Meta Platforms Q4 2021 Earnings Call Transcript

Quartr
Provided by Quartr
February 2, 2022

There are 14 speakers on the call.

Operator

Good afternoon. My name is France, and I will be your conference operator today. At this time, I would like to welcome everyone the Meta Fourth Quarter and Full Year 2021 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. To the operator's remarks, there will be a question and answer session.

Operator

To the call will be recorded. Thank you very much. Ms. Deborah Crawford, Facebook's Vice President of Investor Relations, you may begin.

Speaker 1

To the call.

Speaker 2

Thank you. Good afternoon, and welcome to Meta's Q4 and full year 2021 earnings conference call. To Joining me today to discuss our results are Mark Zuckerberg, CEO Sheryl Sandberg, COO and Dave Wehner, CFO. To the operator. Before we get started, I would like to take this opportunity to remind you that our remarks today will include forward looking statements.

Speaker 2

To the operator. 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 to 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, to 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 our GAAP and non GAAP financial measures.

Speaker 2

A reconciliation of GAAP to non GAAP measures is included in today's earnings press release. To 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.

Speaker 3

To the call. Hi, everyone, and thanks for joining today. This was a solid quarter for our products and business. To It was also an important one for our company. In October, we announced that Meta would be our new name and we laid out our vision for the metaverse.

Speaker 3

To And when we shared our plans to connect, I said this is not something that we're going to do on our own. The metaverse will be built by creators and developers, to We'll be interoperable and will touch many different parts of the economy. In the months since, it's been exciting to see lots of other companies share their own plans to the next question

Speaker 1

and answer session.

Speaker 3

And how their experiences and products might show up too. And I look forward to partnering with a lot of them as we work to bring this to life together. To Now last year was about putting a stake in the ground for where we're heading, and this year is going to be about executing. To And today, I'm going to discuss our 7 major investment priorities for 2022. They are reels, community messaging, commerce, to ad privacy, AI and of course the metaverse.

Speaker 3

And these are the areas that we're putting a lot more talent and budget towards. To Before I get to that, I want to briefly touch on our Q4 results, which I know Cheryl and Dave are going to go deeper on. To I'm proud of the work that our teams did here. We shipped products, our community continued to grow and businesses of all sizes turned us to help them reach people. But there are 2 things that I want to call out that are having an impact on our business.

Speaker 3

The first is competition. To people have a lot of choices for how they want to spend their time and apps like TikTok are growing very quickly. To the services out there for young adults, which I spoke about on our last call. The second area and related to this is that we are in the middle of a transition on our own towards short form video, like reels. So as more activity shifts towards this medium, we are replacing some time and news to and other higher monetizing services.

Speaker 3

So as a result of both competition and the shift to short term short form video as well as our focus on serving young adults to while we're optimizing

Speaker 1

overall engagement, we're going to

Speaker 3

continue to see some pressure on impression growth in the near term. To non confidence that leaning harder into these trends is the right short term trade off to make in order to get long term gains. To We've made these types of transitions before with mobile feed and Stories where we took on headwinds in the near term to align with important trends to the next question and answer session. And while video has historically been slower to monetize, we believe that over time short form video to monetize more like feed or stories than like watch. So I'm optimistic that we'll get to where we need to be with reels too.

Speaker 3

To our next question. Ultimately, our continued success relies on building new products that people find valuable and enjoy using. And in a competitive marketplace, we are focused on understanding the areas that we deliver on for people and executing against this strategy.

Speaker 1

To Dave is going to

Speaker 3

share more on the impact to our business in a minute. But before we get to that, I want to discuss our investment priorities for 2022. To the first one is reels. Now it's clear that short form video will be an increasing part of how people consume content moving forward. And Reels is now our fastest growing content format by far.

Speaker 3

It's already the biggest contributor to engagement growth on Instagram to And it is growing very quickly on Facebook too. And as we continue to improve the tools for creators, ranking for the people watching to And as we roll out the product everywhere across the world, we expect that this will continue growing quickly. So looking ahead, we're investing in simplifying video across to Instagram, building more great creative and monetization tools for creators and helping more people discover and interact with relevant reels. To the next investment priority is community messaging, which is about chatting with groups of people that you have something in common with, whether that's a shared community, to interest or experience. We already run some of the world's most popular messaging platforms where people connect 1 on 1 or in groups with friends, family and colleagues.

Speaker 3

To And we're seeing people increasingly want to share more things in messages that they were previously maybe posted to feed. To So I think the popularity that we're seeing, with apps like Slack in the workplace or Discord or Telegram, reflects this trend too. To So we're going to help people on WhatsApp better organize their group chats and make it easier to find information for the communities that they're a part of, to like parent groups or neighborhoods and we're also building community chats on Facebook and Messenger for real time conversations within those groups and communities. To I also want to call out business messaging, since it's an area where there's some real momentum here. We estimate that there are more than 1,000,000,000 users to our connecting with a business account across our messaging services every week.

Speaker 3

And we're partnering with companies like Uber and GeoMART to help people book a ride to 4 have their groceries delivered right from a check. And we're building new tools to make buys online better for people and easier to manage for businesses. And we believe that this to the company's business for us in the years to come. We're also making good progress on our broader commerce efforts. To We already helped a lot of businesses reach new and existing customers with personalized ads and our commerce tools are an extension of that.

Speaker 3

To the seamless way for people and businesses to buy and sell through our apps. And our strategy here since introducing Shoppes a year and a half ago to make it as easy as possible for people to make a purchase after discovering a new brand or product without having to switch over to a browser or reenter their payment info. To And Cheryl will share more about our progress here, including some of the success we saw over the holidays. Now next up is ads. To the next question.

Speaker 3

And with Apple's iOS changes and new regulation in Europe, there is a clear trend where less data is available to deliver personalized ads. But people still want to see relevant ads and businesses still want to reach the right customers. So to We are rebuilding a lot of our ad infrastructure, so we can continue to grow and deliver high quality personalized ads. To the next 2 priorities I want to discuss focus on infrastructure that underpins all of our products. To the operator.

Speaker 3

The first one is privacy. We've made huge investments in strengthening our approach to privacy, including rebuilding our privacy program and our privacy review process. To We made updates to bring greater privacy to our products, including end to end encrypted backups and disappearing messages on WhatsApp to the conference call. And over the next few years, we're focused on building out a major privacy a structured project that will encode our privacy commitments at a deeper level of our technical foundation to make them more durable and make product development faster to the next question. Now on to AI, this is one of the areas where we've routinely seen to stronger returns on our investments over time than we've expected.

Speaker 3

Advances in AI enable a lot of the experience that I've talked about so far. To It enables us to deliver better ads to people while using less data. That's core to all of our safety and security work. To It has meaningfully improved the relevance of reels and overall content ranking in general and it plays a big role in our e commerce efforts. To our next question.

Speaker 3

Artificial Intelligence is also going to play a big role in our work to help build the metaverse. We just announced to our AI research supercluster, which we think will be the world's fastest supercomputer once it is complete later this year. To This is going to enable new AI models that can learn from trillions of examples and understand hundreds of languages, which will be key for the kinds of experiences that we're building. Now looking ahead, we're focused on further scaling our computing power to the operator and transforming our AI infrastructure through advances in foundational research as well as improvements to data center design, networking, to Storage and Software. Now the last investment priority here is the metaverse.

Speaker 3

We are focused on the foundational hardware and software to the required to build an immersive, embodied Internet that enables better digital social experiences than anything that exists today. To the operator. On the hardware front, we're seeing real traction with Quest 2. People have spent more than $1,000,000,000 on Quest store content, to helping virtual reality developers grow and sustain their businesses. We had a strong holiday season and Oculus reached the top of the App Store for the first to our next call.

Speaker 3

We're working towards a release of a high end virtual reality headset later this year, to And we continue to make progress developing projects Nazare, which is our first fully augmented reality glasses. To As for software, Horizon is core to our metaverse division. And this is our social to a VR world building experience that we recently opened to people in the U. S. And Canada.

Speaker 3

And we've seen a number of talented creators to build worlds like a recording studio where producers collaborate or a relaxing space to meditate. And this year, we plan to launch a to the next version of Horizon on mobile too. So that will bring early metaverse experiences to more surfaces beyond VR. To the next question. So while the deepest and most immersive experiences are going to be in virtual reality, you're also going to be able to access these worlds to from your Facebook or Instagram apps as well and probably more over time.

Speaker 3

So this will enable us to build even richer social to experiences where you can connect with friends in the metaverse, whether they're in VR or not. We're also focused on avatars, Which will be how you represent yourself in Horizon and across other developers' experiences in the metaverse. In December, to We rolled out our Metaverse Avatars SDK to all Unity developers on Quest and Rift and Windows based VR platforms, letting developers bring to Meta Avatars to their own VR experiences. We just announced an update that lets you further customize your avatar to better express yourself. To We're introducing Digital Clothing 2, starting with an NFL partnership, so you can share on your favorite team.

Speaker 3

You can use your avatar across Quest, Facebook, Instagram to our Investor. So it serves as another bridge between our 2 d social apps and 3 d immersive virtual reality experiences. To We have a bunch of work ahead to make the avatars as expressive and high fidelity as they need to be to fully represent us and help us feel present with one another. But

Speaker 1

to the conference call. I am very excited for the

Speaker 3

advances that we're making here. Now making meaningful progress across all 7 of these areas to is going to improve the services that we offer today and it will help power a more social, intuitive and entertaining metaverse, where to People, businesses and creators can all thrive. And this fully realized vision is still a ways off. To the operator. And although the direction is clear, our path ahead is not yet perfectly defined.

Speaker 3

But I am pleased with the momentum and the progress that we've made so far, to And I'm confident that these are the right areas and investments for us to focus on going forward. To 2022 is the first page of the next chapter for our company. I'm grateful for all the talented team at Meta and our partners for executing on this important work and of course for all of you who are on this journey with us. To And now here is Sheryl.

Operator

Thanks, Mark, and hi, everyone. To our Q4. Our total ad revenue in Q4 was $32,600,000,000 which is up 20% year over year. The close of the year also marked to first time our business generated more than $100,000,000,000 in annual revenue. I want to congratulate our teams and thank our partners for helping us reach this milestone.

Operator

To the Q4. Throughout 2021, we saw solid growth, which continued in Q4. But there were a number of dynamic factors that created headwinds for us this past to the quarter in addition to those Mark described around competition and our shift to short form video. We were lapping a period of strong demand in 20 to 20 that benefited from very strong growth in online commerce, which has since slowed. Q4 was also the first holiday season after Apple's iOS changes, to the company's call, which have had an impact on businesses of all sizes, especially small businesses who rely on digital advertising to grow.

Operator

To this conference call. This will continue to be a factor in 2022. We've also heard from advertisers about other macro trends that contributed to the headwinds in Q4, to our Q1 results, including global supply chain disruptions, labor shortages and inflationary pressures. A number of to Industry reports have pointed to people shopping earlier in the holiday season to avoid potential supply chain issues and shipping delays. To this is in line with the behavior we saw from advertisers, many of whom front loaded their spend earlier than usual.

Operator

To Mark talked about 7 areas of investment. I'd like to talk about our progress in 3 of those: ads, commerce and messaging. To the Q1. 1st, ads. Like others in our industry, we faced headwinds as a result of Apple's iOS changes.

Operator

To the next question. As we described last quarter, Apple created 2 challenges for advertisers. 1 is that the accuracy of our ads targeting decreased, which increased the cost of driving outcomes. To the other is that measuring those outcomes became more difficult. These challenges are complex and interrelated.

Operator

We're working to try and improve things. To, for example, by making progress in closing the under reporting gap for iOS web conversions and by introducing tools like our aggregated events measurement solution to deliver better insights for advertisers. These efforts will help to mitigate some of the challenges, but we expect the overall targeting and measurement headwinds to moderately increase from Apple's changes and from regulatory changes in Q1 and throughout 2022. To the next question. On the shift to short form video, I want to emphasize that while we're going through a transition, we're optimistic.

Operator

Right now, Reels monetizes at a lower rate than feed in Stories, to the Q2, but we expect this to improve over time. We've made successful transitions before, the shift from web to mobile and another shift from feed to stories. To the conference call. We have a playbook here. The experience we have for monetizing stories is directly applicable, so we're not starting from scratch.

Operator

We think that over the long term, this shift will be a success for us and our partners too. 2nd, commerce. To the Q4. We launched a

Speaker 1

number of new tools in Q4.

Operator

We released new features like ratings, reviews and community replies to product questions and significantly improve checkout stability. We brought shops to groups and we started testing live shopping for creators, to an early glimpse of the Immersive Shopping experiences that will be possible in the metaverse. To our Commerce strategy remains focused on 3 areas: continuing to be the best place for advertisers to find customers and get strong ROI, to making it easier to sell on our platform and improving the customer experience. We still have a lot of work to do compared to other mobile and web shopping experiences,

Speaker 1

to the operator. But we're seeing promising early signs.

Operator

It's great to see businesses and consumers using social and immersive shopping experiences to product tags, drops and live shopping. A good example is the Laundress, a premium fabric care and home cleaning brand from Unilever that wanted to build awareness of a new line he developed with the musician John Mayer. In November, they launched exclusively on Instagram for 24 hours and hosted a live shopping event, a conversation between John Mayer and Laundress Co Founder, Lindsay Julia Boyd, where people could buy the new products as they talked about them live. To the call. The hour long event generated more than $40,000 in sales.

Operator

Overall, we're pleased with the engagement we saw with our commerce tools over the holiday season and view Q4 as a promising milestone in our multiyear journey. 3rd, business messaging. To our website. Our focus is on helping businesses and consumers connect. Our largest monetization effort is click to messaging ads.

Operator

To. When you click on an ad in your Facebook or Instagram feed and it opens a chat with the business in Messenger, Instagram Director, WhatsApp. It's a great way for businesses to drive engagement. To And we've seen lots of demand from consumers who want to use our messaging apps for everyday services like utilities, financial services, education and travel. To our Q4.

Operator

In Q4, we expanded the types of information people can choose to receive from businesses in the format in which they can interact. To We're continuing to invest in new tools to make it easier for people to help and make purchases right from a chat. More than 150,000,000 users globally now view a business to our new features like collections on WhatsApp help businesses organize their products and make it straightforward for people to find things to buy. To our conference call. As we enter 2022, our focus is where it has always been, building products that help people connect and businesses grow.

Operator

For making long term investments to evolve our business and continue to drive real value for our partners. In the coming year, we'll continue to invest things that improve ad performance for our clients in short form video like Reels and in making the commerce experience better for consumers and marketers on our platforms. To As ever, I'm grateful to our partners around the world, big and small, who we learn from every day and to our teams at Meta who work so hard to help businesses to the holiday season and beyond. Now here's Dave.

Speaker 4

Thanks, Sheryl, and good afternoon, everyone. To the operator. As we announced in October, beginning this quarter, we were reporting revenue and operating income in 2 segments, Family of Apps and Reality Labs.

Speaker 1

To the operator.

Speaker 4

I will begin by discussing our consolidated results before moving to segments and ending with our outlook. All comparisons are on a year over year basis unless otherwise noted. To the operator. We delivered solid results in the Q4, ending a strong year for our business as full year 2021 total revenue grew 37% to nearly $118,000,000,000 to Q4 total revenue was $33,700,000,000 up 20% or 21% on a constant currency basis. To the Q1.

Speaker 4

Unlike the 1st 3 quarters in 2021, we experienced a currency headwind in Q4 and had foreign exchange rates remain constant with Q4 of last year, total revenue to the Q4. Q4 total expenses were $21,100,000,000 up 38% compared to last year. To the operator. In terms of the specific line items, cost of revenue increased 22%, driven primarily by Reality Labs hardware costs, to core infrastructure investments and payments to partners. R and D increased 35%, driven primarily by hiring to support family of apps to the company's call and reality Labs as we increased as well as increased reality Labs R and D operating costs.

Speaker 4

Marketing and sales increased 34%, mainly driven by marketing to Hiring. Lastly, G and A increased 107%, driven primarily by legal related costs and employee related costs. To the operator. We added over 3,700 net new hires in Q4, the majority in technical functions. We ended the quarter with over 71,900 full time employees, up to 3% compared to last year.

Speaker 4

4th quarter operating income was $12,600,000,000 representing a 37% operating margin.

Speaker 1

To our financial results. Our tax rate was 19%.

Speaker 4

Net income was $10,300,000,000 or $3.67 per share. To Capital expenditures, including principal payments on finance leases were $5,500,000,000 driven by investments in data centers, servers, network infrastructure and an office to Facilities. Free cash flow was $12,600,000,000 We repurchased $19,200,000,000 of our Class A common stock in the 4th quarter to the Q4 of 2018. Moving now to our segment results. I'll begin with the Family of Apps segment.

Speaker 4

To Q4 total Family of Apps revenue was $32,800,000,000 up 20%. Q4 Family of Apps ad revenue to the conference call. With $32,600,000,000 up 20 percent or 21% on a constant currency basis. On a user geography basis, year over year Ad revenue growth was strongest in Asia Pacific at 31%. Rest of World, Europe and North America grew 28%, to 20% 15%, respectively.

Speaker 4

Currency was a modest headwind in all international regions. To the call. In Q4, the total number of ad impressions served across our services increased 13% and the average price per ad increased 6%. To the Q1. Impression growth was primarily driven by Asia Pacific and Rest of World, while impressions in North America declined 6% year over year.

Speaker 1

To the operator.

Speaker 4

On a global basis, compression growth benefited from ad load increases in user growth. This was partially offset by engagement related headwinds as we faced increased competition for people's time to a shift of engagement within our apps video services like Reels, which show fewer ads than Feed or Stories today. To our press release. Pricing growth was broad based across regions. Worldwide pricing growth slowed from the Q3 as we lapped stronger growth in the year ago period and faced currency headwinds.

Speaker 4

To the operator. Pricing was also negatively impacted by advertisers facing challenges from macroeconomic factors and measurement and targeting headwinds. To the company's financial results. Family of Apps' other revenue was $155,000,000 down 8% due to a decline in payment revenue earned from gains. To the company.

Speaker 4

Family of apps expenses were $16,900,000,000 up 35% due to higher legal related costs, employee related expenses, to Marketing Infrastructure Related Costs and Payments to Partners. Family of Apps operating income was $15,900,000,000 representing a 48% to operating margin. We estimate that approximately 2,800,000,000 people use at least 1 of our family of apps on a daily basis in December to And that approximately 3,600,000,000 people used at least 1 on a monthly basis. Facebook daily active users were 1,930,000,000, up 5% to the operator for 84,000,000 compared to last year. DAUs represented approximately 66% of the 2,910,000,000 monthly active users in December.

Speaker 4

To the Q4. To the Asia Pacific and Rest of World, we believe COVID resurgences during prior periods pull forward user growth. User growth in India was also limited by an increase in to our data package pricing. In addition to these factors, we believe competitive services are negatively impacting growth, particularly with younger audiences. To our call today.

Speaker 4

Within our Reality Labs segment, Q4 revenue was $877,000,000 up 22%, driven by strong Quest II sales during the holiday season. Reality Labs expenses were $4,200,000,000 up 48%, driven by employee related costs, to R and D operating expenses and cost of goods sold. Reality Lab's operating loss was $3,300,000,000 in the 4th quarter. To the Q1, Reality Labs operating loss was $10,200,000,000 Turning now to the outlook. To the operator.

Speaker 4

We expect Q1 2022 total revenue to be in the range of $27,000,000,000 to $29,000,000,000 which represents 3% to 11% year over year growth. To the operator. We expect our year over year growth in the Q1 to be impacted by headwinds to both impression and price growth. To the Q1. On the impression side, we expect continued headwinds from both increased competition for People's Time and a shift of engagement within our apps towards video services like Reels, to the

Speaker 1

operator, which monetizes lower rates

Speaker 4

than feeds and Stories. On the pricing side, we expect growth to be negatively impacted by a few factors. To the Q1 of 2019. First, we will lap a period in which Apple's iOS changes were not in effect and we anticipate modestly increasing ad targeting and measurement headwinds from platform and regulatory changes. 2nd, we will lap a period of strong demand in the prior year and we're hearing from advertisers that macroeconomic challenges to the call today.

Speaker 4

Finally, based on current exchange rates, we expect foreign currency to be a headwind to year over year growth. To the operator. In addition, as noted on previous calls, we also continue to monitor developments regarding the viability of transatlantic data transfers and their potential impact on our European operations. Turning now to the expense outlook. We expect 20 to 2022 total expenses to be in the range of $90,000,000,000 to $95,000,000,000 updated from our prior outlook of $91,000,000,000 to $97,000,000,000 to our Q1.

Speaker 4

Our anticipated expense growth is driven by investments in technical and product talent and infrastructure related costs. To the operator. We expect 2022 capital expenditures, including principal payments on finance leases to be in the range of $29,000,000,000 to $34,000,000,000 unchanged from our prior to our planned capital expenditures are primarily driven by investments in data centers, servers, network infrastructure and office facilities. To the operator. As we discussed previously, this range reflects a significant increase in our AI and machine learning investments, which will support a number of areas across our family of apps.

Speaker 4

To the operator. While our Reality Labs products and services may require more infrastructure capacity in the future, they do not require substantial capacity today to and as a result are not a significant driver of 2022 capital expenditures. On to tax, absent any to changes to U. S. Tax laws, we expect our full year 2022 tax rate to be similar to the full year 2021 rate.

Speaker 4

To our Class A common stock will begin trading on NASDAQ under the ticker symbol Meta in the first half of twenty twenty two. To the new ticker symbol aligns with our rebranding from Facebook to Meta. In closing, 2021 was a strong year for our business to an important year for the company as we aligned our corporate identity with our long term ambition to build the next generation of online social experiences. To. We're investing aggressively in 2022 to support our product roadmap as we work to deliver new and engaging experiences for people and support the businesses and creators who rely on our services.

Speaker 4

To. With that, France, let's open up the call for questions.

Operator

We will now open the lines for a question and answer session. To ask a question, please press 1 followed by the number 4 on your touch tone phone. Please pick up your handset before end And our first question is from the line of Brian Nowak with Morgan to Stanley. Please go ahead.

Speaker 5

Thanks for taking my questions. I have 2. The first one on the Reels transition, you all talked to you've been through other transitions in the past with mobile and Stories, etcetera, and you successfully navigated through. Is there anything That's unique or more challenging about the reels transition that makes you think it could take potentially longer to sort of scale those ad products to for this format as opposed to other formats in the past. Then the second one, Dave, when you sort of talk about the headwinds around ad targeting and measurement to Becoming larger in the Q1 and in 2022, is there anything other than sort of year on year to Data comps there or are you expecting other changes from a signal perspective and maybe help us understand any further changes you expect to come on the signal loss perspective?

Speaker 4

To Yes. Thanks, Brad. I could probably take both of those or yes. So on reels, I mean, I think there is a lot of to the characteristic of reels that makes it quite similar to the transitions that we've gone through before. As in the past, when we are focused on Stories, to We're really focused on consumer experience and really making short form video work effectively on both Instagram and Facebook, and we're already seeing that to the biggest driver of growth on Instagram and it's growing very quickly on Facebook.

Speaker 4

So we're really encouraged by what we're seeing. But we're really focused on making the consumer experience right. To And over time, we do think it's a format that will work effectively for advertising and we think the experience that we have for Stories will really lend itself well to in the Reels format. So we're confident in our ability to monetize over time. But right now, there's relatively few to sorry, relatively few ads and reels today.

Speaker 4

So it's definitely something that from an impression growth and monetization perspective is going to be a headwind. To On iOS 14, we saw the revenue impact with iOS 14 sorry, iOS just in general to in Q4 and that was in line with our expectations and similar to the Q3 headwind. But obviously, as we go into 2022, We're going to be lapping a period in which in Q1 and Q2, those headwinds were not in place to In the year ago period, so that definitely makes for a tough comp in the first half of the year. And we believe the impact of iOS to the operator. Overall, as a headwind on our business in 2022 is on the order of $10,000,000,000 So it's a pretty significant to the Q1 of 2019.

Speaker 4

And we're seeing that impact in a number of verticals. E commerce was an area where to the operator. We saw a meaningful slowdown in growth in Q4. And similarly, we've seen other areas like gaming be challenged. To But on e commerce, it's quite noticeable to notable that Google called out seeing strength in that very same vertical.

Speaker 4

To And so given that we know that e commerce was one of the most impacted verticals from iOS restrictions, to It makes sense that those restrictions are probably part of the explanation for the difference between what they were seeing and what we were seeing. To And if you look at it, we believe those restrictions from Apple are designed in a way that carves out browsers from the tracking prompts Apple requires for apps. To And so what that means is that search ads could have access to far more third party data to our next question. For measurement and optimization purposes and app based ad platforms like ours, so when it comes to using data, you can think of it to Yes, it's not really apples to apples for us. And as a result, we believe Google search ad business to Could have benefited relative to services like ours that face a different set of restrictions from Apple.

Speaker 4

And given that Apple continues to take 1,000,000,000 of dollars a year to.

Operator

To our next question is from Eric Sheridan with Goldman Sachs. Please go ahead.

Speaker 6

To the operator. Thanks so much. Maybe two questions if I can. First, following up on Brian's questions about reels. I think when we've gone through these transitions before, to You've talked a little bit about what you're seeing from an engagement standpoint about reels and how levels of engagement compared to other to forms of engagement from a consumer perspective on the property and what the differential might be in terms of while it's early innings, in terms of differential of ad pricing and how you think to close that gap.

Speaker 6

Is there any willingness you're able to give us on both engagement levels or pricing differential, so we can think through what the transition scope might need to be? To And then Cheryl, on the last call, if I remember correctly, you talked about elements of as we move into Q1 in the first half, some of the workaround efforts to the team, we're trying to implement would start to show some efficacy. Can you give us an update on where you stand internally on workarounds and broader advertising to the acceptance of some of the workarounds on targeting and measurement as we move into the first half. Thank you.

Speaker 1

To the

Speaker 3

operator. Sure. I can start with your first question on some what we're seeing on engaging on engagements. To Reels and short form video overall are very engaging. And a lot of what we're seeing to Is that there is people are spending a lot more time and

Speaker 1

I

Speaker 3

think I mentioned this in my script upfront that to It's growing very quickly. This is already the biggest contributor to engagement growth on Instagram. And I think it's one of the biggest contributors that we're seeing to positive engagement on Facebook too already.

Speaker 1

But I think going back to

Speaker 3

the last question, when there was a question on what to Are there any factors here that will what are the similarities and differences to what we've seen in the past? The big similarity is that this is to Certainly not the first time that we've gone through a major format evolution. And what these transitions have all had in common from desktop to Feed to mobile feed, Feed to Stories and now to Reels is in the beginning to our ad system and business are not as tuned for the new format. So as the engagement to the new thing starts to replace some of the engagement in the old thing, It creates a near term headwind for revenue, but it's not that part to At this point now, it's not that big of a concern for us. I mean, it makes some of the stuff not as clean in the near term, but over the long term, we're pretty optimistic about that.

Speaker 1

To The dynamic that

Speaker 3

I think is actually a little bit different with reels than what we've seen with Stories and mobile speed in the past. To With Reals, I would say that the teams are executing quite well and the product is growing very, very quickly. To the next question. The thing that is somewhat unique here is that TikTok is so big as a competitor already And also continues to grow at quite a faster rate off of a very large base. To And so that to the question that was asked before around, are we to I would like those asked before around, is there anything that's going to make it so that we it takes us longer to to kind of get to where we want on this.

Speaker 3

It is that even though we're compounding extremely quickly, that to the operator that is compounding at a pretty quick rate too. But overall, back to the question, Reel is Extremely engaging. I think overall engagement will grow as a part of this. And that's why we're optimistic about the future, but there's a lot of work to do here.

Speaker 4

To And then Cheryl, were you going to take the second part of the question on the mitigation front?

Operator

Yes. So when we talked about mitigation, we've said there are 2 key challenges from the iOS changes, to targeting and measuring performance. On targeting, it's very much a multi year development journey to rebuild our ads optimization system to drive performance while we're using less data. And as part of this effort, we're investing in automation to enable advertisers to leverage machine learning to find the right audience with less effort and reduced reliance on targeting. That's going to be a longer term effort.

Operator

On measurement, to There were 2 key areas within measurement, which were impacted as a result of Apple's iOS changes. And I talked about this on the call last quarter as you referenced. To the first is the under reporting gap. And what's happening here is that advertisers worry they're not getting the ROI they're actually getting. To the Q and A session.

Operator

On this part, we've made real progress on that underreporting gap since last quarter, and we believe we'll continue to make more progress in the years ahead. I do want to caution that it's easier to address this with large campaigns and harder with small campaigns, which means that part will take longer And it also means that Apple's changes continue to hurt small businesses more. The second area underneath the measurement challenge is really are really data delays. To As part of the iOS changes, we and many other platforms, we receive less granular conversion data on a delayed basis. To And what advertisers shared with us that this makes real time decision making especially difficult.

Operator

And that's particularly important during the holiday period where people are often spending a lot and really monitoring their ads and adjusting spend, not even on a daily basis, but often on an hourly basis.

Speaker 1

To the Q1.

Operator

Our next question is from Justin Post with Bank of America. To

Speaker 7

Great. Thank you. A couple. Mark, just on a big picture basis, you're adding a lot of short form video to And maybe the content shifting from content from your friends to general content. What does that mean for Facebook?

Speaker 7

I'm sure you've thought about a lot of it, but how do you think about the evolution to Facebook as a platform. And then for Dave, as you think about the measurement and targeting challenges, when we get out to September October, to Should we be effectively lapping the issues? Or is there a reason to think it could actually get worse in the second half, just thinking about revenue growth kind of reaccelerating. Thank you.

Speaker 3

I'll take the first one. To So for Facebook, I think content from your friends is always going to be an important part of the experience. And to So we'll be discussing stuff that you find with friends, whether it's in a group or community or public content or reels or to News or different content like that. But I think overall, you're right, but the balance of content that people see and see to Is shifting a little bit more towards stuff that isn't coming from their friends, which you may discuss with your friends, to But it is kind of shifting towards more public content. I think at the same time, we're seeing this trend where I mean, if you can do your day to day behavior to on a lot of this stuff.

Speaker 3

This pattern may resonate with you, but a lot of people now are to taking a lot of the content that they may have previously shared in a feed and sending it to friends over chats, whether it's 1 on 1 or through group chats. And this is one of the reasons why I called out community messaging as one of the major priorities for us. Because if you look at the overall constellation of services, to A lot of the kind of personal sharing is sort of shifting towards messaging. And a lot of the to What we're seeing in fee is basically this content consumption and a lot of just really highly engaging to content that forms the basis for conversations, whether it's in chat or in common threads in those feed apps. But to That type of creative work is a lot more of what we're seeing across the feed apps, whether that's Facebook or Instagram.

Speaker 4

To Hey, Justin, it's Dave. On the second part of your question, it's really about sort of what's the landscape of headwinds to the Q1 of 2019. Looks like as it relates to

Speaker 1

targeting and measurement.

Speaker 4

And there I think what we're seeing is kind of 2 things going on. We've got incremental to headwinds coming from things like iOS 15, which provides some additional sort of targeting and measurement headwinds, but those are far to Less significant than the changes made with iOS 14.5, which really started to have an impact to more seriously on the business in the second half of last year. So I think the lapping effects can be very pronounced in

Speaker 3

the first half of the

Speaker 4

year where we're lapping to periods that didn't have that impact. So that's where we're going to see the biggest impact from the lapping. But we're continuing to face more to the next question and

Speaker 1

answer session. I would

Speaker 4

like to welcome everyone to the next question. I was just wondering if you could just give us some headwinds as it relates to like Ios

Speaker 1

15 and also further regulatory

Speaker 4

headwinds that restrict the use of data for targeting purposes in regions like to Europe. So we're continuing to see headwinds. I think we're working to mitigate those. But the

Speaker 3

biggest lapping effect will be

Speaker 4

in the first half of the year where we didn't have the big iOS fourteen to headwinds in the same period last year.

Operator

Our next question is from Doug Anmuth with JPMorgan. Please go ahead.

Speaker 1

To the

Speaker 7

operator. Thanks for taking

Speaker 8

the questions. Mark, you talked last quarter, I think, about how Reels would become better integrated into both Facebook and Instagram. Can to can you just talk about where you are in that process? Clearly, we've seen some. Just curious if there's more in the product pipeline and could that deeper integration to potentially have even greater drag on revenue going forward.

Speaker 8

And then Dave, just curious if you're willing to comment on a Reality Lab to spend or loss number in 2022.

Speaker 4

To the operator. I can talk about

Speaker 3

the first piece. I mean, I think we're probably a little further along than Just the beginning, but I'd say we're closer to the beginning than the end of the trend on reels. There's to a big flywheel here where more creators share more content and because we have a mix of content in the feeds from all different types.

Speaker 4

We're only

Speaker 3

going to show reels or recommend them. If to We feel like there's high quality content to show. So as there's more high quality content, we show more of it. There certainly will be a lot more. We think it's growing it is to Going to grow a lot.

Speaker 3

Going forward, we believe in engagement on both of those platforms. So Yes. I mean, I think that we probably will see, as for forecasting, and I think Dave is talking about here, to The relative monetization rate of reels for the next, I don't know, for whatever the foreseeable future is, to the next question. We'll be lower than the feed as we kind of displace some of that with this. But over time, we think that there's a potential for a to tremendous amount of overall engagement growth and we think that in a steady state over time, to We think that Reel should monetize closer to theater stories than other longer form video.

Speaker 3

To So I think we're optimistic about it. And I think that that's we think it's definitely the right thing to lean into this and to push as hard To grow Reals as quickly as possible and not hold on the brakes at all, even though it may create some near term, just slower growth than we would have wanted. To That's kind of that's

Speaker 1

the picture that I see.

Speaker 3

I don't know if you want to add anything to that.

Speaker 4

No, I think that's exactly right. And that's what's kind of factored into the guidance we're providing specifically for Q1. To And then, Doug, on the expense outlook, we're not breaking out expenses by segments, but to I probably can give some color here. We're expecting accelerating headcount growth in 2022 to be the biggest contributor of expense growth and to That's largely in tech and product roles to support the 7 product priorities that Mark laid out, reels, community messaging, commerce, ads, privacy, AI and the metaverse. And a number of those investment priorities map to our Family of Apps to segment and we expect Family of Apps to continue to drive the majority of expense growth in 2022.

Speaker 4

Though we do expect Reality Labs to operating loss to increase meaningfully in 2022 and that's incorporated into our outlook. To

Operator

our next question is from the line of Mark Mahaney with Evercore ISI. Please go ahead. To Mr. Mahaney, your line is open, sir.

Speaker 9

One more time. Okay, got it. All right. I want to ask 2 questions, please. First on ESG, could you just there's been a series to steps that have been taken reducing the ability to do political targeting, the introduction of the Take a Break feature within Instagram and maybe a few other things to that arguably have been put out there to kind of address some of the ESG concerns.

Speaker 9

Where do you think you are in terms of addressing to some of those that we've heard in the investment community. And then, Dave, I think you mentioned this $10,000,000,000 headwind, and I think that was related to some of to these policy changes, Apple policy changes. Could you just give a little color as to how you came up with that number? Thanks a lot.

Speaker 4

To Yes, Mark. On the headwind, we're just estimating what we think is the overall impact of the cumulative iOS to the Q2 revenue forecast is. So if you kind of aggregate the changes that we're seeing across to iOS, that's sort of the order of magnitude. We can't be precise on this. It's an estimate.

Speaker 4

We've got ranges on the impact to our business. But we think it's to The substantial headwind to work our way through and obviously we're working hard to mitigate those impacts and continue to make ads relevant and effective to the next question. I don't have anything specific on the ESG front. So probably can't

Operator

to Our next question is from Youssef Squali with Chuyves Securities. Please go ahead.

Speaker 10

Great. Thank you. I have two questions as well. Mark, you stated your goal of refocusing to the Q1 of younger audiences on the last earnings call, and I think you even signaled back then that it could mean maybe less focus on other to Citroen C. I know you may be early, but any color maybe to share on growth on users and engagement by maybe age group, to Groups.

Speaker 10

And then probably another question for you. I'm curious about when you think we can start to Seeing the kind of the meshing of apps like Instagram with AR and VR and the interoperability to Of these apps. Is that something where you think we're going to see gradually evolve or something that gets kind of opened only once the metaverse is to efficiently built up whenever that is. Thanks.

Speaker 4

Let me take the first one. I can take the first one on user growth. To I think what we said about overall kind of user growth is we're certainly seeing an impact from strong competition, particularly with younger audiences. So to That's true and we're kind of seeing that globally. If you look at kind of the overall user growth to the Q4.

Speaker 4

We're seeing MAU and DAU in U. S. And Canada to Sort of bounce around as sort of expected and indicated given our high level of penetration. And then if you look at to The rest of world, we've seen some headwinds there kind of a little bit unique in the quarter in areas like to India, where we saw data plan pricing increase lead to slower growth there. So that's another kind of to some unique elements of the quarter on that front.

Speaker 3

Sure. And in terms

Speaker 1

of when

Speaker 3

are some aspects of the metaverse showing up, I mean, to I talked about avatars in my remarks at the beginning and how we're making it to have to Increasingly both expressive and eventually, and we've shown some demos around photorealistic avatars of yourself that you can show up in all the different apps and to Your avatar can show across Facebook and Instagram and Messenger as well as in Quest, and we'll expand that further. And I think I also commented before about to our goal for 2022 to make it to that horizon works not just in immersive VR, but on 2 d screens as well. So to So you could potentially jump into those kind of worlds from Facebook or Instagram or different apps as well. So I think you're seeing some of that stuff to the call. It's already there.

Speaker 3

Some of it will come over the course of this year. Of course, the ability to message across apps is to We've been working on for a while. You can already do that across Messenger and Instagram and there's more there that will roll out over time as well. So I think to You are going to see the step works seamlessly across the family.

Operator

Our next question is from John Blackledge with to Cowen. Please go ahead.

Speaker 11

Great. Thanks. Two questions. Maybe first one for Mark. How was Reels to differentiated versus TikTok, YouTube Shorts and other short form video services.

Speaker 11

And one for Sheryl, any further color on how to the next question. SMBs are changing ad spend budgets since the iOS changes and is it slowing adoption of new SMB to advertisers on Facebook. Thank you.

Speaker 3

Sure. So I can start with Reels. To One of the things that I think we've seen is that there are some fundamental formats in social media like feeds and stories and now I think this to Reel's short form video format that within the context of a different network or community, to the same format will take on different characteristics. So for example, the kind of discussions that you might have in a feed on Twitter or to On Pinterest are different from what you would do in Facebook or Instagram even given a relatively similar format. To So I think to some degree, even if a creator chooses to reshare their content across a number, you'll have different discussions with your friends to the conference call.

Speaker 3

Across the different services based on who's there. And then there's the social dynamic where friends and different communities create these as well. So to You'll see somewhat different reels across Facebook and Instagram, and I'm sure you'd see different stuff across TikTok too. But what we're seeing is that this is all growing incredibly quickly. So it's hard to know exactly where this is going to settle in the end.

Speaker 3

To But we just think the appetite that people have, there's been this long term trend that I've commented on a number of times where to Over the time that I've been running this company, 18 years this week, basically, to We've gone from text being the primary way that people share and consume content online at the beginning of the early 2000s to we got cameras on our phones and photos became the primary thing. And now that to Mobile networks are starting to get have gotten really good. Video is really becoming the primary thing and it is a lot more natural and engaging. To This is partially by the way why I think that an even more immersive format around virtual reality and augmented reality is going to be to the next step after video and why we're so invested there. But definitely what we're seeing with short term video is it's the next step to From the kind of visual feeds that we have, and the amount of engagement and content that people want to share and interact with and to Whether it's taking it and sending it to a friend and messaging or commenting in line or just having fun watching it themselves, it's in general, we're seeing that people want to spend a lot more time in this to the end of what we've seen from Match so far.

Speaker 3

That's also reflected in the success that other apps like TikTok have had. So There's a lot more to go here. We think we will have competitors across the industry. But as we've seen with some of these other formats too, It will feel different depending on the context in which it's implemented and the content from your friends.

Operator

To our next question is from Lloyd Walmsley with UBS. Sorry, I didn't catch it.

Speaker 4

I think we had a follow-up. Yes, I was a

Operator

follow-up I wanted to answer the SMBs. To So it's a good question because as we've said, the iOS changes definitely hurt advertisers across the board, but they're much harder for SMBs. To the progress we made on the measurement gap, which I talked about before, we've made more progress with larger clients than we have with SMBs. It's also the case that to Personalized ads are more important for SMBs. An SMB really needs to buy a very small targeted audience that they're looking for.

Operator

And the larger the business, the more you're able to personalize the ad less. So we're definitely seeing that this to the conference call. Has more of an impact for SMBs. We do feel over the long run that we believe we have strong benefits for SMBs in using our ad system. To We are going to continue to work on these measurement gaps and continue to make sure SMBs can use it.

Operator

We're also working hard on SMBs adopting some of our commerce tools to the next question and some of our other solutions like business messaging and seeing some success there. But you are right that this remains a challenge. To

Speaker 1

the operator.

Operator

And our next question is from Lloyd Walmsley with UBS. You may go ahead.

Speaker 1

To the operator.

Speaker 12

Thanks for taking the question. Maybe one for Mark and one for Sheryl. Mark, if we look at to short form video. How do you feel right now about the state of your content and your matching algorithm relative to where you to be. I mean, do you have the content you need?

Speaker 12

Are you getting it in front of the right users? Or is there a lot of room to improve this and drive more engagement? To And then Cheryl, where exactly are you in terms of rebuilding the ad product? And what are the key things to you need to see to kind of roll out or what do customers either need to adopt or do on their end to really start to see improvement to ROAS And a return on that budget. Like are there certain features like CAPI that you need to get adopted?

Speaker 12

Are there tools in the pipeline? Are there things they need to do on their end? To What do we need to see that come back?

Speaker 3

I can take the RILs question. To So we do see a huge amount of potential ahead. But I think sometimes when we say to the beginning. What that means is that we still have a lot of fundamental questions to overcome in order to make to progress to get where we're going. With this product, what we see is there is very clear product market fit and it is growing incredibly quickly.

Speaker 3

To We face a competitor in TikTok that is a lot bigger, so it will take a while to compound and catch up there. To But fundamentally, we think that there's just a lot of potential for it to continue growing. So to your question of do we have the content that we need, to It's a flywheel. So, the better tools that we can build for creators and the better monetization we can offer them, which tends to be an advantage that we have over other competitors is how effective our monetization and ad systems are. Then I mean the bigger it gets, the more it will attract more creators and it will kind of build on itself.

Speaker 3

And we think that we're already at a scale where we're seeing that flywheel to really kick in and start to grow. And if it keeps on compounding at the rates that it's growing at, then this is going to grow extremely quickly over the next year to And potentially beyond that. But yes, I think that's kind of the best summary that I can give of where we are. To Clear product market fit, growing quickly, long way to go to catch up to be the biggest in the space. But I think the pieces are in place and to Focus is certainly there, at this point to really go after that.

Speaker 3

It's just that as this grows, it is to At least for the coming quarters, it's going to monetize at a somewhat lower rate, which is reflected in the guidance that Dave gave. But again, I think this is clearly the right strategy for us push on this is what people want. They enjoy the product. We're going to so we're just going to roll it out as quickly and as well as we can.

Speaker 1

To the call.

Operator

On the question of what we need to see to rebuild ad products and continue to grow return on ad spend,

Speaker 1

to the operator. In the short run, as I talked about, we're

Operator

working on measurements. We're rolling out new ways to help businesses continue to measure campaigns using Apple SKAd Network API and Meta's aggregated events measurement and conversion modeling. So we have specific products to the next question that people can adopt that help us. Over the longer term, we need to develop privacy enhancing tech to help minimize the amount of personal information to the next question. We learn and we use, use more aggregate, use more anonymized data, while still allowing us to show relevant ads and that's going to take us time.

Operator

But one thing I do want to point out is there are also a lot of things that small businesses and large businesses can do to take advantage of the many to our targeted marketing and measurement tools we have. So while we have seen an impact from these changes, we also didn't start from a place to 100% of our millions and millions of advertisers are using the tools that are available. So while we continue to get those that were all the way on the adoption curve to learn and adapt these changes. There are also advertisers out there that aren't doing even the basic things yet that we can continue to work on and improve their performance. We still believe there's a lot of performance improvement left in the system.

Speaker 2

To Great. Operator, we have time for one last question.

Operator

Very good. Our last question will be from the line of Ross Sandler with Barclays. Please go ahead.

Speaker 13

To Thanks for squeezing me in. I guess, Dave, a question on the family of apps to Segment margin. This hasn't come up yet, but it was down about 6 points year on year. And I know that you had to Kind of forecasted the expense growth that you came in at for 2021, but I think that downtick is coming as a bit of a surprise to For some folks who thought your ad business had fairly stable margins. So any more color on what's driving that?

Speaker 13

Is it just the revenue to headwinds that you're experiencing or any other lumpy items? And then related to that, as you build out short form video, to How does your thinking evolve around paying rev share like YouTube does or other things like that to catalyze the shift?

Speaker 1

To Any thoughts on that? Yes,

Speaker 4

Rob. I think in terms of lumpy items, I mean, you will see the G and A was up to a pretty substantial amount in Q4. So a part of that is related to legal related expenses that to tend to be lumpy, so that there was a factor there. I think in general as it relates to family of apps to And margin, I'd come back to the commentary that I made on the investments that we're making and Family of Apps to Being an area where we're investing heavily in 2022 across the priorities that Mark outlined, including reels, messaging, commerce and ads, There's a big investment that we're making on the CapEx side that's primarily geared towards AI and machine learning to For the Family of Apps business, so segment. So there's a lot of investments that we're making there.

Speaker 4

What was it? Can you make sure

Operator

I get the second question?

Speaker 4

Yes. In terms of payments to partners that clearly will play into the to the best profile as we grow that, as we grow short form. So that's also reflected to the next question. As part of the guidance for expenses, so over time that will be an impact as well and that's part of the investments that we're making to On the real side, it's factored into the 2022 outlook.

Speaker 2

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

Operator

And this concludes today's conference call. Thank you for

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Earnings Conference Call
Meta Platforms Q4 2021
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