Meta Platforms Inc - Class A (META) — Q4 2018 Earnings Call Transcript

Thank you. Good afternoon, and welcome to Facebook's Fourth Quarter 2018 Earnings Conference Call. Joining me today to discuss our results are Mark Zuckerberg, CEO; Sheryl Sandberg, COO; and Dave Wehner, CFO. Before we get started, I would like to take this opportunity to remind you that our remarks today will include forward-looking statements. Actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are set forth in today's press release and in our quarterly report on Form 10-Q filed with the SEC. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. During this call, we may present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. The press release and an accompanying investor presentation are available on our website at investor.fb.com. And now, I'd like to turn the call over to Mark.

Thanks, Deborah, and thank you all for joining us today. Our community continues to grow, and our business delivered good results this quarter. There are now 2.7 billion people using Facebook, Instagram, WhatsApp, or Messenger each month and more than 2 billion people who use at least one of our services every day. On our last call, I talked about our overall strategy as we faced some important opportunities and challenges. And today, I want to give you an update and talk about our priorities for 2019. For the past couple of years, most of our focus and energy has gone into addressing some of the biggest social issues around the future of the Internet, including election integrity, content governance, safety and security, data privacy, and digital well-being. And these are all complex issues, but we've made real progress. In many of these areas, we believe we built the most advanced systems in the world and, in many cases, more advanced than any other company or government. In other areas, we have clear road maps now for our work ahead. Still, there's a lot more to do, and I expect it will take strong execution through 2019 and beyond before we get all our systems to the level that we need. But we've fundamentally changed how we run this company. We've changed how we build services to focus more on preventing harm. We've invested billions of dollars in security, which has affected our profitability. We've taken steps that reduced engagement in WhatsApp to stop misinformation and reduced viral videos on Facebook by more than 50 million hours a day to improve well-being. We've made significant progress and we're going to continue this work, but we're also going to allocate more of our energy to building new and inspiring ways to help people connect and build community. Going into 2019, we're focused on four priorities: first, continue making progress on the major social issues facing the Internet and our company; second, build new experiences that meaningfully improve people's lives today and set the stage for even bigger improvements in the future; third, keep building our business by supporting the millions of businesses, mostly small businesses, that rely on our services to grow and create jobs; and fourth, communicate more transparently about what we're doing and the role our services play in the world. And I want to take a minute to talk about each of these. So first, continue making progress on the major social issues. The most important work here is to keep executing our road map to build systems that can proactively identify harmful content so we can act on it sooner. We just finished a year of very heavy investment to get these systems to a better place, and we've seen the results of that in recent elections, including the U.S. midterms and in our transparency reports, where we report what percent of violating content we identified proactively. We ended 2018 with more than 30,000 people working on safety and security, up from 10,000 people a couple of years ago. This work will never be finished, but I now believe we've built some of the most advanced systems in the world for dealing with these issues. However, this raises a broader set of values questions about how to use these systems. One question is about who decides what speech is acceptable and what isn't. Right now, we have a deliberative process of consulting with experts around the world. But I've increasingly come to believe that we shouldn't be making so many of these decisions about content ourselves. In November, I wrote a note about a blueprint for a system of content governance and enforcement, which includes giving people the ability to appeal our internal content decisions to an independent body, and we're currently working with experts to design the system and we plan to start piloting it this half. Another important issue is the future of privacy and encryption. People really value the privacy that encrypted messaging brings, and we've built the most secure global messaging service in the world. As people increasingly share more privately, we're working on making more of our products end-to-end encrypted by default and making more of our products ephemeral so your information doesn't stick around forever. I'll discuss this more over the coming quarters. Our second priority for 2019 is that as we make progress on these social issues, we also need to deliver new experiences that meaningfully improve people's lives. Now, I'm not talking about the many day-to-day iterative improvements we make so that ranking gets a bit better or that things get a little faster, but I'm talking about major improvements to people's lives that whole communities recognize and say, 'Wow, we're all doing something new on Facebook or on WhatsApp that we weren't doing before.' The last experience like this was Stories, which continues to grow very quickly. For example, Instagram just passed 500 million daily actives on Stories. But the reality is we've put most of our energy into security over the past 18 months, so building new experiences wasn't the priority over that period. This year, I think we're going to deliver several of these new experiences. Messaging is an area that's growing the most quickly, and this year, people are going to feel these apps becoming the center of their social experience in more ways. We're going to roll out Payments on WhatsApp in some more countries. Private sharing in Groups and Stories will become more central to the experience. We're going to onboard millions of more businesses that people can interact with. In Facebook, the way people experience groups and communities will continue to deepen. We're going to get to a point soon where people feel like Facebook is about communities as much as it's about friends and family, where almost everyone is in a group that's meaningful to them and that community is a central part of their experience. On Facebook, I also expect this to be the year where Watch becomes more mainstream. There are now 400 million people who use it every month, and people, on average, spend over 20 minutes on Watch daily. This means we're finding ways for video to grow outside of News Feed so it doesn't displace the social interactions that people primarily come to our services for. In Instagram, one of the areas I'm most excited about this year is commerce and shopping. There's a lot of natural activity happening here. This year, I expect us to deliver some qualitatively new experiences around that. Longer term, I remain very focused on building technology that brings people together in new ways, including through AR and VR. I'm looking forward to Oculus Quest shipping this spring. The feedback there so far has been very positive. Also, I've been positively surprised that Portal has done better than I expected it to. I love using it with my family. But we never shipped Facebook-branded hardware before and a lot of people said this would be a difficult time to start. So I'm pleased that so many people are enjoying the experience of being able to feel closer to the people they care about, even when they're physically far apart. Our third priority is to continue strong execution on our business. In the past couple of years, a lot of our business challenges have been self-imposed. The reality is that we've had a number of substantive issues that we needed to address, and the investments we made in safety, security, privacy, and well-being both increased our costs and, in some cases, reduced our revenues. But as I said at the time, I believe that these investments are the right thing to do and will make our community and our business stronger over the long term. What we've seen is that the fundamentals of the business remain strong. More than 90 million small businesses now use our products, the vast majority of them for free. Of those we surveyed, half tell us that they've been able to grow their businesses and hire more people since joining Facebook. This means they're using our services to create millions of jobs, and this is one of the most important contributions that we feel we can make to the world. To put this in perspective, the U.S. economy added about 2.6 million jobs last year. Our last priority is to get out there more and make the case for the role our services play in the world. Right now, there's a lot of negativity about the impact of technology, and some of it's fair and some of it's misplaced. We, in the tech industry overall, should be scrutinized heavily because we play a role in many people's lives. My approach here is to listen to the critique first, to work on addressing our issues, figure out what we believe are the most important principles to uphold, and then go engage in the debate. I feel like we've come out of 2018 not only making real progress on important issues but also having a clear sense of what we believe are the right ways to move forward. We're still going to make mistakes along the way, but we now have a clearer sense of the path ahead and we're ready to work with people to understand our role and move towards good outcomes, whether that's regulation on content or data, cooperation on shared threats, working openly to make sure AI best serves people, or just standing up for the kind of open and connected world that we all want to see. The Internet is a massive force for change and we're at the center of a lot of the debate that brings us, but our core value to people and society remains the same. We offer a service free to everyone to help you stay connected with the people you care about, express what you're thinking and feeling, get help when you need it most, support the causes and ideas you believe in, start and grow businesses no matter where you are, and that makes a lot of good possible, and we're committed to building technology that people can use to create positive change. Thank you for being on this journey with us. Now, here is Sheryl to talk about our business.

Thanks, Mark, and hi, everyone. We had a strong fourth quarter and a good end to the year. Q4 mobile ad revenue was $15.5 billion, increasing 36% year-over-year and contributing approximately 93% of our total ad revenue. Full year mobile ad revenue grew 45% compared to 2017. 2018 was a challenging and important year for us. As Mark said, we made significant investments in safety and security and strengthened our defenses against election interference. We gave people tools to better control their information and set a new standard for transparency in ads. We have focused on making progress in these important areas while continuing to grow our community and our business. This quarter proved that we can do both. We know we still have a lot of hard work ahead of us. We need to continue to do better at anticipating the risks that come from connecting so many people, and we need to earn back people's trust not with words alone but with actions. Part of building trust is helping people better understand our business model. Protecting people's privacy and showing them relevant ads are not at odds. We don't sell your data, and we don't tell advertisers who you are. What we do is allow advertisers to reach people interested in their products. The result is that people see more relevant ads, and small businesses can reach people in ways that only big companies previously could. This business model keeps Facebook free so people all around the world can use it and levels the playing field for businesses of all sizes while protecting people's privacy. I'm excited to announce today that we have more than 7 million active advertisers across our services. From local shops to global brands, companies all over the world are growing and hiring because they can reach their customers on our platform. The opportunities we create for businesses drive our growth, which continues to be broad-based across regions, marketer segments, and verticals. During the holidays, companies used our ads to help people discover deals and find gifts. We saw particular strength among advertisers that optimized for measurable objectives, like conversions or sales. For example, Bryan Anthonys, an online jewelry store based in Austin, Texas, used our campaign budget optimization to bring in new customers and sales on Black Friday. The campaign was so successful that they tripled their holiday purchases and hired additional people to help pack and ship orders for the busy season. We're also helping advertisers keep up with shifts in how people use technology. People are creating more Stories and sending more messages, which means these are emerging areas of opportunity for marketers. Today, we're also announcing that 2 million advertisers are using Stories to reach customers across our family of apps. We're making it easier for advertisers to adopt their campaigns for Stories. In Q4, we expanded automatic placements, which converts feed ads into a format that works for Stories and delivers ads wherever they'll get the best results. Framebridge, a start-up that provides custom picture framing, recently used automatic placements to run ads across Instagram Stories, Facebook, and Instagram feed. They ran short videos to show that their frames make great holiday gifts, and Instagram Stories generated over 25% of their new customer sales. As people increasingly use messaging apps, we're helping small businesses make that shift, too. In Q4, we launched ads in Messenger Stories, which means advertisers can now easily buy Stories ads across Facebook, Instagram, and Messenger. Beyond Stories and messaging, we have an opportunity to connect people and businesses on new services like Marketplace. We're seeing good early results at Marketplace ads. In Q4, we worked on making ads more relevant to the products that people are looking for. For example, if someone is browsing furniture in Marketplace, we'll try to show them an ad for furniture or a related item. We plan to keep working on this to provide a better experience for people and more value to advertisers over time. As we build new ad products, we remain focused on improving the overall quality of our ads. Across all of our platforms and formats, we're investing in AI to make ads more relevant and effective. In Q4, we developed new AI ranking models to help people see ads they're more likely to be interested in. We're also using AI to identify and more quickly review ads that might violate our policies, which was particularly important during the U.S. midterm elections. Looking ahead, we see more opportunities to use AI to keep people safe on Facebook and help businesses grow. I want to close by saying thank you to the businesses around the world who are using our tools to create jobs and growth. Last month, I went to Facebook's Community Boost in my hometown of Miami, which was the 50th stop on our tour across the U.S. in 2018, offering digital skills training to small businesses and job seekers. I met entrepreneurs like Alex Kassab. He started Morelia Gourmet Paletas with friends just two years ago. He says that 60% of his new customers learned about their ice cream from Facebook and Instagram. Because of this growth, they've expanded to 12 locations and hired more than 35 people. Last week, I was in Europe and met with SMEs from across the continent who shared similar stories of growing their companies, hiring people, and investing in their communities. These stories motivate us to keep improving so more people can succeed on our platform. I also want to thank our global team for their commitment to tackling our issues and making our products better every single day. As we come out of a challenging year and continue to face challenges ahead, I believe we're in a position to build on the progress we've made and better serve our community in 2019. I am grateful to all of you for your continued hard work and dedication. Now, here's Dave.

Thanks, Sheryl, and good afternoon, everyone. Q4 was a strong quarter wrapping up a good year for our business. Full year 2018 revenue grew 37% to $56 billion, and we generated over $15 billion of free cash flow. Let's begin with our community metrics. Daily active users on Facebook reached 1.52 billion, up 9% compared to 2017, led by growth in India, Indonesia, and the Philippines. This number represents approximately 66% of the 2.32 billion monthly active users in Q4. MAUs grew 191 million or 9% compared to last year. Turning to our overall family metrics. Around 2.7 billion people worldwide used one of our applications in December, and on average, over 2 billion people were active daily. This is our best estimate of our de-duplicated audience across Facebook, Instagram, Messenger, and WhatsApp. We believe these numbers better reflect the size of our community and the fact that many people are using more than one of our services. For the time being, we will continue to disclose both sets of numbers. But over time, we expect family metrics will play the primary role in how we talk about our company and we will eventually phase out Facebook-only community metrics. Turning now to the financials. All comparisons are on a year-over-year basis unless otherwise noted. Q4 total revenue was $16.9 billion, up 30% or 33% on a constant currency basis. Had foreign exchange rates remained constant with Q4 '17, total revenue would have been approximately $348 million higher. Q4 total ad revenue was $16.6 billion, up 30% or 33% on a constant currency basis. In terms of regional ad revenue growth, Asia Pacific was strongest at 34%, followed by North America at 31% and Europe at 28%. Rest of World ad revenue grew 24% and was impacted by ongoing currency weakness and macroeconomic challenges. In Q4, the average price per ad decreased 2%, and the number of ad impressions served on our services increased 34%. Impression growth was primarily driven by ads on Instagram, including both feed and Stories as well as Facebook mobile News Feed. The year-over-year decline in average price per ad reflects an ongoing mix shift towards product services and geographies that monetize at lower rates. Payments and other fees revenue was $274 million, up 42%. Sales of Oculus Go and the launch of Portal contributed to the revenue growth in the quarter. Turning now to expenses. Total expenses were $9.1 billion, up over $1 billion sequentially and up 62% compared to last year. In addition to continued investment in infrastructure, safety and security, and innovation, expenses were also driven by seasonal factors, including marketing efforts, notably the promotion of Portal and Oculus Go. We ended the year with over 35,500 full-time employees, a 42% increase. Operating income was $7.8 billion, representing a 46% operating margin. Our Q4 tax rate was 14%. Net income was $6.9 billion or $2.38 per share. Full year capital expenditures for 2018 were $13.9 billion, driven by investments in data centers, servers, network infrastructure, and office buildings. We generated $3.3 billion in free cash flow in Q4 and ended the year with approximately $41 billion in cash and investments. In Q4, we bought back approximately $3.5 billion of our Class A common stock and completed our prior repurchase authorization. In December, our Board of Directors authorized the repurchase of an additional $9 billion of stock. Turning now to the revenue outlook. In Q1, we expect our total revenue growth rate to decelerate by a mid-single-digit percentage on a constant currency basis compared to the Q4 rate. We also expect that our revenue growth rates will continue to decelerate sequentially throughout 2019 on a constant currency basis. Turning now to the expense outlook. On a full year basis, we continue to expect 2019 total expenses will grow approximately 40% to 50% compared to 2018. Our 2019 capital expenditure outlook is unchanged at $18 billion to $20 billion, driven primarily by our continued large investment in building data centers. Lastly, we expect that our 2019 tax rate will be a few percentage points higher than our 2018 rate. In conclusion, we are confident in our ability to continue to invest effectively in the key priorities that Mark outlined in his opening remarks: making progress on the major social issues facing the Internet, building new experiences that meaningfully improve people's lives, and growing our business by supporting the many businesses that rely on our services. With that, operator, let's open up the call for questions.

I have two, the first one for Dave. Last quarter, you talked about an expected sequential deceleration in Q4 rather, and I think it came in a little better than expected. Could you just talk to sort of which forms of media, whether it's News Feed or Stories or Instagram, kind of came in better than you thought it originally would and what drove the upside? And then, Mark, you talked about the Instagram commerce opportunity. Maybe just talk us through sort of 1 or 2 of the key - what you think are the most important steps you have to cross throughout 2019 to really execute on this opportunity.

Sure. Thanks, Brian. I'll take the first part of your question. Yes, Q4 was very strong on revenues, so we're pleased with that. On the demand front, we continued to benefit from advertisers targeting on business results. So direct response was especially strong during the holiday season. And then on the supply front, we benefited from strong Instagram growth, which was aided by both growth in impressions on Instagram feed and on Stories. But I'd reiterate that we expect that we will see a deceleration of revenue growth in Q1.

I'd like to talk about a bit about commerce. When I think about it, just from the consumer side, increasing commerce on Instagram, Facebook, and WhatsApp, I think is one of the most exciting product opportunities that we have in all of these products and a big business opportunity as well. The big things that I think we want to make sure that we nail, in Instagram especially, are discovery. People are already doing a lot of commerce activity and are really interested in following brands, and I think making sure that works is a big deal. There's a very big opportunity in basically enabling the transactions and making it so that the buying experience is good and that when you buy from someone, you know that you can trust them and that you're going to have a good experience and in facilitating and making that go well. The work that we're going to do in Instagram will also go across the efforts in Marketplace and Facebook, and the rest of the work that we're doing in Facebook and all the work that we're going to be doing in WhatsApp as well. This is a big area that I'm personally very excited about and focused on.

Maybe, first, for Sheryl on Stories. Stories continues to grow very quickly. As you said, the number of advertisers using Stories are growing quickly. Can you give us a little bit more on the performance of the ads? Are you seeing improvements in conversion rates for those ads? Are the ads performance on Stories narrowing the gap with feed ads in terms of pricing or performance? And anything broadly on demand for those ad formats. And then one for Mark. I wonder if you could speak to the possibility of stitching together the messaging apps, WhatsApp, Instagram, Messenger. It would be great to hear what the rationale or potential commercial benefits might be to or for potential integration of those properties.

I'll take the Stories question. One of the challenges that marketers have is keeping up where consumers are. If you think about our history, people made the shift to mobile before marketers did, and I think one of the successes we've had is we made it easier for advertisers to move into a mobile environment. Just as we did that in mobile, now we're very focused on doing that in the new things that people are doing, and Stories is a big part of that. Messaging will be further out, but as important as well. The fact that we've already gotten 2 million advertisers to move into Stories is because we've gotten better at making it easier. We launched our automatic placements and expanded it, which converts feed ads into a format that works for Stories and delivers the ads wherever they'll get the best results. Our goal is to make it as easy as possible for marketers to get to the format of Stories and then deliver the ads where they're going to get the best experience and the best ROI. One interesting thing about Stories is there's a benefit to being an early adopter. The pricing is really attractive. We think the mix shift to Stories is a big opportunity for us and it's going to take time to continue to get advertisers in, but we're very happy with demand to date.

Before we turn to Mark, I'd just layer in on the Stories front. When we look into 2019, we do expect to see a deceleration of revenue growth throughout the year. While we have opportunities to grow impressions on Facebook and Instagram, that's less so in feed, where we already have healthy ad loads on both surfaces. More in Stories where we have lower CPMs. In 2018, we benefited from strong impressions growth on Instagram in both feed and Stories. We'll be more reliant on Stories impression growth in 2019.

I can talk about messaging and the integration that we're thinking about, but first, we're really early in thinking through this. There's a lot more that we need to figure out before we finalize the plans. This is going to be a long-term project that I think will probably be to whatever extent we end up doing it in a 2020 thing or beyond. There are a few big reasons why I'm excited about this and think it'll be good for the user experience. Part of the question was about a commercial benefit, but that really isn't the big focus here. The first reason I'm excited about this is moving more to end-to-end encryption by default in more of our products. People really like this in WhatsApp. If there's an opportunity to use the work that we've done with WhatsApp there, rather than doing it in different ways in the different messaging experiences, to have encryption work in a consistent way across the different things that we're doing. There are also a number of cases that we see where people tell us that they want to be able to message across the different services. A lot of people are using Marketplace on Facebook now, and many of them are using it in countries where WhatsApp is the primary messaging app that they use. We have experiences where we're building Marketplace, and you go to message someone to buy something. The link to do the messaging is over Messenger, but in those countries, where people really want to be using WhatsApp, we need to facilitate more transactions and connections there. Another example is there are tens of millions of people, on Android, use Messenger not only for Facebook messaging but also for SMS. When you're going to message someone over a phone number network, we think that there's an opportunity to have that primarily go over WhatsApp instead of over SMS, where it's unencrypted and less secure. We're working through this in a deliberative way. I wouldn't expect anything here to launch soon, but this is definitely something we’re thinking about and that I think will improve the user experience.

Two, if I could. One, Mark, on Facebook Watch, what do you think are some of the things you're still trying to solve for on either the content side or the consumer engagement side to drive broader adoption of Watch and turning it into sort of the mechanism for customers that you're trying to solve for over the medium to long term? I'd love to understand how you see the opportunity and the challenge that's just in front of the company. And second, there was a fair bit of noise in the advertising community about the macro environment at the end of 2018 and maybe at the beginning of 2019 with things like Brexit and the government shutdown in the U.S. Are you seeing anything on the macro front in your own business either exiting 2018 or starting this year?

Yes, I can start on the macro environment, Eric. Obviously, we delivered strong results in Q4. Looking out into 2019, that's a potential headwind and risk to the business given the sensitivity of the advertising business to a slowdown in growth. We believe we've got the best advertising products out there in terms of delivering measurable business results to clients. That does help us in that environment, but clearly, macroeconomics stands out as a risk on top of other issues that we face, leading to a deceleration of revenue growth in 2019.

I'll talk about Watch and video. We've really had this dynamic over the last 12 to 18 months where we've limited the amount of video that we've shown in News Feed to ensure that it doesn't displace interactions that people are having. The big thing that unlocked a lot of growth in Watch is we were able to move the video-watching behavior to a different tab, where people intentionally go to watch a video and browse. This has allowed us to really increase video consumption without disrupting social interactions. Within the Watch tab, we’re focused on making sure the consumption isn't all passive. We need more two-way interactions between viewers and the creators, building community around that where we've built this feature, Watch Party, that allows people to watch different content and premiers together. It's a new feature that allows people to take a video and stream it live for the first time when it comes out. These make it so the video-watching experience isn't just about passive consumption but about interaction, and that’s going to help drive engagement as well. There's also the monetization side for creators, which is really important to ensure that we have the content that people want to consume. We think that more money creators can make through Watch will create a virtuous cycle for growth. It looks like this is going in a good direction. It's still early, and we're still growing quickly but from a small base, but it's something I'm excited about for this year.

One for Mark and one for Dave. Mark, it's been more than a year since you shifted to feeds for more friends and family and removed the passive videos, as you just talked about, and reported engagement numbers. Are there any signs that the changes you made a year ago are now having a more positive impact on engagement in the core Facebook feed? And then, Dave, you talked three months ago about better aligning revenue and expenses in 2020. I was just curious if that's still your view at this point. What gives you the confidence you can do that? And what changes most from a spending perspective as you look toward 2020?

We continue to have an outlook for expense growth in 2019 of 40% to 50% total expense growth. We did see headcount growth come down modestly in Q4 from Q3 by 42%. Beyond 2019, we'll have expense growth more in line with revenue growth. But we plan to continue to invest aggressively in priority areas, including innovation with AR/VR and AI, ensuring safety and security programs continue. We'll expect to see more of that flow through over time. So I would say, we plan to continue to invest aggressively in the business going forward, and we will see a margin impact from that in 2019.

I can talk a bit about meaningful social interactions. I think this has gone pretty well and has done what we hoped, although we've made a number of changes. This is a long-term direction that we're going to continue making more ranking changes and building more products around. I think this is reflected broadly in engagement numbers, growth in daily actives, and how people are engaging across the family of apps. At the time, I basically said that even though we might decrease time spent and we expected that it would, we took out viral videos. We thought that helping people interact more was the unique thing that people come to our services for and that it would be good for the community and our business over the long term. Everything that we've seen since then suggests that was right.

Great. A couple of questions. First, pretty rough press cycle in Q4. Did you see any impact in the U.S. and Europe on engagement or usage or people closing their accounts? It certainly doesn't seem evident in MAU numbers. But just anecdotally, did you see any impact or - on that? And then maybe to Sheryl, if we look at trailing 12-month monetization in the U.S. ARPU, it's about $110. How do you think about that long term? If you improve targeting, is there room to grow that significantly? Obviously, Instagram's a growth platform that's contributing to that.

In our ability to continue to grow the advertising business, it's about developing the best products we can to enable advertisers to achieve business results. Targeting is very important. From a pricing perspective, there are headwinds we might face on targeting, given the overall privacy landscape in 2019. That is another risk in our ability to continue to grow ARPU. We are seeing a mix shift towards Stories leading to a deceleration of revenue growth. Regarding the impact of the press cycle, we saw we are growing in all regions; however, we're sort of bouncing around in developed markets like the U.S. and Canada. In Q4, we saw better growth in Europe after the initial GDPR implementation.

I think over the long term, which is how you framed your question, we have a lot of opportunity. If you look at what percentage of our ads are truly relevant to the people who are seeing them, I think we've done a lot better over the last couple of years, but we have a long way to go. For every ad we show, that ad can be better, better for people, showing something they're more interested in. The shift we're seeing toward people doing measurable results is important, particularly among the largest brands in the world. That bodes well for our business because we think we can do that efficiently. When we have new opportunities open up like Stories, even with pressure on pricing, it gives us more inventory, opportunity, and formats. We haven't really even gotten started on future things like messaging, so over the long run, I believe we remain very optimistic about the growth opportunities we have.

It's Zachary Schwartzman on for Mark. Mark, I have a question on data privacy as it relates to your 2019 goal of progressing major social issues. This is a topic that is important for the Internet ecosystem as a whole and not just Facebook, and it appears regulators are struggling to come up with comprehensive reform appropriate for all stakeholders involved. Facebook has invested a lot to improve data privacy, transparency, and trust in the platform over the last year. I wanted to hear your thoughts on the following. In your Facebook post at the end of 2018, you asked the question of whether we should decentralize authority through encryption or other means to put more power into people's hands. As the accumulation of data and micro-targeting increases, can individuals be compensated for renting their data to Facebook and other tech companies? Will that be in the form of crypto or other methods? I know we're in the early days and due to scalability and consumer adoption roadblocks, this isn't possible yet, but do you believe these technologies are real existential risks or perhaps even solutions to current data privacy and control issues?

This is an important question that we are spending a lot of time on. I do believe strongly in decentralizing authority and putting power in individuals' hands. That's always been a part of Facebook's mission, giving people the power to share, connect, and build communities. One way we're talking about decentralization is through end-to-end encryption in messaging. There’s a broad sense that having data stored with companies can be a liability, breaching privacy or using data in unintended ways. Features around encryption and keeping data less permanently are becoming increasingly important. We think about building messaging products where encryption plays a huge role, along with sharing with your friends. Stories, which are ephemeral, are the main thing that's growing. These privacy-first products are key and drive our growth. In terms of regulation, I think having principles like GDPR codified around the world would be a positive step.

Two if I can. First, Mark, it sounds like there's really a clear shift this year to more aggressive core product development. You talked about a lot of areas across Instagram commerce, Messaging, Payments in WhatsApp, and many more. Are there any that you would point out that could be a material contributor to revenue over the next 2 to 3 years? And then, secondly, when you look at the Stories ad in adoption, is there any difference you're seeing between sophisticated advertisers and smaller advertisers either in terms of adoption or performance? Do you see any inhibitions to long-term success among smaller advertisers with the format, or do you think they can compete effectively in the creative side?

It's Dave. Commerce broadly and e-commerce is an important vertical for our advertising business. Our success in building good advertising products for our e-commerce clients will be a more important contributor to revenue in the foreseeable future than new areas. Those are still very small, and we're early days regarding what’s contributing to revenue. Sheryl will take the question on Stories ad.

At 2 million advertisers in Stories, we’re seeing broad adoption among both large and small advertisers. Some small or medium-sized advertisers can move the fastest. We take tools previously only available to large companies and make them available to small companies. The easier we make it for advertisers to use our technology, the more they'll adopt. We’re focused on getting marketers to ring cash registers to know their advertising dollars are spent effectively.

While I'm excited about the roadmap that we have, the growth of the business over the next year or few quarters is generally going to be based on the growth of Stories and core News Feed work. We're still working to monetize Stories at the same levels as News Feed. I’m confident we’re going to get there, but I want to ensure we’re providing the right outlook about how we expect the near future to unfold.

First, regarding Stories again. Given the size of the WhatsApp audience and the amount of status posts on that platform, just curious about your early learnings from testing status ads on WhatsApp and how optimistic are you that, that will become an interesting and meaningful opportunity going forward. In terms of Stories on Facebook, from what we can gather, consumption and impression volume on the core Facebook ad seems to not be scaling as fast as some of it, and maybe even that some of your comments last year suggested that, if that's true, why do you think that is? Does that pose any sort of issue to your long-term growth plans for Stories at least on that platform?

We don’t have ads on Stories for WhatsApp; that's something more for the future. We remain focused on the consumer experience there. We do have the WhatsApp Business app which is helping businesses connect with consumers, and that's growing well, but that monetization opportunity is not available yet.

Stories is a big success on Instagram. We're pleased with what we're seeing; however, it's much earlier on the Facebook platform, so we need to continue to build that format on Facebook.

Stories on Facebook is growing quickly. We started a little bit later, and some of the early execution wasn't as good as it should have been. But I believe we're doing good work, and it's growing quite quickly. I’m confident about where we will be there.

A question on Messenger. Any learnings from the monetization efforts at Messenger? You have inbox ads that you've done. You just mentioned Stories ads are starting to enter Messenger. What are you seeing there? What are you most excited about as far as monetizing Messenger? And what might be applicable at some point in the future to WhatsApp?

Our approach to monetization anywhere is always very cautious and we are moving very slowly on Messenger, where we remain primarily focused on consumer growth and engagement. Our real focus has been on the organic connections between businesses and consumers. We have 10 billion messages being sent between people and businesses every month. Of course, that includes automated messages as well. We're starting to roll out Stories ads, but it’s very early days, and we think it will be a long road ahead. It's worth noting that experiences moving from Facebook to Instagram were more similar, where Instagram feed is, in terms of what you can do with advertising. Messenger has a distinct structure and will take more work.

Mark, you mentioned Facebook Groups as one part of the community effort. I wonder if you could expand on how you see Groups gaining a higher profile and how that extends to other apps potentially? Listening to descriptions of convergence of features across the apps, I wonder how we should think about that impacting usage and engagement if people are converging their own use into one or two apps instead of the broad suite.

For Groups, the main focus is connecting with meaningful communities. It's going to be as central to the experience as connecting with friends and family. Friends and family will remain central to what we do, but there's an opportunity to facilitate people's involvement in significant communities. Hundreds of millions of people tell us that the groups they are a part of on Facebook are the most important part of their social experience. There's sociological data that shows physical group membership in the world has been declining for decades. Building groups can’t replace in-person gatherings, and successful groups facilitate real-world events. This is an essential human need. Instagram also focuses on community and interest, emphasizing discovery and hashtags.

If I think about kind of the San Francisco Valley kind of elitist community and even a good chunk of Wall Street, there’s been this ongoing narrative that nobody uses core Facebook blue anymore, and really, time spent is all about Instagram. Your DAU numbers obviously give a good sense that people are touching Facebook still, core Facebook on a regular basis, but we don't really get any sense of engagement with Facebook versus your other apps. Is there anything you can do to give us some color or sense? You talked about Marketplace before on the call, but any way of getting a sense of actual usage trends in core Facebook versus Instagram versus the communications apps?

Look, I think the DAU trends tell the story broadly, which is stability in the developed markets, growth for Facebook blue in developing markets. We're not giving an update on time spent. That’s not our major focus. We've pivoted to focus on meaningful social interactions, and we're pleased with the results broadly.

For Mark, just curious if you're happy with the progress around the safety and security initiatives. Going forward, is there any kind of recurring metric or anything you can disclose to show progress that you guys might see internally but Facebook users and other constituents maybe don't see? A quick one on pricing on Instagram Stories. Should we expect to see the pricing gap close between feed and Stories over the course of 2019?

The reality is pricing outcomes depend on supply and demand and how demand grows versus supply. While we expect to bring more advertisers to Stories and develop additional advertising formats, we’re also growing Stories inventory quickly. These items will balance out in price. Our goal is to improve the value of the Stories format, translating into better pricing.

Regarding safety and security issues, there’s more to do, but I’m proud of the work we’ve done to get in front of many issues. We’re moving from reactively dealing with problems flagged by the community to proactively building AI systems. Tens of thousands of people are doing more proactive review of content that could be problematic. We're prioritizing content that could create the most harm. For example, we're achieving 99% accuracy in identifying ISIS and Al Qaeda content before users see it. Regarding self-harm, we're able to get first responders to reach out to people in need, saving hundreds of lives. We are continually making more progress, and we're ready to share these results on a quarterly basis, which reflects our commitment to accountability.

Great. Thank you for joining us today. We appreciate your time, and we look forward to speaking with you again.