Facebook (NASDAQ:FB) Q4 2019 Earnings Call Transcript

FACEBOOK INC (FB) | Q4 2019 Earnings Conference Call

Final Transcript

Corporate Participants

Deborah Crawford

Vice President, Investor Relations | Facebook, Inc.

Mark Zuckerberg

Founder, Chairman and Chief Executive Officer | Facebook, Inc.

Sheryl Sandberg

Chief Operating Officer | Facebook, Inc.

Dave Wehner

Chief Financial Officer | Facebook, Inc.

Conference Call Participants

Brian Nowak

Morgan Stanley | Analyst

Ross Sandler

Barclays | Analyst

Heather Bellini

Goldman Sachs | Analyst

Justin Post

Bank of America Merrill Lynch | Analyst

Doug Anmuth

JP Morgan | Analyst

Eric Sheridan

UBS | Analyst

Youssef Squali

SunTrust | Analyst

Mark Mahaney

RBC Capital Markets | Analyst

Colin A. Sebastian

Robert W. Baird | Analyst

Kevin Rippey

Evercore ISI | Analyst

Lloyd Walmsley

Deutsche Bank Securities | Analyst

John Blackledge

Cowen | Analyst

Michael Nathanson

Moffett Nathanson | Analyst

Brian Fitzgerald

Wells Fargo Securities | Analyst

Presentation

Operator

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 Fourth Quarter 2019 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 (Operator Instructions). This call will be recorded.

Thank you very much. Ms. Deborah Crawford, Facebook’s Vice President of Investor Relations, you may begin.

Deborah Crawford

Vice President, Investor Relations | Facebook, Inc.

Thank you. Good afternoon and welcome to Facebook’s Fourth Quarter and Full-Year 2019 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

Founder, Chairman and Chief Executive Officer | Facebook, Inc.

All right. Thanks everyone for joining us today. This was a good quarter for our community and our business and a strong end to the year. There are now around 2.9 billion people using Facebook, Instagram, WhatsApp or Messenger each month at around 2.3 billion people using at least one of our services daily. There are now more than 140 million small businesses that use our services to grow and the vast majority of which use our services for free.

Last year, I shared our four company priorities and they are still our priorities in 2020, making progress on the major social issues, building qualitatively new product experiences, continuing to grow our business and getting out there and communicating more transparently. Today, I’m going to focus mostly on the new product experiences we’re building. But before we get to that this is going to be another critical year for making progress on social issues.

We’re very focused on election integrity, and this is an area where I’m proud of the progress that we’ve made, preventing foreign interference. We were behind in 2016, but after working to protect elections and countries across the world from the EU, in the EU, to India, to Mexico, to the US midterms for the past few years. We think our systems are now more advanced than any other company’s and we’re often alerting law enforcement and intelligence about threats that we identify. There’s still going to be debate about what kinds of political speech should be allowed, especially as the 2020 elections heat up, but by any objective measure our efforts on election integrity have made a lot of progress.

This is also going to be a big year for our greater focus on privacy as well. As part of our FTC settlement, we committed to building privacy controls and auditing that will set a new standard for our industry going beyond anything that’s required by law today. We currently have more than a 1,000 engineers working on privacy-related projects and helping to build out this program. Related to this, just yesterday, we announced that we’re rolling out a privacy checkup tool to nearly 2 billion people reminding them of the control they have and making sure that they’re set the way they want them. We also introduced a new tool that notifies you anytime your account signs into a new service.

So it’s going to take time, but over the next decade, I want us to build a reputation on privacy that’s as strong as our reputation on building good stable services. When it comes to these important social issues, I don’t think that private companies should be making so many important decisions by themselves. I don’t think that each service should have to individually decide what content or advertising is allowed during elections or what content is harmful overall. There should be a more democratic process for determining views rules and regulations. For these issues, it’s not enough for us to just make principal decisions, the decisions also need to be seen as legitimate and reflecting what the community wants. And that’s why I’ve called for clear regulation for our industry and until we get clear rules or established other mechanisms of governance, I expect that we and our whole industry will continue to face a very high level of scrutiny.

So during this, our job is to keep doing what we think is right on the social issues and to stay focused on continuing to deliver product improvements and better experiences for our community. The product areas that I’m most focused on for the next chapter of our company are building out the private-social platform and more intimate communities, enabling more commerce and payments and delivering the next computing platform.

When I look at the internet today, we all have this ability to connect with people and content and opportunities coming from all around the world in ways that were unimaginable just a generation ago. And I grew up in a town of 10,000 people and making long-distance calls anywhere outside the area is very expensive. Today, we all have access to billions of people and that’s made it easier to find people who are into the same things that you are. But as our networks and communities have gotten so large, we increasingly crave a sense of intimacy and privacy. So delivering this experience is our focus. And across our services the greatest growth in how people are communicating continues to come from private messaging, small groups and disappearing stories where your data doesn’t stick around forever. There’s a lot more to do here, while the Facebook and Instagram apps have developed with lots of different ways to interact with the people you care about, our private communication apps are still pretty much just about texting.

So we spent the last year building infrastructure to turn our private messaging apps, WhatsApp and Messenger, into richer private social platforms, where you can hang out and be present with friends, find groups with your interest, engage with businesses more naturally. So some of these are bigger projects like full end-to-end encryption, interoperability across the apps or rewriting our apps for performance and they’re going to take a long time to see through. But we should start seeing more new experiences later this year, and this will all be built on a very strong privacy foundation.

Commerce and payments is another area that will be important for the private social platform, but also across all of our apps including Facebook and Instagram. Our goal here is to make sure that every individual, small business entrepreneur out there has the same opportunity and access to the same type of sophisticated tools that historically only the big companies have had access to. That’s what we stand for, putting power in individuals’ hands. One example that we’ve been working on is WhatsApp Payments. Now, you’re going to be able to send money just quickly and easily ascending a photo. We got approval to test this with 1 million people in India back in 2018 and when so many of the people kept using it week-after-week we knew it was going to be big when we get to launch. I’m really excited about this and I expect this to start rolling out in a number of countries and for us to make a lot of progress here in the next 6 months.

Beyond WhatsApp Payments, we’re working on several other efforts to help facilitate more commerce from Facebook Marketplace to Instagram Shopping to our work on Facebook Pay or our work on Libra. This is such a big space and it’s important for empowering people. So we’re taking a number of different approaches here ranging from people buying and selling to each other directly, to businesses setting up storefronts to people engaging with businesses directly through messaging and a number of things on payments ranging from existing — using existing national systems like India’s UPI to creating new global systems.

Having small businesses succeed, is not only key to creating broad economic growth wherever one can support themselves. It’s also important to maintaining healthy communities. Since small businesses are often where people come together, we see on our services all the time have small businesses that use our tools are often at the heart of their local communities. So this is a top priority for us on both fronts, for the social mission and the business.

We’ve also been focusing on delivering the next computing platform with augmented and virtual reality. The defining characteristic of AR and VR is that they deliver a sense of presence like you’re right there with another person or in another place and this is the Holy Grail of social experiences. And it’s going to let us build things that we’ve only dreamed of for the last 15 years like letting people interact as if they in person together, no matter where they are. We’re letting people live wherever they want and hologram into work, so they can access opportunities anywhere and don’t have to move to a city or another country to find a job.

So while full augmented reality is still a number of years away, we hit a real milestone for virtual reality with Quest. Sales are stronger than we expected and people are buying and engaging with more content than we’d expected to. On Christmas Day, people bought almost $5 million worth of content in the Oculus store. And that’s an outlier day but still, this is real volume by any measure. And it shows the progress that this ecosystem is making. The experience also just keeps on getting better. Last quarter we shipped hand-tracking which almost no one thought was going to be possible with the Quest hardware and we shipped Oculus Links and now you can run all of your Rift content from your PC on Quest.

On the AR side, while working on the long-term hardware and operating system, it’s worth noting that our Spark AR platform is the most widely used AR platform in the world with hundreds of millions of people interacting with effects every month. Artists are using this to create new face filters and other tools that are going viral across Instagram and Facebook. We’re well-positioned here overall, and we’re going to keep developing this platform.

So those are some of the bigger product initiatives that I’m excited about. And aside from these, we’re also focused on communicating more clearly what we stand for. One critique of our approach for much of the last decade was that because we wanted to be liked, we didn’t always communicate our viewers as clearly because we were worried about offending people. So this led to some positive but shallow sentiment towards us and then towards the company. And my goal for this next decade isn’t to be liked, but to be understood because in order to be trusted people need to know what you stand for.

So we’re going to focus more on communicating our principles, whether that’s standing up for giving people a voice against those who sensor people, who don’t agree with them. Standing up for letting people build their own communities against those who say that the new types of communities forming on social media are dividing us. Standing up for encryption against those who say that privacy mostly helps bad people. Standing up for giving small businesses more opportunity and sophisticated tools against those who say the targeted advertising is a problem or standing up for serving every person in the world against those who say that you have to pay a premium in order to really be served.

These positions aren’t always going to be popular, but I think it’s important for us to take these debates head-on. I know that there are a lot of people who agree with these principles, and there are a whole lot more who are open to them and want to see these arguments get made. So expect more of that this year.

This is going to be another important year. It’s going to be an intense year with the elections, some of our long-term technology bets are going to start coming to fruition. We have strong business momentum and we have to get out there and show what we stand for. As always, I’m grateful to all of you for your support and for being on this journey with us.

And now I’m going to hand it over to Sheryl to talk about our business.

Sheryl Sandberg

Chief Operating Officer | Facebook, Inc.

Thanks, Mark, and hi everyone. We had a good quarter across the board and a strong end to the year. Q4 ad revenue was $20.7 billion, increasing 25% year-over-year. Full-year ad revenue grew 27% compared to 2018. We’re focused on creating value over the long-term for our community and for the 140 million businesses around the world, who use our platform to connect with customers and grow. The majority, use our free tools, but there are also more than 8 million businesses who advertise with us. This is because we help businesses create a mobile presence, increase sales, build the right relationships with customers and hire people.

We will continue to focus on helping businesses use our free and paid tools to reach the people who matter the most. Throughout the holiday season, people use our apps to take advantage of the best deals and shop for the perfect gifts. With our particular strength with e-commerce and online retailers, who optimize for measurable objectives like website visits or sale. Pura Vida, a jewellery company based in San Diego ran ads on Facebook and Instagram for a 50% off sale. In nine days they sold more than 300,000 bracelets supporting more than 800 artisans around the world.

People often adopt new technologies before businesses and we try to make it as easy as possible for businesses to catch up. Stories is a great example, we recently announced 4 million advertisers are using Stories, up from 2 million this time last year. Bombas, a sock and apparel company used Instagram Stories to show people wearing their stocks while ice skating and gift wrapping. As a result, they saw 60% increase in purchases from people under 35. In addition, to helping businesses shift to new formats, we’re also making it easier for people to shop directly on our app. We launched Checkout on Instagram with the small closed beta in Q1 2019. We slowly been building the experience and now hundreds of businesses in the US are experimenting with Checkout. We’re taking the time to get this right and growing slowly, so people and advertisers can benefit over the long-term.

We give small and growing businesses like Pura Vida and Bombas the same tools that previously only the biggest firms could access. Large companies combined national TV spots and large billboards but most small businesses can’t, that’s why small businesses benefit the most from targeted ads. We help them reach a more focused audience with the right message, and we do it while protecting people’s privacy. This really matters because, as Mark said, when businesses of all sizes succeed they hire people and invest in their communities.

Last week, we released a report with Copenhagen Economics, according to 7,000 companies surveyed across 15 EU countries our apps helped businesses contribute about EUR200 billion euros to European economy just last year. Economists say this translates to more than 3 million new jobs last year alone. I announced these findings in London last week, where I had the chance to meet with Naomi Roberts. Naomi started Flare Audio with her husband to improve the sound quality in everything from earplugs to loudspeakers, more than 75% of their sales come from Facebook and Instagram. This has enabled them to export to more than 180 countries and grow their business from two employees to 22. Stories like Naomi are why we remain committed to helping small businesses reach customers and grow. But we know it’s not enough. We also have to keep people safe and give them control over their experience on our app and we are.

This month, we announced a number of improvements to our industry-leading ad transparency tools, including a new feature that gives people the option to see fewer political ads. We also updated our ads library to make it more transparent and easier to navigate. These updates help people understand who is trying to reach them and we believe that this transparency is critical to empowering people and keeping them safe.

We also want everyone to be in control of their privacy on Facebook. As Mark said, we are rolling out our updated privacy checkout tool to nearly 2 billion people around. With a few taps people can control who sees what they share and how to keep their account secure.

I want to close by saying how grateful I am to our partners around the world. Every day they give us valuable feedback on how to improve our products, so we can help them turn great ideas into revenue, jobs and economic empowerment. I also want to thank our teams around the world for working to solve tough challenges, while still building great products that businesses use to grow, compete and hire.

Thanks for your continued dedication, we are better prepared to serve the billions of people who count on us.

Now here’s Dave.

Dave Wehner

Chief Financial Officer | Facebook, Inc.

Thanks, Sheryl, and good afternoon everyone. Q4 was a strong quarter and ended a good year for our business. Full-year 2019, revenue grew 27% to $71 billion and we generated over $18 billion in net income.

Let’s begin with our community metrics. In terms of Family metrics, we estimate that approximately 2.3 billion people used at least one of our services on a daily basis in December and that approximately 2.9 billion people were active on a monthly basis. As a reminder, the Family metrics are our best estimate of the de-duplicated audience across Facebook, Instagram, Messenger and WhatsApp. We believe these numbers better reflect the size of our community and the fact that many people used more than one of our services. Beginning this quarter we are including Family metrics and related information in our SEC filings and the slide presentation on our investor website.

Turning now to Facebook. We are pleased with the growth of the Facebook Community in all regions this quarter. Daily active users reached $1.7 billion, up 9% compared to last year, led by growth in India, Indonesia and the Philippines. DAUs represented approximately 66% to the 2.5 billion monthly active users in December. MAUs grew 178 million or 8% compared to last year. We plan to continue to disclose Facebook only Community metrics through late 2020.

Turning now to the financials. All comparisons are on a year-over-year basis unless otherwise noted. Q4 total revenue was $21.1 billion, up 25% or 26% on a constant currency basis. Had foreign exchange rates remained constant with Q4 of last year, total revenue would have been approximately $295 million higher. Q4 total ad revenue was $20.7 billion, up 25% or 26% on a constant currency basis. On a regional basis, ad revenue growth rates were strongest in Asia Pacific and rest of the world, which grew 33% and 28% respectively. Europe and US & Canada grew more slowly at 24% and 22% respectively.

In Q4, the total number of ad impressions served across our services increased 31% and the average price per ad decreased 5%. Similar to last quarter impression growth was driven primarily by Facebook News Feed, Instagram Stories and Instagram feed. Facebook News Feed impression growth benefited largely from community growth and engagement trends on the Facebook app. The year-over-year decline in average price per ad was primarily driven by the ongoing mix shift towards ads on stories and in geographies, which monetize at lower rates. Other revenue, was $346 million, up 26%. Year-over-year growth was driven by sales of Oculus Quest.

Turning now to expenses. Total expenses were $12.2 billion in Q4, up 34%. Cost of revenue increased 25% and the growth was driven primarily by depreciation related to our infrastructure spend. R&D grew 36%, and was driven primarily by increased investments in core product as well as our innovation efforts particularly in AR/VR.

Marketing and sales grew 23% and was driven primarily by consumer and growth marketing. Finally, G&A grew 7% largely driven by higher legal fees and settlements. This includes charges related to $550 million settlement in principle we reached this month in connection with the Illinois Biometric Information Privacy Act litigation. We had over 9,300 net new hires in 2019, primarily in technical functions. We ended the year with approximately 45,000 full-time employees, up 26% compared to last year. Operating income was $8.9 billion representing a 42% operating margin.

Our tax rate was 20%. Net income was $7.3 billion or $2.56 per share. Full-year capital expenditures were $15.7 billion, up 12% driven by investments in data centers, servers, office buildings and network infrastructure. In 2019, we opened data centers in Nebraska, New Mexico and Denmark. These new data centers are supported by 100% renewable energy. We are committed to doing our part to help tackle the challenge of climate change that’s why we’re working to minimize our energy emission — emissions and water impact, across the entire company. We are on track to meet our 2020 goal of supporting our global operations with 100% renewable energy and lowering our operational carbon emissions by 75% from 2017 level.

We ended the year with $54.9 billion of cash and investments. I would note that though we booked the expense in 2019, we have not paid the $5 billion FTC fine announced earlier this year as the agreement is still pending court approval. In the quarter, we repurchased approximately — we repurchased $1.3 billion of our Class-A common stock and had $4.9 billion remaining of our prior authorization as of December 31. Today we announced a $10 billion increase in our stock repurchase program authorization.

Turning now to the revenue outlook. We expect our year-over-year total reported revenue growth rate in Q1 to decelerate by low to mid-single-digit percentage points as compared to our Q4 growth rate. Factors driving this deceleration include the maturity of our business as well as the increasing impact from global privacy regulation and other ad-targeting related headwinds. While we have experienced some modest impact from these headwinds to-date, the majority of the impact lies in front of us.

Turning now to expenses, we anticipate our 2020 total expenses will be in the range of $54 billion to $59 billion, unchanged from our prior outlook. Our 2020 capital expenditures outlook is also unchanged at $17 billion to $19 billion driven by investments in data centers, servers, office facilities and our network infrastructure. Lastly, we expect our 2020 effective tax rate to be in the high-teens.

In summary, Q4 was a strong finish to 2019. We are pleased with the growth of our community and business as we continue to focus on our mission.

And with that, operator, let’s open up the call for questions.

Questions and Answers

Operator

We will now open the lines for a question-and-answer session (Operator Instructions) Your first question comes from the line of Brian Nowak from Morgan Stanley.

Brian Nowak

Analyst | Morgan Stanley

Thanks for taking my question. I have two, just the first one on Instagram, Checkout Instagram commerce. I’m curious to hear about sort of early learnings of what you’ve learned from the hundreds of adopters and sort of what you think are the one or two key points of friction you really have to get over to build that business into a larger contributor over the next couple of years? And then Dave, I guess, to go back to your quite your comment about the majority of the impact lies ahead when you’re thinking about ad targeting and privacy regulation. Is there any more detail you can give us on sort of types of data or types of sort of breakage that you see as potential risk to the targeting and the efficacy of the ads going forward? Thanks.

Sheryl Sandberg

Chief Operating Officer | Facebook, Inc.

So I’ll take the first part of the question. So when you think about the shopping experience or the checkout experience on Instagram, these are still very early days and we’re working hard to improve the product and expand to more businesses. These require full integration, so our focus is making sure we get the right partners on-board and consumers have a great experience all the way through. We expanded shopping to all — shopping ads to all advertisers globally Q4, and we began testing checkout and shopping ads, and what you’re going to see from us is very small steps to get more people in and make this deeper across the experience people have. But you are right that we are moving very slowly and very, very, very carefully because we want to make sure the entire experience is right across the board before we go deeper and go broader.

Dave Wehner

Chief Financial Officer | Facebook, Inc.

Yes. Thanks, Brian. Yes, we are seeing headwinds in terms of targeting and measurement, but as I noted, the majority of that impact lies in front of us. Just as a reminder, we utilize signals from user activity on third-party websites and services in order to deliver relevant and in fact effective ads to our users. And in that regard, there are sort of three overlaying factors that I’d point to and I spoke to these on prior calls as well. First, the recent regulatory initiatives like GDPR and now CCPA have impacted and we expect they’ll continue to impact our ability to use such signals. Secondly, mobile operating systems and browser providers, such as Apple and Google have announced product changes and future plans that will limit our ability to use those signals. And then finally, we’ve made our own product changes that give users the ability to limit our use of such data signals to improve ads and other experiences. And there I’d point to something like the rollout of our Facebook activity controls and that’s been100% today.

So each of these factors limits our ability to target and measure the effectiveness of ads on our platform and that can negatively impact our advertising revenue growth. Both Mark and Sheryl talked about the importance of ad targeting for small businesses. And I think it’s important to note that the regulatory and platform changes will have a disproportionate impact on the ability of small businesses to use ads to grow and thrive.

Operator

Your next question comes from Ross Sandler from Barclays.

Ross Sandler

Analyst | Barclays

Great. Dave, can we talk about the growth rate in the fourth quarter, particularly in the US, was there anything that surprised you guys or any particular cohort of advertisers that slowed down? If we look at your growth rate from 3Q to 4Q in the US, I think it was the lowest since 2012 in the fourth quarter. So, any color on what happened in the fourth quarter or was this in line with your plan? Thank you.

Dave Wehner

Chief Financial Officer | Facebook, Inc.

Yes, thanks. Thanks, Ross, no real surprises there. We are pleased with our Q4 results. We had a strong holiday season despite it being abbreviated. In terms of the North American numbers, we’re seeing slower growth in our more mature markets, that’s consistent with the outlook that we had going into the quarter, it’s true in North America and our more developed markets within Europe. But I wouldn’t say there is any real surprises there.

Operator

Your next question comes from the line of Heather Bellini from Goldman Sachs.

Heather Bellini

Analyst | Goldman Sachs

Great. Thank you. I just wanted to follow up on the Checkout on Instagram and obviously you guys mentioned that you’re rolling it out very slowly, which is understandable. I’m just wondering how much of this is due to the integration, you need to have with the businesses inventory system and how are you going about the integration work that needs to be done to make the experience seamless, where you could kind of match inventory levels with what people are actually buying? And I guess the follow-up would be, you know, is there a benefit that you envision businesses getting from using this format versus one of your more traditional shopping ads? Thank you.

Sheryl Sandberg

Chief Operating Officer | Facebook, Inc.

So the integrations you spoke of, are the right ones we want. You want to be deeply integrated at a product level. It has to go all the way through for this to work from discovery, all the way through a pretty seamless checkout flow, and that’s what we’re working on and that and that really takes time. You’re also right that we are very focused on commerce ads on Facebook. That you know the great, great, great majority activity is commerce ads on Facebook. We have very strong holiday season. We continue to see growth across Facebook, across Instagram and people who are discovering products they’re interested in, and we’re continuing to make a lot of investments there.

Operator

Your next question comes from the line of Justin Post from Bank of America Merrill Lynch.

Justin Post

Analyst | Bank of America Merrill Lynch

Great. Thank you. A couple of questions, first on the privacy commentary, David, has anything changed since third quarter when we’re looking at less deceleration this year? Has there been incremental changes since then? And then secondly, on the expense outlook, I noticed headcount growth was around 26%. As far as getting to your headcount guide. I mean to your expense guide, do you expect that growth to accelerate? And are there other kinds of expense initiatives you’d call out for 2020? Thank you.

Dave Wehner

Chief Financial Officer | Facebook, Inc.

Yes. Thanks, Justin. So I don’t think anything has changed since Q3 in terms of our outlook on the headwinds that we have around ad signals. I think that’s very consistent with what we’ve been talking about over the last several quarters. So I think we continue to face those headwinds and they will be more impactful as we move forward. In terms of the expense guide in 2020, I would say that, obviously, we plan to — a large factor of our expense growth is driven off of headcount and we’re continuing to invest across the board in terms of our core R&D and innovation efforts in terms of headcount growth there. In addition, growth in infrastructure spend is our large increase in CapEx over the last several years flow through the income statement is another driver of our expense growth as well.

And there are other non-headcount-related expenses that we expect to grow, including marketing and content investments.

Operator

Your next question comes from the line of Doug Anmuth from JP Morgan.

Doug Anmuth

Analyst | JP Morgan

Thanks for taking my question. Mark, you have multiple payment initiatives across the Family, you talked about WhatsApp Payments, Facebook Pay potentially more over time around Libra and Calibra, could you just talk about the importance of payments across the Family and how do you tie these together as you work toward interoperability? Thank you.

Mark Zuckerberg

Founder, Chairman and Chief Executive Officer | Facebook, Inc.

Yes. So we’re doing a lot around commerce and payments, because there are lots of different segments for what people are trying to do. In terms of buying and selling things, a lot of people want to buy and sell used goods, we have Facebook Marketplace for that. A lot of small businesses, want to set up storefronts, we’re enabling that through Instagram and Facebook and then increasingly through messaging as well. On the payment side, WhatsApp Payments will be a part of Facebook Pay. I mean we announced this program last year that basically will make it. So if you pay for something in any of our apps you only need to enter your credit card once and then you can use that to have a more frictionless checkout experience across the other apps.

So those two things tie in together, but we are taking multiple approaches on payments where things like what we’re doing with payments in WhatsApp for Facebook Pay overall are built on top of traditional payment infrastructure, whereas the longer-term work that we proposed around Libra that’s now being handled by the independent Libra Foundation, we’re working on a wallet that will work with Libra. That is more a proposal to make it so that some of the payment infrastructure around the world can be more efficient, especially for things like transferring money across borders. If you think about it, a lot of the companies that do payments and such today are kind of national and are in one country and there aren’t that many folks who have an incentive to make this work well across different places around the world. So that’s someplace where we thought that we could add.

But overall, we’re — a big focus for us is making sure that individuals and small businesses have access to the same kind of tools that historically only larger companies have had access to. Bigger companies are going to find ways to sell their things and measure the effectiveness of their ads and all that. A lot of the work that we end up doing goes towards making it easier for small businesses to be able to, without a big technology shop, be able to use the same tools, get access to payments, set up storefronts easily, being able to measure the effectiveness of ads and that’s a lot of what we’re focused on, and you’ve heard Wehner talk about this a bit. A lot of the concerns that we have with some of the potential changes to the ecosystem we think will disproportionately hurt small businesses ‘ ability to compete with larger companies.

Operator

Your next question comes from the line of Eric Sheridan from UBS.

Eric Sheridan

Analyst | UBS

Thanks for taking my question. Maybe two if I can. Mark, you talked previously about trying to more tightly integrate the applications in the Family under the Facebook umbrella. I wanted to get an update on the way you’re thinking about branding the applications to the consumer as well as integrating them on the tech back-end as you look out over the next couple of years? And then following up on the comment on messaging, I wondered if you can give an update on the way the team is thinking about the messaging component on the monetization front and thinking about sort of the more interesting products you might use to monetize the messaging applications both Facebook Messenger and WhatsApp as you look out over the next couple of years? Thanks so much.

Mark Zuckerberg

Founder, Chairman and Chief Executive Officer | Facebook, Inc.

Sure. So on integration overall, here’s how I think about it. We’re going to keep the brands, right, from all the apps, of course, I mean these are large communities that people love and strongly associate with a specific app. So that’s clearly going to stay.

In terms of integration, all the apps are already very integrated today. We all run off of common infrastructure. We’ve tried to run the company in a way where we have — we set up the infrastructure and we set up the business models that way and engineer. Improving the efficiency of one system makes all of the apps better. And that’s — everything is already very tightly integrated kind of below the surface, in a way that people using these apps may not feel. But I think the push for the next few years is, we think that — and running a company, I want to make it — so it’s not just the back-end engineers when they improve something it improves everything, we want to make it so that features that get built across Instagram or Facebook or WhatsApp and when people engage on those that it can also make your experience better across the other apps in the Family too. So that’s kind of the philosophy behind why we’re doing a number of things. Some of it is just, we built up multiple technical stacks in some places that didn’t need to exist, the voice calling stack on WhatsApp and Messenger, there’s not a real reason why those need to be different, but we didn’t standardize at that layer historically and that means that now we have to put twice as much work into making that good. If we got that to be integrated then the same engineering effort could just make it better across everything at a faster rate.

So it’s going to be more work like that. I think some of it will start to be more visible across the apps. The apps will always continue to have their own identity and brand though because they — people use them for somewhat different things and that’s really important.

Operator

Your next question comes from the line of Youssef Squali from SunTrust.

Youssef Squali

Analyst | SunTrust

Okay, great. Thank you very much. I actually just have one question. Could you guys provide us any update around Facebook Dating that is not one products that Mark, you talked about? Any stats that you can share with us, any plans to push into other geos and would you bring it to Instagram as well? Thank you.

Sheryl Sandberg

Chief Operating Officer | Facebook, Inc.

So, before we answer that I am to go back and answer the messaging monetization second half of the last question if that’s okay, and then we’ll take this one. On messaging we are still really focused on this and we think in many ways we’re better positioned than anyone else in the industry to participate in the opportunity, that should be there over the long run for businesses and consumers to connect on message. In terms of direct ads in messaging, we’re taking that very slowly, we’re very slow rollout in Messenger, we don’t have that rolled out in WhatsApp.

Where we are seeing a lot of growth and really exciting metrics, right now are click to messaging ad. These are one of the fastest-growing ad formats in our Family, especially with SMBs in markets like APAC but really across the board. And what happens is that from Facebook or Instagram feed or from Facebook, Instagram or Messenger Stories you can click to message a business on Messenger or WhatsApp. It’s a really good way to drive engagement. It also really takes people further down the funnel from seeing an ad to having a direct connection with businesses, which consumers like and businesses like.

We also think the ROI is very high here. So I’ll share an example, Manulife from Vietnam as an insurance company. They used click to messaging ads to generate and qualify leads and compared to Facebook lead ads which were already performing well those had 2.4 times more qualified leads and a 4 times increase in sales. And so we think the combination of the discovery ads we can do clicking through to Messenger right now already shows the potential of how important messaging can be for businesses.

Mark Zuckerberg

Founder, Chairman and Chief Executive Officer | Facebook, Inc.

Yes, I could talk a little bit about the dating experience. It’s going well. I don’t think we have any specific stats to share on this, but it’s going well and we — I think we’re already one of the top dating services and we expect to continue growing. In terms of where we launched it, we launched in a number of countries before bringing it to the US and our product development approach is that we launch something and then we get feedback. We try to test things before we launch them, but then there are some things that you can’t learn until you have it out. And then we will kind of keep on iterating on it until in a number of countries people who use it really like it and keep using it, and then we rolled it out to more countries. So we did that over the last year. We’ll continue doing that and more places, but the US was certainly one of the biggest places that we were focused on launching it.

Overall, I mean, the way the dating fits into the strategy here is within the Facebook app we think that News Feed is really central and that it’s one of the only things that we think everyone who uses the app is really going to use on a daily basis. But there are different social utilities is that, even if not everyone wants to use them, hundreds of millions of people might find value. And so whether that’s a marketplace for buying and selling things, groups and communities we think is increasingly ubiquitous but the tab there isn’t going to be used by everyone. It’s going to be used by hundreds of millions of people. Things like Watch or the news tab that we have started rolling out or not things that we expect everyone to use, but even if tens or hundreds and millions of people use them and we’re adding unique value that other folks might not be able to build and we’re making the app more valuable. So I kind of expect in a year or two the world that we’re going to be in is people use Facebook, they’re going to use News Feed and then they’re probably each going to have two or three other of these social utilities that they find valuable. And as we start building those, I think that that’s some part of the story that you’re seeing on why the Facebook app engagement has been strong recently, especially as we build more of these things that certainly is showing up in how people use the app.

Operator

Your next question comes from the line of Mark Mahaney from RBC.

Mark Mahaney

Analyst | RBC Capital Markets

Okay. Thanks. Two things. One, congrats on the carbon reduction goal, I love that, I posted about it Mark you’d be happy to know that but I’d love to see more companies do that. The real question I have to do — I have has to do with the security of the platform in this election year. And so can you just talk about the confidence you have, and I know there’s a lot of things you can’t control, but I’m sure that there is going to be a lot of controversy around the elections or I assume that’s going to be the case, there may well be bad actor interferences there was four years ago. The extent you think that Facebook and its platforms are ready to handle that better prepared? Is there anything you could do to talk more about that, quantify it whatever, just how you are trying to hedge that risk, which I think is going to be a material risk this year? Thank you.

Mark Zuckerberg

Founder, Chairman and Chief Executive Officer | Facebook, Inc.

Yes, this is certainly something that we’re extremely focused on and I do think that there is going to be a lot that we need to be watching out for this year. Since — in 2016, I think it’s very fair to say that we were behind where we needed to be, as was a lot of the — rest of the industry and governments as well and expecting the kind of information operations that we now have seen. Now, the good news is that since then it’s not like this is the first presidential election that we’ve had to play a part in, in defending the integrity of. There have been major elections across the world and each time we’re able to see the tactics of the foreign adversaries evolve because we and others weren’t really focused on that in 2016 as much.

We’ve been able to improve it at quite a fast rate. There are also good partnerships in place now across the industry, across law enforcement, the intelligence communities not just in the US, but across other countries too. So I think the systems are much more robust and you can look at the results in other elections around the world. Where for example in the EU election last year where a lot of people were very worried that there would be this kind of foreign interference. I actually had gone to the EU Parliament and testified about what we were going to do. And then I think the EU Parliament President after released a statement saying that we’ve met our commitments and did the things that we said we were going to do and it was a relatively clean election. So we’re going to continue seeing the adversaries get more advanced. I think certainly because this got a lot of attention. It’s not just Russia at this point, we’ve seen similar types of attempts from Iran, China in some places, others as well.

So there is more to kind of lookout for there, but overall I do feel confident about where we are. One of the things I think we need to look out for and that the intelligence community has warned us about is some of the goals of some of these nation-state actors is not necessarily to interfere directly but to just sow doubt about the legitimacy of an election. So even to the extent that we may not even see specific attacks, but if there is a big meme that there is widespread interference that has the same effect in terms of kind of sowing doubt about things. So we’re very focused on this and making sure that people know what we’re doing. So they can have confidence and this is just — this is really a top priority for us.

Operator

Your next question comes from the line of Colin Sebastian from Baird.

Colin A. Sebastian

Analyst | Robert W. Baird

Great. Thanks. Two for me as well. Following up on the shopping commerce question, I wonder if the focus here includes expanding Marketplace across multiple services or whether that seems like better as a distinct application? And then separately, curious on some of the newer visual apps such as Threads and Lasso, what are you seeing here in terms of usage or engagement and are these features that ultimately fit within existing apps or also might be distinct from the current surfaces? Thank you.

Sheryl Sandberg

Chief Operating Officer | Facebook, Inc.

I can talk about Marketplace. Marketplace is growing nicely. It’s now used by hundreds of millions of people every month. We also rolled out ads in Marketplace, which are available in 94 markets, so which means advertisers can extend their News Feed ads to Marketplace. We’re seeing a lot of interest, especially with the retail and auto advertisers. It’s very early, but we’re seeing good results. So we believe this is a good opportunity, we’re going to continue to invest. But for the foreseeable future, even within this ads remains the great focus.

Mark Zuckerberg

Founder, Chairman and Chief Executive Officer | Facebook, Inc.

Yes. I think you mentioned Threads and Reos and a couple of the apps that we’ve launched with Instagram. It’s still early, I think that there are some promising signs. We’re figuring out the extent to which those should grow to be big independent apps over time or should be integrated into the core of the Instagram service or our other messaging apps. So we’ll figure that over time, but those are certainly both important spaces to be in visual messaging and kind of interest-based talent showing stories type functionality.

Operator

Your next question comes from the line of Kevin Reevey from Evercore ISI.

Kevin Rippey

Analyst | Evercore ISI

Hi. Thanks for taking the question. Mark, this is really one for you, you describe the new experiences that could be rolling out in the back half of the year. Could you just maybe provide a little more color on that and kind of what you’re envisioning? It’d be great to hear. Thank you.

Mark Zuckerberg

Founder, Chairman and Chief Executive Officer | Facebook, Inc.

Yes. I’ve been talking a lot about how we’re trying to build out our private messaging apps into richer private social platforms. And the idea there is that people want to interact and lots of different ways and then Facebook and Instagram you can interact with a lot of people you know are interested in connecting with, in a number of different ways. But our texting apps today are primarily still texting. So a lot of what we’ve been trying to do is make it so that, we build out the infrastructure, so a WhatsApp and Messenger and Instagram Direct can evolve in a way rather than being just places where you message folks. They can be places where you can hang-out and feel more present with people, where you can connect to different groups in different ways, interact with businesses and do payments and commerce.

And when we kicked off this big initiative, a lot of the stuff with long-term infrastructure that we needed to get started building. So we’ve now been — we’re now a year or so into starting to build out a lot of that. So I guess what I’m saying is I just expect some of this to land in this year, not all of it, some of the stuff is longer-term. For example, the work that we’re doing on full end-to-end encryption that’s just — that’s a long-term project. We want to make sure we get the safety implications of that right. Already fully rolled out around WhatsApp. We’re really committed to making sure that we nail the safety parts of that before, fully rolling it out across Messenger and Instagram as well. So some parts of this will not land this year, but I expect a lot of this will start to land this year around this vision of building the private social platform.

Operator

Your next question comes from the line of Lloyd Walmsley from Deutsche Bank.

Lloyd Walmsley

Analyst | Deutsche Bank Securities

Thanks. So this is the second quarter in a row where you guys have called out Core Facebook as the key driver of impression growth. So I’m wondering if you can just elaborate a bit on what’s driving that strength in Core Blue engagement, whether this is something you guys expect to continue? And I guess kind of as a follow-up related to that, there has been some press, you plan a Super Bowl ad specific to the Facebook Groups product. So any updates on engagement around Groups or how the strength there is impacting the ad business, any color you could share would be great? Thanks.

Dave Wehner

Chief Financial Officer | Facebook, Inc.

Yes, okay. So I’ll take that, Lloyd. Yeah, I mean we have — we are pleased with the engagement that we’re seeing on the Facebook app broadly. And as you mentioned, this has been a pretty consistent story over the last several quarters. So I don’t think it’s particularly a new story, but we’re seeing that across the globe in all regions. And I’d say the character of the engagement growth is a little bit different by region. In the US and Canada on Facebook, we’re seeing strength in sort of non-video feed engagement. In other regions, we are seeing good strength in video and then I’d say across all of our apps, we’re seeing strong adoption of Stories and WhatsApp Status products around the world, and that continues to provide another way for people to connect and share. But specific to Core Facebook, I think those are some of the drivers that I’d call out.

Operator

Your next question comes from the line of John Blackledge from Cowen.

John Blackledge

Analyst | Cowen

Great. Thanks. Two questions. How should we think about the video strategy on Core Facebook and any update on Watch users and engagement? And then on Instagram, there has been some discussion within the advertising community that Explorer is an area for ad inventory expansion, just any color on ad trends on the Explorer tab? Thank you.

Mark Zuckerberg

Founder, Chairman and Chief Executive Officer | Facebook, Inc.

Yes. The video strategy has been pretty consistent. We — and it’s consistent with the rest of what we’re trying to do on creating these other tabs in social utilities as well. People watch a lot of videos as part of News Feed. But what we also found was that just straight consuming a lot of video and News Feed was displacing some of the social interactions and connecting with people, that was the real core of what people came to our services for. S basically, in order for — to fully meet the needs that people have for video, we started creating the separate tab Watch and that’s been growing quickly as well. You can think about the content acquisition that we do there. As more along the lines of either marketing or bringing new people into the experience, we’re not building out a subscription service or anything like that around this. So that’s more just some good examples of content and anchor content to help create the community and get people into that experience.

Sheryl Sandberg

Chief Operating Officer | Facebook, Inc.

I can share a little bit about the Explorer opportunity. So more than 50% of accounts on Instagram are using Explorer every month, and as of Q3 ads were available to a 100% of advertisers. We think it’s a great opportunity to reach customers who are already in a discovery mindset. And the way it works is, after you click on a post in Explorer grid you enter a feed like an experience where the ads show up.

Operator

Your next question comes from the line of Michael Nathanson from Moffett Nathanson.

Michael Nathanson

Analyst | Moffett Nathanson

Thanks. I have two. One for Dave and one for Mark. So maybe for Dave, If you look at your slide deck Page 4, what you see is just this amazing ARPU growth in the US and just the size of the US ARPU is so much larger than all these other markets including Europe. I wonder when you look at the opportunity to try to drive market — drive pricing in other markets, what are those gating factors? What are you looking for or what should we look for to move pricing to be closer to where I guess ARPU closer to where the US numbers are heading? And then, for Mark on payments. What are your — initial markets you’re trying to target and what impact do you all expect so that if you get payments right. What impact it will that have on your other parts of the advertising business?

Dave Wehner

Chief Financial Officer | Facebook, Inc.

Sure. Mike, I’ll take the first one. So this has been a pretty consistent question that’s come up over the years and I think the answer, largely, it’s the same as I’ve given on previous calls, which is the US and Canada segment is really a pure-play developed market with just US and Canada the two countries in that segment. Europe is a broader mix of countries. So you’ve got, Eastern Europe and you’ve got Turkey in there. So you’ve got just lower ad market per capita countries that are included in that segment. It’s a much closer number if you were to look just pure play at Western Europe and then there is obviously different engagement levels. Maturity of Instagram in those markets that also plays into it, I guess not for Facebook only the stats, but I think you just get different dynamics based on really characteristics of those countries. So that’s really what’s driven the difference in ARPUs and we’re also getting faster growth in general in the lower ARPU countries both within Europe and within APAC. So that tends to also have a mitigating impact on ARPU because of the mix towards those lower ARPU countries as the users grow there more quickly.

Mark Zuckerberg

Founder, Chairman and Chief Executive Officer | Facebook, Inc.

Sure. And on payments we’re focused in different places with different products. For things like Instagram and even a lot of what we’re doing on Facebook, It’s a lot more developed countries. For WhatsApp, it’s the biggest countries on WhatsApp so that’s countries like India, and Mexico, and Brazil and Indonesia, which will make up a large part of the community on WhatsApp. The way that we expect that this will work out is basically for people, it’s just is an important feature to be able to move your money around pay friends and individuals, as well as small businesses. From a small business perspective being able to close the loop on ads and transactions, we think it’s just going to make it so that it’s more valuable to have a presence on our services and buying ads is going to be more valuable. So quick to messaging ads which the ads run in Facebook and Instagram but then link you to WhatsApp or Messenger is a product that’s growing well. As you can complete more payments in WhatsApp and Messenger, you would expect it to be worth more for businesses to bid more there, which is why we’re so far focused on making it so that the payments can be free or really as cheap as possible because we think that from a business perspective, we will get some of the value Just by having the services be more valuable for businesses and the ad prices that they’ll bid in the auction.

Deborah Crawford

Vice President, Investor Relations | Facebook, Inc.

Okay. Operator, we have time for one last question.

Operator

Your last question comes from the line of Brian Fitzgerald from Wells Fargo.

Brian Fitzgerald

Analyst | Wells Fargo Securities

Thanks, guys. Within the last few weeks you’ve brought several gaming streamers on-board, Disguised Toast, (inaudible), Zero and in December, you acquired PlayGiga. So we want to hear a little bit more about Facebook Gaming and the opportunities there and maybe the strategic overlap with Oculus? Thanks.

Mark Zuckerberg

Founder, Chairman and Chief Executive Officer | Facebook, Inc.

Yes. I mean there are a couple of different things here. Over the long-term, there surely will be a connection between the work that we’re doing in the Facebook app and Oculus, there will be opportunities for that. But right now we’re developing them somewhat independently. I think within the Facebook app you can think about this as a connection — as an extension of the social utility strategy where — and we’ve talked about Dating on the call, we’ve talked about Watch, we’ve talked about Groups, News tab. Certainly, the Facebook Gaming effort for the people who are engaged in that, I mean there are a lot of communities that can get — that people who really care about gaming it has connections to the video and kind of live content services that we’re building out.

So this is going to be one of the increasing focus for us or just the different ways that people want to interact and build communities, we’re not just trying to build things that everyone is going to want to use. We think something like gaming — hundreds of millions of people are going to want to use it and that’s great.

Deborah Crawford

Vice President, Investor Relations | Facebook, Inc.

Great. Thank you for joining us today. We appreciate your time and we look forward to speaking with you again.

Operator

Ladies and gentlemen, this concludes today’s conference call. Thank you for joining us. You may now disconnect your lines.

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