Facebook executives interpreted the 2021 Q3 financial report: iOS policy adjustments affected the company’s growth in the third quarter
News on the morning of October 26, Beijing time, Facebook today released its unaudited financial report for the third quarter of fiscal 2021 as of September 30. According to the report, Facebook’s revenue in the third quarter was US$29.01 billion, an increase of 35% compared to US$21.470 billion in the same period last year; net profit was US$9.194 billion, an increase of 17% compared to US$7.846 billion in the same period last year.
After the financial report is released,Company Chairman and Chief Executive Officer Mark Zuckerberg (Mark Zuckerberg), Chief Operating Officer Sheryl Sandberg (Sheryl Sandberg) and Chief Financial Officer David Wehner (David Wehner)Answered the analyst’s question.
The following is the record of the conference call:
Morgan Stanley analyst Brian Nowak:The first question is, what is the usage rate and participation rate of users of the company’s short video service Reels? Can you analyze the current user group composition? second question,AppleWhat are the impacts of changes in the company’s App tracking transparency policy on the company’s business? What investments does the company plan to increase in the future to cope with the complex and volatile market conditions?
David Weiner:The Reels business is a bright spot of the Instagram platform. At present, the global growth of the business is very good, and it performs better in some regions. We have made great progress, and the Reels service of the Facebook platform has just started. In terms of commercial operations, we have just started to launch Reels ads through Instagram, and the scale is not very large. Regarding the iOS14 question, can Shirley answer it?
Shirley Sandberg:OK. We still have to understand the meaning of personalized advertising. This type of advertising is good for users and businesses, and is especially important for small businesses. Of course, this type of advertising must also protect privacy and be pushed in a safe way. Changes in iOS have brought two major challenges: one is to target target customer groups, and the other is to measure the effectiveness of advertising. Let me start with the second one. Regarding the measurement of advertising effectiveness, we expect to solve more than half of the under-reporting issues by the end of the year, and make more progress in the next few years. We estimate that there is under-reporting of iOS advertising conversions, sales and applications The actual conversion rate for program installation is higher than what we reported. Therefore, we need to work hard to help customers correctly measure these indicators and let them understand the improvement of our business. We hope that we can complete most of this work next year.
How to target the target customer group is a longer-term challenge. Our direct response advertising products are built on the basis of user level conversion. The adjustment of iOS policy prevents us from obtaining such data, so the company must reconstruct and optimize customers. The positioning system allows us to complete the same work with less data, and it may take many years to complete this work in the future. The privacy-enhancing technologies we are developing are based on using less user data collected by ourselves and more using aggregated or anonymous data. These technologies still allow us to present users with the most relevant personalized advertisements. Of course, this also requires the cooperation of various industries and the provision of more e-commerce service functions in order to provide advertising users with more long-term value.
Goldman Sachs analyst Eric Sheridan: Regarding the two challenges you mentioned, can Shirley introduce the company’s current progress in related technologies, and what areas need to be improved in the future to meet the needs of advertisers? Another question is for David, what are the operating expenditures and capital expenditures of the company’s core Facebook business and the new businesses that other companies are actively expanding? In the short and long term, what are the driving effects on the company’s business development? What are the trends in expenditures in these two areas in the next few years?
Shirley Sandberg:We can develop certain technologies ourselves, such as artificial intelligence. The company’s investment in this field will continue, which will help us improve our data processing capabilities. The company also introduced some e-commerce service functions for merchants to use. In terms of targeting customers, we have also seen some opportunities for cross-industry cooperation, including functional design and other aspects. More consultation is definitely needed, and we have relatively little control.
David Weiner:Regarding the expenditure outlook for 2022, it is only a preliminary estimate. There are still many places where the company needs to invest in various businesses, including the core business of Facebook App, virtual reality research laboratory, advertising, artificial intelligence, e-commerce, privacy protection, etc. We will make a very aggressive spending plan for next year. In addition, the company’s recruitment plan for next year will also accelerate. You can see that the number of employees in the company increased by more than 20% in the third quarter, as well as related office and travel expenses. We do not disclose the expenditure plan of each business.
JP Morgan Chase analyst Doug Anmuth:Two questions. First of all, I would like to ask Mark that the company’s income statement and capital expenditures have increased significantly, including the “Meta Universe” business as a long-term focus. Could you please predict the product line in the next few years? The question for David is that next year’s expenditures are estimated to increase by 29-38%. Can you predict the trend in the next few years?
mark Zuckerberg:Let me answer the question of the virtual reality research laboratory and the meta-universe. In the next one to three years, we will mainly lay the foundation. None of these investments will be profitable in the short term. We believe that if Metaverse can open up the social mode we ultimately hope to achieve, including social acquaintances and other experiences, then it can succeed on the mobile Internet and unlock a creative economy that can simultaneously achieve online and offline benefits in the next ten years. In the next one to three years, we will not pay too much attention to business results. Our focus is still on product improvement and infrastructure construction, including the improvement of hardware and various functions. We have virtual reality product lines, augmented reality product lines, which need to be continuously improved, as well as new product operating systems and development models, as well as supporting e-commerce tools and virtual social platforms implemented through Horizon. These are all businesses that we hope to see progress in the next few years, but the real contribution to the company’s performance may be viewed from the perspective of about ten years. As I mentioned earlier, our Polaris indicator plan is to help 1 billion users use Metaverse before 2030, and support hundreds of billions of e-commerce market scale.
Bank of America Merrill Lynch analyst Justin Post:Mark, I know that it is not easy to acquire users aged 18-29. What methods does the company take to acquire users? What is the growth trend in the next few quarters? David, how does IDFA affect the company’s fourth quarter revenue outlook? Is it similar to the situation in the third quarter? Less impact or greater?
David Weiner:I can answer these two questions. In terms of young users, our products are widely used by this user group, and the company has been constantly improving product functions to make products more usable. Reels is also a very important part of this strategy. Since its first launch in August last year, it has been used by users in more than 100 countries. We will continue to invest in improving user experience and enhancing product features.
mark Zuckerberg:I think for users to use different products and platforms, Reels can bring important and essential changes. New product forms will also bring new types of content, such as information flow, stories and other services. Different apps present different content flavors, and Reels also have similarities. Reels is still in the early stage of development, and there is still a long way to go before the business is mature. We can also promote its development by launching some Reels tests and experiences on Facebook. You mentioned the use of Reels on Instagram platforms in various places. I think there is still the potential for rapid growth in the future, and it may grow to a scale similar to the story business within a year or two.
David Weiner:Regarding the impact of the iOS policy update on the business in the third and fourth quarters, the iOS14 update has basically been completed in the third quarter, so we see that the impact on the third quarter is greater than the second quarter. Most users have also completed the iOS14 update, so we don’t expect the impact in the fourth quarter to be greater than in the third quarter. More importantly, this year’s holiday season is also the first holiday season after these policy updates are launched. Considering the increase in prices due to increased demand, we are currently unable to accurately predict the impact of the new policy on accurate advertising and effectiveness measurement. The impact on the outlook for the fourth quarter is also unclear.
Truist Securities analyst Youssef Squali:Mark, what is the current progress of Horizon, a user-made game and sharing experience app? I know that it has been in closed testing for the past two years. In my opinion, if the company wants to successfully migrate Facebook to Metaverse, it needs a very easy-to-use virtual reality social app. Another question is also related to the 18-29 year old user group. At present, how is the participation of this user group on the company’s Facebook and Instagram platforms? What are the trends?
mark Zuckerberg:Regarding the business of Metaverse, we will provide a lot of details at the Connects event on Thursday, such as our development vision and what contributions the company can make to this field. We hope everyone will participate online. Among them, we will also talk about Horizon, the collaboration between Horizon and other businesses. We have been doing this part of the work, including acquiring more content creators and users, and adding more usage scenarios. You are right. Metaverse is very important to the future development of our business. We have recently released the virtual office space App Workrooms. We are very happy with the continuous improvement of functions. You mentioned the social experience of virtual reality. I think the cross-platform virtual reality social experience is very important. I don’t want to become just a virtual reality social network in the end, but hope that users can get an immersive experience. In virtual reality, augmented Feeling the presence of other people in reality and holographic imaging, we want users to have this experience when using the company’s apps, and regardless of whether they are using a browser,cell phoneStill PC. So we still have a lot to do. Whether we call it a beta version or not, in the next one to three years, we still have a lot of basic work to be done. Some of the work is also reflected in the report, and the investment amount will be very high. The company hopes to be transparent about this. These investments will create great value and huge growth opportunities for the company in the future. I hope everyone will come to the event on Thursday.
David Weiner:On the question of user engagement. Our products are widely used by teenagers, but we also face fierce competition from peers such as TikTok and Snapchat. The company will continue to focus on innovation, release products like Reels, attract and retain more young users, and we will continue to invest in these areas.
Evercore analyst Mark Mahaney:Two questions. One is whether the iOS policy update is the growth in the third quarter, and the most important unfavorable factor for this forecast in the fourth quarter? Second, can you tell us about the progress made by artificial intelligence in helping the platform delete inappropriate content?
David Weiner:You’re right, the iOS policy change was the most important unfavorable factor for the company’s growth in the third quarter, because the third quarter was the first quarter that was completely affected after Apple’s policy changes, and the user upgrade rate for the new version of iOS. It also keeps rising. If there is no impact in this regard, we may achieve a quarter-on-quarter growth in the third quarter.
mark Zuckerberg:Let me talk about artificial intelligence. You’re right. The impact is huge. We have previously released a quarterly report on operational transparency. Here I would like to add that Facebook is a leader in this field, whether it’s the discovery of inappropriate content or the content we outlined. In terms of depth, users who have problems can contact us directly, and we will explain our work in detail, as well as the measurement standards we adopt in reports and disclosures, as well as the proportion of artificial intelligence we use in content review, etc. . I know that many users use our products. In the past few years, the practice was to take action after receiving user problem content reports. Now we have decided to go ahead of user reports and build a complex system to solve problems preemptively, instead of relying on users alone. report. At present, among the discomfort content of different categories, in general, we have more than 90% of the audits that can be completed by artificial intelligence. Of course, there will be slight differences between the categories. For example, nude content, it is relatively easy to train a computer to recognize this part of the content, so we use more. Another example is hate speech. Artificial intelligence is a bit difficult to distinguish, because we operate content in more than 150 languages around the world, and it contains many subtle differences in culture, so we must pay special attention to the innuendo content when reviewing it. We want to make sure that users can talk about and condemn racism. It is definitely wrong for a person to make racist remarks or encourage others to hate, but if a person says I saw someone do it, he shouldn’t do it. The content should not be censored, so this is a very complex issue. In the first one or two years of using artificial intelligence to review content, our usage rate was still relatively low, that is, 10-15%, but our progress in recent years has been tremendous. More than 90% of content is automatically reviewed, including The part of the censorship of hate speech.
Let me talk about this issue in a different direction. I know that many people are critical of the company’s efforts, but I want to say to our team that I am very proud of the progress everyone has made. We have the best talents in the world and have achieved the best results in this field. I know that this field is very important, so criticism is right, but we have to take an objective attitude to the progress the company has made, and there will be more progress in the future.
David Weiner:The quarter-on-quarter growth rate in the fourth quarter is indeed not as high as the same period in history, reflecting the many uncertain factors I mentioned before, including the iOS14 upgrade, the impact of ATT and IDFA on the pricing of the holiday season. The other is the impact of macroeconomic factors, such as supply chain issues.
Shirley Sandberg:Regarding the issue of accurate advertising, it is difficult to say what level of improvement can be achieved in the end, but it does take us many years of hard work to complete it. Our business has indeed been affected, but we will continue to introduce more tools in the future to provide support to advertisers. . We have the ability to improve precision investment efforts through internal operations, but I also need external cooperation to make my own contribution to the industry. Advertisers have the right to choose platform delivery, so it is how strong our service capabilities are. Our precision delivery capabilities may not be as good as Apple, because they have their own data directly obtained, but we are still very good in this field. Even with the current impact, we will continue to work hard to improve our capabilities in this area.
Cowen analyst John Blackledge:Two questions. First, has the company felt the impact of supply chain issues on its fourth-quarter results? Or is it predicted to appear later in the fourth quarter? The second question is whether the rise of Reels services will affect the user engagement of other services on the Instagram platform?
David Weiner:We are not experts in the field of macroeconomics. What we can tell you is that we heard from advertisers that there were indeed supply chain problems in the third quarter, which had an impact, and we expect this problem to continue to exist in the fourth quarter. Coupled with the impact of unfavorable factors from the iOS policy update, our operations in the fourth quarter are facing challenges. We cannot accurately describe the impact of platform issues and macroeconomic factors on the fourth quarter, but we have considered the impact of these two aspects when formulating the fourth quarter outlook.
Questions about Reels and other Instagram services. Any new products released by the company, including previous stories and video-on-demand services, will attract some users’ time and attention. We believe that this has many benefits for improving the overall company’s service experience, and in the long run, it can also increase user engagement for each service. I believe Reels can promote user engagement for Instagram and Facebook, so we will continue to invest in this.
AllianceBernstein analyst Mark Shmulik:A question about e-commerce and other e-commerce businesses on the company’s platform. Shirley mentioned the data performance of merchants and users. Can you introduce the data of products related to user behavior? Another question is about recruitment. The company recently recruited 10,000 employees to open up the meta-universe business in Europe. Can you analyze the reasons for such a large-scale recruitment? What are the company’s plans for global recruitment?
Shirley Sandberg:E-commerce activities on our platform are very active. Users have found many products they want to buy through our information flow and story service. E-commerce is also the vertical industry that has the largest contribution to the company’s advertising business and has been growing very fast in the past five years. , And the epidemic has accelerated the growth of this part of the business. Our offline e-commerce business has brought hundreds of billions of sales to advertisers. The company’s e-commerce service function has helped many businesses radiate to more consumers, thereby increasing sales. Our work in e-commerce business focuses on three aspects: continue to build the best advertising platform, make it easier for merchants to sell goods on the platform, and improve the consumer experience. Our progress in these three areas is different. In terms of making the best advertising platform, we are a very good choice for our customers, with a very good return on investment and strong competitiveness. In terms of making it easier to sell, we are trying to catch up with the shopping experience of other mobile phones and browser-side platforms, and there is still some work we can do. In terms of improving the consumer experience, we have also made progress, but there is still room for growth.
David Weiner:On the issue of recruitment. We have a very large investment project next year, including a global recruitment plan for talents. We will also recruit people to complete more remote work, recruit more employees outside the Bay Area, and focus on improving the company’s product and technical capabilities. Europe is a priority, and we have also announced related plans before.
Jeffery analyst Brent Thill:The midpoint of the capital expenditure outlook exceeds 70%. Can you tell us the reasons for this sharp increase in expenditure?
David Weiner:The company’s next year’s outlook reflects the growth of investment in such areas as artificial intelligence machine learning, many of which will be used to apply machine learning to improve ranking and recommendation capabilities to improve product experience. In terms of information flow and Reels business, our investment focus is on advertising relevance, and we use machine learning to balance losses caused by changes in platform policies. We can make advertising more efficient to make up for losses in machine learning and artificial intelligence, and the current operating conditions of the company also allow us to do so. These are the reasons for the substantial increase in capital expenditure next year. (over)