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Thomson Reuters StreetEvents Event Transcript
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E D I T E D V E R S I O N
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Q4 2012 Facebook Earnings Conference Call
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01/30/2013 02:00 PM GMT
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Corporate Participants
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* David Ebersman
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Facebook, Inc. - CFO
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* Deborah Crawford
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Facebook, Inc. - Director of IR
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* Mark Zuckerberg
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Facebook, Inc. - CEO
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* Sheryl Sandberg
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Facebook, Inc. - COO
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Conference Call Participiants
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* Carlos Kirjner
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Sanford C. Bernstein & Co. - Analyst
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* Justin Post
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BofA Merrill Lynch - Analyst
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* Youssef Squali
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Cantor Fitzgerald - Analyst
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* Ben Schachter
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Macquarie Research Equities - Analyst
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* Ken Sena
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Evercore Partners - Analyst
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* Brian Pitz
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Jefferies & Co. - Analyst
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* Ross Sandler
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Deutsche Bank - Analyst
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* Heather Bellini
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Goldman Sachs - Analyst
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* Jordan Rohan
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Stifel Nicolaus - Analyst
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* Mark Mahaney
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RBC Capital Markets - Analyst
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* Scott Devitt
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Morgan Stanley - Analyst
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* Brian Nowak
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Nomura Securities International, Inc. - Analyst
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* Douglas Anmuth
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JPMorgan - Analyst
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* Neil Doshi
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Citigroup - Analyst
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Presentation
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Operator [1]
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Good afternoon. My name is Steve and I will be your conference Operator today. At this time, I would like to welcome everyone to the Facebook fourth-quarter earnings conference 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.
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(Operator Instructions)
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Thank you very much. Ms. Deborah Crawford, Facebook's Director of Investor Relations, you may begin.
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Deborah Crawford, Facebook, Inc. - Director of IR [2]
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Thank you. Good afternoon and welcome to Facebook's fourth-quarter and full year earnings conference call. Joining me today to talk about our results are Mark Zuckerberg, CEO; Sheryl Sandberg, COO; and David Ebersman, CFO.
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Before we get started, I would like to take this opportunity to remind you that, during the course of this call, we will make forward-looking statements regarding the future events and the future financial performance of the Company. We caution you to consider the important risk factors that could cause actual results to differ materially from those in the forward-looking statements, in the press release and this conference call. These risk factors are described in our press release and are more fully detailed under the caption risk factors in our quarterly report on Form 10-K, filed with the SEC on October 24, 2012. In addition, please note that the date of this conference call is January 30, 2013 and any forward-looking statements that we make today are based on the assumptions as of this date. We undertake no obligation to update these statements as a result of new information or future events.
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During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. this call is being broadcast on the internet, and is available on the Investor Relations section of the Facebook website at investor.FB.com. A rebroadcast of the call will be available after 6.00 PM Pacific Time today. The earnings press release and an accompanying investor presentation are also available on our website. After management's remarks we will host a Q&A session.
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And now I'd like to turn the call over to Mark.
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Mark Zuckerberg, Facebook, Inc. - CEO [3]
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Thanks, everyone, for joining us. 2012 was a big year for us. We made this big transition where now there are more people using Facebook on mobile every day than on desktops. This was challenging for us to navigate, since we started off the year with Apps that weren't as high quality as we wanted, and no ads in our Apps at all, but now we're coming out of the year with a strong foundation and a lot of momentum. Just last week, comScore put out a report, saying Facebook is now 23% of all time spent on Apps in the US, and one of the next biggest Apps is Instagram at 3%, so put together, we're now more than a quarter of the time spent in Apps. Today, there is no argument, Facebook is a mobile company. As I've said before, there are three main parts of our strategy, build the best mobile product, build the platform and services that leverage the social graph, and build a really strong monetization engine.
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I'm going to use our time today the same way I will on most of these calls, to give my assessment of how I think we're doing in each of these big areas. Let's start with mobile. I think more people are starting to understand that mobile is a great opportunity for us. Mobile is the perfect device for Facebook for three reasons -- it allows us to reach more people; we have more engagement from the people who we reach; and I think we'll also be able to make more money for each minute people spend with us on their mobile devices. But mobile isn't just driving greater engagement on Facebook. Mobile enables many new experiences, and is growing overall share and across all Apps. This creates a very dynamic ecosystem, and one where there's a lot of room for us to create even more sharing through Facebook.
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Often, doing a good job is just about focusing on basic issues like performance and stability. In December, we released a completely rewritten version of Facebook for Android. This was the Android version of the iOS rewrite we did earlier last year. Neither of these rewrites added big new features, but simply by improving speed and stability, we've made a much better user experience, enabling people to share even more. It's a good example of how early we are in the market that these changes made such a difference.
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Photos and Instagram are doing really well too. We had our best day ever on New Year's Day with more than 600 million photos uploaded to Facebook. Instagram has continued growing very quickly, and hopefully we'll have some new milestones to share with you all soon. A lot of what we had to do last year was simply to improve our mobile development process. Now we're there.
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We move fast and ship new versions of our Apps on a regular monthly cycle. You have a good version of all of the Facebook features you know and want on your phone. So now, the next thing we're going to do is get really good at building new mobile first experiences. That's going to be a big theme for us this year. If we do this well, we should be able to bring even more relevant content and connections to more people, and continue to deepen their engagement.
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Next I want to talk about platform and building new services, using the social graph. Normally I'll use this section to talk about what's going on in the ecosystem outside of our Company, but this quarter, I think we built the most interesting new service using the social graph, Graph Search. This is an early beta product, but I'm really excited about it, because it's an entirely new kind of search. It's not web search, it's structured search over the whole graph of content that people have mapped out on Facebook. It's good for lots of things you wouldn't use a traditional search engine for; seeing where your friends have eaten or traveled to, browsing photos and content your friends have posted, finding new people to meet or recruit for a job, and many other things.
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Some of these are big areas, where we think there's room for much better product. Down the line, if we do this well, this could potentially turn into a meaningful business for us. For now, we're going to continue working to refine the product and roll it out to everyone. Still, I think the way the Graph Search is different from normal web search is a good example of how there's going to be this market for a whole new crop of social services, in existing markets today that weren't designed with the principles of real identity and social connections, et cetera.
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One platform development that I am really excited by is seeing how well our App install advertising product is doing. Developers are finding that Facebook is a great service for connecting with the right people who want to use their Apps, and getting a lot of installs. On mobile, our platform already enables developers to help you bring your friends to a developers App. We also want to be one of the primary ways that developers get new people to their Apps in the first place, and with App install ads, we're off to a good, if early, start in achieving that.
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Now I want to talk a bit about monetization. Last year was a big year for us here. We started off the year with no ads at all in mobile, and we ended up with approximately 23% of our ads revenue coming from mobile in the fourth quarter. That's a pretty amazing change. One of the big drivers of this, has been that as we rolled out ads to News Feed, we found that it barely affected the level of engagement on Facebook. We thought that we could make this work over time without a big impact if we spent a long time tuning the ads, but the numbers turned out even better than we thought without much tuning, so this has enabled us to show people a few ads in News Feed each day.
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So that means that now we have this News Feed ad business that we have barely tuned, and there's a big opportunity in front of us to make every ad that we're showing a lot better. The biggest ways that we're going to this are by improving targeting and relevance so we can show everyone content that they care more about, and by designing better ad products that aren't just about links and text and images. For targeting, I'm most excited about the work we're doing on Custom Audiences, our tool that lets advertisers upload their customer list and target against that, and information that is already on Facebook at the same time, perfectly. Say, my customers are in some age range and live in some states, you may not know which states your customers live in, but if they shared it on Facebook it's possible to create these kinds of experiences.
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For new ad experiences, I'm looking forward to doing more with different kinds of media. As our News Feed design evolves to show richer kinds of stories, that opens up new opportunities to offer different kinds of ads as well. Aside from ads, I do want to temper near-term expectations a little bit on revenue items coming from other areas, like Gifts or Graph Search. I think these can be big opportunities for us long term, but for the foreseeable future, the most important thing for us is to continue building out great consumer experiences around these products. We're going to invest in these, but for the next year at least, our work around ads will have by far the biggest impact on our business.
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Now, before I hand it off to Sheryl, there's one more thing I want to discuss. We're at an interesting point in our evolution, where there are lots of areas we need to invest in. We need to build the best mobile experiences, we need to build our platforms, and we need to build a really strong monetization engine. We can easily invest our entire engineering team just in building out the nuts and bolts of these areas today, but we also feel like there's an imperative to start planting seeds for tomorrow's businesses as well.
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Products like Graph Search, that are in beta today, but will hopefully grow up to be pillars of the Facebook service and businesses, are things that we want to invest in aggressively, and things we feel like it's the right thing for our business over the long term to invest in aggressively. Based on this, we made the decision to continue to grow our headcount quickly in 2013, particularly in Product Development. This will likely cause our expenses to grow at a faster rate than we expect to grow our revenue this year, which means that aren't operating to maximize our profit this year, but we're doing what we think will build the best service and business over the long term.
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Finally, I just want to take a minute to thank everyone who works at Facebook. Last year really was an amazing year for us, on many levels. We connected one billion people, we navigated the transition to becoming a mobile company, and we laid the foundation for some great new products I'm excited to show the world this year. And this is all because we have this unique culture, filled with some of the most talented people in the world, who are still mission-driven, who want to make the world a better place, and who work so hard to make the world that place. Thank you, all. Thanks to everyone who's on this call for taking the time to be with us today. I look forward to be able to report on all the progress we will make next quarter.
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And now I'll hand the podium over to Sheryl.
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Sheryl Sandberg, Facebook, Inc. - COO [4]
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Thanks, Mark. So our ad business continued its positive trajectory in the fourth quarter. Total fourth-quarter revenue was $1.585 billion, with $1.329 billion coming from ads. This represents a 41% increase for advertising revenue. Ad revenue from News Feed increased across both desktop and mobile, and in Q4, approximately 23% of our ad revenue came from mobile, up from approximately 14% in Q3.
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Our focus in the fourth quarter was to continue improving and scaling the products we launched in 2012. We know that our advertising products are delivering results for marketers, and one of the best indicators of this came over the holiday season, where more businesses, from big brands to small retailers, used us as a core part of their holiday outreach. Perhaps the biggest highlight in the fourth quarter was the increasing importance of mobile, not just to Facebook but also to our clients. Marketers are realizing more and more that Facebook is one of the best places to reach their customers on mobile, because of our unique ability to reach specific target audiences at scale. Another highlight is the traction our offers and Promoted Post products, which are really easy to use, have given us at local businesses.
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As I described last quarter, our strategies focus on three priorities. One, building products and tools that create value for every type of marketer. Two, proving that value to marketers. And three, taking advantage of the unique opportunity we have in mobile. Starting with the first. We build products that create value for every type of marketer. We continue our focus on four key customer segments; brand marketers, direct marketers, local businesses, and developers. For brand marketers, we combine access to the largest community of real people in the world, with some of the industry's best targeting capabilities. We now work with every one of the Ad Age Global 100 Advertisers and overall revenue from these clients is growing through consistently with our ad revenue in 2012, which means it significantly out paced the estimates for our overall ad spend from the industry.
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In the fourth quarter, we launched a new way for advertisers to buy guaranteed ad impressions, with the goal of helping them reach massive audiences on mobile. Wal-Mart used this target block over the important Thanksgiving weekend to deliver 50 million mobile ads to their existing and potential customers. We think this is a really important step in the evolution of mobile advertising, as these numbers rival the appeal of broader web and TV campaigns. Increasingly, companies use Facebook as the exclusive channel to launch new products. To share one example, Michael Kors used Facebook to launch a line of new sneakers. Many of the sneakers sold out online and in stores, and they achieved a 16 point increase in awareness of the sneaker among the 36 million people that the campaign reached on Facebook. That's the equivalent of 5.8 million new people in the brand's target audience, who are now aware of the new line of shoes.
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For direct marketers, the products we launched in the third quarter continued to gain traction in Q4 as well. Since we launched our office products at the end of September, we have seen stronger advertiser adoption and user engagement, with nearly 42 million unique users claiming an offer. Cost per redemption compare favorably to those from e-mail, newspaper, paid search and display media, based on data from the Direct marketing Association. Discounts and promotions are often an important tactic for direct marketers and we think our Offers product is well-placed to compete in these media budgets.
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As Mark said, one of the products we're most excited about is Custom Audiences, which lets marketers show their ads to exactly the right people, by coupling our rich targeting capabilities with their own customer data, or data from a third party. A large retailer, for example, can send one set of ads to customers who typically buy sporting goods, and a different set of ads to those who would purchase TV products. This results in some of the best targeting available on or off line today.
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To share one example, [Jax Rags], an online shopping site for men, used Custom Audiences to target specific segments of its customer database, and target them with ads for products that the Company knew were most relevant to them, such as sneakers. As a result, the Company achieved a 30% lower cost per acquisition than other platforms, and saw a 6-times return on advertising spend. It's important to understand that Custom Audiences is not a separate standalone ad product, but rather a targeting capability that can be used with many of our ad products to drive greater accuracy and efficiency. For example, when Custom Audiences is used with Offers, marketers can customize discounts for exactly the right kind of customer.
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The Facebook exchange or FBX allows businesses to bid on specific ad impressions in realtime, and it continues to gain momentum and drive solid results for advertisers. Despite only becoming available to all marketers in September, by December, FBX served nearly one billion impressions daily, and supported over 1,300 advertisers each day. Large and small advertisers alike are seeing higher click-through rates, lower costs for conversion and strong incremental reaches in FBX.
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Revenue from local businesses was particularly strong in the fourth quarter. We're pleased that the number of local business pages that advertised and Facebook nearly doubled since the beginning of 2012. This is due in no small part to our Promoted Post product, which makes it easier for businesses to create and purchase ads directly from their Facebook page. Almost 500,000 pages have used Promoted Posts. About 30% of these are new advertisers to Facebook, and more than 70% have become repeat customers.
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Finally, for developers, we continue to gain traction with our new mobile App install ads. Since their launch in October, they are already being used by 20% of the Top 100 grossing iOS Apps to accelerate growth. According to research conducted by comScore in December, Facebook is the top driver of awareness of new mobile App downloads, and among people who learn about new Apps on Facebook, 48% click directly from the Facebook App to download new mobile Apps.
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Cie Games used this product to drive installs of its new game, Car Town 2. As a result, it broke into the Top 10 games list on iOS in many countries, while achieving a 40% lower cost per installation compared to their other advertising. In addition to games, we believe this will be a very useful product to help companies and industries like retail, travel and financial services shift their businesses to mobile.
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Next, I want to focus on our commitment to proving value -- proving Facebook value to marketers. We designed all of our products to deliver a strong return on investment. Given that we are still a relatively new marketing platform, proving that our ads are effective remains an important and ongoing priority for us. We work with research companies like Nielsen, Aggregate Knowledge and Datalogix, to demonstrate how our ads drive sales and help inform our product development. For example, research from Aggregate Knowledge shows that Facebook is an increasingly powerful tool to help marketers reach more people and drive sales.
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In a study of fourth-quarter marketing campaigns, they found that media plans that included Facebook reached people who would not have seen the campaigns otherwise. In fact, 45% of those reached were reached exclusively through Facebook. The study also found that Facebook had a 68% lower cost per acquisition, and drove 24% more new sales than other online channels. We also worked with clients directly to integrate with their own measurement systems, so they can better understand the ROI Facebook delivers. For example, we built a deep relationship with PepsiCo, where we worked with its Lays brand to drive significant sales ahead of plan, and a 5X return on ad spend, for their Do Us a Flavor campaign on Facebook. In the fourth quarter, we also made conversion tracking available in beta. Conversion tracking allows marketers of all sizes to more easily measure the impact of their Facebook advertising, whether the Facebook ad is the first ad or the last ad the person sees before taking an action.
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Finally, I want to discuss how we are continuing to take advantage of the significant opportunity we have in mobile. As mentioned before, approximately 23% of our advertising revenue now comes from mobile. In addition, 65% of our advertisers are now using ads in News Feed, which run on both desktop and mobile, up from 50% at the end of the third quarter. Marketers are recognizing that our News Feed is the most efficient and effective place to reach their customers, due in large part to the fact that ads in News Feed see a higher click-through rate and ultimately a lower cost for conversion than ads on the right hand side of our site. By working with Datalogix, we have shown that ads in News Feed also drives more than 8 times the incremental off line sales than ads on the right hand side. Clients also recognize that, because our users share their real identities on Facebook, and because they are logged in when they use Facebook on mobile, we have a unique ability to serve advertising that people find relevant. This is an important competitive advantage for us, relative to other mobile platforms, and one we think we are very unique in.
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Overall, we continue to make real progress advancing our advertising strategy. Our revenue and key metrics are growing nicely, and as we look ahead to 2013, we're very confident in the direction of our ad business. Over one billion people are on Facebook, and we are enabling businesses to engage with them directly wherever they are. Our massive scale, accurate targeting, strength in mobile, and new advertising products are driving measurable results for all types of businesses, and transforming the way people and businesses connect. We look forward to making even more progress in these areas in the year ahead.
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Now, I'll hand it over to David.
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David Ebersman, Facebook, Inc. - CFO [5]
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Thanks, Sheryl, and good afternoon, everyone. We're pleased with the progress we have made in Q4 against our key financial priorities, growing revenue, investing aggressively in areas critical to our future performance, and positioning the Company to maximize long-term financial returns. We ended the year with 1.06 billion people using Facebook, up 25% from a year ago. In December, 618 million people accessed Facebook each day on average, up 28% from last year, and we grew monthly and daily users across all geographic regions. Mobile continues to drive our growth. 680 million people accessed Facebook from Mobile Devices in December, up 57% versus last year, and the numbers I just mentioned do not include Instagram, which continues to grow at an impressive rate. We ended 2012 with strong engagement across our products, and this engagement remains a foundation for everything we're trying to build.
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Turning to revenue, in Q4, revenue was up 40% year-over-year, or 42% when adjusted for constant exchange rates. Q4 year-over-year growth would have been 34%, if adjusted to exclude the additional month of Payments transactions we recognized as planned. Ad revenue in Q4 was up 41% or 43%, when adjusted for constant exchange rates. Year-over-year advertising growth in Q4 was the strongest of any quarter in 2012, and we view this as a validation of our recent investments in mobile News Feed ads, growing our advertiser base, and launching new ad products.
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In the fourth quarter, ad impressions were up 46%, and average price per ad was down 4% compared to last year. These trends were driven by significantly faster impression growth in developing markets such as Asia and Latin America, which have relatively lower pricing and thereby brought down our average price overall. The faster impression growth in developing markets in Q4 was significantly affected by product changes, primarily our decision to lower the market reserve price, or the floor price we accept in our auction, which increased the number of ads shown in these markets. We continue to see positive trends in price per ad in key developed markets, including an 18% increase in average price in the US and Canada in Q4.
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Payments and other revenue was $256 million in Q4. As planned, in Q4, we recognized revenue from four months of payments transactions, for accounting reasons detailed in our last 10-Q. Adjusting for the extra month, Payments' revenues from games was essentially flat with the fourth quarter of 2011. This past quarter, Payments and other revenue also included around $5 million from sources outside of games, primarily user-Promoted Posts, and to a lesser extent, from our new Gifts product.
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Shifting now to expenses. In Q4, our total GAAP expenses were $1.06 billion. Excluding the impact of stock compensation, total expenses increased 67% to $849 million, driven primarily by headcount and infrastructure. We ended 2012 with just over 4,600 employees, a 44% increase from last year, driven by hiring in our technical groups. We were recently ranked the number one place to work by Glass Door, which we view as a testament to how strong our culture remains, through this period of significant headcount growth.
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In Q4, our GAAP operating income was $523 million. Excluding stock comp, our non-GAAP operating income was $736 million, representing a 46% operating margin. Our GAAP tax rate for Q4 was 87%, and our non-GAAP tax rate was 41%. For 2013, we expect our non-GAAP tax rate to be a few percentage points higher than the rate in Q4. Additionally, we ended the year with approximately $5.8 billion in NOL tax loss carryforwards, created by stock compensation. GAAP net income and EPS for the fourth quarter was $64 million or $0.03 per share, non-GAAP net income and EPS was $426 million or $0.17 per share, compared to $0.15 in Q4 last year. We ended Q4 with $9.6 billion in cash and investments, giving us great flexibility and risk protection.
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Looking forward now, we believe we've built a solid foundation for continued growth in 2013 and beyond. In our ads business, we believe we have good momentum and plan to continue investing to grow advertiser demand and improve the quality, engagement and value of our ads, particularly in News Feed. In terms of 2013 expectations for Payments, our games ecosystem continues to show healthy signs of diversification, with new kinds of games growing engagement and monetization in Q4. However, we continue to face an offsetting headwind from declining desktop usage in developed markets, since our games payments revenue is essentially all from desktop computers. In terms of non-games payments revenue, while we remain excited about the long-term potential of commerce on Facebook, current revenue from user-Promoted Posts and Gifts is very small, and we expect 2013 contributions from these initiatives to remain very small, given current run rates.
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In terms of infrastructure, we expect CapEx spend in 2013 will be in the neighborhood of $1.8 billion, as we continue to invest in servers, new data centers, and network infrastructure to enable us to bring Facebook speedily and reliably to everyone around the world. We're pleased that planned 2013 CapEx spend is up relatively modestly compared to 2012, which came in under forecast at a shade under $1.6 billion, as our investments in software and hardware efficiency are paying off nicely. As Mark noted, 2013 will be a year of significant investment in areas we believe are critical to drive long-term engagement and monetization, and we plan to continue to hire aggressively to accelerate product development, and deliver new products for users and advertisers.
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As a result of our hiring and investment plans, we expect that our total expenses, excluding stock comp, will likely grow by somewhere around 50% in 2013, though actual growth will depend on hiring and project decisions we make through the year. We believe this level of near-term investment is the right strategic decision, to enable long-term value creation. We're excited about the potential returns from investing in our product. We continue to feel there's operating leverage inherent in our business, and we're committed to building a highly-profitable cash-generating business over the long term.
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In summary, we believe we're entering 2013 in a strong position. We're working in very large markets that offer us great opportunities for growth. We have uniquely-valuable assets in terms of the size, identity, and engagement of the people who use Facebook, and we have a fantastic group of employees who have big aspirations to build on our financial performance from 2012.
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Now, let's open the call for questions.
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Questions and Answers
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Operator [1]
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(Operator Instructions)
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Your first question comes from the line of Douglas Anmuth from JPMorgan. Your line is open.
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Douglas Anmuth, JPMorgan - Analyst [2]
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Just wanted to ask two things. First, can you help us understand the mobile trajectory through Q4, just given the commentary you gave about exiting Q3 at a $270 million run rate, and doing more than $300 million in the fourth quarter? Did you open up more additional inventory in Q4 from the late Q3 levels, and did you see any notable change in pricing? And then can you also just comment on how you feel about the volume of ad load in the News Feed right now on both desktop and mobile, and perhaps in terms of baseball innings, where you think you are in terms of penetration? Thanks.
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David Ebersman, Facebook, Inc. - CFO [3]
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I'll take the first half. We think the most important thing is we think mobile can be a huge opportunity for us and we're really pleased with the progress we made in the fourth quarter. If you compare the averages Q3 versus Q4, well if you compare the overall revenue, our mobile revenue doubled from Q3 to Q4, and we continue to make progress also, in terms of the quality and the relevance of the mobile ads that we show. I think the most important thing here is we're still really early. A couple quarters ago, mobile revenues were 0% of our ads revenue, and now we're up to 23% and believe there's a lot more we can do, and a lot of growth ahead of us.
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Mark Zuckerberg, Facebook, Inc. - CEO [4]
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I'll speak to the quality piece. So one of the things that we measure for News Feed quality is the amount of feedback that we get, so likes and comments and things like that, and just to give a sense of the magnitude of these things, the ranking improvements and things that we did over the course of last year improved the amount of feedback in News Feed, on the order of about 50%. I don't know if it was quite exactly 50%, but it was on that order. And we measure very closely, when we take into account advertising and spend, in order to rank ads into News Feed, we're inherently not showing what would have organically shown up in that slot, so we want to make sure we're not decreasing quality by a big amount. So what we found was that when we did the tests to take out the ads, we were -- inserting the ads had about a 2% reduction in the amount of likes and comments. So over the period of last year, we had on the order of a 50% increase and a very marginal offset of 2% for putting ads in, which just makes us feel really confident that we're continuing to very strongly net improve the experience of Feed. And that's one of the things that I mentioned in my script before. We weren't that, we're confident we could get this to a good place over time in terms of being a good experience, but the amount of the improvements we've done have just dwarfed the quantitative feedback hit that anything that we've seen on the ads is very promising to us, in terms of what we're going to be able to do, going forward.
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Operator [5]
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Your next question comes from the line of Ben Schachter with Macquarie. Your line is now open.
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Ben Schachter , Macquarie Research Equities - Analyst [6]
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Mark, in the comments you said you're looking at different types of media for ads. I was wondering at a high level, if you could talk about how that would potentially change the overall Facebook experience, and if you could give real examples for how these different types of ad units would come into play. And also, just separately, engagement. I was wondering if you could give us any update on how you're viewing engagement, or any change to how you measure it, and any views on how that's going through the quarter? Thanks.
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Mark Zuckerberg, Facebook, Inc. - CEO [7]
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Sure. So one of the product design principles that we've always had is, we want the organic content to be of the same basic types of formats as paid content, right? So historically, advertisers want really rich things like big pictures or videos, and we haven't provided those things historically, but one of the things we've done in the last year, is you've seen the organic News Feed product that consumers use, moving towards bigger pictures, richer media, and I think you'll continue to see it go in that direction. And I think a lot of the success of products like Instagram is because of that, it's very immersive, even on a small screen, it's a wonderful photo product. And when you have those form factors for the content, that gives you the ability to offer those form factors for advertising as well, so I think you see the trend there in terms of where it's going, and that's naturally going to make it so we can deliver much more engaging advertising experiences than we were traditionally able to do when we didn't have those types of content in the system. David can speak to some of the stats you were asking about.
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David Ebersman, Facebook, Inc. - CFO [8]
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In terms of engagement, overall, everything continues to go very well. We passed a billion users, and in the fourth quarter, 59% of them used Facebook on an average day in December, which is up a couple percent from where we started the year, so just pretty remarkable how, as we continue to grow the user base, that number continues to grow and really speaks to the value of the service and the importance of mobile, which is really driving that. There's another metric we track which measures the number of people who have come to the site, in at least six of the last seven days, so it shows the audience for whom Facebook is a daily experience, and that, we ended the year with record highs on that metric as well. So everything continues to go well, and our job is to make Facebook a better, more useful product so we can continue to drive new kinds of engagement in the future.
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Operator [9]
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Your next question comes from the line of Heather Bellini with Goldman Sachs. Your line is now open.
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Heather Bellini, Goldman Sachs - Analyst [10]
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I had a question for Sheryl and then a question for Mark. Sheryl, I was wondering if you could share with us what you've seen from FBX. I know it's still early, but what milestones you're looking to hit with this business in 2013? And then, Mark, just wondering where you think we are in terms of the social ad revolution, and when you look out over the next 12 months, what do you think could surprise you the most in terms of revenue opportunities that are ahead of you when you look out for 2013? Thanks.
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Sheryl Sandberg, Facebook, Inc. - COO [11]
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So on FBX, as everyone knows, it's realtime bidding for specific instructions, we're very encouraged by what we see, both in terms of marketing demand and ad performance. And the numbers, as I said in my opening remarks, are getting higher. We see good data from our clients and customers that it's driving more conversions, we have data from one of our clients, Triggit, that FBX drives 36% more conversions than we target anywhere else, Shutterfly had a 4X higher return on ad spend than other platforms, and we have a bunch of other examples like that. I would say the importance of FBX is not just the product itself, but really what it represents, and the other opportunities around making the ads more targeted. So FBX is one way of making the ads better targeted and more useful to users, which makes a higher return from advertisers. Custom Audiences is another, but I think what you're seeing from us is a really big push to make our ads higher quality, better for users, higher return for advertisers, and FBX is just one of many ways we're working on doing that.
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Mark Zuckerberg, Facebook, Inc. - CEO [12]
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Yes, and I'll just add to that a little bit but you mostly covered it. I think we're really early, but what we really expected was to not be able to necessarily show everyone an ad every day because we weren't sure that we had the quality up front, and that was some of the engagement metrics I was talking about before. So we've been positively surprised that the quality has been naturally high, and there's been basically no engagement hit at all that's very meaningful. So what that means is that now, previously we thought we were going to have to spend 6 to 12 months just tuning in order to be able to get it to a quality level to incrementally rollout ads, whereas now we've had them rolled out. Now we can go straight into doing the same types of things to improve targeting, and improve the quality of the ad format, which obviously, when they're fully deployed has much more leverage to those changes than if we had to wait until we hit different quality thresholds to roll it out more, so I think we're pretty early. It's not that it's going in a completely different direction, it's mostly the two things that we talked about so far, good targeting and good ad formats, and there's just a lot of room to grow in both.
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Operator [13]
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Your next question comes from the line of Carlos Kirjner from Sanford Bernstein. Your line is now open.
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Carlos Kirjner , Sanford C. Bernstein & Co. - Analyst [14]
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Thank you. I have two questions. Can you help us understand why ad ARPU in the US grew 27%, while it grew only 7% in Europe? Is Facebook that sensitive to macro? And on the platform, can you help me understand what metric you track to evaluate the progress and adoption of the Facebook platform outside Facebook.com? Is that the number of pages or objects tagged with Open Graph, and are you in a race with Google's Knowledge Graph to be the basis of the semantic web, or can both co-exist? Thank you.
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David Ebersman, Facebook, Inc. - CFO [15]
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Carlos, I'll take the first one. So I think that when you compare the disclosure we make about the US and Canada to Europe, one of the notable differences is in Europe, as we continue to penetrate that market, we're getting into some of the lower monetizing countries in Europe, so there's sort of an inter-Europe lower price dynamic going on where the ads, the places that are growing more rapidly are starting at a lower price point and bringing down the average, either on a CPM basis or an ARPU basis, so I do think there are macro things that matter in Europe as well, but that's the bigger point.
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Mark Zuckerberg, Facebook, Inc. - CEO [16]
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Yes, and in terms of the point on structured data there's Open Graph in order to help developers and people map out all of the different connections between things outside of Facebook, but one of the things that we talked about when we rolled out Graph Search is there are more than a trillion connections between people and things in Facebook today, and that's the basis for Graph Search. I think a lot of the goal of having the utility like Graph Search is also to give people a reason to map out more of these structured connections themselves. You mentioned the Google comparison, I think we're just coming from a completely different place. Our whole product is people and structured connections to other people, and content, and things that they like, whereas traditional web search is the exact opposite, it's completely unstructured. Google and others may be trying to put in some of the structured foundation, but we just have years of having built that up and I think that we're just in a completely different place on that.
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Operator [17]
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Your next question comes from the line of Youssef Squali from Cantor Fitzgerald. Your line is now open.
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Youssef Squali, Cantor Fitzgerald - Analyst [18]
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Two questions, please. First, starting with David. First, thank you for helping quantify the increase in operating expenses next year. I was wondering if you can help us with the trajectory of that spend throughout the year, how long do you think this investment cycle is going to be? Is it mostly 2013, or is this a multi-year cycle? Then maybe, Mark, maybe can you talk just about the video opportunity for Facebook, video in the News Feed that is. Where are you in that process, will that be something that organically you can do or would that require you to maybe acquire? Thanks.
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David Ebersman, Facebook, Inc. - CFO [19]
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So Youssef, we think we've got some really big and important opportunities right in front of us now, and that's driving our decision-making around the level of investment we're making, which is important to us in 2013. That will moderate over time but I wouldn't want to make a firm commitment to exactly what it's going to look like in the future, because particularly the R&D part of it is going to depend on what the opportunities are, and how excited we are about the returns we can get from them.
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Mark Zuckerberg, Facebook, Inc. - CEO [20]
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Video ads?
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Deborah Crawford, Facebook, Inc. - Director of IR [21]
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Not just ads though.
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Mark Zuckerberg, Facebook, Inc. - CEO [22]
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Yes, I mean I think I touched on some of this earlier in terms of making it that News Feed is richer just enables more opportunity for this, and there are already the ability for pages to post videos in different content into the systems. We actually have a very large volume of this. Another thing we have the ability to support is people posting links on other services, so for video advertising, it's not necessarily critical that we host the video. We want to be the distribution platform for a lot of the stuff, but I think there's definitely an opportunity and over time, we'll have more to talk about.
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Operator [23]
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Your next question comes from the line of Scott Devitt from Morgan Stanley. Your line is now open.
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Scott Devitt, Morgan Stanley - Analyst [24]
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I had a different question on that regional ARPU slide, which is I guess wondering the pace or maybe where we are now from a Sponsored Story rollout, and relative ad load in the US relative to Europe and Asia? And then secondly, it looks like the absolute additions of mobile users and mobile-only users was quite strong in the quarter. It was up 25% in terms of mobile ads, and 30% in terms of mobile-only ads versus the third quarter, and Mark mentioned a few areas. I was just wondering if there's any one or two things that stand out in terms of driving that acceleration? Thanks.
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David Ebersman, Facebook, Inc. - CFO [25]
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Okay, in terms of the ARPU by geography, I don't know that I have a lot more color to offer. In terms of the mobile News Feed rollout, as you would expect with a new advertising product, really in the end of the second quarter and the third quarter it took off first in the US, and Europe followed and I think the growth was much more notable for that product area, in Asia and the rest of world in the fourth quarter, as compared to the third, and that's just sort of the natural progression of how roll-outs tend to go for us. In terms of your second question about the increase in mobile users and mobile-only users, which we agree is really important and impressive, I don't know that we would point to any one thing that drove that, just as much as continued penetration of smartphones and around the world in many markets, and our ability to make our products better, so that people are more inclined to use them.
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Operator [26]
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Your next question comes from the line of Mark Mahaney from RBC. Your line is now open.
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Mark Mahaney, RBC Capital Markets - Analyst [27]
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Great, thanks. I know it's very early stages, the rollout of the Graph Search, but any early signs of the impact that has had on engagement? And then, Mark, you mentioned just early on about the new products, maybe some mobile-specific products and features, any hint as to what those could be? Thanks a lot.
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Mark Zuckerberg, Facebook, Inc. - CEO [28]
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Unfortunately, I don't think there's that much that I can share with you on either of those. On Graph Search, it's still early. This is one of the products that I'm the most excited about that we've built. It is a completely new pillar of our ecosystem, and I think it's going to be an important utility that people use. Right now, the whole strategy around this is, it's a beta product, and we are primarily rolling it out in order to get more data, so that we can incorporate the data of how people use it to make ranking better before we do a full rollout. So right now it's rolled out to the order of tens or hundreds of thousands of people, not extremely widely, and I mean so we have data, but I don't think anything that is really relevant to share beyond that.
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In terms of the new experiences, I think the big theme that we're just going to push on mobile is, people keep on asking if we're going to build a phone, and we aren't going to build a phone, because it's not the right strategy for us to build one integrated system, where so, let's say we sold 10 million units, that would be 1% of users. Who cares for us? But the big thing for us is we have a billion people using our products and we need to make Facebook really good across all of the devices that they use, and we're going to keep on pushing to get more integrated with the system. When Facebook is a product that people are spending almost 20% of their time or more on phones using, it really should be, and I think people want it to be very integrated into all of the different devices that they have, and that's what we're going to focus on. So rather than just building an App, that's a version of the functionality that you have today, making it so that we can go deeper and deeper, I think will be a big focus for us.
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Operator [29]
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Your next question comes from the line of Ross Sandler from Deutsche Bank. Your line is now open.
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Ross Sandler, Deutsche Bank - Analyst [30]
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Great, just one question for David, on the right hand rail revenue. So based on our math, the overall News Feed business may have been around $500 million-ish in the fourth quarter, which would imply about a 10% decline for right hand rail revenue. Does that make sense directionally? And if so, can you just talk about how you think right hand rail is likely to trend in 2013 and can the new ad tools like Custom Audiences help offset the desktop traffic decline that you're seeing in markets like US and Europe? Thanks.
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David Ebersman, Facebook, Inc. - CFO [31]
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Yes, thanks for your question, Ross. For us, the most important metric is that the overall ad revenue increased 41%. I think that the way we think about things, it's hard to really separate out the mobile and desktop or Feed in right hand column as separate and distinct businesses, because for most of our ads, marketers will tell us what ad they want to show and to what audience they want us to show the ad, and we choose where it goes. It's not true for 100% of the ads, but it's certainly true in the majority case. So our job is to find the place to put the ads that will create the most value for the user and the marketer. So the overall ad revenue number really provides a sort of just a better sense of how much advertising demand there is in the system that we're able to service, and over time, we'll continue to experiment with how to optimize that. In general, you can see from the user numbers that the growth in usage is coming from mobile, particularly in developed markets that desktop usage continues to be flat or declining, so that's obviously the macro trend that will affect what the future of the right hand column revenues are.
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Operator [32]
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Your next question comes from the line of Neil Doshi with Citi.
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Neil Doshi, Citigroup - Analyst [33]
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Mark, could you maybe tell us how far along you are in terms of developing tools, and providing more data metrics to large agencies and advertisers? And then, David, in terms of the gaming declines that we're seeing on Facebook desktop, is there an opportunity for Facebook to help monetize or to monetize games that are played on Facebook on the mobile site? Thank you.
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Mark Zuckerberg, Facebook, Inc. - CEO [34]
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Yes. These are important. Sheryl has more details on this, so I think she should take the first one.
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Sheryl Sandberg, Facebook, Inc. - COO [35]
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Yes, measurement is really important for us and it's one of the challenges we face. I remember, through the years I've worked on this, when search happened, people weren't able to measure it and then they figured out how to measure search, and more a new thing, and people need to think about measurement differently. One of the most important things we need to do in the market is help educate people that the click is not really the most important metric for us. In fact, now that we've been able to work with companies to look at in-store sales data, we find that of the people who saw a Facebook ad and then purchased a product in the store, 99% of them never clicked on an ad, so reeducating the market, what the metrics are that are right for us.
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I would say in terms of our measurement capabilities, we're really early. We weren't able to tie into sales data at all until pretty late in 2012. In order to do those studies we have to work very deeply with retail providers and each client. A lot of our big clients have their own departments that do this measurement and we work with them individually, so we're pretty early. We're happy with the progress we've made. We launched conversion measurements in just mid-December, and that's broadly available on the system, but I think we have a lot of opportunity to do a lot more measurement, a lot more rapidly. We're particularly excited about our ability to do this on mobile. With customers who are using their data in a privacy protected way, we can now measure all the way from seeing a Facebook ad in a mobile device through to a purchase in a store, and that's a pretty exciting capability, we think is pretty unique in the market.
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David Ebersman, Facebook, Inc. - CFO [36]
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Neil, your second question was about mobile gaming and it's an interesting question as well. So while we're seeing now is really strong growth in adoption of our platform in games on both iOS and Android, and we want Facebook to be the default social infrastructure for mobile games, and feel like we're making progress in that direction, and convincing developers that they will get more users, more engaged users, and better monetizing users, if the users are able to connect with their friends and bring their Facebook identity with them. At this point, we don't have any payments integrations with these mobile games, but our belief is that if we can help game developers to grow users' engagement and monetization, it puts us in an interesting position to consider future financial relationships. And the only other thing I would add is that we really launched or ramped up the mobile App install ads in the fourth quarter, and are already seeing that's a pretty promising way for developers to try and get better distribution for what they've built, including games developers, and that's sort of a nice first step for us in trying to participate in the mobile gaming ecosystem.
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Operator [37]
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Your next question comes from the line of Brian Nowak with Nomura. Your line is now open.
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Brian Nowak, Nomura Securities International, Inc. - Analyst [38]
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I have two questions. First one, could you talk at all to some of the engagement trends you're seeing within the demos? Specifically what are you seeing in the younger post college demos? Are their engagement trends per user still rising, or are they starting to show signs of leveling off? And then the second one is, when you look at your biggest categories of branded advertisers and where you're at this point, what do you see as still the biggest near-term opportunities where Facebook and social budget share is still low and pretty underpenetrated relative to your larger categories? Thanks.
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David Ebersman, Facebook, Inc. - CFO [39]
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In terms of engagement, as we said, the overall engagement patterns remain really strong for us. We don't break out engagement metrics by self-reported demographics like age. I think that one thing we can say is that our view is that the overall marketplace is expanding really rapidly here, in terms of just the amount of time people, college-age, post-college are spending, connected, sharing with their friends, et cetera, and we think that's great for Facebook and our long term position, because we're a leader in such a rapidly-expanding market.
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Sheryl Sandberg, Facebook, Inc. - COO [40]
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And taking the second part we think we have really big opportunities across-the-board with the large brand spenders. If you just look at mobile, what you see, and [Merrymaker] just put out a report on this, mobile gets 1% of ad revenue and 10% of time consumed, so right there, you see a big gap. Our opportunities there are to ramp with the large advertisers, build more deeply into their measurement systems so we can measure, help them use the Custom Audiences and other targeting we offer because right now a lot of our advertisers aren't using that targeting so they are sending more generic ads to our whole system. And that's great, we have the scale to do that, but a better ad experience will take advantage of the targeting we offer.
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We think in mobile, we think we're particularly really uniquely positioned. It's not just that we have unprecedented scale and huge engagement, that Mark talked about in his opening statement. We have a natural ad format, one of the big successes of 2012 was putting ads into News Feed and having them work, both for our clients on the marketing side, but also for our users, the engagement Mark talked about. On mobile, because we have real identity and people are logged in, we have a really unique ability to serve relevant ads, and so I think particularly in the mobile area, we are positioned in a very strong way, compared to anyone else.
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Operator [41]
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Your next question comes from the line of Justin Post with Bank of America Merrill Lynch. Your line is now open.
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Justin Post, BofA Merrill Lynch - Analyst [42]
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I have a couple questions. It definitely seems the mobile ramp slowed as the quarter progressed. Obviously, good numbers versus last quarter. Did you make an effort to maybe pull back some of the ad loads, or is there still a lot of opportunity to add more inventory in the mobile News Feeds, as we look forward? And then secondly, maybe you could just comment on the health of the Payments business. It looks like the US was up quarter-over-quarter, even if we back out the extra month, so was that some of the other new initiatives, or did the gaming business get a little bit better in Q4? Thank you.
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David Ebersman, Facebook, Inc. - CFO [43]
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On the mobile side, I think it's just really important to recognize we're very early in this. Of course we're still making changes in terms of what ads we show, how we select them, how many we show to different users, and under different circumstances, so this is still very early in the process of us trying to learn how to optimize that business as we develop it. Our perspective is that we're still we have a lot of opportunity there. In terms of Payments what you said is generally true. Note that this year as opposed to last year, we do have a little bit of revenue from non-game sources as I said, so you've got to neutralize or back that out of you want to compare games to games year-over-year. But having said that, if you make the year-over-year comparison, we do as I said, we see as I said earlier, we see a nice diversification happening in games, and it's a very interesting business to try and think about projecting going forward because some of the trends are really quite positive, but you have to be mindful of the macro trend, that we're not growing the sort of the essence of this user base in the developed markets right now.
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Operator [44]
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Your next question comes from the line of Jordan Rohan with Stifel Nicolaus. Your line is now open.
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Jordan Rohan, Stifel Nicolaus - Analyst [45]
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Thanks, a couple of questions. Any chance you can clarify more than just the impression volume metrics that you gave on FBX? Importantly, when do you anticipate mobile News Feed will be accessible through that platform? Separately, and given the promise of Gifts and e-commerce, why does it seem to be a business that you characterize as very small in the near term? What are the impediments to future growth so that you can call it big enough to matter or an important part of 2013 revenue mix? Thank you.
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Sheryl Sandberg, Facebook, Inc. - COO [46]
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On the first one, on FBX, when it's available, we have nothing to share at this point.
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David Ebersman, Facebook, Inc. - CFO [47]
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So second question on Gifts. I think that I really can just reiterate what Mark said earlier, which is that the focus for right now is trying to figure out what the right product is. We think Gifts is, if done well can be a very natural and positive part of the Facebook experience, so for example, when you're wishing someone a Happy Birthday the ability to send a gift along with that and just figuring out how the product needs to work, what the interfaces are, what the selection of products is, how the payment process works, all of that stuff is what we're going to have to optimize, to make the product grow as you're asking. And we're going to try to do that. That will be something we work on in 2013.
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Operator [48]
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Your next question comes from the line of Brian Pitz with Jefferies. Your line is now open.
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Brian Pitz, Jefferies & Co. - Analyst [49]
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Two questions. Mark, could you give us some examples of the kind of mobile first experiences you're working on that you mentioned at the beginning of the call? And also any comments on how integration with iOS 6 is benefiting your overall mobile strategy? Thanks.
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Mark Zuckerberg, Facebook, Inc. - CEO [50]
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I don't really think I can say anymore about things that we're developing, then directionally what I've already said. On iOS, I mean there are two really big platforms out there. Sorry, there are three. Android, iOS, and mobile web, and where we basically are, the strategy through each of those are a bit different. So mobile web, there's a limit to how the depths of how deep you can get into the system but we can go as deep as anyone else, so we feel pretty good about that, and we think our mobile web experience is really good, and has on the same order of magnitude of users as our App, so that's actually really good.
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For Android, and then I'll get to iOS last, Android is a very dynamic and open platform, as long as Google keeps it that way. And even though our relationship with Google isn't one where the companies really talk, we are able to do a bunch of things, because they have an open platform that lets us get fairly deep into the system and build some really great experiences, which I think will be, which we're excited on about and we're working on. An example that we have already that I can talk about is for Messenger. On Android, you build an messaging app that can actually do SMS on the phone. You can't do that on iOS, because on iOS, iOS controls SMS on the phone. But on Android you can build something that does that, and our Messenger App does that. So that's a good example on what you can do on Android.
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On iOS, because it's a more locked down system, the way that you can do deeper integration is by working directly with Apple. They've been a great partner for us so far, and we're really excited about doing more there, and people enjoy the integration that we have with them today, to be able to share photos and share web pages from anywhere across the experience, when you're on your iPhone or iPad, and we're really happy with it. So I don't think there's any meaningful numbers to share there, but qualitatively it's a really good experience and I'm really happy with the partnership we have with them.
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Deborah Crawford, Facebook, Inc. - Director of IR [51]
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Operator, we have time for one last question.
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Operator [52]
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So your last question comes from the line of Ken Sena with Evercore Partners.
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Ken Sena, Evercore Partners - Analyst [53]
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Thank you. Can you maybe give some color behind your decision to lower the price, the pricing floor, on the Marketplace? And also can I get just a clarification on FBX? Are you doing about a billion impressions per day? And then also within the 22% mobile number, is there any FBX within that? Thank you.
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Sheryl Sandberg, Facebook, Inc. - COO [54]
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On the last you're correct, we're doing a billion impressions per day and FBX is not available now on mobile.
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David Ebersman, Facebook, Inc. - CFO [55]
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On the reserve price, we're always iterating and experimenting to optimize what we show for the user experience, and for our business performance. The price floor has been something we've had in place. It's way below the average prices, and the purpose of it has been to both support higher prices and omit poor quality ads. Over time, we've developed other tools to help us achieve those objectives, so the floor has become less important for us. And interestingly there's non-intuitive benefits also that we've been realizing, which is that small businesses as you can imagine, often create some of the highest quality and most highly-engaging ads on Facebook. It makes sense because your local coffee shop feels like part of the community you live in and seeing an ad from them fits naturally into the experience that you want on Facebook, and small businesses are often the lowest bidders in our auction. So by lowering the floor, if we can bring in more small businesses into our network, get them comfortable advertising with us, and hopefully ramp them up over time, that should be a good thing. As I said, for the changes we happen to make this quarter, the impact was really primarily in international markets, because the price floor really wasn't coming into play in most of the developed markets anyway.
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Deborah Crawford, Facebook, Inc. - Director of IR [56]
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That's it. Thank you for joining us today. We really appreciate your time, and we look forward to speaking with you again next quarter.
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Operator [57]
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Ladies and gentlemen, this concludes today's conference call. You may now disconnect.
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