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1 Facebook, Inc. Third Quarter 2019 Follow Up Call October 30th, 2019 Operator: Good afternoon. My name is Jessa, and I will be your conference operator today. At this time, I would like to welcome everyone to Facebooks third quarter 2019 results follow-up Q&A call. All lines have been placed on mute to prevent any background noise. To ask a question, please press star then the number one on your telephone keypad. This call will be recorded. Thank you very much. Ms. Deborah Crawford, Facebooks Vice President of Investor Relations, you may begin. Deborah Crawford: Thank you. Good afternoon, and welcome to the follow-up Q&A call. With me on todays call is Dave Wehner, CFO. Before we get started, I would like to take this opportunity to remind you that our remarks today will include forward-looking statements. Actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are set forth in todays 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 certain non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in todays earnings press release. This press release and an accompanying investor presentation are available on our website at investor.fb. And now, I would like to turn the call back over to the operator for the first question. Operator: Thank you. We will now open the lines for a question-and-answer session. To ask a question, press star followed by the number one on your touch-tone phone. Please pick up your handset before asking your question to ensure clarity. If you are streaming todays call, please mute your computer 2 speakers. Your first question comes from the line of John Blackledge from Cowen. Please go ahead. John Blackledge: Great. Thank you. Just a couple questions. On OpEx, in 3Q, cost of revenue growth decelerated fairly significantly. Just Im curious, any color there? And also, sales and marketing growth was a bit lower than expected, if theres any color there. And then, my second question was on the 3Q ad impression growth, where you called out the core Facebook feed as the leading driver. I know you mentioned this on the call, Dave, but if you could remind us again, in order, if possible, of the key drivers of the core Facebook feed impression growth in 3Q. Thank you. Dave Wehner: Yes, sure, John. Yeah, on the core - the cost of revenue growth, youll note that we saw depreciation go down sequentially. And the majority of our cost of revenue continues to be depreciation associated with our infrastructure spend. And so, COR just grew 30% in Q3, versus 49% in Q2. So I wanted to - Ill give you two contributing factors to that slowdown. The first is, were transitioning our server decommissioning approach from an individual rack basis to an entire data hall at once. And as a result of that change, were using some of our current servers longer and therefore depreciating them over a longer period. And this is a temporary change as we transition to this hall-based depreciation model. So were going to - once we get kind of - we start replacing all of the servers on a hall basis, well go back to the old lifetime. But were getting some extended life out of our servers because of this. Thats the biggest factor. The other thing is that were lapping some significant growth last year and our ads integrity expense growth. And so, that stabilized a little bit. So, those are the two factors on the slowdown in cost of revenue growth. 3 Marketing and sales, there were some Q2 launches in AR/VR and associated marketing campaigns, so thats one thing that Id call out there as being a little bit higher in Q2 versus Q3. John Blackledge: OK. And then on the - on the core Facebook feed, impression growth being the number-one driver that you called out, if you could just remind us again what drove the feed impression growth at core? Dave Wehner: Sure. I think what were seeing is a couple factors. You talked about some of the optimizations that we made in terms of - in terms of things like ad load as it relates to managing internal promotions, and so that had an impact in - especially internationally, in terms of the impact on that, and then overall just good engagement growth, as well, on Facebook, and especially good - we saw good feed engagement growth in U.S. and Canada, so that was positive. So, I think there was a few different factors going on. But a combination of, I think, good core engagement growth, as well as some of the optimizations around how were using our internal inventory. John Blackledge: Do you include the Facebook Marketplace in that kind of rolled-up feed? Or is that separate? Dave Wehner: Its relatively small compared to overall feed. I think John Blackledge: OK. Dave Wehner: Ill have to check on that, but well get back to you later on the call on that, if we can. I dont know. John Blackledge: OK, great. OK, sounds good. Thank you. Dave Wehner: Great. Thanks. Operator: Your next question comes from the line of Jason Helfstein from Oppenheimer. Please go ahead. 4 Jason Helfstein: Thanks, two questions. First, is there - given that expenses came in kind of - clearly at the low end of the expectations for this year, is there a specific kind of line that you thought you got greater than - or youre on target to get greater than expected leverage from, that kind of next year creates kind of a tougher comp as were trying to think about how to model the expenses next year? And then, youve got a lot of emerging - what do I want to call them - verticals, right, Marketplace, now News, Messenger, WhatsApp. Is it reasonable to ask you to rank as far as in order when we start to see revenue from those? I mean, in the - on the call, you guys talked about tests that are happening with Messenger and the automotive. Can you comment if Facebook News ultimately will have ads in it? And then, kind of - and then, any comments on plans to monetize Marketplace or WhatsApp? Thanks. Dave Wehner: Sure. I mean, on the expense growth, we talked a little bit about the cost of revenue, depreciation change. That obviously was - there was a benefit there that we got with the extended life of servers. We took a benefit in Q3. So thats one of the things that did factor into the overall expense growth. And also, headcount growth is 28%. We do plan on re-accelerating that next year, so I talked about that. Obviously, our execution on that will drive some of the - some of where we fall in the range of cost guidance that I gave. And then, marketing is another expense that is going to be quite variable and will depend on the ROI that we see from doing that. So, thats some of the color that I would give there. We do expect to continue to see cost of revenue growth that relates to the big CapEx build that weve had, so that will factor into the growth next year. In terms of emerging verticals, were already monetizing Marketplace with ads. So some of the areas where were seeing kind of good growth in, Id say, newer product, obviously, Stories is the biggest one. I think were seeing opportunities with Instagram Explore and putting ads into Instagram Explore. 5 Marketplace - ads in Marketplace is also a positive. On the messaging side, were seeing click to messaging ads perform very well. So those are some of the bigger areas of growth and opportunity. I think some of the areas that were investing in for the long run are things like Instagram Shopping. Those are much smaller, but have opportunity in the long run. Operator: Your next question comes from the line of Michael Levine from Pivotal Research Group. Please go ahead. Michael Levine: Two questions, guys. One, Im just trying to understand, as youre talking about the deceleration in Q4 and some of this being a function of some of the signals basically rolling off, I mean, are you - are you already seeing - because Im guessing what would happen is that ROIs would decline in - then conceivably your more direct response-driven advertisers would conceivably reduce what theyre willing to pay, I mean, is that - is that the sequence of events? And then, a second question about campaign bid optimization, where I feel like theres a little bit of uncertainty. Im hearing from advertisers as to whether you guys were going to make that mandatory in the front half of next year. Dave Wehner: So, yeah, I mean, in terms of how the signals play into the revenue forecast, yeah, it just relates to what ability advertisers have to get good conversion on their ads to ultimate end business outcomes. And if we dont have targeting and measurement thats as effective, that will play into their willingness to pay, because they see a lower conversion rate on their spend. On the - I dont actually - Ill try and find out - well try and find out the answer on the campaign bid optimization. I dont know the answer to that question, Michael. 6 Michael Levine: But if youd - on campaign bid optimization, at least in some of the work Ive done, Im seeing good results. Like, are you - is it a fairly big initiative? Are you seeing it make a difference in terms of clients, ROIs, and ensuing spend? Dave Wehner: Yeah, I mean, we - overall, we believe that we can do a better job of helping clients optimize if they give us what theyre trying to optimize against. So, yes, we know what theyre trying to drive from a real business outcome perspective through things like Facebook Pixel and other techniques. Its very helpful for us to drive better business outcomes for them. So, that is where we think the industry is heading overall. But I dont know the specific answer to your question around mandatory. Operator: Your next question comes from the line of Aaron Kessler from Raymond James. Please go ahead. Aaron Kessler: Great. I have a couple of questions. First, maybe - you talked about kind of the tougher comp in Q4, as well, versus last year, although last year did see about a three point decel. Were you talking about kind of the ad load specifically? Because you did see number of ads increase, I guess sequentially, last year maybe from some of those initiatives. And then second, just on the depreciation real quick, there seems to be a decent lag between kind of that higher CapEx weve seen in the last couple years, versus the depreciation were seeing. Can you just maybe reconcile that? Thank you. Dave Wehner: Sure. The tougher comp that we talked about was driven on a couple things, one - more on the - on the demand side and the pricing side, how the ad auction is operating and optimizing, so that more impacts price. And then, we were in a - still in a very high growth - very high growth phase for Instagram on both the Feed and Stories side and benefited from ad load optimizations there, as well. So lapping those were the two factors that I cited as being the tougher comps in Q4. So, those are kind of the two product factors. 7 In terms of the depreciation question, keep in mind that a lot of the cyclical build that we had was related to data center, and those are pretty long-lived assets. So, it takes time for those to play into the overall depreciation schedule. Obviously, there are some server - significant server spend, as well, and those depreciate at a shorter timeframe, much shorter timeframe than data centers, which is the - effectively the building, so that has a building lifetime as opposed to a server lifetime. And weve been doing a lot of data center builds, so theres a lot of halls that weve built and those depreciate over a long life cycle. So, thats why those take longer to sort of flow through to cost of revenue. Operator: Your next question comes from the line of James Lee from Mizuho. Please go ahead. James Lee: Hey, thanks for taking my questions. Dave, maybe can you help us understand the implications for engagement, specifically with the initiative to support free speech? I assume youre going to have more content as a result and thats a positive for engagement. Is that fair to say? And relating to that, you have 35,000 people filtering content now, with the increased content thats coming up. Do you need to increase the staff, as well? And also, secondly, from a product perspective, any update on Watch or IGTV? Because when Mark talked about product priority going into 2020, he mentioned IG Check outs and Messenger and unified payment but he did not mention Watch or IGTV at all. I was wondering, is that still a priority for the company? And if so, maybe help us understand, what are the key frictions that you try to resolve in terms of increased adoption there? Thanks. 8 Dave Wehner: Sure. Thanks, James. In terms of your first question, I dont really think theres a direct correlation, I think, between the values that Mark is outlining around free speech. I think this really has to do with a fairly limited subset of how we treat - how we treat speech around political figures and how we fact check it or do not fact check it. So, I dont think that has any bearing that Im aware of on sort of content engagement or the amount of content that goes to our reviewers. So, I dont think any change there. I mean, were continuing to invest in our contractor resources for content review and ad review. And so, we would continue to ramp those expenditures, and thats factored into the guidance for expenses in 2020. Watch and IGTV remain areas that were continuing to invest in, not big from a revenue perspective at this point. I think what were really trying to do is get product market fit and intentional viewing behavior where people are coming and it is additive to overall engagement on Facebook and Instagram TV - on Instagram. I think were seeing good signs there. But I think were still early in that, and theyre not going to be big revenue opportunities in the near term or 2020. James Lee: And, Dave, any follow-up on the MAU number or DAU for Watch? I think youve havent updated in a while, and also time spent, as well. And also, lastly, I think someone had asked about mobile monetization, monetization on mobile messaging. Is it fair to say you want to get comfortable with the regulation, potentially get federal regulation kind of in place before thinking about monetization on mobile messaging? Because its a little bit more personal, a one-on-one basis? Dave Wehner: So in terms of - in terms of stats around Watch, we havent updated them since June. I think then we said there w
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