Shulou(Shulou.com)11/24 Report--

CTOnews.com, February 2, Beijing afternoon, February 2, Beijing time, Facebook parent company Meta today released its unaudited financial results for the fourth quarter and full year of fiscal year 2022 ended December 31. According to the report, Meta's fourth-quarter revenue was $32.165 billion, down 4% from $33.671 billion a year earlier; net profit was $4.652 billion, down 55% from $10.285 billion a year earlier; and diluted earnings per share were $1.76, down 52% from $3.67 a year earlier.

Mark Zuckerberg, chairman and chief executive, Susan Li, chief financial officer, and Javier Olivan, chief operating officer, answered analysts' questions after the announcement.

The following is a transcript of the conference call: Morgan Stanley analyst Brian Nowak: the first question for Mark is, in terms of generative artificial intelligence, what changes can corporate decentralization bring to user growth, advertiser growth and usage scenario expansion? Can you provide some time lines for reference?

The second question is for Susan, can you provide more details about the company's new data center architecture? What is the intensity of spending in the future? For example, what is the level of capital expenditure per minute and capital expenditure of daily active users? What is the effect on the company's previous cash flow?

Mark Zuckerberg: thank you. I think generative artificial intelligence is a very exciting area. The two areas we focus on most this year are improving efficiency and generative artificial intelligence in new products. We have several pieces of work going on at the same time on each product, using a variety of new technologies, especially large language patterns and diffusion models, to generate images, videos, 3D virtual portraits, 3D assets, and other types of assets.

With regard to long-term development, we hope to help content creators improve their productivity and creativity in all kinds of applications and fields. Because the business is progressing rapidly, I don't want to make too many forward-looking predictions. After the company releases several products this year, I will introduce their performance and related progress, also because of the rapid development of this field. Practitioners can more quickly find out which roads are feasible and which technologies are conducive to better development.

At present, the cost of generating images, videos and interactive chats is relatively high, which may range from less than a penny to a few cents, so one of the more interesting challenges we face this year is how to reduce costs and make operations more efficient. Improve the user base, if we are successful in these areas, then the use of the scene will be greatly expanded. At present, the answer I can give you is only relatively general, but there may be more details to share with you in the coming months.

Susan Lee: the new data center architecture we mentioned is an important factor in determining the company's ability to reduce capital expenditure in the future. this shift in the new data center architecture will help to achieve more efficient processing of artificial intelligence and non-artificial intelligence data. it will also help us to better understand the needs of artificial intelligence computing and provide more options. In addition, compared with the previous architecture, the new architecture is cheaper and faster, and it also helps us to optimize the way we build the data center, including building the infrastructure with less manpower and financial resources during the phased construction process. And if necessary, the ability to quickly expand computing power. We still plan to greatly increase the computing power of artificial intelligence, which is closely related to many areas in Mark's answer just now.

With regard to the issue you mentioned about the intensity of the company's capital expenditure in the long run, we hope that lowering the capital expenditure outlook will reduce the expenditure as a percentage of revenue, which is the long-term goal we hope to achieve. the surge in capital expenditure we are seeing is still related to the construction of a new data center architecture, which began last year and will continue this year, and the company will monitor the return on this part of the investment. To guide future investment, again, our current goal is to reduce expenditure as a share of revenue, but recent expenditure changes will also depend on revenue changes. and how we meet the future needs of artificial intelligence computing.

Goldman Sachs analyst Eric Sheridan: on the question of Reels short video products, Mark, your idea is to continuously increase user engagement, but you don't seem to be able to keep up with the commercial realization of new products. In short video products, how do you think we can better balance the two and boost the level of cash flow?

Second, with regard to the communication between advertisers and the company on short video products, Canvas instant experience advertising, and the use of Canvas to enhance brands and directly reflect advertising effectiveness, could you ask the management to provide some details?

Finally, can management quantify the current gap in user participation and realization? How to narrow these gaps in the next few years?

Mark Zuckerberg: I have always thought that the construction process and the expansion of the use of these consumer products you mentioned are different in principle from commercial realization. The process of building these new products is very difficult, and we have to convey clear intentions and goals to the team. Maybe what we want to achieve at the beginning is to make it easy for users, but once the number of users reaches hundreds of millions or billions of users, we want to be able to improve commercial cash flow, which is the feasible model we follow.

With regard to the Reels you mentioned, there are many users at present, so my question is whether it is more strategic to continue to expand than to improve its profitability. Based on the current scale of its development, I do not see that continued expansion will bring a greater strategic advantage to the company. Of course, the expansion of the scale means that we can get more feedback and more data distribution points, but so far, this scale is already very good, so next, we need to do better in improving cash efficiency. I know that users want Reels to provide more content, and as the team continues to strive to improve cash efficiency, its optimization is obvious to all. I also shared with you about the doubling of relevant data on the Facebook platform in the past six months. I firmly believe that the continuation of this trend will naturally promote the creation of more Reels content, and it is only natural for us to grow.

With regard to the promotion of new products, my idea is still to get hundreds of millions or billions of users, and then focus on commercial cash, and finding a balance is the right way to deal with it, and I benefit a lot from this way of doing things. The company will continue to adhere to this principle, including the promotion of new generative artificial intelligence products and other meta-universe products.

Javier Olivan: with regard to the response of advertisers to Reels products, we have been trying to help customers participate in Reels applications, providing them with more formats of advertising, setting more promotional goals, and providing more tools to help them achieve their goals. We have made good progress in these areas, and 40% of our customers currently use Reels to place ads on the company's platforms. With regard to the brand and direct response advertising you mentioned, we have seen growth in both businesses, but the focus of customers' attention is still direct response advertising. For example, German fashion retailer Outletcity developed ads specifically for Reels to test its impact on conversion rates, and found that the return on investment of Reels ads was 19 times that of ads on other platforms, with a 89% reduction in the cost of each purchase and a 9-fold increase in sales, so overall, the effect was very good.

Susan Li: the third question about you. We do not quantify the gap between Reels and other services in terms of cash efficiency, but from past data, it took several years for Stories time-limited dynamic services to achieve similar liquidity efficiency as Feed Ads information flow advertising services, and we believe that Reels may take longer to achieve similar liquidity efficiency. That said, we are still trying to reduce the adverse factors affecting Reels revenue to neutral levels by the end of the year or early next year, including improving Reels liquidity efficiency and user participation.

Bernstein analyst Mark Shmulik: first of all, a question for Susan or Havel, thanks to management for the details of revenue conversion, can you think that the company has weathered the impact of Apple's new rules on advertising identifiers (IDFA) that we have been worried about over the past year? Can you tell me something about the blessing of artificial intelligence?

Another question for Mark is how to understand the intensity of the company's long-term investment in the reality Lab (Reality Lab) business. How to balance its investment with the company's next-generation computing platform?

Susan Lee: on the first question, we've been making progress in mitigating the impact of Apple's new rules, which is the reality of our online advertising environment, and the company will continue to build new tools to offset these effects and changes, and the usage of these tools is increasing, including the transformed Application Interface Gateway (CAPI Gateway,Conversions API Gateway) we mentioned earlier. In terms of improving the conversion rate, we also continue to invest in click-to-send message advertising, clue advertising, store advertising and other advertising forms. In the long run, we will continue to invest in privacy enhancement technology to fundamentally enhance the company's ability to provide customers with more effective advertising and privacy security advertising.

Javier Olivan: our advertising strategy is divided into two parts. One is the continued investment in artificial intelligence, and we have also seen an increase in advertising relevance. As Mark said, our revenue conversion rate has increased by more than 20% compared with the previous year, coupled with a decline in acquisition costs per user. it means an increase in the return on investment. We also use artificial intelligence to improve the automatic experience of advertisers, optimize the effect evaluation, and help customers make better delivery decisions. The second is to increase the conversion rate and offset the wastage rate, and we are indeed adjusting the page layout to explore opportunities for data growth. For example, an Italian hotel and resort online marketing and sales automation agency uses the app to collect more links that meet its criteria at a lower cost than offline potential users. in the end, more than four times the number of qualified potential users and more than twice the number of room bookings were obtained at 2.7 times less cost per potential user.

Mark Zuckerberg: about the question you mentioned. There is a question of how to think about the long-term efficiency of real laboratories. I think we can look at this problem from two angles. First, the reality laboratory focuses on three main areas. The first is augmented reality technology that we have been engaged in for a long time, which is also our largest research field. There are no small research challenges here, and we have not launched related products yet. The second is virtual reality, our production capacity is climbing, Quest 2 headsets are doing very well, and there are a number of products related to Quest Pro. Third, the smallest investment in the current budget is the meta-universe software project, a small investment does not mean that it is not important, software and social platforms are also the most critical part, but the investment in software may be much less than that in hardware.

In each of the three areas mentioned above, we are still doing a lot of subdivision work. For the products that have been launched, we are also learning about user feedback, market development, competitors' trends, views on different things, and which experiments are still being carried out, based on which we continue to adjust the roadmap. Many aspects also need to do long-term and advance layout, such as planning for hardware products to be released two or three years later, continuously observing market signals, and making meaningful decisions. At present, we do not see the need to adjust the strategy of the reality laboratory, but from an implementation point of view, we have been adjusting specific practices to improve efficiency.

Another perspective is different strategies, including the flattening of the organization and other practices that are applicable to all departments of the company. whether it is the reality laboratory or the company's application family, we all want to focus on improving its efficiency. of course, in the past, people often thought about priorities and which big businesses could be cut, but I think in the long run, the key to making the company bigger and stronger lies in the execution and the expansion of business scope. More efficient means doing more with fewer resources. We have entered a new stage of development. with the rapid growth in the past 18 years, we may not have time to care about efficiency. in today's environment, there are still many areas with great potential for rapid growth, and the right strategy is to focus on revenue growth. but we also pay more attention to efficiency than ever before. I hope the company can become a place where more people have fun at work and work together to get things done. I will never hesitate to do so.

Doug Anmuth:Susan, an analyst at JPMorgan Chase, we have seen a reduction in the company's outlook for spending by $5 billion. Could you please tell us where the company has improved its efficiency? What is the impact of this outlook on employee recruitment this year? In addition, with regard to the problem that companies use their own data to achieve accurate advertising in Europe, how do management think the problem will be solved? What are the risks?

Susan Lee: with regard to the spending outlook for 2023, the reduction mainly involves three aspects. First, the growth of the number of employees is slowing down, and we will continue to carefully consider the allocation of recruitment resources. the company has suspended new recruitment, and throughout the year, we will slow down recruitment while assessing the needs of specific jobs. the company has not set a target for this year's recruitment. The second is the reduction of operating costs, including the extension of the service life of non-artificial intelligence-related servers. Third, our outlook reflects a cost of $1 billion for facility integration, compared with $2 billion mentioned in our previous outlook, as some of it has been included in the fourth-quarter financial report.

About the company's use of data to achieve accurate advertising in Europe. The ruling of the European Union data Protection Committee requires that when companies place advertisements in Europe, they must change the way they use data based on the contract model (that is, users sign a contract with the platform by accepting the terms of service). We do not agree with this decision, and we believe that the current use of the company's data is in line with the provisions of the EU General data Protection regulations (GDPR). Therefore, we have also appealed against the content of the ruling and the related fines. We believe that these rulings will not affect the company's ability to provide personalized advertising in EU countries, and customers will be able to continue to use Meta's platform to reach consumers and drive their business growth.

Bank of America Merrill Lynch analyst Justin Post: follow up on a question about privacy and data usage. Is the company still affected by these adverse factors in the first quarter? Has the impact of Apple's new rules disappeared? In addition, what do companies need to pay attention to about Android, the EU Digital Market Act, or anything else in the coming year?

Susan Lee: Apple's new rules still have a negative impact on the company's revenue growth, and of course the new rules have been introduced for a long time, so we have also made a lot of progress in mitigating its impact. including tools available to advertisers, advertising formats, increased conversion rates, and continued investment in artificial intelligence and privacy enhancement technologies.

On the second question, Android, we are not clear about the regulatory trend. Google's attitude is to work with the industry, which we think is very important, and if there are any new developments, we will share it with you in a timely manner. On the issue of EU regulation, we are also preparing for compliance with the Digital Services Act and completing it before it comes into force this year. Although the amount is large, these are manageable costs and have been included in the overall expenditure outlook in the past.

Youssef Squali, analyst at Truist Securities: two questions. Susan, one is about you talking about efficiency. The company has made a lot of cost adjustments. Can you talk about what kind of relationship the company wants to build in the long run between revenue growth, operating expenditure growth and capital expenditure growth? Remember the last time I saw these numbers change synchronously, or when the numbers were close to 2017. Does the company want to synchronize the level of growth? Are we still in investment mode? Will the low profit margin last? Mark, can you talk about the development of digital advertising? is the company still as cautious about this area as it has been in the past three to six months?

Susan Lee: the prospect of lower spending and lower capital expenditure will help the company achieve better financial performance, and we are focused on achieving Mark's goals. Last quarter we achieved compound profit growth and significant investment in future technology, which are also the main principles guiding our financial plan. On the second question, the holiday performance in the fourth quarter is roughly in line with our expectations. The online commerce market has improved slightly, but it is still negative compared with the same period last year. We are still in a very volatile macro environment. It is too early to predict the situation for the whole of this year.

Citibank analyst Ron Josey: Mark, I'd like to talk about the progress of the Reels artificial intelligence discovery engine. We have seen some new developments in content and category, could you please talk about the possibility of using this engine on Stories and Feed, or even Messenger communication platform?

Mark Zuckerberg: among AI discovery engine applications and multiple platforms, including Facebook,Instagram, and many types of content, Reels's use of this engine is a special case, but it is growing very rapidly. I would like to say that the application of this engine is very extensive, and this is the trend we have seen. We use a larger model, require more computing, and achieve the transition from CPU-based computing to GPU-based computing, with increasing user usage and participation.

At present, it is difficult to predict what other work needs to be done to adjust and improve, but from our experience, there is still great potential for future growth. Reels has played a good role in increasing the overall user engagement of the company. We expect that by the end of the year, short videos may account for 30% and 40% of the recommended content on Facebook and Instagram platforms, and this number will continue to grow.

Cowen analyst John Blackledge: will the real laboratory business maintain the accelerated growth of losses this year? Will there be a decline after that? In addition, Susan mentioned earlier that when she realized her business, she included store advertisements. Could you ask the management to talk about the growth of the business this year?

Susan Lee: on the first question, yes, the loss of the real laboratory business will still increase this year, but considering the huge long-term growth opportunities in this field, we will continue to invest on a large scale, which is long-term. It is also the need to improve the overall operating profit.

Javier Olivan: in the fourth quarter, we continued to test store advertising services in the US market, and the business grew by helping guide consumers directly to the stores where they are most likely to place orders to buy goods. At present, the scale of the business is still very small, but revenue and utilization showed triple-digit growth in the fourth quarter, and the growth rate is expected to return to a normal, relatively low level this year. The sales of store advertising are on the scale of hundreds of millions of dollars.

Evercore ISI analyst Mark Mahaney: how does the company view future growth trends with annual revenue of about $10 billion from click-to-send messages? Does the business attract new advertisers to use Meta's products? What industries do these advertisers come from? Can it become a new growth point of the company? Mark, last year you mentioned the issue of improving efficiency and the improvement of operating profits. why did the company pay so much attention to this issue since a year ago? Is it just because the business is mature, or is it just to successfully weather the possible economic crisis?

Susan Lee: click-to-send advertising is one of the company's fastest-growing advertising products, and we also believe it adds new demand to the platform, as we mentioned in our opening remarks. Half of the customers who click to send messages do not use the company's other advertising services.

With regard to the question of doing large-scale work that you mentioned, I think there are several dimensions to think about. From a demand perspective, by creating more entry points and simplifying the creation process, we can help more merchants use Meta's click-to-send message advertising service. We have been working hard to integrate with our partners to help small businesses expand their business scale. From the effect point of view, we continue to improve the return on investment of click-and-send message advertising, help customers improve the delivery effect, improve the user experience, simplify the process, and improve the revenue conversion rate.

Finally, we have been focused on increasing supply, expanding the business communications ecosystem, and making it easier for consumers to contact merchants, including searching merchants directly on WhatsApp. We are very excited about the progress of these efforts, and we have invested a lot of money, and the growth is healthy.

Mark Zuckerberg: we have also talked about efficiency from several angles. One of them is that the company has maintained a compound annual growth rate of 20% and 30% over the past 18 years. This situation has changed dramatically in 2022, showing negative growth for the first time in the company's history. We do not expect this situation to continue, but it may not be able to return to the previous level of growth. With such drastic changes, we have to take a step back and think about the growth of the company. Some businesses will continue to grow at a high speed, some areas we want to continue to invest to achieve future growth, while others have a large number of users. businesses that support a large number of businesses may operate differently in the future. When we start to do these things, the company will really get better, and I am more optimistic about the road map for the future development of the company. We can do more things that we like and make the company more efficient.

Not all the things we need to do can save money, such as investment in artificial intelligence can help us increase engineer productivity, not necessarily reduce costs. Although in the long run, we can use these efforts to recruit fewer employees and keep the company on a smaller scale for a longer period of time, I think, streamlining the management hierarchy is really just to make information flow better within the company and help us make decisions faster. This will not only help us build better products, but also help us to attract and retain top talent who want to work in a fast-growing environment.

Jeffery analyst Brent Thill: Susan, what factors did the company consider about the outlook for the first quarter? Are seasonal factors conducive to growth in the first quarter?

Susan Lee: we expect first-quarter revenue to be between $26 billion and $28.5 billion, down 7% from a year earlier to an increase of 2%, taking into account all kinds of uncertainties, including the macro situation. We are very satisfied with the core user engagement trends, the results achieved for advertisers, the work on commercial realisation, and the investment in artificial intelligence. The negative impact of the exchange rate in the first quarter is expected to be less than that in the fourth quarter of last year. We will also pay close attention to the changes in demand in the advertising market and the continued fluctuations in the macro-economy.

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