Good afternoon. My name is Jay and I will be your conference operator today. At this time, I would like to welcome everyone to the Facebook Second Quarter Earnings Conference Call. All lines have been placed on mute to prevent any Thank you very much. Ms.
Deborah Crawford, Facebook's Director of Investor Relations, you may begin.
Thank you. Good afternoon and welcome to Facebook's 2nd quarter earnings conference call. Joining me today to talk about our results are Mark Zuckerberg, CEO Sheryl Sandberg, COO and Dave Wehner, CFO. Before we get started, I would like to take this opportunity to remind you that our remarks today will forward looking statements and actual results may differ materially from those contemplated by these forward looking statements. Factors that could cause these results to differ materially are set forth in today's press release and our quarterly report on Form 10 Q filed with the SEC.
Any forward looking statements that we make on this call are based on assumptions as of today and we undertake no obligation to update these statements as a result of new information or future events. During this call, we will present both GAAP and non GAAP financial measures. A reconciliation of GAAP to non GAAP measures is included in today's press release. The press release and an accompanying investor presentation are available on our website at investor. Fb.com.
And now, I'd like to turn the call over to Mark.
Thanks, Deborah, and thanks everyone for joining today. This is a good quarter for us and a good end to the first half of the year. We've continued to grow our community and size and engagement with 1,320,000,000 people now connecting on Facebook each month and 63% of them visiting daily. Our momentum remains especially strong on mobile. There are now 829,000,000 people using Facebook every day with more than 650,000,000 people using our services on mobile every day.
One thing that's exciting is that there's still so much room to grow. On average, people in the U. S. Sorry, people on Facebook in the U. S.
Spend around 40 minutes each day using our service, including about 1 in 5 minutes on mobile. This is more than any other app by far, but overall people in the U. S. Spend about 9 hours per day engaging with digital media on TVs, phones and computers. So there's a big opportunity to improve the way that people connect and share across how we all engage with the rest of media as well.
When it comes to our business, we continue to be pleased with our growth. This quarter our total revenue grew to over $2,900,000,000 and advertising revenue grew by 67% from a year ago. Mobile now accounts for 62% of our advertising revenue, which is a good sign of how the growth of our community on mobile is also producing better business results for our partners. The results this quarter show our continued focus on improving our core products and business. We're to continue investing aggressively in areas that are important for our mission and long term strategy, but we're also going to stay focused on our core products and business.
This is the best way for us to continue creating value for our community. Now let's talk about how we're making progress in our 3 big company connecting everyone, understanding the world and building the knowledge economy. Our strategy for connecting everyone has 2 basic approaches. Our first approach is Internet.org, our effort to bring affordable Internet access to every person in the world. Our second approach is about giving everyone more tools for connecting, so they can share all the different kinds of content they want with the right people.
Instagram, Messenger and our Creative Labs apps are a part of second approach. So with internet.org this quarter, we've continued to deepen our partnerships with mobile operators and lay the foundation for running tests in more countries. Already our initial partnerships in the Philippines, Paraguay and Tanzania have helped around 3,000,000 people connect to the Internet who had no access before. We're really proud of these early results. In June, we acquired PRYT, which has a lot of expertise bringing affordable Internet access communities by partnering with mobile operators, app developers and content providers.
Later this year, we expect to launch a broader set of free basic Internet services in a number of other countries as well. In our app efforts, we're continuing to build momentum with messaging. People now send more than 12,000,000,000 messages a day on Facebook, and in April, we reached 200,000,000 monthly actives on Messenger. Last month, we announced that David Marcus will be joining us from PayPal to lead our messaging efforts. We expect David to continue growing Messenger, building out new experiences to serve our community and ultimately to build Messenger into an important business.
Instagram continues to make great progress in giving people new ways to share their stories through photos and videos. Last month, we made one of the biggest updates ever to Instagram by adding new creative tools that allow people to refine exactly how their photos look and feel. This is an important part of building out Instagram's capabilities as a platform and serving the creativity of the Instagram community. Next, let's talk about understanding the world. As of last month, on average, more than 1,000,000,000 search queries are made every day on Facebook.
This is a great milestone and it shows we're in a unique position to answer a lot of questions for people. But this is just the start. And over the next few years as we make progress on building out search and our broader efforts in artificial intelligence, I expect us to deliver even greater utility for people. Our progress on public content is also very promising. As part of helping people better understand the world, we want to help you connect around important public moments and personalities.
And now nearly 800,000,000 people on Facebook are connected to public figures. These connections are driving conversations at a huge scale. During the World Cup, over 350,000,000 people made over 3,000,000,000 interactions on Facebook. To enable even more of these conversations, we've improved the ranking of videos and news feed and launched new APIs to help TV and media organizations use Facebook content productions. Public content will continue to be a growing focus for us over the coming months and we plan to invest in building more great products and partnerships this area.
Now building great social experiences to serve our community isn't something we do alone. Supporting developers is a key part of our strategy and at our F8 conference in April, we announced new ways to help mobile developers build, grow and monetize their apps. Over a 1000000000 people use Facebook on their phones every month and more than 80% of the top apps on iOS and Android now use Facebook login. So we think we're in a great position to be the cross platform reaction from developers. App Links, our new method of deep linking to specific content in any app, is now being used by hundreds of apps across iOS, Android and Windows Phone, with links to more than a 1000000000 individual destinations in these apps.
We also launched our audience network, our first big effort to developers monetize on mobile. So we've received a lot of interest from developers. We're rolling out the audience network gradually. We're going to continue to ramp this up over the coming months and are excited by the opportunities ahead. Finally, let's talk about our efforts to build the knowledge This has been a strong period for us and we've reached some new milestones as a business.
Now more than 30,000,000 small businesses use Facebook pages to connect with their customers and more than 1,500,000 of them are active marketers on Facebook. To continue delivering the best returns for marketers, we've been very focused on improving the quality of the ad experiences for our community. Our goal here is to make ads as interesting and useful as your friends' content Facebook. We're investing heavily in this area and this quarter we launched a number of efforts to improve the quality and relevance of our ads, including our new ads preferences tool, interest based advertising and improvements to newsfeed designed to reduce low quality content. In some countries, our surveys indicate that our ads are getting close to the quality level of organic content.
But in most developing country developed countries, sorry, we still have a lot to do. We expect to continue focusing on this for a long time. So that's my update on how we've been executing over the last quarter. It's been a quarter with good performance and continued momentum. So I want to thank everyone who works at Facebook and is part of our community, including our shareholders and partners.
Because of your efforts, we're continuing to make progress towards our mission to help connect the world and we're improving 100 of millions of people's lives every day. I'm grateful for your support and
to have the chance to
work with all of you. Thanks. And now here's Cheryl.
Thanks, Mark, and hi, everyone. As Mark said, we had a strong second quarter. Ad revenue grew 67% year over year to more than 2.6 $1,000,000,000 Mobile ad revenue grew 151% year over year and now makes up 62% of our ad revenue. We continue to focus on 3 key areas of investment: capitalizing on the shift to mobile, growing the number of marketers using Facebook and building ad products. These investments continue to generate broad based growth.
All geographies and all marketer segments performed well this quarter. Our team has a really strong belief in what we're building, the world's 1st ad platform that delivers personalized marketing at scale. While we believe it's still early days, we're pleased with the progress we're making and I want to join Mark in congratulating our global teams on their continued execution. Today, I'm going
to focus on 2 of
our key marketer segments, small business and brand marketers, as well as cover some of the investments we're making on the product and ad tech fronts. We believe that personalized marketing at scale can drive results for all types of marketers. Just a few weeks ago, I was in India and I hosted our 1st India SMB roundtable. 1 of the entrepreneurs I met, Vivek Prabhupakar, sold his house just a few years ago to raise the money to start his and his wife's dream business, Chumbak, a company that makes India inspired products. Facebook is Chumbak's leading marketing channel and is responsible for 35% of online revenue and 38% of their website traffic.
Their Facebook ads deliver a 5x return on advertising spend and have helped the company grow to more than 150 employees in 3 offices. We have more than 30,000,000 active small business pages and over 19,000,000 of these are active on mobile. We think we have a big opportunity to help SMBs like Chumbach grow their businesses and I'm pleased to announce today that we have over 1,500,000 active advertisers. We're also ramping up our engagement with this community. In the U.
S, we're hosting Facebook Fit workshops in cities like New York, Chicago and Miami to help small businesses. And we're doing this globally, including forming our 1st European SMB Council. We're also making great strides in our work with larger brands who increasingly recognize how our scale, targeting and measurement capabilities can drive great results. For example, P&G's Gillette worked with us and agencies IBS and Mediacom to launch its Vector 3 razor to men in India. 80% of the 100,000,000 Facebook users in India are mobile and a majority of these are using feature phones.
This was our 1st feature phone only Facebook campaign in Asia. It reached 60% of Gillette's target audience and generated significant lift in both and ad recall. As we work with brand marketers around the world, we focus on how they can leverage our technology platform to build their brands through creative storytelling. We saw many great examples of this at the recent Cannes Lions Festival. We were excited that campaigns that made Facebook a key part of their efforts took home prestigious awards.
The World Cup also provided a great opportunity for brand building on Facebook. Facebook was an important part of this global event with 350,000,000 people joining the conversation, generating 3,000,000,000 interactions. The final was the single most talked about sporting event in Facebook history, generating 280,000,000 interactions from 88,000,000 people. Brands such as season, Nike, Ford and McDonald's capitalized on this global conversation. McDonald's worked with agencies OMD, Framestore and Arc Sponsorship as well as Facebook's Creative Shop to produce 30 videos that used French fries as players.
Fry Football recreated the most spectacular World Cup moments and random as videos the very next day with the French fries acting as the players. This campaign reached 125,000,000 people in 158 countries. We also remain committed to investing in product development to drive higher returns for all of our marketers. Our custom audiences capabilities, which enable better targeting, are being adopted quickly and are now being used by 91 of the Ad Age 100. Earlier this year, we launched website custom audiences, which enable marketers to target recent visitors to their websites.
This is like retargeting, but it's even more effective because it works across both web and mobile. We're pleased with the early reaction from marketers. We also introduced premium auto play video ads this year. Video on Facebook helps brands extend their TV investments by combining traditional reach focused campaigns with our unparalleled targeting abilities. To date, we run about a dozen campaigns and the early data show promising results.
We'll continue to roll this product out slowly and carefully. Similarly, we're seeing positive early demand from marketers for ads on Instagram, and we're rolling these ads out carefully as well. In all of this, we remain focused on the transition to mobile. Our recently launched audience network lets advertisers use Facebook targeting, while extending their campaigns beyond Facebook. This can improve the relevance of ads people see both on and off Facebook and we're encouraged by the early response.
Finally, earlier this summer, we announced the acquisition of LiveRail, a leading online video advertising platform that enables customers like mlb.com to monetize their video inventory efficiently. We have a lot to do here, but with Live Rail, we're investing in tools that can improve the relevance of video ads across the web. In summary, we're pleased with our performance and the progress we're making. We're the 1st platform that can deliver personalized marketing at scale and marketers are increasingly recognizing the great results we can drive for them. Staying focused and executing will remain a major theme for us moving forward.
Our teams know that our future success depends upon our continued execution and our plan is to stay focused. Thanks. And now here's Dave.
Thanks, Sheryl, and good afternoon, everyone. Q2 was a good quarter for us across our key operating and financial metrics. We generated strong revenue growth and operating margins and delivered $872,000,000 of free cash flow. And we continued to make investments to drive our core business as well as to support our long term strategic priorities. Let's start with a review of our network.
We are executing well on our ongoing mission to connect everyone. 829,000,000 people used Facebook on an average day in June, up 130,000,000 from a year ago. This represents 63% of the 1,320,000,000 people who used Facebook during June. Mobile continues to be a strong driver of our growth, with over 1,000,000,000 people using Facebook monthly on mobile. At the same time, we're enabling more ways for people to connect and share beyond the core Facebook app.
For instance, both Instagram and Messenger have each passed over 200,000,000 MAU and continue to grow nicely. Turning now to the financials. Total revenue in the 2nd quarter was $2,900,000,000 up 61% or 59% on a constant currency basis. Total ad revenue was $2,700,000,000 up 67% or 65% on a constant basis. Ad revenue growth was strong around the world with each of our 4 geographic regions growing by over 60%.
Mobile ad revenue was approximately $1,660,000,000 or 62 percent of ad revenue compared to approximately 6 $60,000,000 or 41 percent of ad revenue last year. Desktop ad revenue was up 8% year over year. In Q2, the average effective price per ad increased 123% compared to last year, while ad impressions declined 25%. The decrease in ad impressions continues to be driven by the shift towards mobile usage, where people are shown fewer ads compared to desktop. The increase in the average price per ad was primarily driven by an increase in the percentage of our ads being served in News Feed.
The price volume trends were generally consistent across all four reported geographic regions. Total payments and other fees revenue was $234,000,000 up 9% versus last year. As we have noted in the past, we believe the more meaningful comparison that better reflects the organic growth rate of the payments business comes from looking at payments volume from games specifically, which was up 1% in Q2 versus last year. Our current games payment revenue comes entirely from desktop usage and we are seeing declines in the number of people using Facebook on desktop, a trend that will make growing this business challenging going forward. Turning now to expenses.
Our Q2 GAAP expenses were $1,500,000,000 up 22% and our non GAAP expenses were $1,200,000,000 up 18%. Note that cost of revenue grew 2% on a GAAP basis and 1% on a non GAAP basis, mainly driven by unusually high expenses in 2013 related to the transition out of certain leased data centers. This flatness in cost of revenue was the primary reason overall expenses grew relatively slowly. Operating expenses, excluding cost of revenue, grew 33% on a GAAP basis and 31% on a non GAAP basis. We ended Q2 with 7,185 employees, 6% from last year.
Our Q2 GAAP operating income was $1,400,000,000 representing a 48% operating margin, up from 31% year. And our non GAAP operating income was $1,700,000,000 representing a 59% non GAAP operating margin, up from 44% last year. Our GAAP and non GAAP tax rates were 43% and 36% respectively. GAAP net income was $791,000,000 or 0.30 dollars per share and non GAAP net income was $1,100,000,000 or $0.42 per share. In Q2, we spent $469,000,000 on CapEx and generated $872,000,000 of free cash flow.
We ended Q2 with approximately $14,000,000,000 in cash and investments. This excludes the impact of the Oculus acquisition, which was closed earlier week and included an approximately $400,000,000 cash payment. Now looking forward, let me start by noting that the forward looking comments I'll share today for 2014 include the impact from the recently closed acquisition of Oculus, but exclude except where otherwise noted the impact from WhatsApp, which we continue to expect will close later this year. In terms of expenses, we expect that our total 20 14 GAAP expenses, including cost of revenue stock compensation, will likely grow in the neighborhood of 30% to 35% and that our total non GAAP expenses, including cost of revenue, but excluding stock compensation will grow at a similar rate. These rates are slightly lower than our prior expectations due to efficiencies in areas like cost of revenue and G and A.
However, we believe that we are still in the early days of building out all of the services to maximize Facebook's impact on the world and we intend to continue to invest aggressively in people, products and infrastructure in the second half of twenty fourteen and beyond. Though it is premature to give a specific outlook for 2015 expenses, I wanted to note that we expect significant stock based compensation and amortization expenses as well as substantial incremental operating expense costs related to the acquisitions of Oculus and WhatsApp. These will add to our overall expenses 15 and subsequent periods. These costs will be incremental to core Facebook expenses, which will continue to grow significantly in 2015 as we ramp investments in people, products and infrastructure. For taxes, we expect GAAP and non GAAP rates for the rest of 2014 to be similar to our Q2 rates, although these could vary widely depending on our international revenue and expense mix and other factors, most notably the impact from acquisitions, including the expected closing of WhatsApp later this year.
We continue to anticipate that 2014 CapEx will be approximately $2,000,000,000 to $2,500,000,000 We expect shares outstanding to grow from around $2,600,000,000 at the end of 2013 to approximately $2,900,000,000 at the end of $9,000,000,000 at the end of 20 declined from 72% in Q1 to 61% in Q2 or 59% on a constant currency basis. This is consistent with our comments on the Q1 call when we indicated that over the course of 2014, the year over year growth rates in revenue would decline meaningfully as the comps became more difficult. We expect this trend to continue over the course of the second half of the year. While we are excited about the long term potential of our ad initiatives like Instagram, autoplay video and the Audience Network, we are still in the early days of building these businesses and expect their revenue contribution to remain small in the near term. We remain optimistic as ever about the long term opportunity to grow revenue by improving the quality and relevance of our ads and increasing the value we bring to marketers through our products, tools and technologies.
In summary, we're very pleased with our overall performance in Q2 and in particular the continued growth of our mobile audience, the strength of our ads business and the investments we're making to build long term shareholder value. With that Jay, let's open up the call for questions.
Your first question comes from the line of Eric Sheridan with UBS. Please go ahead. Should we
go to next question?
Next, we have Heather Bellini with Goldman Sachs. Please go ahead. We have our question from Eric Sheridan. Your line is open. Please go ahead.
Sorry about that. I don't know if you'd heard the question. But Cheryl, one on sort of Audience Network and Live Rail. Maybe you can give us a little better sense of the depth of the conversations with advertisers and what that might do to the platform longer term 2014 and beyond in terms of broadening out Facebook's advertising effort? And second question, Dave, on the Oculus and WhatsApp, is there any way to get a sense of employee counts at the companies or the pressure that we might see from OpEx going forward?
Thanks.
So I'll start. One of the goals we have we talk about in all of these calls is to make ads more relevant for people and marketers. And increasingly with the audience network, we have a goal to do that for publishers as well. Video is really important. It's one of the fastest growing ad mediums out there on both desktop and mobile.
So LiveRail has a leading online video advertising platform and we think we can use it to effectively expand video ads to marketers and to publishers outside of Facebook and offer greater audience reach and ability to sell to video advertisers. When you look at the audience network, we're still in really early days and we only have some publishers in our network. But we see this as an opportunity to provide greater reach for Facebook marketers and developers, again, to improve the relevance of the ads people see both on and off Facebook.
Thanks, Eric. On Oculus and WhatsApp, we're in very much in investment mode on our overall business and we expect to continue to ramp investments in the core business through 2015. And like I said, we'll be layering on top of that costs related to Oculus and WhatsApp. But we're not getting into more specifics on the exact headcounts on those. But we believe those are significant opportunities in the long run and so we're going to be investing aggressively accordingly.
Your next question comes from Heather Bellini with Goldman Sachs. Your line is
open. Great. Thanks again for the question. Two quick questions for me. First would just be, if you could share with us any qualitative commentary about the breadth of mobile app revenue.
There's always a lot of debate back and forth about how big mobile app installs are. And if there's anything you could share with us about how the breadth of these the breadth of mobile has kind of been changing over the last year or so? And then the follow-up question would just be related to how your conversations with advertisers are changing as people start to think collectively about their TV and video budget together. I'm just wondering if you're starting to see your conversations with the big TV advertisers start to change somewhat over the last 6 months or so. Thank you.
So when you think about our mobile ads and I'm really glad you asked this question. I do think sometimes people think that mobile app install ads are all other revenue or a great majority of the revenue and they're not. They're only part of the mobile ads revenue. Our mobile ads revenue is pretty it's broad based. We have large brand advertisers, small SMBs, direct response advertisers as well as developers using our mobile ads.
The mobile app install ads, which are run not only by developers, but also by large companies that want to get people to install apps are growing. They remain a good part of our mobile ads revenue and we're excited about the opportunities there. But we see our opportunities in mobile ads as much broader than just installing apps. To the second question, I do think one of the things that's happened in the last really year, year and a half on Facebook is people understanding how strong the creative opportunity is. We've built out the technology platform and made our product investments and we've really created, particularly with the move to mobile on our ads and news feeds, an opportunity to do great creative storytelling.
A great recent example is progressive the Progressive baby ads, if you've seen them. They're really engaging and really fun, but they're making a really important point, which is people should be buying their own insurance. But the ability for them to do that ad is based on the technology we've created and also the great work they've done with Arnold Worldwide, their agency, on the creative part. And so I think for a long time, people have thought TV was for creative storytelling and online ads were for more targeted text based results. And I think we're seeing that change, which means that the way people approach TV, they'll also approach Facebook and are starting to, which makes those budgets work much better together.
Your next question comes from the line of Douglas Anmuth with JPMorgan. Your line is open. Great. Thanks for taking the question. Two things I wanted to ask.
First, Mark, there's been talk I know it was on your blog about testing buy button within the platform. So I was hoping you could talk about how important you think commerce is to Facebook going forward and then perhaps also payments as well? And then secondly, Sheryl, you mentioned some of the major brands that advertised during the World Cup. Can you talk about how you get the follow through from those brands now that that major event has passed and how you keep those ad dollars on Facebook? Thanks.
So on the buy button, we launched a small test in the U. S. Only, which enables people to hit a buy button and in pages on pages or in page post ads on Facebook, it streamlines the process of buying from our clients. No one's buying from us. We're just streamlining the process of buying from our clients.
I think commerce is really important and is a growing important part of our business as all marketer segments are growing. But I don't think people should confuse that with Facebook selling things directly. The more people buy online, the more people buy things they discover through their mobile phones, the more people discover things from a news feed and go on to purchase, the more important we are in driving e commerce and I think we are increasingly important. That doesn't mean we're going to or have to sell products.
Yes. And I mean, I'd just add to that, because some of the question was about payments that we will clearly do work in payments to accept payments for advertising and on platform and other things that we do. But just because we'll do that doesn't we still basically view ourselves as a partner to other companies in the payment space rather than trying to compete directly for that. Our main business is advertising. And I think we're mostly to the extent that we do payments it's going to be supportive to that.
I wanted to make one more point just related to that. So I think some of the questions around payments are connected to what we're planning on doing in the other apps outside of Facebook, right? So things like Messenger and WhatsApp over time when that closes in and Instagram. And I really do just want to emphasize that there's a of work to set up the foundation for having a good business community and ecosystem in those that we think is going to be years of work before those are huge businesses for us. And I kind of I liken where we are now on something like Messenger to where we were on Facebook in like 2006 or 2007 where it was primarily consumer product at the time where you really only communicated with friends.
And a bunch of people asked us and said that we should put ads in. But before we did that, we wanted to create really good organic consumer experiences for people to interact with different entities. So we created pages, so people could interact with organic businesses. And then in order to make it so that businesses and public figures and folks would create pages, we offered insights and different products. And we gave all those things away for free.
Pages were free and continue to be free. And that's partially why we have 30,000,000 businesses today using Pages on the platform. And Insights, we kind of gave away for free in order to enable more folks to use Pages. But only after we had a good kind of organic interaction that people could and would want to interact with these different businesses and entities that we really layer ads on top of that and start to build the business that we have today. So I just think it's worth emphasizing this because we've said in a number of comments that we think that some of these newer initiatives are going to ramp over time.
We really do mean that and we are serious about doing this the right way and building up the be an impact that you'll notice in the next, I don't know, short term period of time.
To the World Cup part of your question, brands certainly use the World Cup in big events like this to launch things that they continue those ad campaigns. They also have other big events that come along as well as their own events around product launches. And so we think obviously not every day is a World Cup, but there are lots of opportunities throughout the year and through the product cycle to work with brand advertisers in big ways.
Your next question comes from Ross Sandler with Deutsche Bank. Your line is open.
Great. Thanks. I had one question for Mark on the Perc side and then one for Dave. Mark, so AppLink's just launched, but if you go out a few years, how much do you think something like deep linking could increase engagement or add effectiveness for Facebook? And for those 1,000,000,000 links that you have up and running already, what are you seeing in those early tests?
And then Dave, we know you don't break out the price versus volume metrics for mobile, but just directionally, could you give us some color on how the ad impression growth in mobile compares with the 31% MAU growth in mobile? Thanks.
Sure. So I don't have much color that's useful to share here on App Links. It's still early. People have marked up a bunch of apps with this metadata that allows us to search for it. But search for Facebook is going to be a multiyear voyage.
And there's just so much content that is unique to the Facebook ecosystem that we can answer questions for you that really no other service can. I mean, just like the other day, I was curious about finding out which of a person which of one of my friends' friends like worked at a company. And I think I don't know any other service where you can just go do that query, but on Facebook you can. And the secret to this is going to be basically just over a long period of time indexing all of the different content that's on Facebook in every different way. So we started off with people because obviously you need to be able to find people in order to use the product and add friends and just have our core kind of ecosystem work.
But we're indexing more of the connections now we're getting into more of the content and it's a huge amount of content. I think there's more than a trillion posts which some of the search engineers on the team like to remind me is bigger than any web search corpus that's out there. But that's just kind of one part of the data and we're going to keep on doing more and more. We're going to start off focusing on stuff that's unique to Facebook that you couldn't really answer those questions elsewhere. App links by definition of being outside of Facebook are not going to be unique to Facebook.
So we'll get to that over time. I mean, I think it will be a valuable part of the ecosystem. But honestly, we're mostly interested in that to enable value for other developers and pushing distribution to them than we are for our own search. I mean, it's going to enable interesting ways for people to for a developer to be able to make it so that people in their apps can share content on Facebook and then link directly to the right part of the app and enable some engagement ads. So that way a developer can say it's like a person was using my app and they were going to buy something, but they dropped out of the checkout flow.
So now we're going to have an ad that helps them link right back to the checkout flow, so that way they can complete their conversion. And you want deep linking to be able to enable things like that, but it's going to take a while for this to play out with search. Yes. And Ross on your question on mobile ads, mobile DAU is ramping nicely at 39% growth and we're seeing it grow nicely across all of our geographic regions. Of course, mobile ads are ramping as well.
In terms of pricing, we don't break it out. But on the reported pricing trend, as I was as I think I made clear, the 123% increase in price was driven by mix shift with a higher a higher percentage of news feed ads. And news feed ads are really effective for marketers and that includes mobile news feed ads as well. They deliver a lot of value for marketers. That's why they're getting a higher price in the auction, because the price of ads really correlates to the value that they create.
And we continue to focus on making those ad units better and better, more relevant and targeted for our the people who use Facebook as well as for marketers. And we're seeing good results. Marketers are getting good ROIs and they're coming back and spending more with us. So we're pleased about all of that.
Your next question comes from Justin Post with Merrill Lynch. Your line is open.
Great. I'd like to follow-up a little bit on the ad pricing, obviously up 123%. Cheryl, maybe you can comment a little bit about the organic growth like for like ads there. And do you see opportunities to continue to see nice pricing growth as you look out the next couple of years? Years?
And then as you think about the new ad formats, video and other things, would you think that could continue to drive pricing higher, meaning new ad formats could drive even more value than the existing ads that you have on Facebook? Thank
you. Hey, Justin, it's Dave. Yes, just following up on that. In terms of the pricing, as I said, it's really about the mix shift towards the news feed ads is what's driving the overall reported pricing trend. But we are focused on making our ads all better and driving better returns for our marketers.
And we see that reflected in the price. There's other things, for instance, we're making our right hand column ads more effective by changing the format of those. Those will be higher value to our marketers because they'll drive more engagement. And it will but there'll be fewer of them. So that will impact pricing.
But everything that we're doing is about trying to drive more value for our marketers as well as trying to drive more relevant ad experiences for the people who use Facebook. And if we're successful in doing that, we'll drive ROI for the marketers, we'll drive good experiences and we'll get good pricing.
Your next question comes from Mark Mahaney with RBC Capital Markets. Your line is open.
Thanks. Two questions, please. Anything you could share with us regards to China and efforts to develop more of a presence there? And then maybe a follow-up question on David Marcus coming over and as somebody with a huge payments background running the messaging product, it's kind of like hiring, signing Messi up to the Miami Heat like it's a little an odd transition. Are we looking at it wrong?
Is there any particular reason why he wouldn't be more focused on payments? Thank you.
So I'll talk about China. Our mission is to enable everyone in the world to share and connect. And so we've been studying and learning about China for a number of years and we remain very interested. We are seeing Chinese based companies use Facebook to reach a global audience and we are we think we have an important opportunity just with their export market and we're focused on that for now.
Yes. And I mean on Messenger and David, I mean I think he is just a real talented product generalist. I mean he's done a number of different things including in his past he ran and built a messaging company. Most recently clearly he ran a very important company and I think he was pretty successful in helping get good get really good results there. Messenger will have over time there will be some overlap between that and payments.
But I guess what I'm just trying to say is 2 things. 1 is the payments piece will be a part of what will help drive the overall success and help people share with each other and interact with businesses. But it's we're really focused on the interactions overall rather than the mechanism. And David shares that here. And the second thing is just that there's so much groundwork that we need to do in order to make it so that people are communicating with businesses and public figures and entities in these other apps that we're building, which is part of the business ecosystem.
And I really can't underscore this enough that we have a lot of work to do and we could take the cheap and easy approach and try to put ads in or do payments and make some money in the short term, but we're not going to do that. So to the extent that any of your models or anything reflects that we might be doing that, I would strongly encourage you to adjust that, because we're not going to and we're going to take the time to do this in the way that we think that's going to be right over multiple years.
Your next question comes from Arvind Bhatia with Stern AG. Your line is open.
Thank you very much. Just a quick question on WhatsApp. I realize it hasn't closed yet, but can you give us any indications to us on kind of the user trends and engagement etcetera? Sheryl you mentioned India where we see a lot of usage coming out of there for WhatsApp in particular. Any comments there would be helpful.
No. I mean the deal hasn't closed. We have nothing to say.
Our next question comes from Neel Doshi with CRT Capital. Your line is open.
Great. Thanks guys. Cheryl, I think attribution could be a very big opportunity, especially for local businesses to help them realize ROIs or people are going from online to offline. With 30,000,000 businesses now on Facebook, how are you helping those businesses realize the online to offline conversion through Facebook in order to drive more dollars going to local businesses? Thanks.
I agree strongly that this is a huge opportunity. Our goal with all of our clients from the biggest to the smallest is to drive their business results and that's usually selling a product, sometimes online, but often in stores. We've done a lot of work over the last year or 2 on measurement. We talk about measurement in all of these calls. And that's because investing in measurement and connecting not just from online to online, but online to offline is super important, because if we can prove those results to our marketers, large and small, they'll continue to invest.
We think we have a real advantage here that we have real identity. We have real identity across the desktop and across mobile. And we have found ways in very privacy protective ways to work with 3rd parties, 3rd party users of data to connect offline and on offline sales to online ads and those investments remain a very big focus for us.
Your next question comes from Ken Sena with Evercore. Your line is open.
Thanks. So you mentioned over 1,000,000,000 users 80% of app developers use the Facebook login on iOS and Android. And when we think about Facebook as a platform, can you provide any stats on the number of developers who are starting to build their experience on Facebook? And then how integrated do they need to be to see things like app linking, native formats, autoplay video or other? Thanks.
So we've shifted to this model on mobile where developers aren't really building their apps inside Facebook, right? So we're not an operating system. We had a little bit more of this dynamic with Canvas on desktop. But now we've shifted the strategy to helping developers with 3 things build, grow and monetize their apps. And we have a number of services that developers can plug into their apps to help out with all three of those.
So for example, we have for helping people build their app, we do things like log in and we have services like parse that help developers build apps more easily. That stuff is all great for helping folks build social apps that in a way that's faster than they could have otherwise. In terms of Gro, I mean, we offer tools like sharing and messaging that people can enable our developers can enable their users to be able to organically spread the app. We also have things like app installs and engagement ads to make it so that developers can pay to increase that. And then on the monetized side, we are rolling out the audience network and we have and then I guess on Canvas, we have things like payments for to help developers monetize.
And that's an increasing focus as well and audience network is new and it's getting started. So it's again, it's one of these things that will be pretty slow for a while because we really want to do it right. But that's be an important part of this as well. So I think that's kind of how you want to think about developers. And right now we're really proud that 80% of the top developers see value in touching a part of our platform.
We obviously want to get the last 20s, but we're excited about the progress so far.
And in terms of those developers using our different ad products, as we say we roll out slowly and slowly usually means we pick a handful of advertisers to work with. That's certainly what we've been doing on autoplay video ads. But over time, our goal is to make our ad products available to all of our marketer segments and that's what we'll work on. So over the long any developer, any small or large business, whether they're using other parts of our platform or not, would be able to purchase any type of our ads.
Your next question comes from Brian Nowak with SIG. Your line is open.
Thanks for taking my questions. I have 2. The first one is on the video ads. You mentioned it's the early days on video advertising. And just wondering if you could talk to some of your early learnings, what you're pleased with and where you see areas for improvement and which metrics you're gauging to kind of determine when to undergo a broader rollout?
And then secondly, I think you mentioned the larger higher quality right rail desktop ads. There's been some changes in experimentation around that inventory. How has the advertiser receptivity been to those ad units compared to the old Right Rail? And where are those dollars coming from? Is that new dollars to the platform?
Or are they shifting from old sponsored stories or old Right Rail? Thanks.
So I'll talk about video and then Sheryl can answer on the right hand tone. The biggest thing that we want to make sure is that quality is really good as we roll this out. And that's going to be the same on all of these different initiatives. And one of the reasons why we're optimistic about video ads is sorry, in autoplay specifically as a format for both organic and paid content is that you're scrolling through feed and if the content catches your eye and you like it, then it's playing and it's loaded and you can just easily continue watching it or otherwise the person has complete control and if they don't like it, they can just keep on going through it. So the content has to be really good and we think that that's going to be a really high quality experience.
There are still a number of things that we really want to prove and make sure that we're doing well here. We want to make sure that it's that when people see an autoplay video, that's not only paid content, we want a lot of that to be organic content as well. So we're trying to ramp up the amount of good public content and content that people share at the same time as we're ramping up on the autoplay video ads. We also want to make sure that this doesn't consume a lot of people's data. So we're just being really careful about how we handle that and getting that really right across different markets.
That's going to be a different thing that we want to be really sensitive to. So it really just in a word, this all comes down to quality and we're more focused on just making sure that this is the right and best thing over time than something in the near term. And that I think is a theme of a lot of the areas that we've talked about, whether it's the new apps that we're building, things like Messenger or Instagram and what we're doing there or things like Audience Network, which we just announced or video ads. There's just a lot of things that we're super excited about. We obviously will talk about them publicly because we're working with partners and we're excited to talk about them here as well because we do really think that these are going to be great things to help build businesses over time.
But we want to make sure that we don't get ahead of ourselves because these things are early and quality is the most important thing for growing this the right way over time.
On the right hand column redesign, the redesign was driven by making the ads more consistent with the News Feed, which results in fewer but larger ads. Budgets don't come from any one place. And I think when you think about Facebook's growing part in the ad ecosystem, you really have to think about ad dollars shifting online as the majority of the driver of budget shifting and ad dollars coming on to mobile. We are pleased that we see higher engagement rates from the people who are shown the new ads compared to the old, which makes us optimistic that these are more valuable.
Your next
in a question in a different direction regarding privacy and maybe you could just walk us through your current thoughts. The reason I ask is because Facebook recently introduced the anonymous login product at F8 this year and new services like Save are hidden from friends unless users specifically opt in. Can you just give us a sense, is this kind of a change of strategic shift in thinking or tone with regards to privacy? Thanks so much.
This is it's a really important question. I think something that's One of the things that we focus on the most is creating private spaces for people to share things and have interactions that they couldn't have had elsewhere. So if you go back to the very beginning of Facebook, rewind 10 years, I mean there were blogs and things where you could be completely public and there were email, right, so you could circulate something completely privately. But there was no space where you could share with just your friends, right? And have that I mean it wasn't a completely private experience.
It's not completely public and that it's 100 or 150 of the people that you care about. And creating that space, which was a space that had the kind of privacy that no one had ever seen before was what enabled and continues to enable the kind of interactions and the content that people feel comfortable sharing in this network that don't exist in other places in the world. So we're constantly looking for new opportunities to create new dynamics like that and open up new different private spaces for people where they can then feel comfortable sharing and having the freedom to express things that you otherwise wouldn't be able to. It's one of the reasons why I'm personally so excited about messaging, because I mean it's like right now I think at some level there are only so many photos that you're going to want to share with all of your friends. I mean we still think that there's more to do there.
But I mean, but like it's the amount of messaging and how quickly we see that growing is crazy, because like there's just a lot more that people want to express and that they need the tools to express with smaller groups of people, not just one person at a time, but smaller groups as well. Things like anonymous login totally unlock different behaviors, right? I mean, how many times would you want to sign into an app, but you don't necessarily want to share a lot of information with that app. But if you can do it anonymously, we think that's going to unlock a lot of different interactions and experiences that people want to have. So we view our job as like very fundamentally providing people with these spaces and tools, which I think is very different from how a lot of people think about what Facebook is.
But it's an important thing to think about how we do our product development.
Your next question comes from Colin Sebastian with Robert Baird. Your line is open.
Thanks. I have a couple of questions as well. First on mobile advertising and ad loads, just curious what you are seeing in terms of the ad load thresholds, if that you're at the point now where the relevancy and quality of ads means that you can tick that up perhaps a little bit? And then secondly, on Oculus and virtual reality applications, how should we think about the pace of development of this technology and the potential integration with Facebook's applications? Thank you.
Sure. I can take care of the mobile ad load question. So ad load is really one of dozens of factors that we focus on. Others are of course the quality, the relevance and then the prominence of the ads. And we monitor the sentiment and engagement of people engaging in News Feed.
And we're really pleased with the strength of sentiment and engagement as we've ramped up News Feed ads. And we feel like we're in a good position given where we are with that to continue to grow the advertising business, while driving good user experience. So we're in a good place on that. Yes. I can talk about Oculus.
So we're really excited about this. The acquisition just closed earlier this week and we're really excited to welcome that team. They're extremely talented and have pulled off something that people have been talking about for a really long time and now it's possible given the technology that this team has developed. And this hits on a different part of our strategy, which the way that I organize my remarks every quarter are around these 10 year goals and themes that we have for the company, connecting everyone, understanding the world, helping to build the knowledge economy and these future platforms, which so what I'm talking about how I think things like the businesses that we're talking about are further out than you think. I think that this stuff is even further out than that, right?
And but there are huge opportunities to build the next generation of computing platforms. When mobile was getting defined, we were basically just getting founded, right? I mean in 2,004, the first smartphone came out in 2,003. And we've mostly been a company that has played on top of the different mobile foundations that other companies have built. And one of the things that I care really deeply about on kind of a tenure arc for the company is having a different relationship to whatever the next set of computing platforms and investing accordingly now to make sure that when the next set of computing platforms get defined, we can help define what the next generation of computing is going to be.
So I think virtual reality, augmented reality, vision, some of the AI work that we're doing is all going to play into this in an important way. And I just think like while I was emphasizing that we're early on some of those businesses and we're not going to rush those. The flip side of the coin is to emphasize that we're also going to spend a lot and invest very heavily in a bunch of these things to do it right over the long term. And so I mean, I think David pointed out that we expect to continue investing heavily and that our costs will increase. And I just want to underscore that as well, because I expect that that to continue to be true.
And it's not that we're necessarily going to go out and have a lot more new strategic priorities,
Operator, I think we have time for one last question.
Your last question will come from Ben Schachter with Macquarie. Your line is open.
Thanks for taking my question. Mark, you talked about a focus on public content. Does that include a focus on exclusive content? And should we expect that you'll pay for or have revenue share agreements for exclusive content with some key public figures? And then separately on search, I think you still have quite a large team working on improving search.
But from our vantage point, we haven't seen many changes since the original beta Grass Search product launch. So when should we expect to see those improvements? And how would you rank search in terms of your priorities? And finally, just a quick housekeeping question. David, the D and A continues to trend down over the past few quarters.
Why is that happening? And should we expect that to continue? Thanks.
I can take the D and A question first, if you'd like. So, ultimately, depreciation is going to track more closely against the CapEx. So in the first half of the year, we've been aggressively investing in the things we want to invest in. That includes infrastructure. So CapEx has been is up 40% in the first half of the year.
There are some investments that we're making notably in the Iowa data center also the new headquarters we're building where those facilities have not gone into service, so they're not hitting depreciation yet. So we're making the big investments in CapEx that will ultimately flow through in depreciation. So I think in short the answer to your question is we'll see depreciation come up as those things come online. And I guess I can answer the others. So on public content, we actually do get a lot of exclusive content.
We don't pay for it. But I mean so I mean this week for example, I think Shakira hit her 100,000,000 fans moment on Facebook. And I mean part of the reason why some of these public figures and political leaders and folks have such big following is because they're constantly providing insight into their lives and unique types of content that other folks that you can't get anywhere else. And there's a format that I makes sense for Facebook. It's not you're not going to come to Facebook to watch a movie or watch a whole TV show.
I mean that's really long form stuff. But I mean in the mode that we have today in our service that kind of attracts and is the best place for a number of types of content like this that we're starting to see that we get. So we're mostly focused on driving success for partners, whether they're news organizations that are publishing content that people share or public figures and individuals who are engaging directly on Facebook. Our view is that the more success in distribution building for Facebook. And tied to search, I think the I mentioned in my opening remarks that this quarter, I think for the first time, we are over on average 1,000,000,000 searches a day, which is awesome and it's something that we're really proud of and have worked a lot on, especially given that we generally found that people search a little bit less on average on mobile.
So we went through a period where in order to have that increase, done. There's just so much more content that needs to get indexed. I mean, if you want to go find that Shakira video that I was just talking about, I don't know if today the product fully delivers on that, but we will soon. And in the next 6 months, we're going to be able to do that. And then if we do well and then a year later, we're going to have more content in the system and build index that better.
So it's just an ongoing thing. There's huge potential. There are a lot of questions that only Facebook can answer that the other services aren't going to be able to answer for you. We're really committed to investing in that and building out this unique service over the long term. And I think at some point there's going to an inflection where it starts to just be useful for a lot of use cases.
But that may still be years away, but we're just committed to doing this investment and making this right.
Great. Thank you for joining us today. We appreciate your time and we look forward to speaking with you again.
This concludes today's conference call. You may now disconnect.