Meta Platforms Inc (META) 2013 Q3 法說會逐字稿

Good afternoon.

My name is Jay and I will be your conference operator today.

At this time I would like to welcome everyone to the Facebook third-quarter earnings conference call.

(Operator Instructions)

Thank you very much.

Miss Deborah Crawford, Facebook's Director of Investor Relations, you may begin.

Thank you.

Good afternoon and welcome to Facebook's third-quarter earnings conference call.

Joining me today to talk about our results are Mark Zuckerberg, CEO; Sheryl Sandberg, CEO; and David Ebersman, CFO.

Before we get started, I would like to take this opportunity to remind you that our remarks today will include forward-looking statements.

The 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, our annual report on Form 10-K, and our most recent 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 demands as a result of new information or future events.

During this call we will present both GAAP and non-GAAP financial measures.

A reconciliation of GAAP to non-GAAP measures is to 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.

Thanks, Deborah.

And thanks, everyone, for joining today.

This has been a busy quarter at Facebook where we planted the seeds to achieve our long-term goals with Internet.org, our AI group, and our efforts to build the knowledge economy.

We continue to see strong overall engagement and are making good progress on our strategy, especially in mobile.

This contributes to the results we reported today -- strong revenue growth, strong growth in daily actives and good growth in engagement, as our ratio of daily actives to monthly active continues to grow.

We've also reached new milestones as a mobile company.

Now, 49% of our revenue comes from mobile.

And 48% of the people who use Facebook on any given day are only accessing it from mobile.

That's almost half of people only using Facebook from their phones.

And it's a pretty incredible sign of how Facebook has evolved over the last year.

On our last earnings call I talked about our three big goals for the next phase of our Company -- connecting everyone, understanding the world, and helping to build the knowledge economy.

Connecting everyone means giving everyone in the world the power to use the Internet and stay connected to the people and things that matter to them.

Understanding the world means helping people not just share day-to-day updates but also building up long-term knowledge about the world, and being able to answer questions for you that no other service can.

Building the knowledge economy is about helping people create growth in jobs, and supporting a larger economic shift in the world based on information and ideas.

This framework is how I'll think about our progress as a company over the next few years.

So I think it's a useful way to look at our progress over this quarter, as well.

Let's start with connecting the world.

This quarter we took an important step.

In August, we launched Internet.org, a global effort with Samsung, Ericsson, Qualcomm and other industry leaders to make affordable Internet access available to everyone in the world.

Today, only about one-third of the world's population is online.

And the Internet is growing more slowly than you'd probably expect, less than 9% a year.

We want to change this.

Our mission has always been to connect the world, and to us that means everyone.

When the next 5 billion people have a chance to use these basic services and participate in the global economy, that's going to create huge benefits for everyone in the world.

By working together on technology and new business models, we think we can help accelerate the process of connecting everyone.

We believe we're in a unique place to help encourage broader growth of the Internet because so much of what people do on the Internet is use Facebook.

According to comScore, around 20% of the time that people spend in apps in the US alone is in Facebook services.

And when you ask a lot of people in developing countries what service they care about using most, the answer is often Facebook.

We're already trying to make access to Facebook cheaper.

And we think that all the same tools and innovations that we're developing to do this can be applied to other basic Internet services, as well.

Like messaging, search, weather, and Wikipedia, to make those services cheaper or free to deliver.

We also recently acquired Onavo.

This is a team that builds world-class data compression technology in mobile analytics.

And they'll play an important role in helping us build more efficient technologies and services that use less data.

Of course no single company can do this alone, and we're working closely with our partners to develop our future plans.

It's still very early for Internet.org, and we'll have more to say in the months ahead.

But I'm very excited about this effort, and I'm grateful to our partners for being a part of that.

Next, let's talk about understanding the world.

What I mean by this is that every day people post billions of pieces of content and connections into the graph.

And in doing this, they're helping to build the clearest model of everything there is to know in the world.

A big part of why this works is that people can share things with any audience they want.

They don't have to share publicly with everyone at the same time.

They can share with just their friends.

So, this means that the model of the world that people are building in our systems includes things that people only want to share with just a few people.

This has the potential to be really powerful.

But right now we actually do very little to utilize the knowledge that people have shared to benefit everyone in our community.

The service we invest in the most is News Feed, which gives you a great sense of what's going on with your community today.

News Feed has proved itself incredibly useful for people.

And is the most used app on people's phones by far.

But this is just the start of what's possible.

And when we get to the point where anyone can easily ask any question to Facebook and get it answered by our community, that's going to be very powerful.

In the last quarter, there have been several important evolutions in our strategy of understanding the world.

The first is around Graph Search.

At the beginning of this year we announced the first beta version of the service on desktop, and indexed more than 1 trillion connections between people and things.

In the last quarter we started testing what we call Post Search, which allows you to search all of the unstructured text and posts that people have ever made on Facebook -- about 1.2 trillion more posts.

The folks on the team who have worked on web search engines in the past tell me that the Graph Search corpus is bigger than any other web search indexed out there.

It's still early for Graph Search because it is still in beta, only in English, and we haven't launched our mobile version yet, but it's something I'm really excited about.

Another evolution in our progress to understand the world is around our approach to building mobile apps.

Our goal has always been to help people share anything they want with anyone they want.

Historically we've done this by building a lot of features into the core Facebook app.

But we also have a few separate apps that are widely used, like Instagram and Messenger, our standalone messaging app.

These are each large services that help people share in different ways.

Instagram enables more than 150 monthly actives to share beautiful photos, often more publicly than people would want to share on Facebook.

Messenger is part of how people send billions of private one-to-one and group messages everyday.

And with the latest release of the app yesterday, we're continuing to add features and make this a better experience.

In the future, we expect to develop more of these services to help people share different content with different groups of people.

And we'll continue to build our Messenger as a better, distinct messaging experience.

There's one more evolution in our strategy to understand the world that I want to mention.

In September we formed the Facebook AI group to do world-class artificial intelligence research using all the knowledge that people have shared on Facebook.

The goal here is to use new approaches in AI to help make sense of all the content that people share so we can generate new insights about the world to answer people's questions.

We started assembling a team of some of the best people in the field to work on these problems.

We also announced the acquisition of Mobile Technologies, a speech recognition and machine translation company that will help expand our work in the field beyond just photo recognition to voice.

Over time I think it's going to be possible to build services that are much more natural to interact with, and can help solve many more problems than any existing technology today.

I'm excited that we're working on this problem and I'm looking forward to us doing a lot more here.

Finally, let's talk about the progress we've made towards building the knowledge economy.

The key to building the knowledge economy is building tools for everyone to use information to do their jobs better.

So, in addition to connecting everyone and understanding the world, we're also focused on building these services for businesses as a way to accelerate the growth of this new economy.

The way businesses will experience this effort is that we'll keep building better services for them to reach their customers with higher quality ads, more efficiently, with better targeting, better analytics and using richer formats.

The way people will experience this effort is that the ads they see will become more and more relevant to their lives.

Last quarter I started talking about how our approach going forward would be to grow our business through improving the quality of our ads rather than by just increasing the quantity.

This quarter we continue to do this.

And the results show our approach is working.

We've been able to deliver better content and grow business for our customers and ourselves.

We're finding that a lot more people are finding our ads useful and engaging with them.

And the average daily actives is engaging with more than one ad per week.

Most people probably wouldn't expect to engage with ads that often.

So I think it's a great sign that people are finding ads useful, and they're adding value to the experience on Facebook.

I think there's still a lot of room to improve the quality of our ads and grow our business over time.

So, this is something that we're going to keep on investing in going forward.

So, that's my update on how we're thinking about the next big changes we want to make in the world -- connecting everyone, understanding the world, and building the knowledge economy.

We made a lot of progress this quarter.

And I want to take a moment to thank everyone who works at our Company and everyone who is part of our community for all that they do to make Facebook great.

Looking ahead, you can expect us to keep preparing for the future, even as we keep on building momentum today.

As I said in our original S-1 filing, we don't build services to make money, we make money to build better services.

This approach has served people who use Facebook, marketers and entire Facebook community well.

It's a different way of looking at the world.

But it's how we're going to keep succeeding as a Company.

Thank you for being with us today.

And now I'm going to hand it over to Sheryl.

Thanks, Mark.

We continue to see strong growth in our ads business, especially mobile.

Q3 total ad revenue grew 66% year over year to $1.8 billion.

And mobile advertising grew to 49% of our total ad revenue.

This is a remarkable milestone in the short time since we introduced mobile News Feed ads just last year.

Similar to last quarter, our performance is very broad-based, with strong growth across all geographies and types of marketers.

At the same time, our overall user engagement metrics remain strong.

We think this validates the careful approach we're taking to building our ads business.

I'd like to highlight some of the key drivers of our performance this quarter.

These are, to a large degree, the results of investments we've made over the past few years.

And they will continue to be our priorities going forward.

The first driver is the continued growth of mobile engagement around the world.

In 2013, for the very first time, people will spend more time with digital media than watching TV.

eMarketer estimates more than five-and-one-quarter a day on digital services, including mobile, compared with four-and-a-half hours watching TV in the US.

Facebook is well-positioned to benefit from this shift.

In the United States, Facebook, including Instagram, that's one in eight minutes people spend on the desktop but one in five minutes on mobile.

According to ComScore, Facebook and Instagram have more mobile time spent than many of the next largest services, including YouTube, Pandora, Yahoo, Twitter, Pinterest, Tumblr, AOL Snapchat, and LinkedIn combined.

Along with this engagement, we believe that we have the best mobile ad products, with ads that are integrated unit into News Feed, where people spend most of their time on Facebook.

As people shift to where they spend their time, marketers are starting to follow.

Our results today show that we're benefiting from this shift to mobile.

And we believe this shift will continue, and will continue to benefit us.

Today mobile represents 12% of consumer media time but it's still only 3% of ad budget.

The second driver of our performance is an increasing number of marketers spending their ad dollars on Facebook.

From brands to direct response to local businesses to developers, more marketers are advertising on Facebook, which is a recognize that our ads work to drive sales.

This growth is taking place globally.

In the third quarter, the number of Facebook advertisers in EMEA nearly equaled the number in North America, reflecting global growth in our online advertising.

The third driver of our growth is product development.

We're working in a number of areas to make the ads people see on Facebook better.

More targeted ads are better, and we're improving our ad targeting to increase relevance.

We're investing in features like custom audiences and partner categories to improve targeting.

These are great tools that are still in their early days and we will continue to invest.

We also want to make it easier for marketers of all sizes to buy ads and measure their impact.

In late September we rolled out at ad format changes to make ads look more consistent across Facebook.

And we reduced the number of ad units marketers have to choose from, to reduce complexity.

And earlier this month we rolled out a full redesign of our ads buying tools to simplify the ads creation process.

Advertisers now select from one of eight business objectives, such as website conversions or app installs.

We think these product investments make it easier for marketers to achieve their goals.

We're also expanding our products for developers.

We already have launched mobile app install ads and these are going very well.

And we now launched mobile app install ads for engagement.

These ads help developers and businesses reach people that have already installed there app, and directs them back to increased engagement.

We believe these apps are a nice complement to our install ads, and represent a unique opportunity.

We also continue to invest in helping brands see that our campaigns increase in-store sales.

We recently launched outcome measurement for the telecommunications industry.

And initial tests showed that more than 90% of people who made a purchase after viewing a Facebook ad had never clicked on that ad.

This shows that impressions matter, and focusing only on clicks does not tell the whole story.

Similarly, a recent study by Kenshoo, one of our leading preferred marketer developer partners, proves this point.

The Kenshoo study found that marketers who use multi-touch attribution to measure campaign ROI credited 12% to 30% more value from Facebook than marketers who use last click attribution.

But, we still have work to do.

Brand marketers aren't moving as quickly as we would like.

And we believe measurement is key to influencing the advertisers.

Another important trend influencing our growth is our preferred marketing developer, or PMD, program.

Over the past two years, we've invested in building an ecosystem that supports all types of marketers.

And PMD has helped those marketers advertise effectively with us.

Today, this program is a community of hundreds of technology and service companies spread across more than 45 countries.

In summary, we think our strong performance this quarter further validates that our ad strategy is working.

Marketers are responding favorably, as we heard during Ad Week in New York.

Our messages are on reach, targeting and measurement are resonating, and we'll continue to reinforce them.

Our ads are getting better, and we still have a long way to go.

Moving forward, our focus remains the same -- continuing to capitalize on the shift to mobile, increasing the number of marketers who advertise with us, and continuing to invest in our ad products.

We believe that we're in the early stages of a major transitioning in advertising.

And we're uniquely positioned to capitalize on that opportunity.

Now, David.

Thanks, Sheryl, and good afternoon, everyone.

Q3 was a strong quarter for us in terms of our financial results.

Our business grew rapidly around the world.

And we're pleased with our performance across our key financial metrics, highlighted by the fact that Q3 was our first $2 billion quarter in terms of revenue.

Let's start with the size and engagement of the Facebook community, which continues to grow.

728 million people used Facebook on an average day in September, up 25% from last year.

Growth continues to be driven by mobile.

In Q3, for the first time, daily actives on web declined year over year, albeit very modestly.

Daily users represented 61% of the 1.19 billion people who accessed Facebook during the month of September.

And our overall engagement data remains strong.

Also, as we announced in September, Instagram now has over 150 million monthly actives.

I want to say a few word about youth engagement on Facebook.

As we've said previously, this is a hard issue for us to measure because self-reported age data is unreliable for younger users.

So, we've developed other analytical methods to help us estimate usage by age.

Our best analysis on youth engagement in the US reveals that usage of Facebook among US teens overall was stable from Q2 to Q3.

But, we did see a decrease in daily users, specifically among younger teens.

We won't typically call out such granular data, especially when it's of questionable statistical significance, given the lack of precision of our age estimates for younger users.

But we wanted to share this with you now since we get a lot of questions about teens.

We're pleased that we remain close to fully penetrated among teens in the US.

Our monthly user numbers remain steady.

And overall engagement of Facebook remains strong.

We'll continue to focus our development efforts to build products that drive engagement for people of all ages.

Turning to the financials.

Total revenue in Q3 was $2 billion, up 60%.

And ad revenue was $1.8 billion, up 66%.

Exchange rates had no meaningful impact.

Revenue growth was strong around the world, with each of the four geographic regions we report on growing by more than 50% versus last year.

The primary drivers of ad revenue growth were an increase in the number of and the strong performance of News Feed ads, and increasing the number of marketers using Facebook, and increased demand in our system.

In Q3, overall ad impressions were up 16%.

And the average price per ad was up 42% compared to last year.

The growth in ad impressions was primarily due to more people using our service, combined with the impact of a price floor reduction late in the third quarter last year.

The growth in price per ad was primarily due to the increase in News Feed ads.

In the US and Canada, where last year's price floor change had a smaller impact, ad impressions decreased 8%, and average price per ad increased over 60% compared to last year.

The decrease in ad impressions, despite an increase in the number of users in the US and Canada was due to the continued migration of usage to mobile devices where we show fewer ads per person compared to web.

The greater than 60% increase in average price per ad in the US and Canada was primarily due to the increase in the number of News Feed ads shown on both mobile and web.

Due to their high engagement levels, News Feed ads have a significantly higher price per ad then right-hand column ads.

Therefore, the mix shift of our ads towards a higher percentage being in News Feed versus right-hand column is driving up our average price per ad.

Mobile ad revenue in Q3 was approximately 49% of our ad revenue, up from 41% in Q2.

The sequential quarterly growth of mobile ad revenue was due to three factors -- an increase in the average price per mobile ad, an increase in the number of mobile users, and an increase in ads shown per mobile user.

Looking now at web, ad revenue from web usage decreased both sequentially and year over year.

Web ad revenue includes both News Feed ads on web and right-hand column ads on web.

Revenue for News Feed ads on web increased significantly in Q3, sequentially and year over year, driven largely by an increase in the number of News Feed ads per web user.

The increase was not enough to offset the revenue decline from right-hand column ads.

Total payments and other fees revenue was up 24% year over year to $218 million, and roughly flat sequentially.

Payments revenue from games was up 18% from last year.

But we believe 12% represents the best apples-to-apples comparison, adjusting for accounting items such as the change in revenue recognition timing from late last year.

Overall ARPU of $1.72 per user was up 33% compared to last year.

We saw 43% increase in the US and Canada, and greater than 40% gains in each of the other three regions we report on.

Turning now to expenses, in Q3 our total GAAP expenses were $1.28 billion.

On a non-GAAP basis, excluding stock compensation, total expenses increased 40% to $1.03 billion, driven by higher headcount and infrastructure spend.

We ended Q3 with just under 5,800 employees, up 34% from last year.

And we continue to be pleased with our success in attracting talent.

Our Q3 GAAP operating income was $736 million, representing a 37% operating margin, up from 30% last year.

And on a non-GAAP basis, operating income was $987 million, a 49% margin, up from 42% last year.

Our GAAP and non-GAAP tax rates for Q3 were 41% and 36%, respectively.

GAAP net income was $425 million or $0.17 per share.

Non-GAAP net income was $621 million, or $0.25 per share, up around 100% from last year.

In Q3 we spent $284 million on CapEx.

And free cash flow was $666 million.

Looking at our balance sheet, we ended Q3 with $9.3 billion in cash and investments.

During the third quarter we repaid our $1.5 billion term loan, and replaced it with a new $6.5 million line of credit, which is currently undrawn.

We'll continue to manage our balance sheet to meet our liquidity needs, protect the business against risk, and provide us with flexibility to invest in new opportunities to grow the business.

Now, let's look forward.

We continue to believe that improving the quality and relevance of News Feed ads provides us with a big, long-term opportunity.

However, as we think about the future we do not expect it to significantly increase ads as a percentage of News Feed stories beyond where we were at the end of Q3.

This is important because increasing ads in News Feed has been a meaningful driver of our revenue growth in 2013.

So this should be factored into your expectations for next year.

Turning to payments revenue, remember that in the fourth quarter of 2012 we recognized revenue from four months of payments transactions.

So, for that reason, we expect payments revenue will be down this coming Q4 compared to last year.

Looking at expenses, we now expect that our 2013 totaled non-GAAP expenses, including cost of revenue but excluding stock compensation, will likely grow around 45%.

In terms of our tax rate, we expect that our Q4 and full-year non-GAAP tax rates will be a few percentage points higher than our Q3 rate.

Finally, we expect our 2013 CapEx to be in the neighborhood of $1.4 billion.

This is down from our prior estimate of $1.6 billion due to a combination of efficiency gains and changes in timing of our planned purchases.

To sum up, in Q3 we made great progress against our key financial objectives -- growing revenue, investing for growth, and positioning the Company to maximize long-term returns for our shareholders.

And, we remain excited about the opportunities ahead.

Now, we're ready to open the call for questions.

(Operator Instructions)

Heather Bellini, Goldman Sachs.

Great, thank you for taking the question.

I just had two -- one for Mark and then one for Sheryl or David.

Mark, the first one, as Facebook's value proposition is connecting the world, how should we expect Facebook, in the future, to more specifically leverage deal location data to advertisers to make the ads even more useful for your users?

And over what time frame should we expect that to play out in your mind?

And then the second question for Sheryl or David would just be, you talked about brand advertisers taking a little bit more time, I think, that you might've liked.

Just wondering if you could help share with us how your mix between DR and brand advertisers has played out over the course of the year, if you could just give us some rough ideas.

Thank you.

The way we think -- I'll take both actually -- the way we think about using location data is that every time we use data we use it in accordance with the privacy controls we offer people.

And we are working hard at making our ads better targeted.

And over time I think you'll see the industry continue to evolve to get better at targeting more ads.

We certainly see it's a significant upside for us to get better at targeting more dads, not just from geo-location data but from all kinds of different data we get based on what users do with our service.

On brand advertisers, we don't break out the different marketer segments.

Our results this quarter are based on growth in all marketer segments, including brand.

And we continue to make progress.

We have every one of the Ad Age global 100 have advertised with us over the past year.

My comment was based on the fact that marketing spend is just not keeping pace with the transition to time online and mobile in that segment of the market.

And since that segment of the market is so big, helping that transition happen presents significant upside for us.

Our focus there is measurement.

We have to show brand marketers that our ads drive in-store sales.

And we work on that.

We work on that client by client.

To share a few examples from this quarter, Cadbury in the UK worked with us to sell their cream egg products the day before Halloween to talk about candy to 16 to 24 year olds.

They used Facebook media for user-generated posts, along with TV.

They reached 15 million people.

21% of those people they only reached on Facebook, not TV.

And the combined impact of TV and Facebook where sales were up 9%.

Another example, because it shows how we can move awareness, is the Alfa Romeo 4C launched in Portugal.

And they did a pretty cool thing where a person could do a test drive with a Formula One driver.

And they got the highest buzz they have ever had in Google trends for a product launch.

So, for us, we think it's a big opportunity ahead of us.

You have to work on these clients account by account, client by client.

But we think as the shift to mobile and digital happens, it's a big opportunity, and we're focused on helping that shift happen.

Scott Devitt, Morgan Stanley.

Hi, thanks.

Sheryl mentioned some of the tools that have been added to make it easier for advertisers to access and use the ad platform.

One example was objective-based ad buying.

I was just wondering how much you would attribute reduction in friction, like the examples that were referenced on the call leading to direct and immediate increases in inflow of ad dollars versus be more gradual in nature?

And then, secondly, for Mark, the concept of the knowledge economy.

I was wondering how you envision what the consumer will be doing on the site five years from now, if today is more about sharing, and sharing is more developed in search and product integrations?

How you think about that relationship between those three activities on the site over a five-ish year time horizon?

Thanks.

On the first, our growth overall is based on the strong performance of News Feed ads, an increase in the number of News Feed ads per user, and also more marketers.

And the simplification of products has actually been very important in attracting new marketers.

If you look at the new advertisers we acquired in Q3, 62% of them started with either promoted posts or promoted page lives which are the most simple of our advertising formats.

So, we think continuing to roll out very simple ways to become an advertiser is driving our growth, and will continue to.

The larger question you ask was based on our focus of business objective.

And that's actually a really big deal for us.

We are now getting to the point where our ad product support is really helping marketers achieve their core business objectives.

So, before people used to buy via the product -- what product do you want to buy -- and now they're buying from us by identifying -- I want to get mobile app installed, I want to get mobile engagement, I want to get website conversion.

I think the fact that we're pivoting to focus on those end business results and making everything else, including social, part of meeting those business results, is a really important part of our strategy.

It's driving our growth and I think it's going to continue to.

I just want to answer the part of the question about the product experience over time.

I move there are two pieces of this that we're thinking about related to the knowledge economy.

The first is just helping our customers use information better to grow their businesses and create jobs.

So, we're thinking about small businesses and making it so that they can have better insights into who their customers are, and better ability to reach them.

Developers being able to use better analytics for being able to find new customers as well.

And those are a lot of the inspiration and the strategy behind the ad products that we're delivering.

On the side of the product experiences that we're creating for people who use Facebook, right now I do think that the Facebook experience is very push-based, in that you go to Facebook and we're suggesting content to you through something like News Feed.

And over time I think if we do a good job we should be able to create more value through all of the knowledge that has been shared over time that we're not really surfacing on a day-to-day basis right now in terms of helping people answer a lot of different questions that they have around the world.

That's the direction we're starting to go in with Graph Search and a few other areas, as well.

But, it's pretty early so I think around a five-year timeframe, like you were saying, hopefully we will have made pretty significant progress towards going in that direction.

Mark May, Citigroup.

Thanks for taking my questions.

Maybe this first one for Sheryl and then David.

It seems like a year-and-a-half ago, around the time of the IPO, the Company was very focused on top-of-the-funnel brand-related advertising.

But over the last year or so it's been much more around direct response.

But certainly get the sense that on the top-of-the-funnel brand is starting to move in a more meaningful way.

What's the Company doing and what are some of the main projects that you're working on that you think will really start to move the dial on the top-of-the-funnel segment of the market?

And what role does video maybe play into that?

And then for David, regarding the ad load comment, had ad load not increased in North America, give us a sense of what the ad revenue growth would have been if you normalized for that?

Thanks.

So, top-of-the-funnel ads remain very important to us.

And, again, our growth this quarter was very broad-based including top-of-the-funnel ads.

The reason they're important is that Facebook is such a unique and powerful discovery place.

When you're on Facebook you are open to discovery, you're open to getting messages.

And that's what we're seeing with News Feed messages from friends and with ads, as well.

The key for us is measurement.

The way we're really going to make progress is better measurement.

It's easier to understand and measure a click that goes through to an online sale.

It's harder to measure households that see ads and don't see ads change their purchase, change their purchase behavior in stores.

The thing I think we've done a lot of over the last year, and we're continuing to do that, is put those measurements in place.

So I talked in my opening remarks about measurement for telecom.

We've also done a ton of work around CPG so that we can look at households that saw an ad, households that didn't see an ad, and what their difference is.

To share one more example, Mondelez did a promotion with us for the Nilla Wafer in the US.

They were targeting 35- to 44-year-old females and moms.

Because we were able to do this type of measurement, that we couldn't have done a year ago, we were able to show that the got a 5 extra turn on their ad spend.

We measured household spending who saw their ads versus households who didn't see their ads, and there was a 9% difference.

They were also able to tell that a lot of the 9% was driven by new buyers of their products, which is what they want.

So I do think we have a big opportunity.

I do think the brands are going to continue to need to be convinced account by account that this moves products off shelves, and that's what we're doing.

Mark, thanks for your question.

This is David.

So, it's really not possible to tease out individual contributions because the way the auction works everything is interdependent.

So if we have fewer ads, that's going to play out with different pricing and other sorts of things.

So, I can give you our best feel for it but I can't quantify it precisely.

If you look at overall ad revenue growth, for example, in the third quarter compared to the second quarter, there's probably three factors that contributed materially that are important to understand.

One is just growth in users.

Second is growth in demand which plays out into pricing.

And then the third is an increase in the number of ads that we showed in News Feed per users.

I'd probably order the ad load, probably third of the three, relative to the sequential.

I think it plays out a little bit differently on mobile versus web.

On mobile we really increased the number of ads as a percentage of the overall mobile experience quite modestly in the third quarter versus the second quarter.

On web, the increase in the number of ads, or the percentage of ads, in the web News Feed experience went up more significantly than mobile did in the third quarter versus the second.

Douglas Anmuth, JPMorgan.

Great, thanks for taking the question.

I just wanted to ask you about two things.

First on video, can you talk about what you've learned from the recent launch of video on Instagram, and how that may have shaped your thinking on rolling out video ads on Facebook?

And then, secondly, just following up on the ad volume, just to clarify, when you're saying the ad volume won't necessarily increase anymore beyond where it was at the end of 3Q, is that on average or in the more penetrated markets?

And then can you comment relative to the 5% of stories in the News Feed that you mentioned last quarter?

Thanks

The experience with video on Instagram has been very positive so far.

And I think that we proved through that, that having clips that autoplay can be a good experience in line in a feed.

And that people really feel like they're in control of the experience because they can just scroll away if they don't like the content.

If it's good content then that can be really good.

So we're heartened by that.

This is an important launch for Facebook overall because the addition of video content to the stream could be one of the most positive things that we've done in a long time for making it more engaging.

But if we do it poorly, then it could also be a negative thing.

And we're trying to take our time to make sure that we do this in a very positive way, and I'm pretty confident that we will.

But that's why you're seeing us take the process that we have on this

I'll add on video ads, we do have a video ad product today because anyone can embed a video in page posts.

And we're actually seeing very good results, particularly around entertainment and media.

This is driving some of out ad spend.

And the area remains pretty exciting because this is a very compelling way for marketers to tell their story.

Doug, you asked about what we mean when we say ad volume won't increase.

The first thing I would say is I would frame that in the context of as a percentage of the News Feed experience.

So, obviously, if we can drive more engagement, that provides more opportunity for us to show more ads.

In general, I think your questions referenced whether this was geographic.

The ad load in News Feed is reasonably consistent across the world.

It's a little bit less in the least developed markets because we have less advertisers there.

But it's not grossly different.

So, I think that that comment holds generally across most of the markets where we make our advertising dollars.

In terms of relative to the 5%, what we said last quarter was that of the total volume of stories in News Feed, about 5% of those were ads.

As I said on the last question, the mobile piece of that didn't change very substantially in the third quarter versus the second.

The web percentage did go up.

So, if you mix those two together, the Q3 number would be modestly higher than the 5% number from Q2.

Mark Mahaney, RBC Capital Markets.

Great, thanks.

Two questions.

First, David, can you just give us some color why the reduction in the OpEx growth for this year?

Were there certain investment projects you decided to cut, and what were those, and why?

And then, secondly, Mark, this five-year vision of moving towards, going from push-based to pull-based, that opens up a lot of opportunities.

That's been the sauce, maybe, behind Google, and an interesting part of Twitter, et cetera.

But could you talk about the challenges in order to get there?

And maybe both in terms of the user experience, the advertiser opportunity, how difficult, substantial the technology challenges are to get there?

It's a very different direction and there's a lot of opportunity but how do you get from point A to point B?

Thanks

Hi, Mark.

In terms of OpEx growth, we're continuing to invest aggressively in the business with particular emphasis on technical hiring and building out our infrastructure.

At the same time, we're trying to do this in a disciplined fashion, making sure that all the investments we make and the dollars we spend are spent wisely in terms of furthering our mission and creating returns for the Company.

I'm really quite pleased with how things are going in that regard in 2013.

From an R&D standpoint, we're really on track or, if anything, ahead of where we expected to be in terms of hiring and spend.

And that's really the most important area for us in terms of investing to drive future growth.

In other areas of the business such as cost of revenue, G&A, marketing and sales, I think we're ramping up spend less than we anticipated for a couple of reasons.

One is better success than we expected in some of the efficiency projects that are helping to keep the Company small even as revenue ramps up.

A second reason is some slower than expected ramp up in both hiring and new projects.

And then the third contributing factor is just we have in the budget some expectations for the unplanned stuff that comes along that can drive spend, like an asset acquisition or something like that.

And we really haven't spent as much money as we expected in the unplanned areas.

And for your question about how do we make the knowledge that's been shared in Facebook more useful, the first thing we needed to do is just index it all and build the infrastructure to start being able to use it in different ways.

The first beta for Graph Search we'd indexed more than 1 trillion connections, friendship connections, group memberships, live connections.

Then for post search we indexed more than 1 trillion of the posts that people had put into the system.

The basic insight that we think we're operating on here is that right now a lot of the behavior and engagement on Facebook is very day-to-day.

You're sharing something, and Facebook is the best place for you to share photos or an event that's going on in your life.

And for you to go to News Feed and see what's going on with the people around you.

But what's happened is that over the past almost ten years of this behavior, this amazing base of knowledge has been built up -- and it's trillions of pieces of content and information -- that now we're just trying to find different ways to expose that and basically make that more useful to people instead of just the stuff that has been shared in the last day or so.

So, Graph Search is one way that you can see that coming to light in terms of people being able to do directed queries for different types of content.

There are other kinds of services that we think we can build, as well, that just give people more utility from this corpus of knowledge that's been built up.

And that's going to be a big focus for us over the next few years.

Justin Post, Merrill Lynch.

Thank you.

Mark, after a successful revenue year you start next year with a clean slate.

And you highlighted some big ambitions in your prepared remarks about access and improving search.

Just maybe remind us how you think about driving profit growth as you look at the Company relative to your long-term objectives for the Company.

Thank you.

We care a lot about that, and in terms of the shareholder value that we're generating, as well.

And I think the recent results -- and what I said at the end of my remarks there was that we're going to keep on planting seeds for future growth while continuing to build momentum now.

And I admit that's a philosophy that we've taken in terms of building the Company.

We generally want it to be profitable and such.

But I don't think we're going to commit or have any specific guidance on this right now.

Carlos Kirjner, Sanford Bernstein.

Thank you.

Mark, can you talk a little bit more about how the knowledge and the Facebook graph compares with the knowledge in the overall web today qualitatively and quantitatively?

And if you are planning to connect the World Wide Web graph to the Facebook graph when you think about the answers that you're going to give people in the future.

Secondly, there's draft regulation in the European Commission, in Brazil at least, that may require Internet companies such as Facebook to store all their data locally.

What do you think would be the impact on Facebook's CapEx and expenses if these regulations are indeed implemented?

Thank you.

On your question about the graph, the graph that people share on Facebook versus the web overall, I think they're pretty different.

So, in terms of quantity, they're getting to a pretty comparable size.

So, engineers on the Graph Search team have told me, folks who have worked on other web search engines before, told me that the scale of things like post search are as big or bigger than any web search index that's out there.

But I know they are just different use cases with different kinds of knowledge, and people are going to use them for different things.

So, our approach with Graph Search is not to build something which is web search.

We think that companies have done that and they're doing a good job at that.

But there's different kinds of knowledge, things that you'd want more opinion on from people that you trust, that I think it's latent inside Facebook that we need to do a better job of surfacing that.

So that's going to be the focus on that.

Over time, there are a lot of possibilities for things that we can do.

And I'm not really ready to talk about a lot of them today.

But you can look at what we've launched in a couple of Graph Search launches that we've done so far.

And we're pretty early in that journey.

And, Carlos, the second part of your question was about draft legislation or discussion about companies needing to store data locally in various countries.

It's an interesting question and definitely something we're tracking.

But the answer is really going to depend on the details of what that looks like.

It's very hard to assess what kind of implications it would have for a company like Facebook without understanding what we would need to do.

So, we'll continue to pay close attention to it but really hard to give you anything in the way of a specific answer at this point.

Jason Helfstein, Oppenheimer & Co.

Thanks.

Can you give us some color on how many advertisers you guys ended the quarter, how that grew?

And then if there's a way to think about how many advertisers have claimed pages, so we can get a sense of how deep the penetration is.

Because it looks like you guys are more successful than other companies, and growing at a faster rate, particularly on the local penetration side.

Thanks

Last quarter we reported that we had 1 million active advertisers.

And that number continues to grow, and continues to grow healthily.

We believe globally we have 20 million small businesses and local businesses of some kind who have pages.

So obviously just a fraction of those are advertisers.

And I think it's one of the most exciting opportunities in front of Facebook.

It's really hard to get small businesses to use technological products.

And 20 million small businesses are using us.

And we haven't gone out and done aggressive sales efforts to make that happen.

Going from having a page that you're using for organic distribution to paid distribution is something we're very focused on.

It's why we roll out these simple products.

And I think our track record at doing that is good and we plan on getting better at it.

Ross Sandler, Deutsche Bank.

David, sorry to beat a dead horse but back to the ads per user comment.

Can you just give us some color on, since you guys started the mobile News Feed ads a year-and-change ago, how much CPC and click-through rate improvement you've been able to drive?

And should we think about it going forward, if mobile users are growing at 18% in the UK, 20% in the US, and I think 60% for ROW, should we think about revenue growth as a slight premium to that but somewhat correlated to that?

Thanks.

Sure, Ross.

I think if you look back over the last year, some of the metrics that I think been most positive for us have been, as we've ramped up from a very low volume, very few ads shown in News Feed to larger numbers, what one could reasonably have expected, given the way the auction dynamics work, is that the pricing would really come down as we were delivering more clicks, and as we were diving deeper into the pool of advertising demand.

And the way pricing has really held up, and click-through rates have filled up, and CPCs have held up as we've progressed through this over the last year, I think, has really validated our confidence that News Feed ads were going to be a really important product, that could really drive the performance of the business.

So, we remain really encouraged and pleased by that.

Going forward, clearly we will try to continue to grow the user base, as you described.

And that's been an important part of our revenue growth since the Company started.

And the other opportunity is for us to continue to improve the quality, the relevance and the performance of the ads, and to drive up pricing by bringing more demand into our system.

We're certainly, I think, doing a good job of that right now, and we've got to continue to execute.

Eric Sheridan, UBS.

Thanks, guys.

Two quick questions.

One, following up on the last one with respect to ROI around advertising products going forward.

I guess maybe more for Sheryl.

But how do you guys think about the dialogue between advertisers and yourselves about ROI?

And how much of that fits with measurement and attribution tools that you guys need to develop internally versus what they need to think about in terms of the ROI on your properties versus other online and off-line properties?

And the second question on mobile app install ads, a question about the diversification of the advertiser base and how that's really developed since the product's been launched?

Thanks

To the first question, it's really both.

In order to measure all the way from seeing a Facebook ad through to a purchase, particularly one that's off-line, that takes work and tools on our site, including the data systems.

And it also takes thinking about measurement on their side.

The industry overall is moving.

We've been really pleased to see more embracing of multi-click over last-quick attribution.

You can see that happening with a number of big players in the industry.

The PMDs are really important here.

The PMDs are good at helping people and helping marketers measure.

But, really, the develop of measurement systems, take our measurement, take industry measurement.

Particularly for brand advertisers, they also takes some rethinking of the ways they have measured ads and ads performance before.

And we work very closely with our clients on that.

On mobile app install and mobile engagement ads, we are very focused on growing across the board.

We want growth in all of our marketer segments, and we want growth that's broadly across the world.

Developers are a really interesting place for us because we think not only do we have, we think, the best mobile ad product in general, because people spend a lot of their time in News Feed, they spend more time in News Feed than they spend in any other part of our service, that gives us an opportunity to sell ads broadly.

But it also gives us a great opportunity for developers.

Because what developers want people to do happens on their mobile phones and on the desktop.

Mobile app install ads have been very successful for us.

And they're interesting because the mobile app install market didn't even exist a few years ago.

I think the move to roll out engagement ads further deepens our relationship with developers.

And shows that we can help get them users, and then we can get those users to continually use their products.

So we're pretty excited about this part of the market because we think it can grow so quickly.

And we think our ad products and offering is so unique.

Peter Stabler, Wells Fargo.

Good afternoon.

Thanks very much for taking the questions.

You introduced hash tags in June and I'm just wondering if you could comment on usage trends, how strategically important hash tags are to indexing the knowledge graph going forward?

And whether hash tags could become a meaningful part of an ad targeting opportunity in the future if usage catches on in a significant way?

Thank you.

The launch of hash tag was more just following behavior that we see from people.

All we really did was take hash tags that people were putting into the product and make them linked so that people could find other posts that had the same tag.

The effort that I think you're latching onto is basically we are putting some more effort now into both public content on Facebook and more private content.

So, there are a bunch of different sets of people that a person will want to share with.

One is all of their friends.

But a lot of the sharing and communication that's done is one-on-one in messaging, or with small groups, or with a community.

And then there's a large set of content that's public, which is often very high-quality content, as well.

And we have efforts in all of those areas to make it that people can share all of those different kinds of content on Facebook.

And that's going to be something that we're going to continue to do.

Brian Nowak, Susquehanna.

Thanks.

I have two, please.

You continue rolling out a lot of new products.

I was wondering if you could speak to the traction and any of the user adoption of the early topical and interest trending that you've rolled out?

And then last quarter you talked about strength in e-Commerce driving some of the advertising.

Which kind of verticals would you speak to this quarter?

Ad as we're adding into the holiday season, are you still seeing e-Commerce being a big driver again?

Thanks.

You're asking about the effectiveness of some of the public content efforts that we've done.

I think it's starting to do very well and we're very pleased with it.

Some of the questions that we've gotten have asked if this is an area we've started focusing on recently, which actually it isn't.

It's something we've been working on for a while.

But I think the question is a sign that the results are starting to be quite good and folks are starting to notice the traffic that we're driving and the higher-quality content that's public that people are coming across on Facebook.

So we're going to keep on focusing on this.

It's not just about public content.

It's about giving people the power to share with every different audience that they want, whether it's the most private, one-on-one communication and thread, up to the most public content that you want to get out for everyone in the world to be able to consume.

We're just going to keep pushing on all of that

To your second question, direct response, including e-Commerce, continues to perform well.

We have high click-through rates, competitive CPCs, so we're attractive for marketers.

When you think about verticals, I think we have really tremendous opportunity in basically all of them.

Things that are performing particularly well right now -- financial services, media and entertainment, e-Commerce, professional services.

But even if you look to a vertical like auto that we haven't historically been strong in, I think we're starting to make real inroads client by client, like the Alfa Romeo case study I showed, because we have such a great opportunity to engage the people they want to reach.

Our targeting is also getting better.

So with custom audiences and partner categories we're able to identify -- here are the people you want to show your ad to who we believe are in the market to buy a car, for example.

So the combination of the measurement work we're doing and the ability to target, I think means we have a strong play in every vertical.

Richard Greenfield, BTIG.

Hi.

I really wanted to ask you about the Instagram blog post that you put up the other week where you stated specifically that -- I think the quote from the blog was you want ads to be creative and engaging.

And that seems pretty different than most of the advertising that I've seen on Facebook, whether on mobile or on the desktop.

And wanted to ask you how do you think, or is it possible that if this strategy of advertising works well on Instagram, could we actually see a new form of advertising appear on Facebook sometime in 2014 or 2015?

What we announced last week is a small test with 10 advertisers to start showing ads in the Instagram feed.

And we're excited about it because there's a lot of interest and a lot of excited brands.

When you think about ads being exciting and engaging, I think we think about two things.

We think about ads that fit the format of the product that they're part of.

So, the Instagram ads right now are the pictures and videos, which are exactly what people post on Instagram.

If you look at the progress we've made with our News Feed ads, those ads, those in the size, the shape, they got larger when they moved over from the right-hand side, right-hand column.

But they're also meant to be as exciting, as engaging as the content.

So, our goal is we want our ads to be as good as the user-shared content.

Some of them are, a lot of them aren't.

We have a lot of room to grow in improving that quality.

But in terms of the excitement you'll see, or the interest, that is our goal.

And we're just going to match the format of the product we're working with as we roll out ads.

Brian Wieser, Pivotal Research.

Thanks for taking the question.

I'll take another crack at the number of businesses advertising.

I was wondering if you could quantify the number of new small businesses, perhaps, or number of advertisers going beyond that 1 million in the quarter.

The reason I ask is I'm trying to understand to what degree that maybe the shift to spending mix towards smaller businesses may have contributed to margin expansion?

And maybe you could talk about the margin profile, the different segments of marketers bring to your business.

We don't break out our business by marketer segment and we don't give margins by marketer segment.

But to help answer your question, we've seen strong growth across all of our marketer segments.

All of them are growing.

Brand's growing, direct response and eCommerce are growing, SMB and local businesses are growing, developers are growing.

We definitely think there is a big opportunity, both to grow same-store sales of our large clients, particularly with the shift that's happening from TV to digital and mobile.

We think that there's a really exciting opportunity.

We also think SMBs are a big opportunity for us.

And certainly in an advertiser base of over 1 million advertisers, the great majority of those are obviously the small- to medium-sized businesses.

We worked hard on our sales effort so that we have the right sales and support effort to meet our clients.

We care about our margins.

Certainly simplified products, such as we've rolled out over the last year, make it easier and cheaper for SMBs to use our products.

Easier for them and cheaper for us.

And we will continue to focus on the automated tools that help.

I think the most important thing we've done on this goes back to an earlier question about focusing on marketer objectives.

Before, we were asking marketers to come in and choose what ad products they were buying.

With our shift to focusing on marketer objectives, it's easier for everyone from the largest to the smallest.

A small business owner can come in and say -- I want my app installed.

Or -- I want web conversions.

Or -- I want web click.

And then we are doing the harder work of figuring out what products are there, figuring out which of those ads should have social context so that we can meet those objectives.

I think that move of moving more towards using their language and focusing on their business needs is a simpler product for them.

It will help gain us more marketers and it helps us work with them in a more efficient way.

Great, that's it.

Thank you for joining us today.

We appreciate your time and we look forward to speaking with you again next quarter.

This concludes today's conference call.

You may now disconnect.