Meta Platforms Inc (META) 2014 Q2 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 Second Quarter Earnings Conference Call.

(Operator Instructions) Ms. Deborah Crawford, Facebook's Director of Investor Relations, you may begin.

Thank you.

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

Joining me today to talk about 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 and 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 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 will 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.

Now, I'd like to turn the call over to Mark.

Thanks, Deborah, and thanks, everyone, for joining today.

This was a good quarter for us and a good end to the first half of the year.

We've continued to grow our community in size and engagement with 1.32 billion people now connecting on Facebook each month and 63% of them visiting daily.

Our momentum remains especially strong on mobile.

There are now 829 million people using Facebook everyday, with more than 650 million people using our services on mobile everyday.

One thing that's exciting is that there's still so much room to grow.

On average, people on Facebook in the US spend around 40 minutes each day using our service, including about one in five minutes on mobile.

This is more than any other app by far, but overall, people in the US spend nine hours per day engaging with digital media on TVs, phones, and computers.

So, there's a big opportunity to improve the way that people connect and share across how we all engage with the rest of media as well.

When it comes to our business, we continue to be pleased with our growth.

This quarter, our total revenue grew to over $2.9 billion and advertising revenue grew by 67% from a year ago.

Mobile now accounts for 62% of our advertising revenue, which is a good sign of how the growth of our community on mobile is also producing better business results for our partners.

The results this quarter show our continued focus on improving our core products and business.

We're going to continue investing aggressively in areas that are important for our mission and long-term strategy, but we're also going to stay focused on our core products and business.

This is the best way for us to continue creating value for our community.

Now, let's talk about how we're making progress on our three big company goals: connecting everyone, understanding the world, and building the knowledge economy.

Our strategy for connective everyone has two basic approaches.

Our first approach is internet.org, our effort to bring affordable internet access to every person in the world.

Our second approach is about giving everyone more tools for connecting so they can share all of the different kinds of content they want with the right people.

Instagram, Messenger, and our Creative Labs apps are a part of the second approach.

With internet.org this quarter, we've continued to deepen our partnerships with mobile operators and lay the foundation for running tests in more countries.

Already, our initial partnerships in the Philippines, Paraguay, and Tanzania, have helped around 3 million people connect to the internet who had no access before.

We're really proud of these early results.

In June, we acquired Pryte, which has a lot of expertise bringing affordable internet access to communities by partnering with mobile operators, app developers, and content providers.

Later this year, we expect to launch a broader set of free basic internet services in a number of other countries, as well.

In our app efforts, we're continuing to build momentum with messaging.

People now send more than 12 billion messages a day on Facebook, and in April, we reached 200 million monthly actives on Messenger.

Last month, we announced that David Marcus will be joining us from PayPal to lead our messaging efforts.

We expect David to continue growing Messenger, building out new experiences to serve our community, and ultimately, to build Messenger into an important business.

Instagram continues to make great progress in giving people new ways to share their stories through photos and videos.

Last month, we made one of the biggest updates ever to Instagram, by adding new creative tools that allow people to refine exactly how their photos look and feel.

This is an important part of building out Instagram's capabilities as a platform and serving the creativity of the Instagram community.

Next, let's talk about understanding the world.

As of last month, on average, more than 1 billion search queries are made every day on Facebook.

This is a great milestone and it shows we're in a unique position to answer a lot of questions for people.

But this is just the start and over the next few years, as we make progress on building out search and our broader efforts in artificial intelligence, I expect us to deliver even greater utility for people.

Our progress on public content is also very promising.

As part of helping people better understand the world, we want to help you connect around important public moments and personalities.

Now, nearly 800 million people on Facebook are connected to public figures.

These connections are driving conversations at a huge scale.

During the World Cup, over 350 million people made over 3 billion interactions on Facebook.

To enable even more of these conversations, we've improved the ranking of videos and News Feed and launched new APIs to help TV and media organizations use Facebook content in their productions.

Public content will continue to be a growing focus for us over the coming months and we plan to invest in building more great products and partnerships in this area.

Now, building great social experiences to serve our community isn't something we do alone.

Supporting developers is a key part of our strategy and at our f8 conference in April, we announced new ways to help mobile developers build, grow, and monetize their apps.

Over 1 billion people use Facebook on their phones every month and more than 80% of the top apps on iOS and Android now use Facebook log-ins.

We think we're in a great position to be the cross-platform platform, that let's developers build great apps across every platform.

So far, we're very encouraged by the reaction from developers.

App Links, our new method of deep linking to specific content in any app, is now being used by hundreds of apps across iOS, Android, and Windows phones, with links to more than 1 billion individual destinations in these apps.

We also launched our Audience Network, our first big effort to help developers monetize on mobile and we've received a lot of interest from developers.

We're rolling out the Audience Network gradually, but we're going to continue to ramp this up over the coming months and are excited by the opportunities ahead.

Finally, let's talk about our efforts to build the knowledge economy.

This has been a strong period for us and we've reached some new milestones as a business.

Now, more than 30 million small businesses use Facebook pages to connect with their customers and more than 1.5 million of them are active marketers on Facebook.

To continue delivering the best returns for marketers, we've been very focused on improving the quality of the ad experiences for our community.

Our goal here is to make ads as interesting and useful as your friends' content on Facebook.

We're investing heavily in this area and this quarter, we launched a number of efforts to improve the quality and relevance of our ads, including new ads preferences tool, interest-based advertising, and improvements to News Feed designed to reduce low quality content.

In some countries, our surveys indicate that our ads get close to the quality level of organic content, but in most developed countries, we still have a lot to do.

We expect to continue focusing on this for a long time.

That's my update on how we've been executing over the last quarter.

It's been a quarter with good performance and continued momentum.

I want to thank everyone who works at Facebook and is part of our community, including our shareholders and partners.

Because of your efforts, we're continuing to make progress towards our mission to help connect the world and we're improving hundreds of millions of people's lives everyday.

I'm grateful for your support and to have the chance to work with all of you.

Thanks.

Now, here's Sheryl.

Thanks, Mark, and hi, everyone.

As Mark said, we had a strong second quarter.

Ad revenue grew 67% year-over-year to more than $2.6 billion.

Mobile ad revenue grew 151% year-over-year and now makes up 62% of our ad revenue.

We continue to focus on three key areas in investment: capitalizing on the shift to mobile, growing the number of marketers using Facebook, and building our ad products.

These investments continue to generate broad-based growth.

All geographies and all marketer segments performed well this quarter.

Our team has a really strong belief in what we're building; the world's first ad platform that delivers personalized marketing upscale.

While we believe it is still early days, we're pleased with the progress we're making and I want to join Mark in congratulating our global teams on their continued execution.

Today, I'm going to focus on two key marketer segments: small business and brand marketers, as well as cover some of the investments we're making on the product and ad tech fronts.

We believe that personalized marketing of scale can drive results for all types of marketers.

Just a few weeks ago, I was in India and I hosted our first India SMB round table.

One of the entrepreneurs I met, Vivek Prabhakar, sold his house just a few years ago to raise the money to start his and his wife's dream business, Chumbak, a company that makes India-inspired products.

Facebook is Chumbak's leading marketing channel and is responsible for 35% of online revenue and 38% of their website traffic.

Their Facebook ads deliver a 5x return on advertising spend and have helped the company grow to more than 150 employees in three offices.

We have more than 30 million active small business pages and over 19 million of these are active on mobile.

We think we have a big opportunity to help SMBs like Chumbak grow their businesses.

And I'm pleased to announce today that we have over 1.5 million active advertisers.

We're also ramping up our engagement with this community.

In the US, we're hosting Facebook Fit workshops in cities like New York, Chicago, and Miami to help small businesses and we're doing this globally, including forming our first European SMB council.

We're also making great strides in our work with larger brands who increasingly recognize how our scale, targeting, and measurement capabilities can drive great results.

For example, P&G's Gillette works with us and agencies, IBS and MediaCom, to launch its Vector 3 razor to men in India.

80% of the 100 million Facebook users in India are on mobile and a majority of these are using feature phones.

This was our first feature phone-only Facebook campaign in Asia.

It reached 60% of Gillette's target audience and generated significant lift in both message and ad recall.

As we work with brand marketers around the world, we focus on how they can leverage our technology platforms to build their brands through creative storytelling.

We saw many great examples of this at the recent Cannes Lions Festival.

We were excited that campaigns that made Facebook a key part of their efforts took home prestigious awards.

The World Cup also provided a great opportunity for brand building on Facebook.

Facebook was an important part of this global event, with 350 million people joining the conversation, generating 3 billion interactions.

The final was the single-most talked about sporting event in Facebook history, generating 280 million interactions from 88 million people.

Brands such as Visa, Nike, Ford, and McDonald's capitalized on this global conversation.

McDonald's worked with agencies, OMD, Framestore, and ARC sponsorship, as well as Facebook's Creative Shop, to produce 30 videos that used French fries as players.

FryFutbol recreated the most spectacular World Cup moments and ran them as videos the very next day with the French fries acting as the players.

This campaign reached 125 million people in 158 countries.

We also remain committed to investing in product development to drive higher returns for all of our marketers.

Our custom audiences capabilities, which enable better targeting, are being adopted quickly and are now being used by 91 of the Ad Age 100.

Earlier this year, we launched website Custom Audiences, which enable marketers to target recent visitors to their websites.

This is like retargeting, but it's even more effective because it works across both web and mobile.

We're pleased with the early reaction from marketers.

We also introduced premium autoplay video ads this year.

Video on Facebook helps brands extend their TV investments by combining traditional reach focus campaigns with our unparalleled targeting abilities.

To date, we run about a dozen campaigns and the early data show promising results.

We'll continue to roll this product out slowly and carefully.

Similarly, we're seeing positive early demand from marketers for ads on Instagram and we're rolling these ads out carefully as well.

In all of this, we remain focused on the transition to mobile.

Our recently launched Audience Network lets advertisers use Facebook targeting, while extending their campaigns beyond Facebook.

This can improve the relevance of ads people see both on and off Facebook and we're encouraged by the early response.

Finally, earlier this summer, we announced the acquisition of LiveRail, a leading online video advertising platform that enables customers like MLB.com and A&E networks to monetize their video inventory efficiently.

We have a lot to do here, but with LiveRail, we're investing in tools that can improve the relevance of video ads across the web.

In summary, we're pleased with our performance and the progress we're making.

We're the first platform that can deliver personalized marketing at scale and marketers are increasingly recognizing the great results we can drive for them.

Staying focused and executing will remain a major theme for us moving forward.

Our teams know that our future success depends on our continued execution and our plan is to stay focused.

Thanks and now, here's Dave.

Thanks, Sheryl, and good afternoon, everyone.

Q2 was a good quarter for us across our key operating and financial metrics.

We generated strong revenue growth in operating margins and delivered $872 million of free cash flow.

We continued to make investments to drive our core business, as well as to support our long-term strategic priorities.

Let's start with a review of our network.

We are executing well on our ongoing mission to connect everyone.

829 million people used Facebook on an average day in June, up 130 million from a year ago.

This represents 63% of the 1.32 billion people who used Facebook during June.

Mobile continues to be a strong driver of our growth, with over 1 billion people using Facebook monthly on mobile.

At the same time, we're enabling more ways for people to connect and share beyond the core Facebook app.

For instance, both Instagram and Messenger have each passed over 200 million MAU and continue to grow nicely.

Turning now to the financials, total revenue in the second quarter was $2.9 billion, up 61% or 59% on a constant currency basis.

Total ad revenue was $2.7 billion, up 67% or 65% on a constant currency basis.

Ad revenue growth was strong around the world, with each of our four geographic regions growing by over 60%.

Mobile ad revenue was approximately $1.66 billion or 62% of ad revenue compared to approximately $660 million or 41% of ad revenue last year.

Desktop ad revenue was up 8% year over year.

In Q2, the average effective price per ad increased 123% compared to last year, while total ad impressions declined 25%.

The decrease in ad impressions continues to be driven by the shift towards mobile usage, where people are shown fewer ads compared to desktop.

The increase in the average price per ad was primarily driven by an increase in their percentage of our ads being served in News Feed.

The price volume trends were generally consistent across all four reported geographic regions.

Total payments and other fees revenue was $234 million, up 9% versus last year.

As we have noted in the past, we believe the more meaningful comparison that better reflects the organic growth rate of the payments business, comes from looking at payments volume from games specifically, which was up 1% in Q2 versus last year.

Our current games payment revenue comes entirely from desktop usage and we are seeing declines in number of people using Facebook on desktop, a trend that will make this business challenging going forward.

Turning now to expenses, our Q2 GAAP expenses were $1.5 billion, up 22%, and our non-GAAP expenses were $1.2 billion, up 18%.

Note that cost of revenue grew 2% on a GAAP basis and 1% on a non-GAAP basis, mainly driven by unusually high expenses in 2013 related to the transition out of certain lease data centers.

This flatness in cost of revenue was the primary reason overall expenses grew relatively slowly.

Operating expenses, excluding cost of revenue, grew 33% on a GAAP basis and 31% on a non-GAAP basis.

We ended Q2 with 7,185 employees, up 36% from last year.

Our Q2 GAAP operating income was $1.4 billion, representing a 48% operating margin up from 31% last year.

Our non-GAAP operating income was $1.7 billion, representing a 59% non-GAAP operating margin up from 44% last year.

Our GAAP and non-GAAP tax rates were 43% and 36%, respectively.

GAAP net income was $791 million or $0.30 per share and non-GAAP net income was $1.1 billion or $0.42 per share.

In Q2, we spent $469 million on CapEx and generated $872 million of free cash flow.

We ended Q2 with approximately $14 billion in cash and investments.

This excludes the impact of the Oculus acquisition, which was closed earlier this week and included an approximately $400 million cash payment.

Now, looking forward, let me start by noting that the forward-looking comments I'll share today for 2014 include the impact from the recently closed acquisition of Oculus, but exclude, except where otherwise noted, the impact from WhatsApp, which we continue to expect will close later this year.

In terms of expenses, we expect that our total 2014 GAAP expenses, including cost of revenue and stock compensation, will likely grow in the neighborhood of 30% to 35% and that our total non-GAAP expenses, including cost of revenue but excluding stock compensation, will grow at a similar rate.

These rates are slightly lower than our prior expectations due to efficiencies in areas like cost of revenue and G&A.

However, we believe that we are still in the early days of building out all of the services to maximize Facebook's impact on the world and we intend to continue to invest aggressively in people, products, and infrastructure in the second half of 2014 and beyond.

Though it is premature to give a specific outlook for 2015 expenses, I wanted to note that we expect significant stock-based compensation and amortization expenses, as well as substantial incremental operating costs related to the acquisitions of Oculus and WhatsApp.

These will add to our overall expenses in 2015 and subsequent periods.

These costs will be incremental to core Facebook expenses, which will continue to grow significantly in 2015, as we ramp investments in people, products, and infrastructure.

For taxes, we expect GAAP and non-GAAP rates for the rest of 2014 to be similar to our Q2 rates, although these could very widely depending upon our international revenue and expense mix and other factors; most notably, the impact from acquisitions, including the expected closing of WhatsApp later this year.

We continue to anticipate the 2014 CapEx will be approximately $2 billion to $2.5 billion.

We expect shares outstanding to grow from around $2.6 billion at the end of 2013 to approximately $2.9 billion at the end of 2014; again, assuming WhatsApp closes by the end of the year.

Turning last to revenue, as we saw in Q2, our year-over-year growth rate declined from 72% in Q1 to 61% in Q2, or 59% on a constant currency basis.

This is consistent with our comments on the Q1 call when we indicated that, over the course of 2014, the year-over-year growth rates in revenue would decline meaningfully as the comps became more difficult.

We expect this trend to continue over the course of the second half of the year.

While we are excited about the long-term potential of our ads initiatives like Instagram, autoplay video, and the Audience Network, we are still in the early days of building these businesses and expect their revenue contribution to remain small in the near term.

We remain optimistic as ever about the long-term opportunity to grow revenue by improving the quality and relevance of our ads and increasing the value we bring to marketers through our products, tools, and technologies.

In summary, we're very pleased with our overall performance in Q2 and in particular, the continued growth of our mobile audience, the strength of our apps business, and the investments we're making to build long-term shareholder value.

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

(Operator Instructions) Eric Sheridan, UBS.

Sheryl, one on Audience Network and LiveRail, maybe you can give us a little better sense of the depth of the conversations with advertisers and what that might do to the platform longer term, 2014 and beyond, in terms of broadening out Facebook's advertising effort?

Second question, Dave, on the Oculus and WhatsApp, is there any way to get a sense of employee counts at the companies or the pressure that we might see from OpEx going forward?

One of the goals we have talked about in all of these calls is to make ads more relevant for people and marketers and increasingly, with the Audience Network, we have a goal to do that for publishers, as well.

Video is really important, it's one of the fastest ad mediums out there on both desktop and mobile.

LiveRail has the leading online video advertising platform and we think we can use it to effectively expand video ads to marketers and to publishers outside of Facebook and offer greater audience reach and ability to sell to video advertisers.

When you look at the Audience Network, we're still in really early days and we only have some publishers in our network, but we see this as an opportunity to provide greater reach for Facebook marketers and developers, again, to improve relevance of the ads people see, both on and off Facebook.

Thanks, Eric.

On Oculus and WhatsApp, we're very much in investment mode on our overall business and we expect to continue to ramp investments in the core business through 2015.

Like I said, we'll be layering on top of that costs related to Oculus and WhatsApp.

But we're not getting into more specifics on the exact head counts on those, but we believe those are significant opportunities in the long run, and so we're going to be investing aggressively, accordingly.

Heather Bellini, Goldman-Sachs.

If you could share with us any qualitative commentary about the breadth of mobile ad revenue, there's always a lot of debate back and forth about how big mobile app installs are, and if there is anything you can share with us about how the breadth of these, the breadth of mobile has been changing over the last year or so.

The follow-up question would just be related to how your conversations with advertisers are changing as people start to think collectively about their TV and video budget together?

I'm just wondering if you're starting to see your conversations with big TV advertisers start to change somewhat over the last six months or so?

Thank you.

When you think about mobile ads, and I'm really glad you asked this question, I do think sometimes people think that mobile app install ads are all of the revenue or a great majority of the revenue and they're not, they're only part of the mobile ads revenue.

Our mobile ads revenue is broad-based.

We have large brand advertisers, small SMBs, direct response advertisers, as well as developers using our mobile ads.

The mobile app install ads, which are run not only by developers, but also by large companies that want to get people to install apps, are growing.

They remain a good part of our mobile ads revenue and we're excited about the opportunities there, but we see our opportunities in mobile ads as much broader than just installing apps.

To the second question, I do think one of the things that's happened in the last year, year and a half on Facebook is people understanding how strong the creative opportunity is.

We've built out the technology platform and made our product investments, and we've really created, particularly with the move to mobile on our ads and News Feed, an opportunity to do great creative storytelling.

A great recent example is the Progressive baby ads, if you've seen them.

They're really engaging and really fun, but they're making a really important point, which is people should be buying their own insurance.

But the ability for them to do that ad is based on the technology we've created and also the great work they've done with Arnold Worldwide, their agency, on the creative part.

I think, for a long time, people have thought TV was for creative storytelling and online ads were for more targeted tech space results.

I think we're seeing that change, which means that the way people approach TV, they'll also approach Facebook and are starting to, which makes those budgets work much better together.

Douglas Anmuth, JPMorgan.

Mark, there's been talk, and I know it was on your blog, about testing a buy button within the platform.

I was hoping you could talk about how important you think commerce is to Facebook going forward and then perhaps also payments, as well.

And then secondly, Sheryl, you mentioned some of the major brands that advertised during the World Cup.

Can you talk about how you get the follow-through from those brands now that major event has passed and how you keep those ad dollars on Facebook?

Thanks.

On the buy button, we launched a small test in the US only, which enables people to hit a buy button and on pages or in page post ads on Facebook, it streamlines the process of buying from our clients.

No one's buying from us, we're just streamlining the process of buying from our clients.

I think commerce is really important and is a growing important part of our business, as all marketer segments are growing, but I don't think people should confuse that with Facebook selling things directly.

The more people buy online, the more people buy things they discover through their mobile phones, the more people discover things from a News Feed and go on to purchase, the more important we are in driving eCommerce and I think we are increasingly important.

That doesn't mean we're going to or have to sell products.

I'd just add to that, because some of the question was about payments, that we will clearly do work in payments to accept payments for advertising and on platform and other things that we do, but just because we'll do that doesn't -- we still basically view ourselves as a partner to other companies in the payment space, rather than trying to compete directly for that.

Our main business is advertising and I think we're mostly, to the extent that we do payments, it's going to be supportive to that.

I wanted to make one more point related to that because I think some of the questions around payments are connected to what we're planning on doing in the other apps outside of Facebook, so things like Messenger and WhatsApp over time when that closes and Instagram.

I really do just want to emphasize that there's a lot of work to set up the foundation for having a good business community and ecosystem in those that we think is going to be years of work before those are huge businesses for us.

I liken where we are now on something like Messenger to where we were on Facebook in like 2006 or 2007, where it was primarily a consumer product at the time where you really only communicated with friends and a bunch of people asked us and said that we should put ads in.

But before we did that, we wanted to create really good organic consumer experiences for people to interact with different entities, so we created pages so people could interact with organic businesses.

In order to make it so that businesses and public figures and folks would create pages, we offered insights and different products.

We gave all those away for free.

Pages were free and continue to be free and that's partially why we have 30 million businesses today using pages on the platform and insights we gave away for free in order to enable more folks to use pages.

But only after we had a good organic interaction that people could and would want to interact with these different businesses and entities, did we really layer ads on top of that and start to build the business that we have today.

I just think it's worth emphasizing this because we've said in a number of comments that we think that some of these newer initiatives are going to ramp over time.

We really do mean that.

We're serious about doing this the right way and building out these ecosystems.

I think for some of these other apps, we're just going to build all the infrastructure that we need to make it be something that's scalable over time, rather than trying to have this be an impact that you'll notice in the next short-term period of time.

To the World Cup part of your question, brands certainly use the World Cup and big events like this to launch things that they continue those ad campaigns.

They also have other big events that come along, as well as their own events around product launches.

We think, obviously not every day is a World Cup, but there are lots of opportunities throughout the year and through the product cycle to work with brand advertisers in big ways.

Ross Sandler, Deutsche Bank.

I had one question for Mark on the product side, and one for Dave.

Mark, App Links just launched, but if you go out a few years, how much do you think something like deep linking could increase engagement or add effectiveness for Facebook?

For those 1 billion links that you have up and running already, what are you seeing in those early tests?

Dave, we know you don't break out the price versus volume metrics for mobile, but just directionally, could you give us some color on how the ad impression growth in mobile compares with the 31% MAU growth in mobile?

Thanks.

Sure.

I don't have much color that's useful to share here on App Links.

It's still early.

People have marked up a bunch of apps with this meta data that allows us to search for it, but Search for Facebook is going to be a multi-year voyage.

There's just so much content that is unique to the Facebook ecosystem that we can answer questions for you that really no other service can.

The other day I was curious about finding out which of one of my friend's friends worked at a company.

I don't know any other service where you can just go do that query, but on Facebook, you can.

The secret to this is going to be basically just over a long period of time, indexing all of the different content that's on Facebook in every different way.

We started off with people, because obviously you need to be able to find people in order to use the product and add friends and just have our core ecosystem work.

We're indexing more of the connection, and now we're getting into more of the content and it's a huge amount of content.

There is more than a trillion posts, which some of the search engineers on the team like to remind me, is bigger than any web search corpus that is out there.

But that's just one part of the data and we're going to keep on doing more and more.

We're going to start off focusing on stuff that's unique to Facebook, that you couldn't really answer those questions elsewhere.

App Links, by definition being outside of Facebook, are not going to be unique to Facebook.

We'll get to that over time.

I think it will be a valuable part of the ecosystem, but honestly, we're mostly interested in that to enable value for other developers and pushing distribution to them than we are for our own search.

It's going to enable interesting ways for a developer to be able to make it so that people and their apps can share content on Facebook and link directly to the right part of the app, it'll enable some engagement ads, so that way a developer can say a person was using my app and they were going to buy something, but they dropped out of the check-out flow, so now we're going to have an ad that helps them link right back to the check-out flow so they can complete their conversion.

You want deep linking to be able to enable things like that, but it's going to take a while to play out in the search.

Ross, on your question on mobile ads, mobile DAU is ramping nicely at 39% growth and we're seeing it grow nicely across all of our geographic regions.

Of course, mobile ads are ramping as well.

In terms of pricing, we don't break it out, but on the reported pricing trend, as I think I made clear, the 123% increase in price was driven by mix shift with a higher percentage of News Feed ads.

News Feed ads are really effective for marketers and that includes mobile News Feed ads as well.

They deliver a lot of value for marketers, that's why they're getting a higher price in the auction.

The price of ads correlates to the value that they create.

We continue to focus on making those ad units better and better, more relevant and targeted for the people who use Facebook, as well as for marketers.

We're seeing good results.

Marketers are getting good ROIs and they're coming back and spending more with us, so we're pleased about all of that.

Justin Post, Merrill Lynch.

I'd like to follow a little bit on the ad pricing, obviously up 123%.

Sheryl, maybe you can comment a little bit about the organic growth, like for like ads there, and do you see opportunities to continue to see nice pricing growth as you look out the next couple of years?

And then, as you think about the new ad formats, video and other things, would you think that could continue to drive pricing higher, meaning new ad formats could drive even more value than the existing ads that you have on Facebook.

Thank you.

Justin, it is Dave.

In terms of the pricing, as I said, it's really about the mix shift towards the News Feed ads is what's driving the overall reported pricing trend, but we are focused on making our ads all better and driving better returns for our marketers, and we see that reflected in the price.

There's other things.

For instance, we're making our right-hand column ads more effective by changing the format of those.

Those will be higher value to our marketers because they'll drive more engagement, but there will be fewer of them.

That will impact pricing.

But everything that we're doing is about trying to drive more value for our marketers, as well as trying to drive more relevant ad experiences for the people who use Facebook.

If we're successful in doing that, we'll drive ROI for the marketers, we'll drive good experiences, and we'll get good pricing.

Mark Mahaney, RBC Capital Markets.

Anything you could share with us with regards to China and efforts to develop more of a presence there?

On David Marcus coming over, somebody with a huge payments background running the Messaging product, it's kind of like hiring, signing Messi up to the Miami Heat, like it's a little of an odd transition.

Are we looking at it wrong?

Is there any particular reason why he wouldn't be more focused on payments?

Thank you.

I'll talk about China.

Our mission is to enable everyone in the world to share and connect.

We've been studying and learning about China for a number of years and we remain very interested.

We are seeing Chinese-based companies use Facebook to reach a global audience and we think we have an important opportunity, just with their export market, and we're focused on that for now.

On Messenger and David, I think he is just a real talented product generalist and he's done a number of different things, including in his past, he ran and built a messaging company.

Most recently, clearly, he ran a very important company and I think it was pretty successful in helping get really good results there.

Messenger will have, over time, there will be some overlap between that and payments.

But what I'm trying to say is two things.

One is, the payments piece will be a part of what will help drive the overall success and help people share with each other and interact with businesses, but we're really focused on the interactions overall, rather than the mechanism and David shares that view.

The second thing is just that there's so much groundwork that we need to do in order to make it so that people are communicating with businesses and public figures and entities in these other apps that we're building, which is part of the business ecosystem.

I really can't underscore this enough that we have a lot of work to do and we could take the cheap and easy approach and just try to put ads in or do payments and make some money in the short-term, but we're not going to do that.

To the extent that any of your models or anything reflect that we might be doing that, I would strongly encourage you to adjust that, because we're not going to.

We're going to take the time to do this in the way that we think that's going to be right over multiple years.

Arvind Bhatia, Sterne Agee.

On WhatsApp, I realize it hasn't closed yet, but can you give us any indications on the user trends and engagement, et cetera.

Sheryl, you mentioned India where we see a lot of usage coming out of there for WhatsApp, in particular.

Any comments there would be helpful.

No, the deal hasn't closed.

We have nothing to say.

Neil Doshi, CRT Capital.

Sheryl, I think attribution could be big opportunity, especially for local businesses to help them realize ROIs or if people are going from online to offline.

With 30 million businesses now on Facebook, how are you helping those businesses realize the online to offline conversion through Facebook in order to drive more dollars going to local businesses?

Thanks.

I agree strongly that this is a huge opportunity.

Our goal with all of our clients from the biggest to the smallest is to drive their business results and that's usually selling a product, sometimes online, but often in stores.

We've done a lot of work over the last year or two on measurement.

We talk about measurement in all of these calls and that's because investing in measurement and connecting, not just from online to online, but online to offline is super important.

Because if we can prove those results to our marketers large and small, they will continue to invest.

We think we have a real advantage here that we have real identity, we have real identity across the desktop and across mobile and we have found ways in very privacy-protective ways to work with third parties, third party users of data to connect offline sales to online ads and those investments remain a very big focus for us.

Ken Sena, Evercore.

You mentioned over 1 billion users, 80% of app developers use the Facebook log-in on iOS and Android.

When we think about Facebook as a platform, can you provide any stats on the number of developers who are starting to build their experience on Facebook?

How integrated do they need to be to see things like app linking, data formats, autoplay video, or other?

Thanks.

We've shifted to this model on mobile where developers aren't really building their apps inside Facebook.

We're not an operating system.

We had a little bit more of this dynamic with Canvas on desktop, but now we've shifted the strategy to helping developers with three things: build, grow, and monetize their apps.

We have a number of services that developers can plug into their apps to help out with all three of those.

For example, we have -- and for helping people build their app, we do things like log-in and we have services like parse that help developers build apps more easily, that stuff is all great for helping folks build social apps in a way that's faster than they could have otherwise.

In terms of growth, we offer tools like sharing and messaging so that a developer can enable their users to be able to organically spread the app.

We have things like app installs and engagement ads to make it so that developers can pay to increase that.

On the monetized side, we are rolling out the Audience Network and on Canvas, we have things like payments to help developers monetize and that's an increasing focus, as well.

Audience Network is new and it's just getting started, so, again, it's one of these things that will be pretty slow for a while because we really want to do it right, but that's going to be an important part of this, as well.

That's how you want to think about developers and right now, we're really proud that 80% of the top developers see value in touching a part of our platform.

We obviously want to get the last 20%, but we're excited about the progress so far.

In terms of those developers using our different ad products, as we say, we roll out slowly and slowly usually means we pick a handful of advertisers to work with.

That's certainly what we've been doing on autoplay video ads.

Over time, our goal is to make our ad products available to all of our marketer segments and that's what we'll work on.

Over the long run, any developer, any small or large business, whether they're using other parts of our platform or not, would be able to purchase any type of our ads.

Brian Nowak, SIG.

The first one is on video ads.

You mentioned it's the early days on video advertising.

I was wondering if you could talk to some of your early learnings, what you're pleased with, and where you see areas for improvement and which metrics you're gauging to determine when to undergo a broader rollout.

Secondly, I think you mentioned the larger, higher quality rail desktop ads.

There's been some changes in experimentation around that inventory.

How has the advertiser receptivity been to those ad units compared to the old right rail?

Where are those dollars coming from?

Is that new dollars to the platform or are they shifting from old sponsor stories or old right rail?

Thanks.

I'll talk about video and then Sheryl can answer on the right hand column.

The biggest thing that we want to make sure is that quality is really good as we roll this out and that's going to be the same on all of these different initiatives.

One of the reasons why we're optimistic about autoplay specifically as a format for both organic and paid content, is that you're strolling through feeds and if the content catches your eye and you like it, then it's playing and it's loaded and you can just easily continue watching it.

Or otherwise the person has complete control and if they don't like it, they can just keep on going through it, so the content has to be really good and we think that's going to be a really high quality experience.

There are still a number of things that we really want to prove and make sure that we're doing well here.

We want to make sure that when people see an autoplay video, that's not only paid content, we want a lot of that to be organic content, as well.

We're trying to ramp up the amount of good public content and common content that people share at the same time as we're ramping up the autoplay video ads.

We also want to make sure that this doesn't consume a lot of people's data.

We're just being really careful about how we handle that and getting that really right across different markets.

That's going to be a different thing that we want to be really sensitive to.

It really just, in a word, this all comes down to quality and we're more focused on just making sure that this is the right and best thing over time than something in the near term.

That, I think, is a theme of the lot of the areas that we've talked about, whether it is the new apps that we're building, things like Messenger or Instagram and what we're doing there, or things like Audience Network, which we just announced, or video adds.

There are just a lot of things that we're super excited about.

We, obviously, will talk about them publicly because we're working with partners and we're excited to talk about them here as well because we do really think that these are going to be great things to help build businesses over time.

But we want to make sure that we don't want to get ahead of ourselves, because these things are early and quality is the most important thing for growing this the right way over time.

On the right-hand column redesign, the redesign was driven by making the ads more consistent with News Feed, which results in fewer but larger ads.

But they just don't come from any one place.

When you think about Facebook's growing part in the ad ecosystem, you really have to think about ad dollars shifting online as the majority of the driver of budget shifting and ad dollars coming on to mobile.

We are pleased that we see higher engagement rates from the people who are shown the new ads compared to the old, which makes us optimistic that these are more valuable.

Brian Pitz, Jefferies.

Maybe a question in a different direction regarding privacy and maybe you could just walk us through your current thoughts?

The reason I ask is because Facebook recently introduced the anonymous log-in product at f8 this year and new services like Save are hidden from friends unless users specifically opt-in.

Can you just give us a sense, is this kind of a change of strategic shift in thinking or tone with regards to privacy?

Thanks so much.

It's a really important question, I think something that's misunderstood about Facebook.

One of the things that we focused on the most is creating private spaces for people to share things and have interactions that they couldn't have had elsewhere.

If you go back to the very beginning of Facebook, rewind 10 years, there were blogs and things where you could be completely public and there were email, so you could circulate something completely privately, but there was no space where you could share with just your friends.

It wasn't a completely private experience, but it's not completely public in that it's 100 or 150 of the people that you care about.

Creating that space, which was a space that had the kind of privacy that no one had ever seen before, was what enabled and continues to enable the kind of interactions and the content that people feel comfortable sharing in this network that don't exist in other places in the world.

We're constantly looking for new opportunities to create new dynamics like that and open up new different private spaces for people where they can then feel comfortable sharing and having the freedom to express things that you otherwise wouldn't be able to.

It's one of the reasons why I'm personally so excited about Messaging, because right now, at some level, there are only so many photos that you're going to want to share with all of your friends.

We still think that there's more to do there.

The amount of messaging and how quickly we see that growing is crazy.

There is just a lot more that people want to express and that they need the tools to express with smaller groups of people, not just one person at a time, but smaller groups, as well.

Things like anonymous log-in totally unlock different behaviors.

How many times would you want to sign into an app, but you don't necessarily want to share a lot of information with that app, but if you can do it anonymously, we think that's going to unlock a lot of different interactions and experiences that people want to have.

We view our jobs as very fundamentally providing people with these spaces and tools, which, I think, is very different from how a lot of people think about what Facebook is.

But it's an important thing to think about how we do our product development.

Colin Sebastian, Robert Baird.

On mobile advertising and ad loads, just curious what you're seeing in terms of the ad load thresholds is that you're at the point now where the relevancy and quality of ads means that you can tick that up, perhaps, a little bit.

On Oculus and virtual reality applications, how should we think about the pace of development of this technology and the potential integration with Facebook's applications?

Thank you.

I can take care of the mobile ad load question.

Ad load is really one of dozens of factors that we focus on.

Others are, of course, the quality, the relevance, and then the prominence of the ads.

We monitor the sentiment and engagement of people engaging in News Feed.

We're really pleased with the strength of sentiment and engagement as we've ramped up News Feed ads.

We feel like we're in a good position, given where we are with that, to continue to grow the advertising business while driving good user experience.

We're in a good place on that.

Yes.

I can talk about Oculus.

We're really excited about this.

The acquisition just closed earlier this week and we're real excited to welcome that team.

They're extremely talented and have pulled off something that people had been talking about for a really long time and now it's possible, given the technology that this team has developed.

This hits on a different part of our strategy, which the way that I organize my remarks every quarter are around these 10-year goals and themes that we have for the Company: connecting everyone, understanding the world, helping to build the knowledge economy, and these future platforms.

When I'm talking about how I think things like the businesses that we're talking about are further out than you think, I think that this stuff is actually even further out than that.

But there are huge opportunities to build the next generation of computing platforms.

When mobile was getting defined, we were basically just getting founded; in 2004, the first SmartPhone came out in 2003.

We've mostly been a company that has played on top of the different mobile foundations that other companies have built.

One of the things I care really deeply about, on kind of a 10-year arc for the Company, is having a different relationship to whatever the next set of computing platforms are and investing accordingly now to make sure when the next set of computing platforms get defined, we can help define of what the next generation of computing is going to be.

I think virtual reality, augmented reality, vision, some of the AI work that we're doing is all going to play into this in an important way.

I just think, while I was emphasizing that we're early on some of those businesses and we're not going to rush those, the flip side of the coin is to emphasize that we're also going to spend a lot and invest very heavily in a bunch of these things to do it right over the long term.

Dave pointed out that we expect to continue investing heavily and that our costs will increase and I just want to underscore that, as well, because I expect that to continue to be true.

It's not that we're necessarily going to go out and have a lot more new strategic priorities, but we expect to go very deep on the priorities that we have to make sure that we completely nail them all, whether it's a 5-year or 10-year timeframe.

Ben Schachter, Macquarie.

Mark, you talked about a focus on public content.

Does that include a focus on exclusive content and should we expect that you'll pay for or have revenue share agreements with the content with some key public figures?

Separately, on search, I think you still have quite a large team working on improving search, but from our vantage point, we haven't seen many changes since the original beta graph search product launch.

When should we expect to see those improvements and how would you rank search in terms of you priorities?

Finally, just a quick housekeeping question, David, the D&A continues to trend down over the past few quarters.

Why is that happening and should we expect that to continue?

Thanks.

I can take the D&A question first, if you'd like.

Ultimately, depreciation is going to track more closely against the CapEx.

In the first half of the year, we've been aggressively investing in the things we want to invest in and that includes infrastructure.

CapEx is up 40% in the first half of the year.

There are some investments that we're making, notably in the Iowa data center, also the new headquarters we're building where those facilities have not gone into service, so they're not hitting depreciation yet.

We're making the big investments in CapEx that will ultimately flow through in depreciation.

In short, the answer to your question is we'll see depreciation come up as those things come online.

I can answer the others.

On public content, we actually do get a lot of exclusive content.

We don't pay for it.

This week, for example, I think Shakira hit her 100 million fans moment on Facebook.

Part of the reason why some of these public figures and political leaders and folks have such big followings is because they're constantly providing insight into their lives and unique types of content that other folks -- that you can't get anywhere else.

There's a format that I think makes sense for Facebook.

You're not going to come to Facebook to watch a movie or watch a full TV show, that's really long form stuff.

But in the mode that we have today in our service, that kind of attraction is the best place for a number of types of content like this that we're starting to see that we get.

We're mostly focused on driving success for partners, whether they're news organizations that are publishing content that people share or public figures and individuals who are engaging directly on Facebook.

Our view is that the more success from distribution and engagement we can drive for them, the better the content and the quality that they're going to invest in building for Facebook.

Type of search, I mentioned in my opening remarks that this quarter, I think for the first time, we are over, on average, 1 billion searches a day, which is awesome and it's something that we're really proud of and have worked a lot on, especially given that we generally found that people search a little bit less on average on mobile.

We went through a period where in order to have that increased, we had to do some really good work and make it a lot faster and improve ranking and do a lot of the basic things that needed to get done.

There is just so much more content that needs to get indexed.

If you want to go find that Shakira video that I was just talking about, I don't know if today the product fully delivers on that, but we will soon and in the next six months, we're going to be able to do that if we do well and then a year later, we're going to have more content in the system and be able to index that better.

It's an ongoing thing.

There's huge potential.

There are a lot of questions that only Facebook can answer that other services aren't going to be able to answer for you.

We're really committed to investing in that and building out this unique service over the long-term and I think at some point, there's going to be an inflection where it starts to just be useful for a lot of use cases.

But that may still be years away, but we're just committed to doing this investment and making this right.

Thank you for joining us today.

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

This concludes this conference call.

You may now disconnect.