Meta Platforms, Inc.
Q4 2021 Earnings Call Transcript

Published:

  • Operator:
    Good afternoon. My name is Frans, and I will be your conference operator today. At this time, I would like to welcome everyone to the Meta Fourth Quarter and Full Year 2021 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. . The call will be recorded. Thank you very much. Ms. Deborah Crawford, Facebook Vice President of Investor Relations. You may begin.
  • Deborah Crawford:
    Thank you. Good afternoon and welcome to Meta's fourth quarter and full year 2021 earnings conference call. Joining me today to discuss our results are Mark Zuckerberg, CEO; Sheryl Sandberg, COO; and Dave Wehner, CFO. Before we get started, I would like to take this opportunity to remind you that our remarks today will include forward-looking statements. Our actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are set forth in today's press release. And in our quarterly report on Form 10-Q filed with the SEC. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. During this call, we may present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. The press release and an accompanying investor presentation are available on our website at investor.fb.com. And now, I'd like to turn the call over to Mark.
  • Mark Zuckerberg:
    Hi, everyone, and thanks for joining today. This was a solid quarter for our products and business. 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. And when we shared our plans to Connect, I said this is not something we’re going to do on our own. The metaverse will be built by creators and developers, it will be interoperable, and it 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 for the metaverse 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. 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. And today, I’m going to discuss our seven major investment priorities for 2022
  • Sheryl Sandberg:
    Thanks, Mark, and hi, everyone. Our total ad revenue in Q4 was $32.6 billion, which is up 20% year-over-year. The close of the year also marked the first time our business generated more than $100 billion in annual revenue. I want to congratulate our teams and thank our partners for helping us reach this milestone. 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 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 2020 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, which have had an impact on businesses of all sizes, especially small businesses who rely on digital advertising to grow. 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, including global supply chain disruptions, labor shortages and inflationary pressures. A number of industry reports have pointed to people shopping earlier in the holiday season to avoid potential supply chain issues and shipping delays. This is in line with the behavior we saw from advertisers, many of whom front-loaded their spend earlier than usual. Mark talked about 7 areas of investment. I'd like to talk about our progress in 3 of those
  • David Wehner:
    Thanks, Sheryl, and good afternoon, everyone. As we announced in October, beginning this quarter we are reporting revenue and operating income in two segments
  • Operator:
    We will now open the lines for question-and-answer session. . And our first question is from the line of Brian Nowak with Morgan Stanley. Please go ahead.
  • Brian Nowak:
    Thanks for taking my questions. I have two. The first one on the Reels transition. You all talked about how you've been through other transitions in the past with Mobile and Stories, et cetera, 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 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 becoming larger in the first quarter and in 2022, is there anything other than sort of year-on-year 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? Thanks.
  • David Wehner:
    Yes. Thanks, Brad. I can probably take both of those -- or yes. So on Reels, I mean I think there's a lot of the characteristics of Reels that makes it quite similar to the transitions that we've gone through before. As in the past when we were focused on Stories, 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 be the biggest driver of growth on Instagram, and it's growing very quickly on Facebook. So we're really encouraged by what we're seeing. But we're really focused on making the consumer experience right. 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 in the Reels format. So we're confident in our ability to monetize over time. But right now, there's relatively few ads in story -- sorry, relatively few ads in Reels today. So it's definitely something that from an impression growth and monetization perspective is going to be a headwind. On iOS 14, we saw the revenue impact with iOS 14 -- sorry, iOS just in general, 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 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 overall as a headwind on our business in 2022 is on the order of $10 billion, so it's a pretty significant headwind for our business. And we're seeing that impact in a number of verticals. E-commerce was an area where we saw a meaningful slowdown in growth in Q4. And similarly, we've seen other areas like gaming to be challenged. But on e-commerce, it's quite noticeable -- notable that Google called out, seeing strength in that very same vertical. And so given that we know that e-commerce is one of the most impacted verticals from iOS restrictions, 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. 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. And so what that means is that search ads could have access to far more third-party data for measurement and optimization purposes than app-based ad platforms like ours. So when it comes to using data, you can think of it that it's not really apples-to-apples for us. And as a result, we believe Google Search ad business could have benefited relative to services like ours is based a different set of restrictions from Apple. And given that Apple continue to take billions of dollars a year from Google Search ads, the incentive clearly exists for this policy discrepancy to continue.
  • Operator:
    Our next question is from Eric Sheridan with Goldman Sachs. Please go ahead.
  • Eric Sheridan:
    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, 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 forms of engagement from a consumer perspective on the property and what the differential might be in terms of wallet's early innings in terms of differential ad pricing and how you think to close that gap. 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? And then, Sheryl, 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 that the team were trying to implement would start to show some efficacy. Can you give us an update on where you stand internally on workarounds and broader advertiser community acceptance of some of the workarounds on targeting and measurement as we move into the first half? Thank you.
  • Mark Zuckerberg:
    Sure. I can start with your first question on some of what we're seeing on engaging -- engagements. Reels and short-form video overall are very engaging. And a lot of what we're seeing is that there is -- people are spending a lot more time. And I think I mentioned this in my script upfront that it's growing very quickly. This is already the biggest contributor to engagement growth on Instagram. I think it's one of the biggest contributors that we're seeing to positive engagement on Facebook too already. But I think, going back to the last question, there was a question on what -- 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 certainly not the first time that we've gone through a major format evolution. And what these transitions all had in common from Desktop Feed to Mobile Feed, Feed to Stories and now to Reels in the beginning, our ad system and business are not as tuned for the new format. So as the engagement of the new thing starts to replace some of the engagement and the old thing, it creates a near-term headwind for revenue, but it's not that part - at this point now, is not that big of a concern for us. I mean it makes some of the stuff not as clear in the near term, but over the long-term, we're pretty optimistic about that. The dynamic that I think is actually a little bit different with Reels than what we've seen with Stories and Mobile Feed in the past. And with Reels, I would say that the teams are executing quite well, and the product is growing very, very quickly. 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. And so that -- to the question that was asked before around are we like -- that was asked before around, is there anything that's going to make it so that we -- it takes us longer to kind of get to where we want on this, is that even though we're compounding extremely quickly, that's -- we also have a competitor that is compounding at a pretty quick rate, too. But overall, back to the question, Reels, it's 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.
  • David Wehner:
    And then, Sheryl, were you going to take the second part of the question on the mitigation front?
  • Sheryl Sandberg:
    Yes. So when we talked about mitigation, we've said there are 2 key challenges from the iOS changes
  • Operator:
    Our next question is from Justin Post with Bank of America.
  • Justin Post:
    A couple. Mark, just on a big picture basis, you're adding a lot of short-form video and maybe the content shifting from content from your friends to general content, what does that mean for Facebook? I'm sure you've thought about a lot of it. But how do you think about the evolution of Facebook as a platform? And then for Dave, as you think about the measurement and targeting challenges, when we get out to September and October, should we be effectively lapping the issues? Or is there the reason to think it could actually get worse in the second half, just thinking about revenue growth kind of reaccelerating?
  • Mark Zuckerberg:
    I can take the first one. So for Facebook, I think content from your friends is always going to be an important part of the experience. And 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 news or different content like that. But I think overall, you're right, that the balance of content that people see in Feeds is shifting a little bit more towards stuff that isn't coming from their friends, which you may discuss with your friends, but it is kind of shifting towards more public content. I think, at the same time, we're seeing this trend where if you can do your day-to-day behavior on a lot of this stuff, this pattern may resonate with you. But a lot of people now are 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 one-on-one 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, a lot of the kind of personal sharing is sort of shifting towards messaging. And a lot of the -- what we're seeing in Feeds is just basically this content consumption and a lot of just really highly engaging content that forms the basis for conversations, whether it's in Chat or in common trends in those Feed apps. But that that type of creative work is a lot more of what we're seeing across the Feed apps, so whether that's Facebook or Instagram.
  • David Wehner:
    Justin, it's Dave. On the second part of your question, it's really about sort of what's the landscape of headwinds look like as it relates to targeting and measurement. And there, I think what we're seeing is kind of 2 things going on
  • Operator:
    Our next question is from Doug Anmuth with JPMorgan.
  • Douglas Anmuth:
    Mark, you talked last quarter, I think, about how Reels would become better integrated into both Facebook and Instagram. 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 potentially have even greater drag on revenue going forward? And then, Dave, just curious if you're willing to comment on a Reality Lab spend or a loss number in '22?
  • Mark Zuckerberg:
    I didn't talk about 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 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, we're only going to show Reels or recommend them. If we feel like there's high-quality content to show 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 going to grow a lot going forward, we believe. And engagement on both of those platforms. So yes, I mean I think that we probably will see as we're forecasting. And I think Dave has talked about here, the relative monetization rate of Reels for the next, I don't know, for whatever the foreseeable future is, will be lower than Feeds as we kind of displace some of that with this. But over time, we think that there's a potential for a tremendous amount of overall engagement growth and we think that in a steady state over time, we think that Reels should monetize closer to Feeds or Stories than other longer-form video. So I think we're optimistic about it. And I think that that's -- we think it's definitely the right thing to lead into this and to push us hard to grow real as quickly as possible and not hold on the brakes at all, even though it may create some near-term slower growth than we would have wanted. That's kind of -- that's the picture that I see. I don't know if you want to add anything to that?
  • David Wehner:
    No, I think that's exactly right. That's what's kind of factored into the guidance we’re providing specifically for Q1. And then, Doug, on the expense outlook, we're not breaking out expenses by segment. But I probably can give some color here. We're expecting accelerated headcount growth in 2022 to be the biggest contributor of expense growth and that's largely in tech and product roles to support the 7 product priorities that Mark laid out
  • Operator:
    Our next question is from the line of Mark Mahaney with Evercore ISI.
  • Mark Mahaney:
    I want to ask 2 questions, please. First, on ESG. Could you just -- there's been a series of 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 that arguably have been put out there to kind of address some of the ESG concerns. Where do you think you are in terms of addressing some of those that we've heard in the investment community? And then, Dave, I think you mentioned this $10 billion headwind, and I think that was related to some of these policy change, to Apple policy changes. Could you just give a little color as to how you came up with that number?
  • David Wehner:
    Yes, Mark, on the headwind, we're just estimating what we think is the overall impact of the cumulative iOS changes to where 2022 -- our 2022 revenue forecast is. So if you kind of aggregate the changes that we're seeing across iOS, that's sort of the order of magnitude. We can't be precise on this. It's an estimate. We've got ranges on the impact to our business. So we think it's a substantial -- 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 for users. I don't have anything specific on the ESG front. So I probably can't comment on that. I can follow up with you offline on that.
  • Operator:
    Our next question is from Youssef Squali with Truist Securities.
  • Youssef Squali:
    Mark, you stated your goal of refocusing on growth of younger audiences on the last earnings call, and I think you even signaled back then that he could mean maybe let's focus on other constituency. I know it may be early, but any color maybe to share on growth on users and engagement by maybe age groups? And then probably another question for you. I'm curious about when you think we can start seeing the kind of the mesh in of apps like Instagram with AR and VR and the interoperability 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 matter is sufficiently built up whenever that is?
  • David Wehner:
    Let me take the first one, I can take the first one on user growth uses. 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 that's true, and we're kind of seeing that globally. If you look at kind of the overall user growth landscape for the fourth quarter, we're seeing MAU and DAU in the U.S. and Canada sort of bounce around at sort of expected and indicated given our high level of penetration. And then if you look at the Rest of World, we've seen some headwinds there, kind of a little bit unique in the quarter in areas like India, where we saw data plan pricing increase lead to slower growth there. So that's another kind of some unique elements of the quarter on that front.
  • Mark Zuckerberg:
    Sure. And in terms of when there's some aspects to the metaverse showing up, I mean I talked about avatars in my remarks at the beginning and how we're making it to kind of 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 your avatar can show across Facebook and Instagram and Messenger as well in Quest, and we'll expand that further. And I think I also commented before about our goal for 2022 to make it so that Horizon works not just in immersive VR but on 2D screens as well. Something 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 will -- is already there. Some of it will come over the course of this year. Of course, the ability to message across apps is something that we've been working on for a while. You can already do that across Messenger and Instagram and there's more there that that we'll roll out over time as well. So I think you are going to see this stuff work seamlessly across the family.
  • Operator:
    Our next question is from John Blackledge with Cowen.
  • John Blackledge:
    Two questions. Maybe first one for Mark. How has Reels differentiated versus TikTok, YouTube Shorts and other short-form video services? And one for Sheryl, any further color on how SMBs are changing ad spend budget since the iOS changes? And is it slowing adoption of new SMB advertisers on Facebook?
  • Mark Zuckerberg:
    Sure. So I can start with Reels. 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 Reels short-form video format, that within the context of a different network or community, 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 on Pinterest are different from what you would do in Facebook or Instagram, even given a relatively similar format. So I think, to some degree, even if a creator chooses to reshare their content across the number, you'll have different discussions with your friends across the different services based on who's there. And then there's a social dynamic where friends and different communities create these as well. So seeing somewhat different Reels across Facebook and Instagram, and I'm sure you 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, but we just think the appetite that people have -- there's been this long-term trend that I commented on a number of times where over the time that I've been running this company, 18 years this week, basically, we've gone from text being the primary way that people share and consume content online at the beginning of the early 2000s to -- until we got cameras on our phones and photos became the primary thing. And now that mobile networks are starting to get -- gotten really good, video is really becoming the primary thing, and it is a lot more natural and engaging. 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 the kind of next step after video and why we're so invested there. But definitely, what we're seeing with short-form video is it's the next step 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 whether it's taking it and sending it to a friend in messaging or commenting online or just having fun watching it themselves. It's -- in general, we're seeing people spend a lot more time on this than what we've seen from apps so far. And 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:
    Our next question is from Lloyd Walmsley with UBS.
  • Sheryl Sandberg:
    Sorry, I...
  • Mark Zuckerberg:
    I think we had a follow-up on SMB.
  • Sheryl Sandberg:
    SMBs. 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. 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 personalized ads are more important for SMBs. And SMB really needs to buy a very small targeted audience that they're looking for and the larger the business, the more you're able to personalize the ad less. So we're definitely seeing that this has more of an impact for SMBs. We do feel, over the long run, that we believe we have strong benefits for SMBs and using our ad system. We are going to continue to work on these measurement gaps and continue to make sure SMBs can use it. We're also working hard on SMBs adopting some of our commerce tools and some of our other solutions like business messaging and seeing some success there. But you are right that this remains a challenge.
  • Operator:
    And our next question is from Lloyd Walmsley with UBS. SP136977589
  • Lloyd Walmsley:
    Maybe one for Mark and one for Sheryl. Mark, if we look at short-form video, how do you feel right now about the state of your content and you're matching algorithm relative to where you want it to be? I mean do you have the content you need? Are you getting it in front of the right users? Or is there a lot of room to improve this and drive more engagement? And then, Sheryl, where exactly are you in terms of rebuilding the ad product? And what are the key things you need to see to kind of roll out or what do our customers either need to adopt or do on their end to really start to see improvement to reel ads and a return on that budget? Like are there certain features like that you need to get adopted? Are there tools in the pipeline? Are there things they need to do on their end? And what do we need to see to see that come back?
  • Mark Zuckerberg:
    I can take the Reels question. So we do see a huge amount of potential ahead. But I think sometimes when we say that there's -- that we're closer at the beginning, what that means is that we still have a lot of kind of fundamental questions to overcome in order to make 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. It -- we face a competitor in TikTok that is a lot bigger, so it will take a while to compound and catch up there. But fundamentally, we think that there's a lot of potential for it to continue growing. So to your question, do we have the content that we need, 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. And we think that we're earning at a scale where we're seeing that flywheel really kick in and start to grow. And if it keeps on compounding at the rates that it's growing at, this is going to grow extremely quickly over the next year and potentially beyond that. But yes, I think that's kind of the best summary that I can give of where we are. Clear product market fit, growing quickly, a long way to go to catch up to be the biggest in the space. But I think the pieces are in place and the focus is certainly there at this point to really go after that. It's just that as this grew, it is -- 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 to 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.
  • Sheryl Sandberg:
    On the question of what we need to see to rebuild ad products and continue to grow return on ad spend. In the short run, as I talked about, we're working on measurement, we're rolling out new to help businesses continue to measure campaigns using Apple's SK ad network, API and Meta's aggregated events measurement and conversion modeling. So we have specific products 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 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. 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 targeting and measurement tools we have. So while we have seen an impact from these changes, we also didn't start from a place where 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 to these changes, there are also advertisers out there can continue to work on and improve their performance. We still believe there's a lot of performance improvement left in the system.
  • Deborah Crawford:
    Great. Operator, we have time for 1 last question.
  • Operator:
    Very good. Our last question will be from the line of Ross Sandler with Barclays.
  • Ross Sandler:
    I guess, Dave, a question on the Family of Apps segment margin. This hasn't come up yet, but it was down about 6 points year-on-year. And I know that you had kind of forecasted the expense growth that you came in at for '21. But I think that downtick is coming as a bit of a surprise for some folks who thought your ad business had fairly stable margins. So any more color on what's driving that? Is that just the revenue headwinds that you're experiencing or any other lumpy items? And then related to that, as you build out short-form video, how has your thinking evolved around paying rev share like YouTube does? Or other things like that to catalyze the shift? Any thoughts on that?
  • David Wehner:
    Yes, Ross. I think in terms of lumpy items, I mean, you will see that G&A was up a pretty substantial amount in Q4, so a part of that is related to legal-related expenses. Those tend to be lumpy, so there was a factor there. I think, in general, as it relates to Family of Apps and margin, I'd come back to the commentary that I made on the investments that we're making in Family of Apps 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 for the family of apps business, so -- segment. So there's a lot of investments that we're making there. What was, I'm sorry, the second question? Oh, yes, in terms of payments to partners, that clearly will play into the expense profile as we grow that -- as we grow short form, so that's also reflected as part of the guidance for expenses. So over time, that will be an impact as well, and that's part of the investment that we're making on the Reels side and is factored into the 2022 outlook.
  • Deborah Crawford:
    Thank you. Thanks to everybody for joining us today. We appreciate your time, and we look forward to speaking with you again.
  • Operator:
    And this concludes today's conference call. Thank you for joining us. You may now disconnect your lines.