Meta Platforms, Inc. (META) Earnings Call Transcript & Summary

Good afternoon, good morning, good evening, where ever you're Zooming in from. Welcome, again, to day 2 of our Morgan Stanley 2021 TMT Conference. We are thrilled for this afternoon's keynote with Sheryl Sandberg and Dave Wehner from Facebook. Thank you so much for joining us today.

Yes, thanks for having us, Brian.

Thanks for having us. We were just discussing that last year, I guess, we didn't come to this conference in person, and it was really the beginning of what has been a long year for everyone. David was just reminding us of that. And so I think we're sad to still be on Zoom, but we're really glad to be with you.

Yes. It's great to have you guys. And next year, hopefully, we will all be back at The Palace.

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So before we get started, let me do the important disclosures. Please note that all important disclosures, including my personal holdings disclosures and Morgan Stanley disclosures appear on the Morgan Stanley public website, at www.morganstanley.com/researchdisclosures. Some of the statements made today by Facebook may be considered forward-looking. These statements involve a number of risks and uncertainties that could cause actual results to differ materially. Any forward-looking statements made today by Facebook are based on assumptions as of today, and Facebook undertakes no obligation to update them. Please refer to Facebook's Form 10-K for a discussion of the risk factors that may affect actual results. Sheryl Sandberg is the COO of Facebook. She's been there since 2008. Dave Wehner joined Facebook in November of 2012 and has served as Facebook's CFO since June of 2014. This is their seventh appearance at our TMT Conference. There is always a lot going on in the world, in the ad industry and at Facebook. So thank you again for joining us today.

Let's sort of get started. I want to start with Sheryl, and sort of start with some of the big-picture topics that have been -- that have really gone on to your point over the course of the last year. It was a very difficult year for a lot of businesses and a lot of people throughout 2020. But yet, you now have over 200 million businesses on your platform using your tools, 10 million active advertisers on the platform. I thought I would just be -- I wanted to start with sort of some of the progress that you've made in bringing on more small and medium-sized businesses to the platform, helping them sort of recover from the difficulty of last year. And how do you think about the strategies to convert more of those 200 million over to the paying category?

So to say this has been a crazy year is the underestimate -- is the understatement, if that's even a word, of all time. But I think what's happened over the year is there was already a digital transformation happening and COVID massively sped it up. So if you look back before the pandemic, 1/3 of small businesses in the U.S. didn't have a website at all. That's actually, kind of a, I think, surprisingly high number: 2/3, did; 1/3 didn't. Now why is that? Because for small businesses, setting up a website is expensive. Setting up a mobile app is even more expensive. And so I think businesses knew they needed to make that digital transformation, and they were making it, but it still was lagging. And what coronavirus did is massively speed it up and made it more critical. When the shutdowns happened, when people were staying home, having an online presence became even more essential. So I think what we saw is several years of that digital transformation happening in 1 year. So now more businesses have an online presence. More businesses know they need to have a mobile app. And I think the reason we have 200 million small businesses using our free tools is I think we're uniquely positioned as the place that makes that the easiest. So if you're a small business owner and you want to set up a website or set up a mobile app, that's kind of prohibitively hard and expensive. But you're likely already on Facebook and Instagram as a user, as a person and setting up a Facebook page or setting up an Instagram presence for your business is really no different than being on there as a person. It takes minutes. It's entirely free, and you already know how to do it. And so our goal has been to help these small businesses go online and through that mass migration through coronavirus, that's why we've now hit 200 million small businesses. And we want to give them free tools that enable them to reach their audiences, grow their business. Then as part of developing our business and theirs, we want to help them become advertisers. And we learned years ago that the easiest -- the easier we could make that, the better it would be. So many years ago, if you wanted to start advertising with us, we would say to you online, do you want to become a Facebook advertiser? That feels like a pretty big lift. And then we started saying, "Hey, you did a post, do you want to pay a few dollars to boost that post?" Well, when you pay a few dollars to boost that post, you are becoming an advertiser. And so what we've done is worked really hard, I think, before coronavirus, but even more in the last year to make it super easy, simple and free for businesses to come online and then make it really easy for them to advertise and advertise effectively with really small amounts of money. And that's affecting the smallest businesses. But it's also helping larger businesses migrate online, and there are just tons of stories over the past year, but I'll share one of them. There's a veteran-owned family business that does woodworking in New Mexico called TFTWood. They were sold in 17 stores nationwide. And then coronavirus happened. So they sold less in stores. They had all these in-person events. They all shut down. They had to pivot online. And so they started using Facebook and Instagram ads, and they grew their revenue 3x year-over-year. So the majority of their revenue in the past year in 2020 was made in Q4 sales, and 68% from Facebook-targeted ads, and they weren't a major advertiser before. So what you've seen in our business is that we've just seen an acceleration to online and to becoming an advertiser. And I think it explains those growth numbers in our past year.

It's a good perspective because it's an interesting example because you mentioned using the targeted ads. And I think that's something that really differentiates you, and the personalization of the ads in the way that you use your third-party data in a privacy-protected manner to help SMBs and advertisers drive the results. So maybe talk to us about what you -- where you've been on innovation, from an innovation standpoint around data, improving the ad targeting and just ensuring that you're even delivering more value for your advertisers on the platform.

Well, I think we have 2 challenges on this front. And one is actually harder than the other. I think the biggest challenge we have on this front is making sure people know that personalized ads, that targeted ads protect their privacy. And then the second is what you're pointing out, which is how do we continue to innovate and make these ads better and better. Now it is really important to understand how deeply important personalized ads are for small businesses. Now they're important for all businesses. We work with businesses of all sizes. And -- but they're particularly important for small businesses. My favorite story -- because I always have felt like so many things must happen in men's room and conferences that I wasn't allowed in. So this is a story that happened in the women's room is that I was in the women's room at a conference in London, and I met a woman who looked to me and said, "Thank you." As we're washing our hands, "My whole business was grown on Facebook." She was walking dogs in a certain part of London. She wanted to grow it into a business. She said, I couldn't afford to take out 1 ad in 1 circular in any part of London. But on Facebook or Instagram, I could show my ad for just a few pounds to advertisers who -- I mean, sorry, to people who were interested in dogs and lived in my section of London. And fast forward a few years, she has a dog hotel. She has multiple employees. She has a thriving business, but she said, "Without personalized ads, I could never do that." Now from the privacy point of view, we took her ad. We showed it to people that we believe like dogs, that we believe lived in her part of London, but we never gave her back one bit of personalized information about people. We never said here are the people. So it was a very good, good experience from a privacy point of view. But I think people don't understand that, and that's on us to explain it better. If you see an ad in your feed that's very personalized to you or targeted for you, it's a better experience as long as you think it doesn't violate your privacy. And I think we have our work cut out for us to explain that personalized ads protect your privacy and that they're critical for small businesses. Because people don't want to see small businesses be unable to grow. More than half the job growth in every developed country in the world is small businesses, and this has become really critical. And then your question is, how do we continue to improve those ads? And on that, we really have focused over the years, quarter by quarter, year by year on improving our ability to target ads so that they are better for people and a better experience. We do that by making ads easier to buy. We do that by using data in a better way to really understand what you're interested in. And obviously, the more you use our service, the more we can see what you're interested in and show you things that will be interesting to you. We also work hard on making it easier for companies and small businesses to become advertisers. Not just here, can I spend a few dollars to boost an ad, but give us a picture and we'll create the ad for you. You don't know if you want to advertise on Facebook or Instagram, we will optimize and try to give you the very best results. And it is, I think, those basis point improvements again, quarter over quarter, year after year that have explained the growth of our business. And I think there's a lot of room. As long as we can make the first case, that personalized ads are privacy protected, and people continue to accept them, and that's a big case for us to make right now, I think from a technical point of view, we can continue to improve those ads.

Yes. Brick by brick basis point improvements. I want to turn to the macro side a little bit and turn it to Dave. I think it's interesting, there are so many dynamics impacting the ad markets this year. Sheryl mentioned a potential multiyear digital pull forward. Our macroeconomic team expects a pretty robust overall GDP environment. We're talking 6% to 7% GDP growth, which should be a tailwind to the ad market. So with that as a backdrop, I wanted to sort of go back to some of the comments that you made in the fourth quarter conference call and just talk to us about some of the crosscurrents in the advertising business that we should think about for Facebook in 2021. And specifically, I think you had mentioned that in the second half, revenue growth could be pressured by consumer expenditure, shifting back towards services. Maybe give us some examples of ad verticals where you may under-indexed that investors should be mindful of from that perspective.

Yes. Thanks, Brian, and it's great to be here with you or at least virtually here with you. COVID is obviously the big overlay here. And it was just before this time last year that we were -- one of the first decisions I remember agonizing over was pulling out of this conference and doing it virtually last year. So it was -- it's kind of pointing to be here a year from now -- a year from then. And hopefully, it will be in-person a year from now. So -- and then I think it was a week after that, that we decided to close down our offices. And then a week after that, that I think California went into a lockdown. So when we look at Q1 of last year, at the end of Q1, we were trying to figure out what COVID was going to mean for the overall Facebook business and the overall ad ecosystem. Our intuition was at the time that we would see -- everybody was predicting a pretty significant GDP pullback globally, certainly negative growth in 2020 globally. To us, that meant a very likely significant advertising recession globally in 2020. And given that digital had become such a big part of the global advertising ecosystem, our expectation was that it was going to flow through to a pullback in digital. And I think how 2020 played out has been very different than those initial expectations. And a couple of the reasons were -- what sort of Sheryl had hinted at about sort of helping businesses come online. So the first big trend, Sheryl called out, which was the shift to from offline to online. And that was very significant. And I think it was profoundly good for the economy as well because the scale of platforms like Facebook and Instagram really enabled businesses to move some of their business online that they couldn't have otherwise conducted in a lockdown world. So I do think that digital platforms like Facebook and Instagram helped the economy pretty significantly kind of weather this storm and make that transition to a more digital outlook. If you look at the growth numbers, looking at e-commerce, the Census Bureau had numbers that indicated that in -- certainly in Q3 and Q4, we were looking at growth rates on a percentage basis for e-commerce that were the highest since 2002. So if you just think about that, the scale of the business is so much larger today, but growth accelerated to levels that haven't been seen when it was just a small tiny part of the overall retail landscape. So that was a big benefit and boom to our business. Also, what we saw was in the second half of 2020, the sort of the recession that we were facing was really focused on the service area. If you looked at product spend, the BEA numbers in the United States for Q3 and Q4 showed that, that personal consumption expenditures on goods were -- actually grew 7% year over year, both of those quarters. Again, that was the strongest growth that we've had in 15 years. So pretty significant growth in a lot of categories that were very important to Facebook. We tend to under-index in some of the bigger service verticals for advertising. I think travel is the best example of that. And so I think that those 2 big trends, the shift to online as well as strong consumption expenditures for goods, really kind of helped fuel our business and then ended up being a positive tailwind to the business by the end of the year. So Q4 was our strongest growth rate from an advertising perspective in 2 years. And again, we're much bigger today than we were 2 years ago. So I think the crosscurrents were pretty significant. And I think our outlook changed pretty dramatically as the year progressed. Now what does that mean for 2021? Obviously, it's pretty uncertain. This is a pretty significant shift in behavior and not sort of an easy thing to forecast. But we do think that the acceleration that we saw in the e-commerce growth side, that's going to slow down because we're not going to have the same drivers of acceleration and pushing people to shift online. We do think that online is going to be a bigger component of people's businesses going forward. So we think we'll lock in those gains. But I don't think the shift will be happening as quickly. So that will be somewhat of a headwind to our businesses is what we would expect. We'd also expect some of the consumer expenditures to shift back into services in places like travel as we get further into the year and people get vaccinated. That could impact us in terms of growth rate because we tend to under-index relative to the overall economy in some of the service sectors. So that's kind of the big macro context. Again, we think there's -- continue to see very strong demand for our advertising products. And certainly, in the first half of the year, we're going to benefit from easier comps because I think COVID was depressing growth. But when we get in the back half of the year, I think those are tougher comps.

Yes. The other part I wanted to ask you about just from a modeling perspective this year is the price versus volume equation. I think as you mentioned in the past, shelter in and COVID was somewhat of a tailwind to overall engagement. And those comps are going to be more difficult in the back half. So talk to us about sort of the puts and takes on engagement in the back half of the year. And how could the potential basis point improvements that Sheryl talked about on the ad performance potentially offset that through pricing and advertiser ROI?

Yes. I think it's auction dynamics. So there's always interplay with supply and demand. I think we continue to see very strong demand just fundamentally, given the importance of digital and people's overall growth outlooks for their businesses and then wanting to deploy more dollars digitally. I think that continues to be sort of a positive driver of price. On the supply side, I do think that we saw the lockdowns and the behavior in the lockdowns drive more digital engagement, and Facebook and Instagram are beneficiaries of that. So we saw a sort of a supply boost there. We also saw some product optimizations that we benefited from in the first half 2020. And so we're going to be lapping those. So I think there's going to be, I think, slower supply growth and continued strong demand that's going to benefit price as we kind of continue through the year. And we continue to make ongoing improvements to our advertising products. We're focused on continuing to enable people to find the right people using our products. We do expect there to be continuing headwinds as it relates to targeting. And clearly, I'm sure we'll be talking about at some point, iOS 14 and the impact of that in term -- as a targeting headwind for the business. But at the same time, we're continuing to make product improvements across the portfolio. We saw some good progress with stories ads and our ability to drive direct response through Instagram stories. So that was a positive story for Q4. And we hope to continue to make progress in areas like that. But we do expect there to be targeting headwinds with iOS 14 as well as the overall regulatory landscape as it relates to privacy.

The regulatory landscape, it tees up my next question pretty well. I think 7 years at the conference, I think regulatory has been a question for 6 of them. So it's a pretty consistent theme and hit rate. So Sheryl, regulation remains top of mind. The ongoing FTC case, discussions about potential changes for Section 230, et cetera. A couple of questions for you. Just first one, how does Facebook philosophically think about the need for increased online advertising and social media regulation? And then secondly, how do you think about increased regulation impacting Facebook and its overall business model over the long term?

So look, you have been asking this question for a long time. And it's a really important question, but I think it's even more kind of front and center now. And we're pretty unusual. I think it's fair to say that most businesses tend to spend a lot of time resisting regulation. But actually, several years ago, we really came out and said, look, we understand the rules of the Internet were written a long time ago, and they need to be rewritten. There's actually an ad campaign we're starting to run, which kind of makes the point and shows the pictures of what the Internet was like when the rules that govern it now were written. And we know they need to change, and we really want to be part of working effectively. And we think there are a lot of areas where updated regulation could actually help, both protect consumers, but also be good, be helpful. Harmful content, these are very hard decisions for us to make on our own. I think you couldn't have watched the presidential election and see that. Election integrity, that's an area where we've worked hard with other companies and with our government. If you look back at 2016, I think we missed, everyone missed, what was Russian interference. And then if you look at 2018 and 2020, I think the track record is much better. That's because of massively more focus from government and private sector, but also the ability to work together. And I think there's some regulatory changes that could even make it easier for companies and government to work together to protect elections. Data portability, we've always believed on it -- believed in it. You can download your data, but also privacy. Now when you think about privacy, one of the call-outs is we do think it's really important that regulation maintain the ability of companies to use data in a privacy protective way, to target ads, to personalized ads for all the reasons we just talked about with small business. But we also think right now what you're seeing is state-by-state legislation. So you have CCPA in California and other states passing other laws. And that makes it very hard for businesses to comply with those laws. And so a federal framework that was consistent across, I think would be better for people and would be helpful for our business. I also think it's worth remembering that when you think about regulatory frameworks, there's companies like ours. I think it will be a drag in our business, and we will have to comply. But if you look back to where Facebook was when I joined 13 years ago, or even before that when Mark started it a few years, they would have had no ability to comply with this, when you are a tiny start-up. And so we need a regulatory framework that modernizes, upstates the Internet, but still protects the ability of start-ups to happen. So the next Mark Zuckerberg, the next Larry and Sergey. The next person can be out there and make sure that these are laws they can adhere to, even when you're a small start-up. And we care a lot about that. We feel like as a large company in our industry, our business is a small business, but we have a responsibility to make sure we work on regulation that protects the ability to innovate. I think it's also worth remembering that the strength of the U.S. Internet companies, and there's very legitimate concerns about the size and power we have, there are legitimate concerns on that here and around the world. But it's also a national competitive advantage for us. Like, we largely -- there are many, many frameworks for Internet regulation. You can think about us versus China. That would be the starkest example of just a totally different approach to the Internet. One, there's an assumption of personal privacy. One, there is an assumption that the government has full access to your data. But there's lots of stuff in between. And I think we exist as American companies and more global companies, but we exist under U.S. law. And I think the fact that the Internet companies have been American companies has been very important for our national competitive advantage. And we think it's worth remembering that as we go into this next phase as well.

Right. That's good perspective. Dave, you mentioned it earlier on iOS changes and IDFA. Another recurring topic in our years of having discussions, whether we're talking about CCPA, GDPR, different acronyms. This year, it's IDFA. So a couple of questions on IDFA. One, talk to us about how you think about it potentially impacting the revenue trajectory for Facebook as we go throughout the year and maybe into '22. And then maybe more importantly, can you give us some examples of technologies you're working on or innovation you're developing to help advertisers navigate through this difficult period that Apple's created?

Sure. So look, Apple is implementing some significant changes with the rollout of iOS 14 that we believe will have a negative impact on a number of businesses. So it's going to be a challenge in a variety of places. It's going to be a challenge for ad-supported developers, and it's going to likely force them to look at other business models and potentially subscriptions and other things along those lines. It's also a real challenge for developers and small businesses who do commerce on iOS 14 to be able to kind of grow their business effectively using advertising. And that's kind of what we're really speaking to. When you think about what this is, just from a high level, it's really -- the biggest impact is going to be Apple requiring a prompt that they draft to opt into allowing companies to use third-party data to provide personalized ads. And so that's -- it's opt-in. It's drafted by Apple. And so that's going to be a significant uncertainty as to what the opt-in rates are going to be on that. We expect them to be low. So that's one of the uncertainties. But we do expect the opt-in rates to be relatively low. We're going to be watching when this actually launches. We expect it to be in Q1, so later in March. And then there's going to be the question of what's the pace of upgrades to iOS 14, which is a little bit more known because we're able to sort of monitor the pace of other updates in the past. We'll be, obviously, looking at what the opt-in rates are there. We're looking at things like pre-prompt to provide additional context of what we're doing and why we're doing it and why it benefits the user. So all of those things will be part of how we kind of assess what the impact for the business is going to be. But we do expect this to be an impact to the business. And to impact our growth rates as we go into -- further into 2020. And so that's factored into the outlook that I gave on the Q4 call. On the mitigation front, I think there's a few different things, obviously, going on. One is this is a broad platform-wide change. It doesn't just affect Facebook, it affects everybody in the ecosystem. And so there's going to be a relative effect and that relative effect is not clear yet. So we, obviously, have a lot of first-party activity in addition to work with third parties. So we think we're relatively well positioned. But again, it's going to be uncertain as to how the ecosystem reacts and how the balance of advertising spend plays out. We do think that there are going to be situations where advertisers who are benefiting from targeting across the ecosystem, not just on Facebook, will find it harder to get ROI on their ads that justify their spend, so they may reduce spend. So we do think there could be a negative effect on the overall industry due to that. Again, not just on Facebook, but anybody advertising on iOS. On other mitigations, we're looking at other ways to help advertisers. This includes working with APIs that both Apple and we have built to help use data in a more aggregated way. And then finally, we're working to have more on-site conversion opportunities for our advertisers. So examples there include the big effort that we're making with shops on Facebook and Instagram and having the opportunity for people to convert on-site, that we think would be a benefit. And then also, other areas where we're growing quickly which are on-site conversions or things like click-to-messaging ads. So things like click-to-Messenger and click-to-WhatsApp. Those are doing extremely well, especially in other parts of the world outside the United States, places like Southeast Asia. So we think there are certainly mitigations, but when you kind of take the full balance, we think it's going to have a negative impact on overall advertising spending growth on iOS. And obviously, that's important for us as well.

Yes. That's a good perspective. There will be a lot to monitor as it comes out over potentially the...

That's true.

Lot to track. You mentioned shopping and commerce, which is something you've been investing and building out for a while. It is an interesting way to bring on more signal onto the platform and help advertisers close the loop. So Sheryl, on the commerce front, there's a lot of initiatives here, Facebook Shops, Instagram Checkout, et cetera. Talk to us about, one, where have you made the most progress from an advertiser and a user perspective? And then two, where do you sort of see the most heavy lifting to be done to really scale that overall shopping opportunity?

Well, you're right, there's like a lot to do here. And it's part of the same trends we've been talking about in this conversation. So first, businesses need to get online. They need to have an online presence. Then they usually want to get awareness. So that is becoming an advertiser. And then you go further down the funnel where you can actually transact, sell, use, do online commerce. And along with coronavirus really accelerating people's need to have an online presence in small businesses and our ability to do that, it massively accelerated our commerce road map. When we were discussing it before coronavirus, we were like, yes, so over the next many years, we should really build more online tools. And when this happened, and businesses needed to sell online because a lot of them weren't open, we really shifted and put a lot more engineering. And I think, had one of our more at least fruitful or large rollouts of products. And you saw us do that. The product after product from Facebook Shops to more abilities -- to pay more abilities to checkout. And it does help us getting signal. It will help us. I think it is a natural way for us to be able to still do personalized ads even if some of the signal. But I think the shorter-term thing is just helping businesses sell online, which is part of our business and growing theirs. And it became absolutely necessary in this crisis. So I'll share an example, there's a manicure bar in Los Angeles called Color Camp. Lauren is the owner. She had 2 manicure bars in L.A., and they were high-quality and customizable kind of nail art. And their early success was really due to Instagram because their customers loved sharing the photos, and word spread. But it was very much an -- talk about an in-person business, manicures, not something you can buy online. And then when she had to close her doors last March, a year ago this month, she had to move the business online. So that next month, she launched an e-commerce site offering at-home super gel manicures, so you could just like press them on. And she created an Instagram shop to grow her business. And in the first month, she generated as much online revenue as she would have in her physical locations. And that made a really big difference. And so it wasn't enough to just have an online presence, she already had that. It wasn't enough to just be using Instagram to showcase the nails and the art and get people in our doors, she then needed to transact online. We also did this with Facebook Live events. So there were a lot of small businesses out there that existed by having people come into their studios. Think about drama or art studios. You came in and you paid for a class. Well, what were those businesses going to do? And so we were able to let people start paying for Facebook Live events. So you could actually attend something but collect payment. Since we are the free platform, so many of these small businesses use, again, it's prohibitively expensive for them to go find ways to collect payments. But when we build that functionality into our product, we think it really helps small businesses do. Heavy lifting to be done was the end of your question? Oh, my God, there's so much. Because if you look at the percentage of things that are happening online, it's massively up, but it's still actually smaller than we think it will be in the future. Now we don't believe the pace of change will continue once coronavirus ends. I don't think we'll see -- and you guys know this, you're in the business of predictions. Predictions are what you pay for them. So I can't be sure. But I don't really believe we're going to see the shift at the same level. But I do think that shift will continue. And we have a lot to do to make it easy for people to transact online.

And how do you -- I feel like a year ago and certainly 2 years ago, we talked a lot about Marketplace and Messenger and the way those can fit into the overall commerce offering. How do you see those kind of fitting into the commerce piece? And talk to us about the monetization potential of those 2 businesses.

So messaging is just one of the fastest-growing channels for consumers. I mean consumers' use of messaging is exploding. And we're seeing that across our platforms, you see it on other platforms. Now when people do something, businesses tend to do it with people too. And that's been the pattern of our development. People were posting on Facebook and into news feed. And then businesses started posting. You see the same thing with messaging. Messaging really starts, I want to send you a message, I want to send David a message. But then businesses start doing it, and we are seeing a huge increase, 40% increase in total daily conversations between people and businesses on messages and Instagram from September of '19 to September of 2020. So you're seeing massive increases. One of the most important short-term things for our business has been click-to-messaging ads. And again, when advertisers are looking for driving people down that funnel, if I see an ad, I might walk into a store or go online and buy a product, but if I see an ad and I click-to-message that business, I've now proven to the advertiser that this is a direct connection, and they are then able to use that direct connection to provide customer service to upsell, to keep you informed of their new product offerings. And so we are seeing really nice growth in click-to-messaging ads. And really importantly, we want it to be useful for people, and people are finding that to be a great connection. And we're seeing people use click-to-messaging ads for things like cars, things where you really think there's no one can really explore a car in a messaging ad. But I think they can. And so we're going to continue to invest. We've also made a lot of investment in our Marketplace product as well. I think you're familiar with that. But again, people had to shift for coronavirus. Marketplace on our service was largely people advertising things to other people and people meeting up in-person to do it. So one of the shifts we had to make there was helping businesses ship those products instead of meeting face-to-face. So in Q3, we launched a shipping option so U.S. sellers could accept digital payment and print labels at home to ship. And so we were able to see, again, a direct connection between businesses and people, growing out of our service, making that shift to coronavirus.

It's been an ongoing shift. Fun fact. I sold a car on Marketplace, a 2006 Mazda 6S almost 10 years ago. But yes, there's a lot of activity in the Marketplace.

And at this conference, I hope I'm remembering this correctly, didn't someone sell their exercise bike on Marketplace? Was that you?

Yes. That was me. No, that was me.

That was Dave.

That was you.

Yes. I must confess, I'm now trying to buy one because of COVID and not being able to go to the gym. So that was not a good idea.

So you sold your exercise bike, and now you need it back?

Buy it on Marketplace.

Well, buy it on Marketplace. David, if you don't support our products, no one will.

Yes.

[indiscernible] those exercise bikes, maybe on Marketplace. The other area, I think it was interesting, what changed last year, David, was India. You have some new investments in India, and some developments have happened around WhatsApp in India where you've received approval to start payment service in India now. So I guess sort of a 2-part question. Talk to us about sort of the state of the India business. And what are you most excited about there for 2021? And then maybe this bigger picture, where are you in sort of the WhatsApp monetization potential?

Yes. Sure. Happy to hit both of those. India is an incredibly important market to us. It's our largest MAU market by country. So for our products, it's extremely relevant. It is extremely important. And we're investing a lot there. Facebook and WhatsApp and Instagram all do extremely well in the Indian market, and it's an incredibly important country strategically for us. And I think, increasingly, it will be important for the business as well. It really -- one of the areas that really fits into the -- some of the stories that Sheryl was talking about was really the importance of business-to-consumer messaging. And when you look at business-to-consumer messaging, a big focus is what we're doing with WhatsApp. WhatsApp, if you look at top countries, WhatsApp India is right there at the top. And when you look at business-to-consumer messaging, we now have 175 million people connecting with businesses daily on WhatsApp. So people are connecting business on WhatsApp today. And we're trying to invest and make that easier. One of the things that we're doing there is obviously payments. And India is the first place that we're live with payments, making it so that you can send money as easily as you can send a message. We're leveraging the universal payments interface that's supported by 200 banks to enable us to do WhatsApp Pay in India. And while it's early, and it's a very competitive market, we're pleased with the results so far. We're -- our plans are to expand that beyond India. We're obviously trying to get it unlocked in Brazil, which is another very important market for us with WhatsApp. So that's kind of the next priority. And then beyond just payments, we're trying to make it easier to do commerce more broadly through messaging services. And a couple of the things that we've done there is in November of 2019, we launched catalogs with WhatsApp. So that's a way for you to be able to browse different offerings that businesses have through a messaging interface. And then we more recently introduced, just in December, shopping carts with WhatsApp, which enables people to sort of browse the catalog and select multiple items and send the order as a message to a business over WhatsApp. So we're excited about these tools. They're free today. And we continue to invest in this area to make it easier for businesses and consumers to interact. One thing for context as well as the WhatsApp privacy update was really about sort of business-to-consumer messaging and enabling businesses to use third-party hosters to manage their messages that are coming to them, not -- and so the privacy update was really about enabling businesses to leverage the specific messages they're getting with consumers. It's not about sort of Facebook looking at broader messaging, but really enabling that business-to-consumer ecosystem, which is really valuable for consumers to flourish and grow. And then broadly -- kind of stepping back broadly, payments -- WhatsApp Payments is one part of what we're doing, but we've also got a number of different payments initiatives underway. And in August, we launched F2, which is our sort of broad family-wide Facebook financial efforts under sort of 1 leadership team with David Marcus. And that includes also the efforts that we had with Novi, which relates to the broader consortium of DM, which was formerly known as Libra. So we think we've got a number of different compelling payments products in the road map. And we're looking forward to continue to make it easier for businesses to transact on our platform and elsewhere. It's really about financial inclusion and enabling people to move money in a frictionless way, to do business in a frictionless way, both within country and across border. And so we're committed to building these payments experiences and making them right for consumers globally.

Sounds great. The next platform to purchase exercise bike on potentially. Sheryl, I want to ask you about Instagram Reels. This is a business where, based on our Morgan Stanley AlphaWise data, we think it looks like about 35% of Americans are using Reels monthly, despite the product is relatively new, just launched last August. So I have a few questions for you. One, your reaction to that number. Two, how is Reels different from other video products on the platform like IGTV and Watch? And then lastly, we've seen some other players in the ecosystem offer daily prizes to content creators for this type of product. How does Facebook think about that, philosophically?

I'm not going to comment on that number because I don't -- I think that's your estimate, not ours. So I'll let you release your own estimates. But I will talk about the different ways people share in video. So if you take a big step back, and you think about your phone. There wasn't a lot of video sharing on Facebook many years ago because if you remember trying to load a video on a phone, it was slow and cumbersome, you lost people. Our phones are fast, we can load videos, we can share video. So video is exploding. It's exploding for us. It's exploding for everyone. And there's just different formats people want to do. And we've tried to roll out products that meet those different desires people have. So Watch connects people with their video interest. We have better navigation. We're able to help you curate. But we've had some nice success there. I mean, my favorite is Red Table Talk. It's, I think, one of the most successful daytime talk shows. It's -- Jada is unbelievable. She's bringing this very authentic content, but it's long-form content that you really sit down and as our products says, watch and engage with. Then there's IGTV, which is an important storytelling format that many creators turn to connect more deeply with fans, and that has obviously different lanes. And then Reels is much shorter form, and it's for creators to experiment with and break out on IG. And we are very pleased with the early data on consumption, but we need to work ahead to make it much easier to create and discover. Now when you ask me about prizes, what you're really asking about is monetization. We haven't launched prizes. We're really focused on helping people have the best user experience and build more services for creators. We do know that creators need to monetize. And so this past quarter, we added more features to help creators and businesses collaborate and monetize. They're still very early, but things like branded content in Reels, which is a natural place for creators to share content. Shopping in Reels can be shopping -- shoppable entertainment. And at the end of the day, these creators, they're entrepreneurs, and our goal is to help them have great platforms to share their content, connect with fans and ultimately grow their business and monetize as well.

Facebook has been incredible at that over the years. And you think about building new use cases for users, whether it's news feed, stories, video, et cetera. And then eventually, is finding ways to serve ads that deliver value for your advertisers. Now sometimes you go through these transitions, there can be some bumps that you go through, such as with stories a couple of years ago. As you look at the engagement, and how people are using Reels, is there anything you can see now on the Reels' engagement side that says there could be some hurdles we have to work through? Or is it very similar stories from a monetization potential?

So we don't have ads in Reels yet. And we don't have a time line to announce, but we have said we will have them. I think the path to monetize this is actually always hard work, always will take work and adoption. But I think it's pretty clear, and it's really based on, having done this before. So we had ads on the right-hand side, then we put them in news feed. Then we introduce them to Instagram, then we introduce them to stories. And each time, we know what we have to do, we have to make it really easy for advertisers to create those formats. So the more we can do the work for them, the better. Give us a photo, give us a video, give us what you want to sell, and we will help you either give you very quick online structures that help you create that ad quickly or will help create it with you. Make it easy to buy. When you're selling your first product, you have to go out and sell it. We have those customers coming in. So we can add the checkbox to the online order flow, which says, okay, I do Facebook, now I want Instagram. Now I want stories across our products. Now I want Reels. We know how to do that. And our sales team is obviously in with the largest customers in the world, and they can help them and they can help them make that adoption. So I think each time we do this, I think we learn a little bit more about how to do it. Now there may be other formats that are very different. But I think Reels is a pretty straight -- it's straightforward for us to see how we will monetize it. That said, we always focus on building the consumer product first. And that is where we are focused now that is much more important to us than advertising right now.

Okay. Pay attention to all the excitement around Reels throughout the year. Dave, I want to ask about virtual reality. "Other" revenue, which is where VR is located, was one of the really strong numbers in the fourth quarter. I think it was up over 150% year on year. And it sounds like Oculus Quest 2 really performed well and drove a lot of that. So my questions on virtual reality are -- I really have 2 of them. The first one is you've been working with Oculus and VR for a while, what do you think the key consumer unlocks were with this specific product that drove the stronger traction? Then the second one, sort of bigger picture, talk to us about sort of the investments that you need to make going forward to really build out this virtual reality ecosystem over time?

Sure. Yes, you're right. So the 156% growth that we saw in other revenue, Quest 2 is the primary driver of that. We're really excited about Quest 2. It's -- we believe it's the first mainstream VR product. There's a variety of reasons for that. I think you've got -- first of all, you've got the faster performance, higher resolution. It's $299 versus $399 for the original Quest. So the price performance value is really there. Also, the content ecosystem has really grown. And you've got a lot of great content on the device now today. It's -- you can do social stuff on it. I play online game with Mark, and I think I've probably proven I'm not as good a wing man in this game as I am a CFO. I'd like to think I'm better at the CFO job and keeping him safe in a first-person shooter. But yes, it's -- but there's a lot of great content. We're also seeing not just games, but we're seeing things like fitness. So coming back to the exercise bike story, I may not need it because there's a lot of great fitness apps that you can do on the Oculus Quest 2 today. So it's pretty cool, and it's getting to be a robust ecosystem. Obviously, we need to get more units out there to grow to a point where you've got a lot more content developers coming to the platform. So I think just continuing to see good growth in shipments is going to help attract more content, working with the ecosystem to develop more content for it and continuing to improve the VR road map. Beyond VR, with Facebook Reality Labs, we're making a couple of other big investments that I probably would point out. One is the Facebook portal products on a Facebook portal right now, which is why I think -- I like to think our resolution is pretty good, and it's a great system for a lot of what people are doing today, which is connecting virtually. And we've seen good results from having that product in the market today. And then we're making a significant investment in augmented reality. There's a lot of fundamental technologies that we need to build over a long period of time to get there. The first kind of product we'll have in that space is -- I'll set expectations, it's not going to be anywhere near kind of where we want to eventually go, but it's a smart glasses from Ray-Ban in partnership with Luxottica later this year. So we're excited about that. But augmented reality, we think -- and virtual reality have the potential to be that sort of next platform, which we think is a natural evolution of just the depth and richness of computing, combined with the social aspect, which is why we're investing so significantly in this area. It has been a major investment area, and we continue to highlight FRL as being one of the drivers of our investment growth.

That's -- that will be exciting to watch to play in that wingman first-person shooter. I want to shift a little bit to the financial model, Dave, in sort of some of the comments about 2021, even sort of some of the long term. So on the last earnings call, you maintained the 2021 OpEx guide for $68 billion to $73 billion of spend. It's about 32% growth at midpoint. Seems like a pretty big number, a lot of investment. So I guess my question is, talk to us about sort of investment priorities, underlying that 30%-plus OpEx growth just to kind of continue to fuel the Facebook engine.

Sure. I mean I'll just start with context on the number. And if you just look at our head count growth in 2020, which is a reasonable leading indicator because, obviously, compensation is a big driver of expense. We grew head count in 2020 at 30%. So during the pandemic and during people being locked down, we continued to recruit very aggressively. And so we added 13,600 people in 2020 on a net basis. 10,000 of those were on the technical side. So the big investment that we're making is continuing to support product development in all of the areas of growth that we see in front of us. We talked a lot about -- a lot of them on this call, commerce, business-to-consumer messaging, video with things like Reels, Facebook Reality Labs. These are the priorities. And then in addition to that, we're investing significantly in sort of ongoing improvements to our service. A big area of investment is on the privacy front. We recently signed a consent decree with the FTC. We're continuing to invest to basically make sure we've got all of the infrastructure in place on the privacy side for all of the commitments we've made on that front. We're also investing to improve customer service in areas like working with small businesses, which we know is extremely important. So across the board, I'd say we're investing quite a bit, and that's what's driving the growth in the investment profile for 2021.

Got it. Understood. In late 2018, Mark had talked about bringing expense growth to be more in line with revenue growth eventually. Now as we're talking about sort of low 30s OpEx growth this year, I think my current model has a high 20s revenue growth this year. So it doesn't sound like this is going to be the year that we're there. I guess sort of bigger picture on when you think about the long-term margins of the business, are those comments made by Mark in 2018, is that sort of philosophically the way you guys think about it? Or how do you think about the long-term revenue versus OpEx equation?

Yes. I mean I don't think we're providing specific margin guidance, and we're not managing the business to a specific margin target. But philosophically, we do sort of look at margin as part of our overall planning process. At the end of the day, we see significant opportunities to invest in growing the business in the long term and an ability to hire against those opportunities, and that's driving the investment that we have today. So ultimately, we're going to be driven by kind of the ability to kind of invest in things that we think will be profitable and grow profits over the long term, from a business perspective, and also, of course, serve the community and build the products that we want -- that we think are needed in the future. So that's really going to drive the overall outline. We continue to be predominantly in the ads business. That's fundamentally a high-margin business, and we think that's going to continue to be reflected in our overall financial model. But we're increasingly investing in other areas like AR and VR, which are going to have a different margin profile. So in the long term, that will affect the overall mix. But our primary goal is to continue to unlock these growth opportunities to build the best products for connecting consumers to each other and building value over time.

Great. And one more for Dave and one more for Sheryl. Dave, first one, it's on capital allocation. You announced the new buyback authorization in January. I think as of the end of 2020, you have about $60 billion of cash on the balance sheet. Just as we sort of -- as we look ahead, just talk about Facebook's overall capital allocation priorities and thoughts about potentially returning more capital to shareholders either through a dividend or larger buybacks.

Sure, Brian. So our priority, as I mentioned, is investing in growth. That said, we see an opportunity to be able to -- with the margin structure and our expectations on free cash flow to invest a more significant portion of free cash flow towards capital return and share repurchase. And that was factored into our decision to authorize a $25 billion share repurchase program. That's on top of $8.6 billion that we had remaining at the end of Q4. So we do think that there are opportunities to continue to return capital to shareholders while investing aggressively in the business. We regularly evaluate our capital return alternatives and repurchases. Our focus in a preferred mechanism, given the flexibility that it provides versus, at this point, looking at a dividend or other mechanism.

Great. Okay. Thanks, David. Sheryl, I will wrap with you, just sort of a bigger picture one. It's -- a lot has changed in a really relatively short amount of time, and you've come so far as a platform. I guess as you sit here today, what are you still most excited about within the family of apps from both a user perspective and a business offering perspective for your advertisers?

So I think ads is a great business. And I think we have to scratch the surface of what's possible. I think as we show that we can continue to put out new products that people really engage with, whether it's growing messaging products or things like Reels, we have more opportunity to connect businesses with advertisers. I think those ads can get better. They can get more personalized as long as we can make the case on data. They can get more useful for consumers. And then we can increasingly help advertisers, not just migrate online as we've seen this past year, but go all the way through to selling online. And again, we don't know the pace of what will happen coming out of a coronavirus here whenever that happens. But we do believe this shift, shift to online commerce, shift to presence online, is going to continue. And we're glad to help small businesses and large businesses [ and being ] a part of this.

Great. All right. Well, Sheryl and Dave, it's always great to see you. I'm glad we're doing it digitally. Next year, hopefully, we will do it live. Thank you so much.

Hopefully, in person. Thanks, again, Brian. We always enjoy the time.

Hopefully, in person. Thank you for having us.

Thank you. Thank you, everyone. Thanks.