2, we bought back approximately $1.1 billion of our class a common stock.
Turning now to the revenue outlook.
We executed well in Q2 with a number of optimizations and product wins, particularly with the Facebook app that fell in our favor and help combat the overall trend of deceleration.
However, we continue to expect that our constant currency revenue growth rates will decelerate sequentially going forward.
We also expect more pronounced deceleration in the fourth quarter and into 2020, partially driven by AD targeting related headwinds and uncertainties.
Turning now to the expense outlook.
We anticipate full year 2019 expenses to grow 53% to 61% compared to 2018.
The $5 billion in accruals, we recorded in the first half of 2019 related to the FTC settlement represent approximately 16 percentage points of this anticipated expense growth.
Absent the $2 billion accrual we recorded in Q2, our 2019 expense outlook is essentially unchanged from last quarter.
I want to reiterate that our agreement with the FTC involves implementing a comprehensive expansion of our privacy program, including substantial management and board of directors oversight stringent operational requirements and reporting obligations and a process to regulate certify our compliance with the privacy program.
These efforts will require significant investments in compliance processes.
Personnel and technical infrastructure.
In addition, these efforts will make some of our existing product development processes more difficult time consuming and costly.
We are lowering our 2019 capital expenditures outlook to $16 billion to $18 billion down from our prior estimate of $17 billion to $19 billion. Our capital expenditures are primarily driven by our continued investment in Datacenters and servers.
We expect our tax rate for the remaining quarters of 2019 to be approximately 16%.
In summary, Q2 was another good quarter for Facebook, we're pleased with the further growth of our community and business, while we continue to make significant investments in privacy safety and security.
With that operator, let's open up the call for questions.
We will now open the lines for a question and answer session to ask a question press star followed by the number one on your Touchtone phone.
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Your first question comes from the line of Brian Nowak from Morgan Stanley .
Thanks for taking my question.
To the first one on the core Facebook App I was wondering could you talk a little more about the impact on engagement as well as monetization from the redesign Dave I think you mentioned some optimization product wins. So what are you seeing on the core App you guys now big White on engagement and monetization and then can you talk to us a little bit more about some of the AD targeting headwind that you foresee for you in 2020. Thanks.
Sure, Brian It's Dave I think on the Facebook on the Facebook App I'd, just say the Dia you trend paints the picture broadly for Facebook, we're seeing stability in the developed markets and growth in the developing markets.
And so.
We're continuing to see.
Solid performance on Facebook.
And we're pleased with the engagement levels that we're seeing.
Overall on the Facebook App. So so I think the first half's been solid from that perspective.
And then the second question was on the AD targeting related headwinds. So we think of those in really three components. The first is regulatory.
As you think about things like GDPR and other impacts and how those will be rolling out globally. The second is a platform changes.
As it relates to operating systems and have more of a focus on privacy from from from the operating systems and the impact that that can have on measurement and also on targeting and then the third is our own product changes as we put privacy more front and center. So really it's the compounding of those three issues that are creating headwinds that we think are going to impact us as we get later in the year and into 2020.
Your next question comes from Eric Sheridan from you yes.
Thanks, so much for taking the question maybe on a bigger broader topic for everyone on video how do you see video evolving as a consumption mechanism on older platforms in terms of how users consume video what they are attracted by second would be how that's informing you investing in video content. How should we think about the investments going forward and how that might impact gross versus margins and then third the at the opportunities on the advertising side. The video might present over the next three to five years. Thanks guys.
So I think video has been pretty important it's really follow technological change. If you think back even up to four years, you can really take a video a lot of videos buffered on your fan and now do you think about what people can do they can consume video very easily on a phone. They can share video. They can take video and so we're seeing very you know we're seeing a lot of interest along along a lot of consumer consumer products. It's also probably worth mentioning that videos within a bunch of our products. So we certainly have video in feed on people can put video and historians in different places and we also have the specific watch place where we're looking at original content I think to the second part of your question, which is how do we think about video content.
Most of the content people put up on Facebook video or other end user generated that's also true of the watch content itself. We have made some investments there in creating a more dedicated place to watch video so while a lot of the content is.
Still provided by people in a way that we are not covering costs. We do have a strategy of investing in great content that really starts the flywheel growing selling and we've been pretty pleased I mean, it's not the biggest effort anyone has but we've had some help from common tied to Tom and time to read table talk to sorry for your loss and we're seeing some really nice engagement numbers on those shows.
And the best of them actually carry over into the Facebook community because the best of the people, creating those shows and starring innovations are also engaging with basic and I think division Mark laid out for this all along is that we should do video in a pretty social way.
When you think about video ads video ads are pretty exciting because it's obviously a format that marketers have long lived I think one of the challenges. We've had is training the market that you can't just take your TV ads and put them on video I'm, sorry put them on mobile or put them into Facebook because they don't perform the same way the best TV AD is 30 seconds. It build slowly to a story the product for VR is usually at the very end the best mobile for Sadder AD on Facebook.
Guests to the main point for guests to the product in the first three seconds captures your attention much more quickly we sometimes talk about it as some stopping creative where you actually want to stop and watch I think the good news. We have here is that mobile first video on Facebook right. Now is now over 50% of video revenue. So that shows real growth people understanding the need to do it differently, but we still got a pretty long way to go on we are seeing good results I'll share. An example, Mcdonald's Mcdonald's use mobile video ads in Facebook and Youtube Facebook and Instagram feed on stories to launch a limited edition called the Big Mac range in the UK. They had a 16.5% lift in AD recall and Nielsen study showed a nearly 20% incremental reach on Facebook versus TV. So I think that shows that when video has done well. It can have a really big impact on companies large and small on our platform.
And then Eric I think you asked about margin impact.
I'd, just say that the video content budget is already factored into the guidance that we're providing on expenses.
Your next question comes from Ross Sandler from Barclays.
Hey, guys.
Can I just go back to the deceleration comment.
So I appreciate the color you just gave Dave.
At the same time, you said that the impression growth in Q2 was driven by Instagram stories Instagram seed.
And then facebooks even so.
If those are kind of the current drivers and we are likely to continue to see those us and in the future. What specifically do you see is slowing down in Fourq and 2020 is that core Facebook any additional color on the surface that might slowdown from some of these changes thanks a lot.
Sure Ross I mean, if you remember we're seeing good impression growth across.
Across Instagram.
Stories.
Instagram feed on Facebook feed so we're seeing good impression growth across all of those.
We are seeing faster growth in impressions coming from stories, and then also coming from geographies that monetize at lower rates on things like Facebook news feed so even though we're seeing good impression growth thats impression growth, it's flowing through at a lower price point.
Then then the way that growth was driven in prior in the prior year. So that's contributing to some of the deceleration specifically as we look out into the remainder of 2019.
When we get into Q4, we're going to be similar to how we had good product wins in Q2. We also had several product optimizations in Q4 that contributed to strong performance that quarter. So.
We're going to have a tougher compare on that basis.
So.
Just just broadly I think we expect the.
Revenue deceleration trend.
That said that Q2 was is not mark a reversal of that but we expect to kind of return to constant currency revenue growth deceleration as you get into the remainder of 2019.
Your next question comes from Doug Anmuth from Jpmorgan.
Thanks for taking the question one for Mark and one for Dave.
First Mark how are you thinking about the opposition that Youve received so far around Libra does that change your view of the timeframe at all in terms of rolling out the currency and then second.
Dave you talked about the higher demands of privacy.
Can you just talk about how that could impact the expense growth as you think about 2020, where in the past you've talked about more moderate expense growth for next year. Thanks.
Sure so so on Libra.
And similar to.
Our approach on some of the important social issues that we face around encryption and content regulation and things like that.
We get that these are.
Really important insensitive spaces. So our approach has been to try to have.
A very open dialog about this right if.
Facebook from a few years ago would have probably just showed up and tried to release the product on our own and now the approach on all of these fronts is to outline the ideas and the values that we that we think.
And eventual service should have.
We've opened a period of of.
However, long it takes to address.
Regulators in different experts and constituents.
Questions about this and then figure out what's the best way to move forward is and that's certainly what we're planning to do with Libra. So we we've worked with.
Divided a safe and stable and well regulated products. So thats always been the strategy and we'll continue to engage here.
And then Doug you were asking about the impact on expense growth, we're not giving guidance specifically on the 2020 expense outlook, but the privacy efforts do you require significant investments, obviously and compliance processes people and then technical infrastructure and those are factored into the 2019 operating expense outlook one of the impacts that I'd point to as its also a reallocation of resources around privacy. So that will have an impact on our overall product development as well so.
That's that's something that I'd factor in both in terms of just the overall impact to the business not purely just the expense side.
Your next question comes from Lloyd Walmsley from Deutsche Bank.
Hi, Thanks, two if I can first can you just talk to us about early learnings from the test Instagram checkout and what some of the key hurdles are to kind of scaling that more broadly and then secondly.
On on Opex It looked like you saw.
A fairly meaningful step up from Q1 to Q2, despite fairly limited.
Head count growth.
So just wondering if there's anything you would point to there.
That that might explain why.
Why those are diverging a little bit in the quarter.
I'll talk about checkout to check out is and you know we talk a lot on this call that early stage things. This is earlier than that we are in a very small closed beta.
83 brands, which for Facebook is about as small as something could be.
Obviously as I said small, but there is working with the brands were pretty excited by their feedback we're not in a rush to steal this quickly we're always focused on the consumer experience and we want to make sure. We really get this right I think the way to think about checkout is kind of in a larger picture of what we're trying to do in terms of commerce in shopping on our services and apps across the board.
Which as you know, we obviously have a lot of consumer engagement in our products and that's great. We obviously have built some good and robust.
Add tools that are helping us grow our business quarter after quarter.
If we can help people close the loop a little more so theyre looking more directly at products that makes our ads more valuable if we can help people checkout and pay for the products and even by the product. It makes the consumer experience better and also closes the loop on the data and measurement, we're going to need going forward. So we're excited about these efforts were doing a lot across the board all of them are in their early stages and we think about this primarily from a consumer and closing the loop point of view more than a monetization in of itself point of view.
And then.
Lloyd you were asking about the step up on the on the cost side in Q2 versus Q1.
A couple of things that I'd point to.
The cost of revenue was up 49% in Q2, and Thats really the flow through of depreciation that you are seeing from the big Capex build cycle that we've been in.
And thats starting to flow through in the end the cost profile of the business.
And then if you look at the DNA line, obviously that was impacted by the accrual for the FTC settlement as well as some other legal expenses, including the including the settlement so.
You had some gn expenses that were higher in the quarter as a result of that.
Your next question comes from Heather Bellini from Goldman Sachs.
Great. Thank you so much I wanted to follow up on two comments one what's the share I was just talking about related to checkout I'm. Just wondering if you could share what the feedback has been so far from the brands that are in the closed beta and how this has helped maybe some stats if they have them like how it's helped to maybe conversion for the brands that are doing it versus maybe the traditional way. They were they were selling on Instagram. If you have anything you could share there and then Dave just back to Ross's comment related to the deceleration that you're referencing I mean in the past you've given us a little bit more specificity not too much but you've said kind of mid single digits or low single digit diesel just wondering if there is any other color you could provide us here for the for the back half in 2021 year, when you're painting Miss it at a high level. Thank you.
Yeah on the checkout at beta, it's just really small and really early we definitely hear that it decreases at friction in the shopping experience, but with 23 brands in a product. That's just too small for us to take any real learnings, we are working with them on integrating the product experience for now.
And Heather on the on the deceleration.
We're we're simply guiding that we would expect that we would see constant currency.
Revenue deceleration.
Sequentially with that being more pronounced on a constant currency basis in Q4 again due to the.
Tougher comp for us in Q4.
Not giving specific specific quantitative guidance on that at this point.
Your next question comes from Justin Post from Bank of America Merrill Lynch.
Great. Thank you Mark on from the outside it's really hard to tell what's going on the regulatory environment status with regulators.
I guess good news on the FTC settlement, but but new investigations being started just wonder if you could just give us high level to to the extent you can or is the company, making progress with regulators both here and in Europe , and how you feel about that and then and then Dave If you could talk about Europe since GDPR GDPR implementation has it really been a meaningful difference in your AD revenue growth rates there versus other regions. Thank you.
Sure. So I can talk about the regulatory picture overall.
Over the last few years, we focused a lot on.
A number of major social issues everything from preventing election interference too.
Reducing harmful content to protecting privacy.
Now I'm I'm out talking a lot about data portability and on each of these I think that the.
There is work that we can do and we certainly have a responsibility to to really make sure that we performed well on them.
But at the end of the day.
When our systems are mature, they're still going to be tradeoffs between important value that we that we all have seven on content between a free expression and.
Civil discourse, and and we're moving hate and things like that it is not those are hard questions that.
At some level, where we're always going to do the best that we can but we think that having a more democratic process for.
Setting with some of those norms are would be helpful.
On privacy there are really important.
Questions about how you define what you want the system to be in terms of how much are you locking down data versus are you, making it possible for to enable competition and innovation and academic research and things like that so we believe that there needs to be a regulatory framework in place for each of the major issues that I, just talked about and my broader concern.
Is that.
If that doesn't get put in place.
Then frustration with the industry I think we'll continue to grow.
And so we're trying to do our part to help.
Advocate for.
Good regulatory framework in each area and it will they will come in different in different.
Forms so in some places.
Well, there will be laws passed and others might be working with regulators and having some structural rules imposed on us like with this FTC settlement. It other areas that might be self regulation like around.
Content in speech in the United States, that's what I'd expect because of the.
The first amendment here, it's a strong protections on on on speech. So this is important overall, we're very focused on it I do think we are making progress on working through the issues and addressing them.
Were I think in a much stronger place in elections now our content systems are getting more mature there is a lot more work to do in each of those but.
But I think we are making progress.
And and as you said this is a global problem not just the news or global problems not just American ones, so working with folks across Europe , and the other continents as well as important.
Hey, Justin it's Dave.
As I noted in my comments.
Europe is growing more slowly than North America and APAC.
That said, we had a strong quarter and we're pleased with results in currency is a factor in that delta as well.
Overall, we did see Europe had a reacceleration of growth in Q2 versus Q1.
And part of that is lapping that the GDP our implementation. So I think overall, we're kind of pleased with what we're seeing around Europe , but but it's still.
Growing more a little more slowly than than North America and APAC.
Your next question comes from Mark May from Citi.
Yes, Thanks for taking my questions first we've seen nice improvement in the rate of expense growth lately and on the Q4 call. You said you expected 2020 in 2020 the expense growth will be more in line with revenue growth. Just curious if that is something that you still feel comfortable with.
And then secondly in terms of what's up and what's out status specifically.
What are your plans as it relates to ads on whats out status have you tested here or have any plans to test. Thank you.
Yes, thanks Mark.
So in terms of in terms of our overall expense outlook, our current outlook for 2019.
That suggests that we'll see margins come down this year versus 2018, even if you were to set aside the.
5 billion dollar FTC accrual, we're not providing specific guidance.
For 2020 or beyond the investment priorities remain the same in addition to the privacy investment priorities that we outlined today will continue to invest in key areas like your core product infrastructure innovation video and content and safety and security over the long run so.
We're not at this point, providing any more specific guidance on on 2020.
I must have satisfied they are not available we're very focused for one stop on the consumer experience.
But I will take a minute to talk about stories as in general because I think eventually depending on our ability to use data across platform that applies to west Saturn, probably pretty important part of the story thats going on Facebook right now.
So we do have stories as available across Facebook Instagram Messenger I think one of the most important things we learned as we were doing this transition to mobile is if we made it easy for our advertisers to place the ads make sure they understood.
The measurement they were having and often make sure the AD format work.
Businesses would move more quickly.
Usually people move before businesses are people move to mobile before businesses and we certainly saw the same with stories I think one of the successes Youre seeing we're at we're having right now is that we are helping people move to stories more quickly because of the lessons. We learned so for example, automatic placements with automatic placements do is they convert feed ads into store into a story format and deliver the ads wherever they get their best results.
I think its product innovations like that that have gotten us to 3 million advertisers so rather than across the three properties, we have available Facebook Instagram and messenger so rather than go to every advertiser both through our sales force them to our online tools, where we sell and say we have a new format you need to create a new format you need to figure out the placement being able to just take what they're already doing like feed ads converted into stories in place. It anywhere helps us move people into these formats.
It's also the case that we have a lot of inventory on that and so theres a real benefit right now to being an early adopter. The pricing is very attractive and so we think the mix shifts the stories is a big opportunity for us.
And advertisers overtime.
Ill say, one more thing, which is that stories don't monetize right now at the same rate as you see we're optimistic about the growth over the long run, but we are as always very prudent and careful on the consumer experience.
Your next question comes from Mark Mahaney from RBC.
Thanks, I just wanted to focus on Whatsapp and.
I know you've had whatsapp payments in beta in India, you launched that last year could you just talk about.
They are there any particular factors that are causing a delay in that and maybe just takes a long time for a product like that to really gain traction but is it consumer.
Awareness of it is the regulatory pushback is are there technical hurdles and what does that tell you about the and maybe nothing but what does it tell you about the ability to take that whatsapp monetization or payments functionality embedded with whatsapp and launch it in other markets I sit I know you said, you're going to launch and in other countries, but what are the lessons from India to tell you about the about the pacing of that thank you.
So it's a regulatory approval question in India.
At this point and we we had a license to roll it out as a as part of an initial test the test win.
Better than we even expected it way driving for a product that you would expect to need to be widely available to be useful right in order to.
For someone to know that they can send money to someone else even a limited test. The feedback was very positive. So I'm quite confident that when we can roll this out broadly on it's going to be.
Meaningfully.
Valuable to the to the user experience.
We're also working.
Beyond India in a number of other countries and hope to have this.
Rolled out too.
A large percentage of the people who use whatsapp.
Within the next year, so thats the goal we're pushing forward on all of these issues and.
Should have more to to talk about that.
Your next question comes from Michael Nathanson from Moffettnathanson.
Thanks, I have two one for Sheryl, Dave and one for Mark.
So Sheryl Dave you noted the growth I guess in Europe . This time acceleration and can you talk a bit about maybe the regional development of stories and either the embracing the advertise community or the user user community.
By region, and then for Mark on the answer on currency.
Arguably christos can take a long time to get approval or to to build the product.
Do you see building a fee on currency wallet for Facebook, Instagram I know spread whatsapp, but how does how does another type of wallet.
Crypto wallet develop if it takes a while for the other products rollout, meaning Cooper takes a while for approval. So does non KRYPTOSPHERE currency become an opportunity for you.
Hey, Michael It's it's Dave.
I guess, we're not really providing.
Detail on on region I would say stories is today from an impression growth perspective really about Instagram stories. So it it mass where we've got good adoption of of Instagram globally.
So we're certainly seeing good growth in places, where Instagram is strong including the U.S. So thats been.
Good to see.
And as we as we continue to work on Facebook stories will have more opportunity as well with Facebook and will map to the regions, where Facebook is stronger so I think.
We are seeing.
We're seeing good growth on Instagram, you think that will continue and continue to drive impression growth and then.
We hope to continue to make progress on Facebook, where we're seeing growth, but it's off a smaller base.
And on payments.
I mean, the short answer is yes, we're very focused on on payments with.
We feel that currencies as well and making it so that.
When you pay in one service, whether it's what's out for or an Instagram shopping or in marketplace.
Your your credentials can be shared and there is a shared payment system across all those things. So thats, a certainly a big area for investment.
Overall these areas around commerce and payments I think are one of the most exciting areas of product development for the next several years, where do we kind of see the products now as we've helped people map out.
And wire up their their network overlap.
Several years from now.
In each of these apps, we have opportunities to help people get more value from the networks that they've created and some of that is going to be on the social side, especially around.
Creating communities and groups.
And some of it is going to be more on the economic and opportunity side and there we're doing on a whole lot of projects I know that.
Libra is the one that has gotten the most attention recently, but it's really just want to have a set of things everything from Instagram shopping.
Which is going to help people connect to brands and emerging creators to Facebook marketplace, which is more consumer to consumer paying and buying and selling used goods to things like what's that business, which is more about connecting with small businesses and then across the payment landscape, helping people do payments and existing currencies and also trying some newer approaches that can hopefully bring down the cost of doing payments around the world. We're just very excited about all the everything in this area.
And if it's one of the the biggest areas that we're focused on for the next several years.
Your next question comes from Ben Schachter from Macquarie.
Mark in one key you mentioned, specifically that GDPR had an impact on the business. Just wondering if you can give an update on that and then longer term on Facebook you focus a few times going on on buying and selling goods. There. Just wondering if you can comment on how you think of services versus goods for example, monetizing recommending a house painter versus selling a widget.
And also can you talk about the timing of how marketplace might evolve. Thanks.
Yes, I don't know, Dave if you want to talk about the GDPR, if I can I can yes Ben.
Just.
In terms of in terms of GDPR I kind of addressed that earlier you know, we do see that having an impact in Europe that we did see a reacceleration in growth in Europe as we lap the.
Initial implementation of GDPR so.
That's that's promising but we continue to see job growing just a bit slower than the rest of the region.
But but overall not not not a whole lot of additional color to provide there.
Yes, and in marketplace, we definitely are going to focus on.
Some of the areas that you talked about including jobs is already a pretty meaningful focus where a lot of people do find jobs.
And businesses, let's jobs through Facebook I don't want to.
I don't know what our last public status here, so I'm not going to attempt to site something but but it is meaningful and the the.
The business model around this is probably not going to be charging for listings, but advertising and.
In order to promote things both then.
And what we're doing on Instagram with shopping and Facebook marketplace.
And in the general approach to payments is providing us as affordably as possible to improve the user experience and complete transactions, which will of course make the tools more valuable for businesses overall and should make the AD prices go up and that should be the primary thing that were that were.
Focused on someone just handed me a piece of paper, which says that we have helped a million people find jobs. So there's the stat.
Your next question comes from Colin Sebastian from Baird.
Great. Thanks, a couple from me.
First off any update on the higher profile for groups in the Facebook App and any perspective on how that's impacting engagements and then mark the five year timeline for the privacy focused vision I guess I'm wondering if we get a better sense for what the key milestones are along the way and why that's a five year outlook, perhaps versus versus a shorter period. Thank you.
Yes, I can take both of those so.
In the Facebook App overall.
After helping people connect with friends and family, helping people connect with communities is the next most important social problem that we believe we can help.
Address and.
And Thats, just going to be an area of increasing value in the product.
That is going well.
Since we started.
Rolling that out after our fate.
I think Dave May have mentioned this earlier, but but in case you Didnt just to emphasize this point I think you know part of the the.
Our strong performance over the first half of this year a meaningful part of.
Our.
Overperformance compared to what we had expected as because of strengths and engagement in the Facebook app over that period. So.
So thats, its generally going going going well overall, and we're very optimistic about communities.
In particular going forward is one of the drivers of that.
What was the second question the five you're right. Okay. So on.
That's on the privacy vision so the.
Yes so.
For the next year or two.
A lot of the work that we need to do is just about getting the architecture right right. So establishing.
We have to rewrite the networks on messenger, and and and DRAM to be more clients and service oriented to be antennas encrypted.
We're working on interoperability.
That people will be able to choose to use between the services. These are these are pretty big technical project.
We want to make it so that the infrastructure that these services are built on is the most secure and most reliable and fastest and most widely available.
Have any of the major messaging platforms out there, we think that Thats the foundation to build a successful private platform on then.
Then we need to do things like what we're doing with what that business, which is building up the the business ecosystem.
And and that's just something that you know our playbook on this is that this is a multi year.
Journey, where first we delivered to the consumer product experience than we create organic business experiences and then only is the last step or we really able to ramp up having businesses pay for things that are meaningful for them within that so it's not that you're not going to see progress on that along the way you will certainly see milestones every six months or 12 months, but before this is really the biggest driver of our business I do think that that is going to be.
A number of years.
Great operator, we have time for one last question.
Your last question comes from Brent Thill from Jefferies.
Thanks, Dave I think a lot of us are having a hard time reconcile that.
The tougher comp in Q4, it was your easiest comp and you just accelerate your constant currency growth.
In the quarter. So I guess just is there any change in terms of the visibility or the contracts that you are putting together that that lead to that any other color I think.
There are some theres a number of questions just trying to understand.
Why why you have such strong conviction that in that diesel.
Hey, Hey, Brent.
So in terms of the outlook remember we don't have contracted revenue. We are constantly working from an auction perspective. So our forecasts are based on supply and demand and how we see the different product.
Launches playing into that different optimizations that we make on so there is a lot of granularity that goes into thinking about how.
Revenue will progress that ultimately, it's going to depend on the supply and demand.
Characteristics in that given quarter, when we do that.
And we see that we expect.
Constant currency deceleration.
And when we get to Q4, we're going to be lapping some.
Particularly successful.
Optimizations that we had in Q4 and that's going to contribute to more of a decel in Q4 than we think we'll see in Q3. So thats the reason I'm characterizing the guidance.
The way I am.
Great. Thank you for joining us today, we appreciate your time and we look forward to speaking with you again.
Ladies and gentlemen. This concludes today's conference call. Thank you for joining US you may now disconnect your lines.