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  • Good afternoon.

  • My name is Mike, and I will be your conference operator today.

  • At this time, I would like to welcome everyone to the Facebook Second Quarter 2018 Earnings

  • Call.

  • All lines have been placed on mute to prevent any background noise.

  • After the speakers' remarks, there will be a question-and-answer session.

  • This call will be recorded.

  • Thank you very much.

  • Ms. Deborah Crawford, Facebook's Vice President of Investor Relations, you may begin.

  • Thank you.

  • Good afternoon and welcome to Facebook second 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 thanks, everyone, for joining us today.

  • We had another solid quarter.

  • Revenue grew 42% year-over-year to $13.2 billion.

  • And Facebook now has more than 2.2 billion monthly active with almost 1.5 billion actives

  • using it every day.

  • For the first time today, we're also releasing how many people use at least one of our apps,

  • Facebook, WhatsApp, Instagram or Messenger, and that's 2.5 billion people each month.

  • This number better reflects our community for a couple of reasons.

  • First, it refers to individual people rather than active accounts, so it excludes when

  • people have multiple active accounts on a single app.

  • And second, it reflects that many people use more than one of our services.

  • And Dave will explain this in a little more detail later.

  • I want to start by talking about all the investments we've made over the last six months to improve

  • safety, security and privacy across our services.

  • This has been a lot of hard work and it's starting to pay off.

  • We recently launched two important ad transparency tools: one to let anyone see the ads any page

  • is running even if the ads aren't targeted to you; and the other an archive of ads with

  • political or issue content that's starting in the U.S. ready for the midterm election.

  • These ads are now labeled so you can clearly see who's paying for them and, within the

  • archives, you can see the budget associated with each ad, how many people saw it, and

  • search all ads with political or issue content that an advertiser has run for up to seven

  • years.

  • This level of transparency will mean increased accountability and responsibility for advertisers

  • globally.

  • Over the next 18 months, there are important elections beyond the U.S. in Brazil, India,

  • and the EU, and these will all be real tests for Facebook.

  • But I'm confident that we will get this right given our results during last year's French

  • and German elections, the Alabama special election, as well as this month's presidential

  • election in Mexico, where our systems found and removed thousands of fake account pages

  • and groups that violated our policies.

  • Of course, security is not a problem that you ever fully solve.

  • We face sophisticated well-funded adversaries who are constantly evolving.

  • But, during each election, we learn and improve too.

  • We're also making progress in the fight against misinformation.

  • We're getting rid of the financial incentives for spammers to create fake news, much of

  • which is economically motivated.

  • We stopped pages that repeatedly spread false information from buying ads.

  • And we also use AI to prevent fake accounts that generate a lot of the problematic content

  • from ever being created in the first place.

  • Our investments in AI mean that we can now remove more bad content quickly because we

  • don't have to wait until after it's reported.

  • It frees our reviewers to work on cases where human expertise is needed to understand the

  • context or nuance of a situation.

  • In Q1, for example, almost 90% of graphic violence content that we removed or added

  • a warning label to was identified using AI.

  • This shift from reactive to proactive detection is a big change, and it will make Facebook

  • safer for everyone.

  • I also want to talk about privacy.

  • GDPR was an important moment for our industry.

  • We did see a decline in monthly actives in Europe, down by about 1 million people as

  • a result.

  • And at the same time, it was encouraging to see the vast majority of people affirm that

  • they want us to use context, including from websites they visit, to make their ads more

  • relevant and improve their overall product experience.

  • Looking ahead, we will continue to invest heavily in security and privacy because we

  • have a responsibility to keep people safe.

  • But, as I've said on past calls, we're investing so much in security that it will significantly

  • impact our profitability.

  • We're starting to see that this quarter.

  • But, in addition to this, we also have a responsibility to keep building services that bring people

  • closer together in new ways as well.

  • Now, in light of increased investment in security, we could choose to decrease our investment

  • in new product areas, but we're not going to, because that wouldn't be the right way

  • to serve our community and because we run this company for the long term not for the

  • next quarter.

  • And Dave will talk about this in a few minutes.

  • Now, perhaps one of the most important things we've done this year to bring people closer

  • together is to shift News Feed to encourage connection with friends and family over passive

  • consumption of content.

  • We've launched multiple changes over the last half to News Feed that encourage more interaction

  • and engagement between people, and we plan to keep launching more like this.

  • Now, of course, connecting isn't limited to News Feed.

  • Now, there are more than 200 million people that are members of meaningful groups on Facebook,

  • and these are communities that, upon joining, they become the most important part of your

  • Facebook experience and a big part of your real world social infrastructure.

  • These are groups for new parents, for people with rare diseases, for volunteering, for

  • military families deployed to a new base and more.

  • We believe there is a community for every one on Facebook.

  • And these meaningful communities often spend online and offline and bring people together

  • in person.

  • We found that every great community has an engaged leader.

  • But running a group can take a lot of time.

  • So we have a road map to make this easier.

  • That will enable more meaningful groups to get formed, which will help us to find relevant

  • ones to recommend to you, and eventually achieve our five-year goal of helping 1 billion people

  • be a part of meaningful communities.

  • Now, since the 1970s, there has been this long decline in people joining physical groups

  • around the world, and that has contributed to a broad feeling of loneliness and isolation.

  • But if we can help 1 billion people be a part of something meaningful, then that can help

  • reverse this trend.

  • Talking about being a part of something meaningful, it's been inspiring to see how people are

  • using our fundraising tools to make a difference.

  • Last month, a campaign to raise $1,500 for undocumented children separated from their

  • families at the border ended up going viral and raising more than $20 million from more

  • than 0.5 million donors all around the world.

  • This quarter, we added the ability for pages to create and donate to fundraisers for causes

  • that they care about too.

  • This quarter, we also reached a milestone with now more than 1 billion actives on Instagram.

  • And this is a moment to reflect on how this acquisition has been an amazing success.

  • When Instagram joined us the team had only 16 people.

  • And since then, Kevin and the team have built Stories, Direct, and now IGTV.

  • This has been a story of great innovation and product execution.

  • And it's also a story of how effective the integration has been.

  • We believe Instagram has been able to use Facebook's infrastructure to grow more than

  • twice as quickly as it would have on its own.

  • So a big congratulations to the Instagram team and to all the teams across our company

  • that have contributed to this success.

  • I'm really excited about video too.

  • And this quarter, we launched IGTV.

  • People are watching less TV, but more video, but most video is not yet optimized for mobile.

  • IGTV will help solve that problem.

  • It's designed specifically for mobile and makes watching long-form vertical video from

  • creators easy.

  • There's a stand-alone IGTV app, but you can also watch within the Instagram app, so that

  • means the entire Instagram community has been able to use it from the start.

  • We're also seeing Watch start to grow more quickly on Facebook too.

  • Our teams are focused on building new experiences that help people connect and start conversation.

  • We recently rolled out Watch Party to all groups, so you can watch and chat with friends

  • at the same time.

  • And we're seeing some real traction with some of the original program, from the talk show

  • Red Table Talk, featuring Jada Pinkett Smith, to Skam, an interactive series that started

  • in Norway and features a new style of storytelling where the characters have accounts on Facebook

  • and Instagram, and key parts of the story are told not just through video, but through

  • posts on their pages.

  • Stories continue to be a big part of the future of sharing too, and they're growing quickly

  • across WhatsApp, Instagram, Facebook and Messenger.

  • While we started off just implementing the basic Stories format, we've now moved well

  • beyond it, and have built lots of new features like polls, questions, and collaborative stories

  • and groups and events.

  • And we're also making progress developing Stories into a great format for ads.

  • We've made the most progress here on Instagram, but this quarter, we started testing Stories

  • ads on Facebook too.

  • The other major trend we're seeing is the shift to more private messaging.

  • There's a lot to build here.

  • We've been testing payments on WhatsApp in India, and it gives people a really simple

  • way to send money to each other and contribute to greater financial inclusion.

  • And of the people who have tested this, feedback and usage have been very strong.

  • All signs point to a lot of people wanting to use this when the government gives us the

  • green light.

  • And in the meantime, we've broadened our focus to building this for other countries so we

  • can give more people this ability faster.

  • Over the next five years, we're focused on building out the business ecosystem around

  • messaging on WhatsApp and Messenger.

  • More broadly, our strategy is to use Facebook's computing infrastructure, business platforms

  • and security systems to serve people across all of our apps.

  • For example, we made the decision a decade ago to build our own data centers, and we

  • opened our first custom-built data center in 2011.

  • Today, we have six data centers around the world, and we're working on building eight

  • more.

  • We're using AI systems in our global community operations team to fight spam, harassment,

  • hate speech, and terrorism across all of our apps to keep people safe.

  • And this is incredibly useful for apps like WhatsApp and Instagram as it helps us manage

  • the challenges of hyper-growth there more effectively.

  • Beyond apps and looking at the next 10 years, we're making a lot of progress with virtual

  • reality.

  • Our goal is to create that feeling of presence like you're right there with people you care

  • about even if you might be halfway around the world.

  • Oculus Go is off to a good start, and at $199, it's going to be how a lot of people experience

  • virtual reality for the first time.

  • Overall, this is a critical year for Facebook.

  • We've made progress preventing abuse, forged ahead with new innovation, and are adapting

  • our services to the new trends of messaging, Stories, videos and groups.

  • As always, thank you for being a part of this journey, and I'm looking forward to making

  • more progress together.

  • And now, here is Sheryl to talk about our business.

  • Hi, everyone.

  • It was a good second quarter with ad revenue growing 42% year-over-year.

  • Mobile ad revenue was $11.9 billion, a 50% increase year-over-year, making up approximately

  • 91% of total ad revenue.

  • Our growth, again, was broad-based across regions, marketer segments and verticals.

  • We are working to ensure that Facebook is a safe place for people and businesses.

  • We've taken strong steps to address a number of issues, including election integrity, fake

  • news and protecting people's information.

  • One of the most important things we can do to affect change is to increase transparency

  • because transparency leads to greater accountability.

  • For example, when anyone can see any ad on Facebook, advertisers have to stand behind

  • the ads they run.

  • Transparency also allows us to get more input from our community and from experts around

  • the world, so that we can find and fix problems.

  • We wish we could find everything ourselves, but we never will, so we're building tools

  • to make it easier for people to report issues to us.

  • As Mark mentioned, this quarter, we took major steps to make advertising in pages more transparent.

  • Now anyone can see all the ads a page is running across Facebook, Instagram, Messenger and

  • Audience Network.

  • You can also learn more about pages even if they don't advertise.

  • You can see when a page was created and if they've changed their name.

  • For political and issue ads, we're going even further.

  • Advertisers placing ads with political content are now required to verify their identity

  • and location.

  • These ads will be labeled with a disclosure about who paid for them and saved in a searchable

  • archive.

  • The vast majority of ads on Facebook are run by legitimate organizations from small businesses

  • looking for new customers to advocacy groups raising money for their causes.

  • But we've seen that bad actors can misuse our products too, so we're erring on the side

  • of transparency.

  • We're being intentionally broad in our interpretation of political and issue ads.

  • This includes ads for books about politicians and brand campaigns that touch on national

  • issues.

  • Given our commitment to transparency, we think it's important to apply this policy to more

  • ads rather than fewer.

  • These steps are just the start.

  • We'll keep looking for ways to improve, and we hope these tools become standard across

  • the industry.

  • As we make these investments in transparency and accountability, we remain focused on our

  • key priorities: helping businesses leverage the power of mobile, developing innovative

  • ad products, and making our ads more relevant and effective.

  • First: leveraging the power of mobile.

  • For businesses, winning on mobile now means winning on video.

  • Globally, people are creating and watching more video, especially on mobile devices.