— 40 minute read

Sparknotes for the Facebook Q1 2018 Earnings Call

Facebook released it’s Q1 2018 Earnings on April 25 at 2pm PST in an hour long call that included statements from Mark Zuckerberg, Sheryl Sandberg, and David Wehner as well as a Q+A portion from listeners. We’ve summarized the call for you, but if you’d like to hear the full recording here’s a link to the official Facebook Earnings call recording with downloads of the Facebook Q1 2018 Earnings release, slides, and a full transcript.

Here’s an outline of the call:

Mark Zuckerberg Opening Statement

  • Facebook Business Summary:

    • More 2.2 Billion People Use FB Every Month

    • More than 1.4 Billion People Use FB Everyday

    • Business Grew 49% Y/Y to $12 Billion Dollars

  • Important Issues to Address:

    • Mission Statement has always been connecting people, but we [Facebook] didn’t do enough to prevent these tools from doing harm

    • Examples From This Past Year:

      • Hate Speech

      • Foreign Interference in Elections

      • Fake News

      • Developers and App Privacy

  • Facebook will be continuing to invest in Safety, Security and Privacy:

    • Implementing New Technology:

      • Restricting data developers can access

      • Investing/Building in advanced AI tools to remove

        • Detect and remove fake accounts

        • Ahead of the elections France, Germany and Alabama

    • Investing in Operations/People

      • 20,000 people for content review + security team

      • Including those with language skills to detect hate speech in all languages (like Myanmar)

    • Protecting Political Discourse

      • Making Ads More Transparent:

        • FB Ads are currently held to a higher standard than TV or Print Advertisements

        • Users Will be Able to See:

          • Who is Running an Ad

          • Who the Advertiser targeting

          • How much the Advertiser is paying

          • What other messages they’re sending to different people/target audiences

      • Additionally, large/Political Pages need to be verified by government ID

    • Completing these changes before the US MidTerm Elections and worldwide elections in Mexico, Brazil, India, Pakistan and more

  • Responsibility to Keep Moving Forward:

    • +2 Billion People use FB to connect

      • #metoo movement and March for our Lives partially organized on Facebook

      • Hurricane Harvey struck and people raised +$20 million dollars for relief through Facebook

      • 80 million small businesses use Facebook to grow and create jobs

  • Facebook 3 Year Plan:

    • Move to Make Facebook Good for People + Good For Society:

      • Wellbeing Research:

        • When you use the internet to interact/build relationships = greater long-term happiness, health and wellbeing

        • Passive consumption of content is not as positive/healthy

    • Meaningful Interaction Takes Center Stage:

      • Video Efforts

        • Passive Consumption of Video is down, but some types of sharing are up

        • Rolling out more interactive video features

          • Watch Party:where you can watch video with your friends - initial positive feedback
      • Groups are a major focus

        • 200 million people are part of meaningful groups

          • Internal Facebook Goal: 1 billion people become members of meaningful groups
        • Physical Meetups are on the decline - FB hopes to make up for that by helping people connect online = strengthen society’s social fabric

      • Facebook, Instagram, Whatsapp “Status” - Video Sharing

        • Whatsapp Status is the largest of all the product and continues to grow at a quick/steady pace

        • Clear trend for sharing to smaller groups

          • Between whatsapp and messenger people, people send over 100 billion messages everyday

          • +3 billion minutes of video and voice calling everyday

  • Facebook 5+ Year Plan

    • Building out business ecosystem around Apps (Instagram, Whatsapp, Messenger)

      • Just launched Whatsapp Business

        • Allows small businesses to create a presence and offers them better messaging tools

        • Within a few months 3 million people are using Whatsapp Business

    • Opportunity: Ads are as good in the Story as they are in Feed; initial results promising on product quality and business performance on Instagram

  • Facebook 10+ Years

    • Connectivity,

      • helped 100 million people get access to the internet
    • AI - important technological trend

      • Amplify good and proactively remove harmful content

        • Examples:

          • AI tools helped remove Al Qaeda and ISIS terror content - AI filters took down content before a human saw it/flagged it

            • AI tools built to help identify when people are thinking about suicide, help get first responders to 1000+ people who needed attention
    • Virtual Reality

      • Oculus go in peoples’ hands soon
  • Broader view of responsibilities, investing in making sure tools are used for good and keeping people safe, also need to keep moving forward to help people connect build community and help bring people closer together.

Sheryl Sandberg, Business Summary

  • Ads and Privacy

    • Facebook’s & Privacy

      • Facebook has always built privacy protections into the ads system. Facebook uses the information you [users] provide and information we receive from websites to target ads for advertisers

      • Facebook doesn’t tell advertisers who you are and does not sell your information to advertisers or anyone else

      • You [the user] can control your ad experience, on every ad that Facebook displays:

        • You can see why you’re being shown that ad

        • Turn off the ads from that advertiser entirely

        • You can opt out of being targeted based on certain information (like the websites you visit or your relationship status)

      • Facebook Ads Benefits:

        • Advertising and Protecting People’s information are not at odds

          • Targeted ads that respect people’s privacy are better ads

            • Shows people ads that are relevant to them and their lives
        • Small businesses rely on Facebook ads because they can’t afford broadreach media

          • Small Businesses in 18 countries and more than half of the small business on Facebook said they’re able to hire more people due to marketing on Facebook

          • Example: Cupcake Kitchen - Hurricane Harvey damaged her business and she relied on Facebook to recover - she’s planning to open a 2nd store

    • Facebook’s Advertising Philosophy:

      • Ensure people see more useful ads, enables businesses to grow, and offers a communication platform free to everyone.

        • Equalize Access and Improve Opportunity
      • People want control over their information and confidence the ads they’re seeing are authentic

    • Facebook Ads Transparency Tools

      • The user will be able to see all ads that an advertiser is running without being in the target audience

        • Currently live in Canada and will roll out to Ireland and US soon
      • GDPR, although only rolling out in Europe, will apply to all Facebook users - regardless of where they live

    • Commitment to the users:

      • Improve Ads Service: strengthening privacy and choice and providing new and better tools to businesses/advertisers
  • Results:

    • Q1 Summary

      • Q1 ad revenue grew 50% Y/Y

      • Mobile ad revenue $10.7 billion up 60% from 2017 and contributed 91% of total ad revenue

        • Revenue growth was broad based across regions, marketer segments and verticals
    • 3 Priorities:

      • Helping businesses leverage power of mobile

        • Advertises recognize the importance of reaching people on mobile

          • During the superbowl 90% of TV advertisers were also advertising on mobile
      • Developing new ad products

        • Carousel Ads introduced on Instagram Stories

          • Advertisers can share 3 videos and images per ad and swipe up to go directly to their website
        • Personalized shopping experience on newsfeed

          • Collection Ad now showcases full screen catalogue relevant to the interests
        • New way to reach people before they make the purchase

          • Using broad categories to play to user interests
      • Making Ads More Effective/Relevant

        • Advertisers want 3rd Party Verification to ensure that Facebook is helping them achieve marketing goals

        • Facebook was recently accredited by the Media Ratings Council for Newsfeed served ad impressions on desktop and mobile → working with them on accreditation on other areas

    • Plan for the Future

      • Focusing on the above three goals and user privacy

David M. Wehner Financial Summary

  • Facebook Growth Summary Q1

    • Community Metrics

      • 1.45 billion DAU on Facebook → up 13% compared to 2017

        • Led by user growth in India, Indonesia and Vietnam

        • 1.45 billion represents 66% of 2.2 billion MAU in Q1

      • 2.196 billion MAU → up 13% from 2017

    • Facebook Financials (All Comparisons are on a Y/Y Basis)

      • Q1 Total Revenue: $12 billion → up 49% or 42% on a constant currency basis

        • Foreign exchange tailwinds contributed $536 Million of revenue in Q1

        • The adoption of ASC 606 (the new revenue standard) resulted in appox. $130 million of incremental revenue in Q1 due to a change from net to gross accounting for FB’s Instant Articles

      • Q1 Total Ad Revenue $11.8 Billion → up 50% or 43% on a constant currency basis

        • Mobile Ad Revenue was $10.7 billion → up 60%

        • Average price per ad increased 39%

        • Impressions served increased 8%

          • Driven primarily by feed ads on Facebook and Instagram
        • Payments and other fees revenue was $171 Million → down 2%

      • Expenses

        • Total Expenses $6.5 Billion → up 39%

        • 27,700 full-time employees → up 48%

          • Added over 2600 employees in Q1 alone (record level new hires)
        • Operating Income was $5.4 Billion → 46% operating margin

        • 11% effective tax rate

        • Net was $5 billion or $1.69 per share

        • Capital expenditures were $2.8 billion

          • Driven by investments in data centers, servers, network infrastructure and office facilities
        • Q1 FB generated $5 billion in free cash flow and ended Q1 with $44 Billion in cash and investments

      • Stock

        • FB bought back approximately $1.9 billion of our Class A Common Stock

        • Board of Directors has authorized the repurchase of up to an additional $9 billion of stock

    • Facebook Financial Outlook:

      • FB will focus on building a great ads business while protecting people’s privacy

      • GDPR predictions/business impacts

        • European MAU and DAU may by flat to slightly down in Q2

        • Potential to impact advertising revenue

      • Overall 2018 Predictions

        • Anticipate revenue growth rates will decelerate on a constant currency basis throughout the year

        • Full Year 2018 total expenses will grow 50% to 60% compared to the previous range of 45% to 60%

          • This range reflects the significant investments FB is making in areas like safety and security, content acquisition and long term innovation efforts
        • Full Year 2018 Capital expenditures will be around $15 billion

          • Driven by investments in data centers, servers, network infrastructure and office facilities

          • Continued growth in capital expenditures beyond 2018 to support global growth and ongoing product improvements

        • Full Year 2018 Tax rate will be in the mid-teens

    • Summary

      • Q1 results growth in FB and global community remains strong

      • A lot of work ahead and FB is investing aggressively to enhance safety, security and privacy while building community and bringing the world closer together

Question and Answer Session:

Note: These are personal notes from the question and answer section and not copied verbatim. Questions and Answers were truncated for easier reading and some statements were rearranged for clarity. If you want a full transcript of the Q1 Sales Call please click here.

Douglas T. Anmuth - JPMorgan Securities LLC

  • Mark - Can you talk about some of the business opportunities for Facebook on the platform away from advertising, and where you’re most focused there?

  • Dave, on the OpEx, can you talk about kind of more specifically where some of the incremental costs would fall that take the previous low end of the range here off the table, given what you’ve seen over the last couple months?

Mark Elliot Zuckerberg - Facebook, Inc.

  • FB Business Opportunities (Not Advertising)

    • Ads is a great business model that is aligned with FB’s mission.

    • We want to build a service that can help connect everyone around the world, so we want to offer that service for free and have it be affordable, and that’s completely aligned with what we’re trying to do.

    • In general our strategy is to offer those services at cost and make it so that businesses can bid what it is worth to them to run ads in the system. We think that that is both the most efficient way to run the business, it offers every business in the world the lowest prices that we can potentially offer, and it provides a great free service to people around the world.

David M. Wehner - Facebook, Inc.

  • The acceleration of expense growth is really driven by three factors.

    • Investments that we’re making in safety and security

    • It’s the content investments we’re making to support Watch

    • The innovation initiatives around our longer term bets like AI, AR, VR and connectivity.

  • Safety and Security investments is what is leading Facebook to tighten the range

    • We’re putting more behind that more quickly than we anticipated, and so that’s where you’re going to see it come up.
  • Our sales and marketing expense grew 51% in the quarter (year over year)

  • Driving growth by categorizing our community operations investment and other operations teams that support the quality initiatives and the safety initiatives

Mark A. May - Citi Investment Research

  • Dave - You commented that you do not expect any significant, maybe some impact from the implementation of GDPR, yet you also voiced some uncertainty there. What gives you confidence in coming out now and saying that you expect no significant impact on the ad business?

  • Mark - there have been some recent reports that imply that even some seemingly simple things that Facebook may not be proactively identifying or addressing have come up - is it that it’s not as simple as it may seem, or is it that these reports aren’t accurate, this just has to do with some of the sensitive data like social security information being showing up online?

David M. Wehner - Facebook, Inc.

  • Facebook can continue to build a great ads business while protecting the privacy of the people who use Facebook.

  • As part of the rollout of GDPR, we’re providing a lot of control to people around their ad settings and we’re committed to providing those same controls worldwide

  • Potential for revenue impact - any change of the ability for us and our advertisers to use data can impact our optimization potential at the margin, which could impact our ability to drive price improvements in the long run.

  • GDPR is affecting the entire online advertising industry. And so what’s really most important in winning budgets is our relative performance versus other opportunities presented to marketers.

  • Watch kind of how this plays out at the industry level.

Sheryl Kara Sandberg - Facebook, Inc.

  • Social security is not an input people put into Facebook

  • Posts containing information like social security numbers or credit cards are not allowed on Facebook and are removed as soon as possible

  • Working to improve these efforts and we encourage our community to report anything like this that they see, but that’s not data that Facebook is collecting in any way

Eric J. Sheridan - UBS Securities LLC

  • Mark, as you’ve started to make product changes at the beginning of the year and some of the content people see on the platform has evolved, what does that mean for engagement? What are you seeing in terms of the way people are using Facebook?

  • Sheryl, how should investors think about the business opportunity on WhatsApp, Facebook Messenger, and messaging apps? We’re starting to pick up from advertisers a lot of momentum and positive commentary on messaging platforms, especially Facebook Messenger.

Mark Elliot Zuckerberg - Facebook, Inc.

  • Facebook made and continue to implement a number of changes to prioritize meaningful interactions between people vs. passive consumption of content.

    • Changes follow feedback directly from FB community

      • People want Facebook to be more about friends and family and less about just content consumption.
    • Facebook Well-being research suggests that when people use the Internet for interacting with people and building relationships, that is correlated with all of the positive measures of well-being that you just expect like longer term health and happiness, feeling more connected and less lonely, whereas just passively consuming content is not necessarily positive on those dimensions.

  • Facebook Changes

    • Product Changes

    • Ranking the News Feed

  • Results:

    • Facebook observed increases in some types of sharing and interaction between people based on changes

    • Facebook also observed some continued declines as they’ve rolled out changes

      • Video being hit the worst
  • Outlook:

    • Changes are doing what we expected that they would do and helping people to connect more and have more meaningful interactions. I think that that’s the thing that people can uniquely do on Facebook that they can’t do on other services that may be more about just consuming content.

    • Facebook is going in the direction of building a stronger community and a stronger business over the long term, and we’re optimistic about what we’re seeing here.

Sheryl Kara Sandberg - Facebook, Inc.

  • Facebook Messenger

    • Primarily focused on consumer growth and engagement, and we’re being slow and deliberate with monetization.

    • It’s worth noting this isn’t a feed product, so there are some more unknowns here.

    • Potential is real and big and growing. We see a lot of organic connections between businesses and consumers - that’s very promising to turn that into monetization as well.

    • +18 million businesses now communicating with their customers through Messenger

      • 2 billion messages sent between people and businesses a month, which includes automated messages.
    • Focused on launching new tools that help businesses use Messenger.

      • FB launched new quick replies for customers. We’re seeing ads in inbox, which are now available to all advertisers.
  • Feelings:

    • Still really early, but nice pick up and lots of potential.

    • Click to Messenger ads on Facebook are actually very promising as well because advertisers want to see a return for the money they spend. And when they have an ad and they can get a direct contact one to one with a customer, that’s been something that people are really excited about.

Justin Post - Bank of America-Merrill Lynch

  • Any update to the time spent trends on Facebook post your changes? And do you think time spent on Facebook can start to grow again?

  • When you look holistically at Instagram, which seems to be doing really well in third-party services, how do you think about the whole platform in total, Facebook plus Instagram?

David M. Wehner - Facebook, Inc.

  • Facebook Trends:

    • Time on Facebook Update:

      • Not providing specific update

      • FB focusing on connections over consumption.

    • Decrease in passive video consumption

    • Increase in sharing

    • FB not really optimizing the business on time spent, but rather the kind of quality of conversations and connections.

    • We’re continuing to invest in that work, and we think it’s the right thing for the Facebook community in the long run. And I think it’s also good for overall engagement.

  • Instagram

    • Instagram continues to grow nicely both from an engagement perspective and a business perspective

Heather Bellini - Goldman Sachs & Co. LLC

  • Could share with us your initial thoughts on Watch and how it’s going versus your expectations? How you see it evolving over the next couple years? How would you define success for it as you look out?

Mark Elliot Zuckerberg - Facebook, Inc.

  • Regarding Facebook Watch Watch

    • Watch is different because it’s intentional - people go to watch specific content vs. Video and Newsfeed (which feeds into passive video consumption)

    • FB is trying to differentiate Watch from competitive video services by making it more about connecting people in different ways

    • Example: Watch Party, where groups of people can get together and can watch videos at the same time and you can interact around that.

      • That specific interaction is the kind of experience that FB can uniquely build, that’s going to further our mission and just be a unique thing that we can add to the world.
    • Content around Watch is good and people watch it → FB is planning to emphasize that kind of content more while building more social features.

    • Still early - but it’s clearly an area that’s important and FB has the tools to make it successful

Ross Sandler - Barclays Capital, Inc.

  • Dave, is the impression growth acceleration to 8% a function of easier comps or is it a function of some of the changes that Mark was talking about around the News Feed content that you put in in January?

  • Is the North America ad revenue growth acceleration being driven by that change on core Facebook? Or is it more coming from Instagram?

  • You mentioned that MAUs and DAUs might be down a little bit in 2Q in Europe. Is that what you’ve seen already from these new screens that just came out with the new terms of service? Or is that just a guess of what you might see in the future?

David M. Wehner - Facebook, Inc.

  • Growth Acceleration

    • So the impression growth acceleration, you’ve got a couple factors going on there.

      • Desktop roll-off is just continuing. As it gets smaller, it has less of a depressive effect on the overall impression growth number

        • Desktop has quite a number of impressions per DAU, just given it’s the right-hand column that has multiple impressions on each screen.
      • Another factor is that Instagram is continuing to grow nicely as well

  • North America Growth Accelerations

    • A big factor is you’re picking up some of the accounting change from the Instant Articles going from net to gross, so that’s contributing to N. America Growth Acceleration.

    • I’m very pleased with the strength of North American ad revenue and, overall, all the different regions, but that’s a factor there, and IG is, obviously, contributing nicely to growth in North America and worldwide.

  • GDPR Trend

    • Based on what we’re expecting (now companies having to bring people through privacy consent flows) FB has been modeling trends and expect there would be a flat to down impact on MAU and DAU → nothing inconsistent with what we’ve been modeling.

Anthony DiClemente - Evercore Group LLC

  • Dave, will the privacy policy or the opt-in process differ in Europe versus other geographies post GDPR? Your prepared remarks suggested that those controls would extend to the rest of the world. And if that is the case, why wouldn’t we also potentially see an impact to MAU and/or DAU outside of just Europe?

  • Mark, just simple question, having watched most of your testimony on Capitol Hill, I just wondered what did you learn, or what surprised you the most personally from that experience?

Sheryl Kara Sandberg - Facebook, Inc.

  • GDPR Changes

    • FB just started rolling out GDPR controls in Europe → FB is now offering everywhere regardless of we’re going to make all the same controls and settings available every way, which gives people the same opportunities to make the same choices

    • Execution is going to be based on location → It’s going to be localized instead for different parts of the world. The difference will come from that.

Mark Elliot Zuckerberg - Facebook, Inc.

  • Testimony

    • It was important to have a public hearing of answering all of the questions around Cambridge Analytica, what we knew, and all the steps that we’re taking on data privacy and developers to make sure that this doesn’t happen again and to lay out all the different things that we’re doing.

    • Touched on foreign interference in elections

      • 2018 There are big elections, not just the U.S. midterms, but the major elections upcoming in Mexico, in Brazil, in India, and Pakistan, and a number of other countries around the world.

      • The important thing is that we execute on all the things that we need to do to make sure that we keep people safe.

John Blackledge - Cowen & Co. LLC

  • Just wondering given the recent events, has there been any change in kind of advertisers’ views about the platform, or concerns about ROI going forward?

  • Was there much investment in video content in the first quarter, or do you expect the bulk of the video content spend to hit kind of through the rest of the year, and what types of content will you be investing in?

Sheryl Kara Sandberg - Facebook, Inc.

  • Facebook Advertiser Concern:

    • In the following days of the scandal a handful of advertisers paused ad spend → one of the advertisers has already come back

    • Since then we haven’t seen a meaningful trend or anything much.

  • Advertisers ask the same questions as the public

    • They want to make sure their and their customers’ data is protected → FB is able to answer those questions in a compelling way.
  • In terms of ROI on the platform

    • ROI is really determined by the ability of advertisers to put the right ad in front of the right person in the right format.

      • FB is seeing impressive growth in all of those areas.
    • Advertisers are using the FB ability to target their ads to the right person, experimenting with different ad formats (i.e. Instagram Stories - lots of brands experimenting right now)

    • Advertisers are also embracing FB Ad analytics, metrics, and measurement (i.e. data helps close the loop and make their ads more effective)

    • In terms of the ROI we are able to offer our marketers, the signs are strong, and we also continue to see there’s a lot of room for improvement.

David M. Wehner - Facebook, Inc.

  • Video Investment

    • It’s clearly going to be more weighted towards the rest of the year, but we’re already seeing the impact of some of that.

    • We saw cost of revenue grow 66% year-over-year. If you look at the gross margin, it dropped from 86% to 84%.

  • Factors of Compression

    • Video content investment.

    • Move to gross versus net accounting on the Instant Articles product.

  • Those factors are main drivers margin compression getting picked up in cost of revenue.

  • Video is having an impact, but we grew expenses 39% year-over-year in the first quarter. We’re obviously expecting faster growth in the back half – back three quarters of the year, so that’s – video’s going to be a component in driving that.

Peter C. Stabler - Wells Fargo Securities LLC

  • Do you think GDPR going to have any impact on your measurement capabilities?

  • If users elect to take the strictest possible approach to their data management, would their product experience change in any way on Facebook? I mean, we have a sense that their advertising experience might change, but in terms of their use of News Feed or any of your products, would the actual product functionality materially change for them?

Sheryl Kara Sandberg - Facebook, Inc.

  • When you think about the way people have the choice to restrict data use, I think it would affect the product. There are lots of ways FB uses data to make the product better. I don’t think we have full visibility into what those changes would be over the long time.

  • Measurement Capabilities:

    • There’s not a specific thing FB is worried about → happens over long term

    • The amount of uncertainty there is for FB and all the other companies in the digital advertising industry is reasonably higher than it’s been right now because we’re in the process of rolling out GDPR.

  • Future

    • We’re going to all know a lot more after we GDPR - what’s constant = advertisers are going to look at the highest ROI opportunity.

    • Most important in winning budgets is relative performance in the industry.

    • FB wants to provide the best advertising and measurement, even after all changes FB remains in a very strong position

Brian Nowak - Morgan Stanley & Co. LLC

  • Mark, and how do you see the Instagram evolving over the next 12 months? What are your visions for how it could continue to drive more engagement and maybe even higher quality connections on Instagram?

  • Could you talk a little about philosophically how you think about the importance of enabling more frictionless payments to drive a higher quality advertising experience on Messenger and WhatsApp?

Mark Elliot Zuckerberg - Facebook, Inc.

  • Instagram

    • The main focus is on helping people capture and share any moment that they want - community is a bit different on instagram

    • While there is no formal groups product on Instagram, people use Explore.

      • More than 200 million people use Explore in order to see content that’s interesting to them and interact with people beyond their friends and the people who they follow directly.
    • Hashtag following in December

      • More than 100 million people follow different hashtags (allows people to form ad hoc communities) → points to Facebook’s overall mission: helping to build community and bring people closer together

      • Private sharing ( Stories and direct messaging) are growing incredibly quickly on Instagram → excited areas for product development

    • Payments, Whatsapp and Messenger

      • Point isn’t to charge for payments → messaging can be a more transactional medium than feed.

      • People interact with pages and their content, maybe follow a page on Facebook or Instagram. People click through or tap through to a message thread, and then you can either get customer support or complete a transaction or do a follow-on transaction. And that will be very valuable for businesses.

      • Payment in that context, not as the goal → something that’s helping the business and the person succeed at having the transaction or doing what they’re trying to do.

      • It’s going to make the experience of being on Facebook as a business more valuable because you can complete the transactions on FB.

    • Example Use Case:

      • We’ve been running an experiment with mobile financial services in Messenger, and one of the things that we found in the Philippines, for example, is that people can buy access to data plans through Messenger.

        • It allows the mobile carriers to not have to have the whole supply chain and sales and retail that they have otherwise, they’re able to sell the data plans for on average about 10% less than they would be able to otherwise, which actually is allowing more people to get on the internet in the first place because they can now afford data plans.
      • Payments in messaging can increase efficiency for businesses and help people easily accomplish their goals with different businesses.

Colin Alan Sebastian - Robert W. Baird & Co., Inc.

  • Can you compare the ability of the machines to analyze content today versus six months or even a year ago? Meaning, is that ability improving at a rate where you have a higher degree of confidence in that reliability?

  • Have you been able to discern any impact to date on content publishers or apps that are utilizing Facebook for reach and engagement following the rollout of changes in access to APIs, login and other developer resource?

Mark Elliot Zuckerberg - Facebook, Inc.

  • Artificial Intelligence

    • Affects the way we think about content moderation on Facebook

    • When FB was first founded they didn’t have manpower for manual content review and AI technology was not developed at the time.

    • Originally FB had to rely on the community to flag and report content - then FB could look at it and take things down that didn’t belong.

    • FB now has the resources to build both AI tools and employees to do faster reviews of content and look at content proactively

    • We’re** shifting over to a much more proactive model of moderation.**

  • Limits of AI

    • AI tools lend themselves towards** identifying certain content a lot more easily than others.**

      • Example: FB AI is doing great work around identifying terrorist content. 99% of the ISIS and Al Qaeda related content that we take down, we’re removing before any person flags it to us.
    • Detecting Hate speech will take more years to do something reasonably

      • More nuanced linguistically, detecting that type of content depends on the local language
  • FB Criticism

    • Why is hate speech so hard to detect? FB is better about enforcing nudity policies than policing hate speech

    • Technologically it’s much easier to build an AI system that can detect a nipple than it is to determine what is linguistically hate speech.

  • FB AI Future

    • AI will get better over time, problems not unsolvable

    • FB Competitors have the same tools, Mark thinks FB is ahead of the game

    • The plan forward: investing in AI and investing in people

Sheryl Kara Sandberg - Facebook, Inc.

  • Facebook Developers/API Changes

    • Currently FB is doing an audit of large developers and doing some investigation.

    • FB doesn’t break out marketer segments, but mobile app install ads, which is where the revenue would come from developers, is a relatively small part of our advertising revenue. And our mobile app install ads help apps of all kinds, not those running on our platform.

    • Investigatory work we’re doing into APIs, into the use, is very important → don’t expect it to have an impact on revenue.

Mark Mahaney - RBC Capital Markets LLC

  • David, could you just try to spell out a little bit more how GDPR could actually impact advertising revenue growth in the future, what’s the doomsday scenario here? Is it just that it’s clipped down because there would be a hit maybe near term to MAUs and DAUs? Or is there a reasonable scenario under which tracking or targeting would be impaired?

  • Mark, on Oculus, could you just give us a little bit of an update on your kind of long-term thinking about Oculus? What is the opportunity you see there, where you think the product development is at this point? Are we years away from something mass marketable?

David M. Wehner - Facebook, Inc.

  • GDPR Doomsday Scenario

    • No doomsday scenario, depends how the public reacts to privacy controls and ad settings, there would be additional limitations on data usage → FB thinks these changes will be relatively minor

    • Depending on how broadly the controls are adopted and set, there is a potential to impact targeting for our advertisers.

      • Ad targeting will be less effective

      • Lower ROI on their advertising campaigns.

        • They’ll then bid differently into the auction. That ultimately will flow through into how we can realize price on the impressions that we’re selling.
    • That’s the mitigating issue that we could see, depending on how GDPR and FB commitment to providing these same controls worldwide could play out.

    • Effective Ad Targeting is good for the business and the user experience → FB thinks they can do that in a privacy-protected way

      • Users get relevant ads, Advertisers reach their target audience
    • FB doesn’t see doomsday, rather an opportunity to really make the case.

Mark Elliot Zuckerberg - Facebook, Inc.

  • Virtual Reality

    • 10 to 15 years there’s a new major computing paradigm → inevitable and the tech progression will continue

    • Each leap forward becomes more natural to interact with, more natural gestures for controlling, more immersive, more portable.

    • The next big change is virtual or augmented reality - FB is investing heavily in VR b/c they need to build up “different muscles” in order to be competitive, shape and succeed in VR -historically they haven’t been a hardware or operating system company

    • Facebook was too small to shape the way mobile platforms were developed

    • FB wants to throw their hat in the ring and highlight - people/relationships should be at the center of how we design technology.

    • Current mobile paradigm is designed around apps → shouldn’t be this way

    • FB very committed to the idea of making the next platform reflects the values that Facebook stands for.

  • VR in 2018

    • Oculus Go being released this year → also prototype, the developer kit around the higher-end stand-alone coming out

    • I don’t know exactly when it’s going to be a big deal → VR was going to be a 10-year journey before this was really a very mainstream, major platform.

    • Plan: Facebook needs to be investing before VR is a big thing to become competitive → I think that this is important for our mission.

Richard Greenfield - BTIG LLC

  • Are there other lines of business, other revenue streams that people should be thinking about that create substantial opportunities - specifically subscription?

  • Instagram’s starting to be a big driver of commerce, how do you think about diversifying revenues versus essentially being almost pure advertising?

Sheryl Kara Sandberg - Facebook, Inc.

  • Potential Facebook Revenue Streams

    • Facebook will always think and explore other forms of monetization

    • Focus on Ads - Ads natural fit for business

    • FB has 80 million pages which translate to 80 million businesses using Facebook on a monthly basis, of which 6 million are advertisers.

    • Instagram has 25 million Instagram business profiles, of which 2 million are advertisers

    • If we just convert people who are advertising on Facebook into Instagram, that’s a lot of a growth opportunity. Then you can start thinking about expanding to Messenger and other platforms under Facebook → consolidating the ecosystem

  • FB Growth Opportunity

    • Large base of businesses use Facebook without paying, growing base of businesses who pay Facebook - then the runway of FB services are 1 billion plus (59:48) that we’re really not monetizing

    • Strong focus on ads → best investment Facebook can make

    • Ads gives FB the ability to provide a free service to the world. FB goal is to connect everyone and make sure that people can all participate → ads-based model makes a lot of sense an FB is continuing to invest heavily there

Youssef Squali - SunTrust Robinson Humphrey, Inc.

  • Growth in MAUs in rest of world was up about 11%. Last year, it was up almost double that, around 19% . Anything changed there that maybe could explain the slowdown? And I think we also saw slightly lower growth in pricing as well. On the buyback, how much do you still have left on the old authorization to which we need to add the new $9 billion? And how do you look at it? Is it being opportunistic, or do you have a timeline by which you guys are planning to complete the repurchase?

David M. Wehner - Facebook, Inc.

  • Growth MAU Slowdown

    • Internet shut down in Ethiopia plus other “one time” factors. → Nothing that notable to call out there.
  • Share Repurchase Authorization

    • FB had about $2 billion left as of the end of the quarter → Board approved a $9 billion additional authorization.

    • FB looks at it on two fronts:

      • Offsetting the dilution from the share issuances that we have

      • To be opportunistic

    • With the cash flow that FB is generating → FB has a strong financial position to fund that