Facebook : Third Quarter 2021 Results Conference Call Transcript

Facebook, Inc. (FB)

Third Quarter 2021 Results Conference Call

October 25th, 2021

Deborah Crawford, VP, Investor Relations

Thank you. Good afternoon and welcome to Facebook's third quarter earnings conference call. Joining me today to discuss our results are Mark Zuckerberg, CEO; Sheryl Sandberg, COO; and Dave Wehner, CFO.

Before we get started, I would like to take this opportunity to remind you that our remarks today will include forward‐looking statements. Actual results may differ materially from those contemplated by these forward‐looking statements.

Factors that could cause these results to differ materially are set forth in today's press release, and in our quarterly report on form 10‐Q filed with the SEC. Any forward‐looking statements that we make on this call are based on assumptions as of today and we undertake no obligation to update these statements as a result of new information or future events.

During this call we may present both GAAP and non‐GAAP financial measures. A reconciliation of GAAP to non‐GAAP measures is included in today's earnings press release. The press release and an accompanying investor presentation are available on our website at investor.fb.com.

And now, I'd like to turn the call over to Mark.

Mark Zuckerberg, CEO

Hey everyone and thanks for joining today.

We made good progress this quarter across a number of product priorities, and our community continues to grow. There are now almost 3.6 billion people who actively use one or more of our services, and I'm excited about our roadmap to keep building great new experiences for them.

As expected, we did experience revenue headwinds this quarter, including from Apple's changes that are not only negatively affecting our business, but millions of small businesses in what is already a difficult time for them in the economy. Sheryl and Dave will talk about this more later, but the bottom line is we expect we'll be able to navigate these headwinds over time with investments that we're already making today.

Before I get to our product update, I want to discuss the recent debate around our company.

I believe large organizations should be scrutinized and I'd much rather live in a society where they are than one where they can't be. Good faith criticism helps us get better. But my view is that what we're seeing is a coordinated effort to selectively use leaked documents to paint a false picture of our company.

The reality is that we have an open culture where we encourage discussion and research about our work so we can make progress on many complex issues that are not specific to just us. We have industry-

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leading programs to study the effects of our products and provide transparency into our progress because we care about getting this right.

When we make decisions, we need to balance competing social equities, like free expression with reducing harmful content, or enabling strong encrypted privacy with supporting law enforcement, or enabling research and interoperability with locking down data as much as possible. It makes a good soundbite to say that we don't solve these impossible tradeoffs because we're just focused on making money, but the reality is these questions are not primarily about our business, but about balancing different difficult social values. And I've repeatedly called for regulation to provide clarity because I don't think companies should be making so many of these decisions ourselves.

I'm proud of our record navigating the complex tradeoffs involved in operating services at global scale, and I'm proud of the research and transparency we bring to our work. Our programs are industry- leading. We have made massive investments in safety and security with more than 40,000 people and we are on track to spend more than $5 billion on safety and security in 2021. I believe that's more than any other tech company, even adjusted for scale. We set the standard for transparency with our quarterly enforcement reports and tools like our political ads archive. We established a new model for independent academic researchers to safely access data. We pioneered the Oversight Board as a model of self-regulation. And as a result, we believe that our systems are the most effective at reducing harmful content across the industry. And I think that any honest account of how we've handled these issues should include that.

I also think that any honest account should be clear that these issues aren't primarily about social media. That means that no matter what Facebook does, we're never going to solve them on our own. For example, polarization started rising in the US before I was born. At the same time, independent research shows that many countries around the world have flat or declining polarization, despite similar social media use there to in the US. We see this pattern repeat with other issues as well. The reality is, if social media is not the main driver of these issues, then it probably can't fix them by itself either.

We should want every other company in our industry to make the investments and achieve the results that we have. I worry about the incentives that we're creating for other companies to be as introspective as we have been. But I am committed to continuing this work, because I believe it will be better for our community and our business over the long term.

We can't change the underlying media dynamics, but there's a different constituency that we serve that has always been more important and that I try to keep us focused on: and that's people.

Billions of people use our services because we build the best tools to stay connected to the people you care about, to find communities that matter to you, and to grow your small business.

And the reason we've been able to succeed for almost two decades is because we keep evolving and building. Facebook started in a dorm room and grew into a global website. We invented the News Feed and a new kind of ads platform. We became a mobile-first experience. And then we grew a whole family of apps that serve billions of people.

And there is so much more to build. Even with all the tools we have today, we still can't feel like we're right there together with the people we care about when we're physically apart. We can't teleport as holograms to instantly be at the office without a commute, or at a concert with a friend, or in your

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parents' living room to catch up. The creative economy and commerce tools are still nascent and there should be opportunity for millions of more people to make a living doing the work that they love.

Our three product priorities remain our focus on creators, commerce, and building the next computing platform.

A big part of our work with creators is our focus on Reels. Reels is already the primary driver of engagement growth on Instagram. It's incredibly entertaining, and I think that there's a huge amount of potential ahead. We expect this to continue growing and I am optimistic that Reels will be as important for our products as Stories is. We also expect to make significant changes to Instagram and Facebook in the next year to further lean into video and make Reels a more central part of the experience.

One aspect of this is giving all our apps the goal of being the best services for young adults, which we define as ages 18-29. Historically, young adults have been a strong base and that's important because they are the future. But over the last decade, as the audience that uses our apps has expanded so much and we've focused on serving everyone, our services have gotten dialed to be the best for the most people who use them rather than specifically for young adults. And during this period, competition has also gotten more intense, especially with Apple's iMessage growing in popularity and more recently, the rise of TikTok, which is one of the most effective competitors we have ever faced.

So we are retooling our teams to make serving young adults their north star, rather than optimizing for the larger number of older people. Like everything, this will involve tradeoffs in our products and it will likely mean that the rest of our community will grow more slowly than it otherwise would have. But it should also mean that our services become stronger for young adults. This shift will take years, not months, to fully execute, and I think it's the right approach to building our community and company for the long term.

Our next product priority is commerce. Helping people discover new products that they're interested in and reach customers inside our apps is going to unlock a lot of opportunity.

As Apple's changes make e-commerce and customer acquisition less effective on the web, solutions that allow businesses to set up shop right inside our apps will become increasingly attractive and important to them. We've built solutions like ads that can dynamically point to either a business's website or their Shop on our platforms depending on what will perform better for them, and that will help more businesses navigate this challenging environment.

Building a full-fledged commerce platform is a multi-year journey. Marketplace is already at scale and lots of people rely on it, especially now with supply chain issues that make it harder to get new products. Shops are getting more developed, and we have an exciting program planned for this holiday season where we're working closely with a number of the businesses that have invested the most in Shops to identify what works to find new customers and grow their business even faster. Our plan is to then scale those solutions even more broadly in 2022.

Beyond Reels and commerce, I also want to share some thoughts on our longer-term efforts to build the next computing platform and help bring the metaverse to life. This is a major area of investment for us and an important part of our strategy going forward.

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I view this work as critical to our mission because delivering a sense of presence -- like you're right there with another person -- that's the holy grail of online social experiences. Over the next decade, these new platforms are going to start to unlock the kinds of experiences that I've wanted to build since even before I started Facebook. Along with those social experiences I expect a massive increase in the creator economy and amount of digital goods and commerce. If you're in the metaverse every day, then you'll need digital clothes, digital tools, and different experiences. Our goal is to help the metaverse reach a billion people and hundreds of billions of dollars of digital commerce this decade. Strategically, helping to shape the next platform should also reduce our dependence on delivering our services through competitors.

Building the foundational platforms for the metaverse will be a long road. We just released the 128GB Quest 2, replacing the 64GB model for $299. With EssilorLuxottica, we released our first smart glasses, and they're off to a strong start as well. But bringing this vision to life isn't just about building one glasses product. There's a whole ecosystem. We're building multiple generations of our VR and AR products at the same time, as well as a new operating system and development model, a digital commerce platform, content studios, and of course a social platform.

So to reflect the significance of this for our business, today we're announcing a change to our financial reporting. Starting next quarter, we'll begin disclosing financial metrics for Facebook Reality Labs separately from our Family of Apps. This will provide investors with additional visibility into the investments that we're making in augmented and virtual reality. In 2021, we expect these investments to reduce our overall operating profit by approximately $10 billion, and I expect this investment to grow even further for each of the next several years. Dave will share more about this later, but I encourage you all to tune into Connect on Thursday to hear more about our vision and our work here in more detail.

I recognize the magnitude of this bet on the future, and I am grateful for the support of our investors, the creative community, and the thousands of talented people working on this effort inside our company to bring this inspiring future to life.

And with that, here's Sheryl.

Sheryl Sandberg, COO

Thanks Mark, and hi everyone.

This quarter our total revenue was $29 billion, up 35% year-over-year. We saw solid revenue growth across all regions. And we continued to grow our user base.

We felt the impact of some big external factors in Q3. I want to explain some of the revenue softness we've seen, and what we're doing to mitigate the headwinds and help businesses over the crucial holiday period and beyond.

To start, let's take a step back. Over the past decade, we've seen more and more businesses shift online. When the pandemic hit, this digital transformation accelerated. We've invested in tools and products over many years to help businesses make this shift. So this acceleration drove very strong growth for us throughout the last few quarters.

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We've been open about the fact that there were headwinds coming - and we've experienced that in Q3. The biggest is the impact of Apple's iOS14 changes, which have created headwinds for others in the industry as well, major challenges for small businesses, and advantaged Apple's own advertising business. We started to see that impact in Q2, but adoption on the consumer side ramped up by late June, so it hit critical mass in Q3. As a result, we've encountered two challenges. One is that the accuracy of our ads targeting decreased, which increased the cost of driving outcomes for our advertisers. And the other is that measuring those outcomes became more difficult.

On targeting, we're focused on improving campaign performance even with the increased limitations facing our industry. We're building commerce tools to help businesses reach more new customers and get more incremental sales. And over the longer term, we're developing Privacy Enhancing Technologies in collaboration with others across the industry to help minimize the amount of personal information we process, while still allowing us to show relevant ads. Progress in these areas will take time and will be a focus for us throughout 2022 and beyond.

On measurement, as we wrote in a recent blog post, we believe we are underreporting iOS web conversions. This means real world conversions, like sales and app installs, are higher than what's being reported for many advertisers, especially small advertisers. We're making good progress fixing this. We think we'll be able to address more than half of the underreporting by the end of this year. And we'll continue to work on this into 2022.

Another external factor is slowing e-Commerce growth. The strong e-Commerce growth in recent quarters was driven in part by the acceleration of the digital transformation that is now tapering off. I think most people see this in their own lives. There was a period of time when many people who were able to stayed at home and ordered things online much more. But now in many places things have opened up, and people are increasingly making purchases in person. That doesn't mean e-Commerce has stopped growing. Businesses are still making the shift online. But e-Commerce is no longer growing at the pace it was at the height of the pandemic.

These factors have been compounded for many advertisers by major global supply chain issues and labor shortages, which have left many consumer businesses with less inventory. This has reduced their appetite to generate demand from consumers, which has impacted advertising spend. Businesses in every region and across a range of verticals have been affected. At the same time we've also seen some impact from Covid surges around the world in places like South-East Asia.

Overall, if it wasn't for Apple's iOS14 changes, we would have seen positive quarter-over-quarter revenue growth. And while we and our advertisers will continue to feel the effect of these changes in future quarters, we will continue working hard to mitigate them.

Despite the headwinds, we remain confident about our future. We believe Facebook and Instagram are the best place for people to connect with their friends and families, build communities, and start and grow businesses. And we believe they're still the best platforms for advertisers to reach people where they are and get measurable outcomes. Our focus remains where it always has been, building products that help people connect and businesses grow.

Mark talked about video a moment ago. Not only is this a growing area for us overall, but we're also continuing to get better at monetizing it. More than 60% of video revenue now comes from mobile-first video, meaning videos that are shot vertically or are under 15 seconds. Over 2 billion people per month

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