Good afternoon. My name is Mike, and I will be your conference operator today. At this time, I would like to welcome everyone to the Facebook second quarter 2012 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then 1 on your telephone keypad. If you would like to withdraw your question, please press the pound key. Thank you. Ms. Crawford, you may begin your conference call.
Thank you. Good afternoon, and welcome to Facebook's first earnings conference call. Joining me today to talk about our second quarter results are Mark Zuckerberg, CEO, Sheryl Sandberg, COO, and David Ebersman, CFO. Before we get started, I'd like to take this opportunity to remind you that during the course of this call, we will make forward-looking statements regarding future events and the future financial performance of the company. We caution you to consider the important risk factors that could cause actual results to differ materially from those in the forward-looking statements in the press release and this conference call. These risk factors are described in our press release and are more fully detailed under the caption risk factors in our final prospectus filed with the SEC on May 18th, 2012.
Please note that the date of this conference call is July 26th, 2012, and any forward-looking statements that we make today are based on assumptions as of this date. 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 earnings press release. This call is being broadcast on the internet and is available on the investor relations section of the Facebook website at investor.fb.com. A rebroadcast of the call will be available after 6:00 P.M. Pacific Time today. The earnings press release and an accompanying investor presentation are also available on our website. After management's remarks, we will host a Q&A session. Now I'd like to turn the call over to Mark.
Thank you, Deborah, and thanks to everyone listening for joining Facebook's first earnings call as a public company. We appreciate having the opportunity to speak directly to all of you and to share our perspective on how we're doing in fulfilling our mission of making the world more open and connected. Hopefully, you'll come away from today's call with a clear sense of the investments we're making to create value over the long term by making Facebook even more useful for all of the people who use our services worldwide. We ended June with 955 million monthly active users, over half of whom used Facebook on a daily basis, and over half of whom used Facebook from mobile devices.
We saw more people using our services at the end of June than at the end of March across all key countries, including 3 million more people in the U.S. Growing the network of people who use Facebook and expanding the social experiences available to them remains the foundation of our efforts and the key to our future success. I'm going to focus the rest of my comments today on our top priorities across our product areas for 2012, specifically mobile, platform, and social ads. Let's start with mobile. Mobile is a huge opportunity for Facebook. Our goal is to connect everyone in the world, and over the next 5 years, we expect 4 or 5 billion people to have smartphones. That's more than twice as many people as have computers today. Building great services for these devices is essential for us to help people connect.
We also think that people are inherently social, and having a device with you wherever you are creates more opportunities for sharing and connecting. We're finding that people are quickly adopting our mobile services. As of the end of June, 543 million people were actively using our mobile services each month. That's 67% more people than the 325 million who were using our mobile services just a year ago. We've also found that people who use our mobile services are more active Facebook users than people who only use our desktop services. On average, mobile users are around 20% more likely to use Facebook on any given day. Mobile not only gives us the potential to connect more people with our services, but it also gives us the ability to provide more value and a more deeply engaging experience.
We don't just want to have the most widely used mobile apps, though. We want to build the best apps, and we also want to build experiences that are as deeply integrated as possible into every device and mobile app that people use. We're investing very heavily in improving our mobile apps, primarily across iOS, Android, and the mobile web. This involves building out world-class teams with competencies in different technical stacks, making significant investments in improving the technical foundation of our apps, and designing new products and integrating into these mobile systems as deeply as we can. We've made some good progress in the past quarter as we released our camera app, shipped new releases of Messenger, shipped two releases of our Android app, agreed to acquire Instagram, and worked with Apple to integrate Facebook into their upcoming release of iOS.
Going forward, you should expect to see a frequency of improvements, to each of these mobile experiences. Finally, we're also beginning to demonstrate that we can advertise effectively within the mobile experience. I'll discuss social ads more in a minute, but at a high level, our Sponsored Stories, which we launched in mobile News Feed earlier this year, have grown quickly and demonstrated early success. Now let's shift to platform. We believe one of the biggest opportunities we have is to create the identity and social layer that all new apps and websites can be built on top of. We think almost every product is better when you can experience it with the people you care about. Over time, we expect almost all of these products should naturally become social.
Since there's no way we could ever build all of these ourselves, we're focused on building a successful platform, which enables developers to build great social experiences into their own apps by integrating with and exchanging information with Facebook. Our platform strategy enables millions of developers to build better products and helps us provide a lot of value to the people who use Facebook. We've already seen how social dynamics can transform industries like gaming, and we believe other industries like music are starting to follow as well. Our goal is to make it easy for developers to build these social apps. We do this in two ways. First, by enabling people to sign into apps using Facebook, and thereby bringing their real identities, friends, and other information to the apps so that the apps can offer a more personalized experience.
Second, by enabling people to share what they're doing in these apps with their friends back on Facebook. These apps can get access to our distribution, and they can scale and grow quickly. Today, you can download Spotify, log in with Facebook, and immediately see your music player light up with songs your friends are listening to and recommending. We can imagine a day when you buy a new car, and by logging into the car's computer with Facebook, you can similarly have it immediately light up with music, addresses, restaurants, stores, and other destinations targeted specifically for you based on your friends and your interests. We believe social products like this will provide better experiences. If we're right, then Facebook is in a unique place to enable these experiences to get built.
It's worth calling out that our vision for platform is bigger than what most people perceive. We believe our platform is about bringing social context to apps and providing distribution for apps regardless of what environment they're built in, including mobile apps, websites, or at our own canvas on our own website. When many people think about our platform, they think only about games that are built inside of the Facebook website directly, and not all of the other kinds of apps that developers can build. Our Open Graph platform is what we call the tools we launched last year that enable developers to easily integrate more kinds of actions and experiences with Facebook. Open Graph has already been adopted by many of the most popular websites and mobile apps. Many of the top apps in the iOS and Android app stores are integrated with Facebook.
Apps like Spotify, Netflix, Pinterest, Foursquare, Instagram, Airbnb, Tumblr, Viddy, Nike+, SongPop, and thousands more have integrated with Open Graph to provide better social experiences and grow their user bases. Already, people are sharing nearly a billion pieces of content each day using Open Graph. These Open Graph integrations enable Facebook users to share more of the content they want with their friends. This helps make our service more engaging overall, since there's more content to consume. Additionally, we found that our largest developers also tend to become our largest advertisers as they look to further boost the distribution they're getting from us. We're still in the early days of our Open Graph effort, and we're continually working to improve how it works. A big focus for us right now is giving people more tools to control how they share their information using these integrations.
We're also working on improving the distribution that these apps get in exchange for the content they help people share. These are some complex problems that will take time to work out, but you should expect us to make steady progress towards building out this ecosystem. Finally, I'd like to discuss our social ads initiatives. The basic idea here is that the best type of advertising is a message from a friend. Facebook wants to offer advertisers the best tools to create ads that are social. We believe that the more our advertising includes interesting content from people you care about, the more marketers will be able to create advertising that adds value to people's experience on Facebook. Advertising on Facebook today is already delivering a compelling ROI, even though most advertising on Facebook today isn't social. We believe the experience can be better and more social.
For example, if I like a restaurant, then my friends might see that I like that place, and that's likely a more convincing ad than anything the restaurant would produce on its own. That's an example of aligning social activity and ads. One important aspect of social ads is that since they're based on social activity, they fit into our News Feed product on both mobile and desktop. This is important because mobile users already spend so much time reading their News Feed. These social ads and News Feed give us a clear path to building a strong business on mobile. I mentioned earlier that we recently began to roll out our Sponsored Stories in both desktop and mobile News Feed.
By the end of June, Sponsored Stories and News Feed was at a run rate of over $1 million per day in revenue, and about half of that is coming from mobile. This is an encouraging start in our effort to generate revenue from the mobile use of Facebook. We know that social ads perform much better than non-social ads, so our job over the next few years is to increase the percentage of ads that are social and engaging. Overall, I hope my comments here give you a good sense of our priorities around mobile platforms and social ads. We have a lot of interesting things going on here. There are a lot of challenges, and these are the types of problems that we like to work on.
We're working hard to staff up across the company, especially in the technical groups, to make sure that we make progress against these goals. We just announced we've begun recruiting engineers to work in our London office to help us access talent across Europe. We're pleased that the company and culture are centered on building great products and around our mission to make the world more open and connected. Thanks again for taking the time to be on the call with us today, and now I'd like to hand it over to Sheryl.
Thanks, Mark. I'm going to focus today on Facebook's opportunities in the advertising market and the progress we've made in the past quarter. Our total second quarter revenue of $1.18 billion, $992 million came from advertising. This represents a 32% year-over-year increase overall and a 28% increase for advertising. Facebook's power to change the way people and businesses influence each other creates unique advertising opportunities. We offer marketers the ability to reach a mass or a targeted audience and establish real and ongoing relationships directly with their customers. Marketers have always known that a recommendation from a friend is one of the most powerful ways to sell their products. Marketing on Facebook is fundamentally different than other mediums because messages can be shared from friend to friend. This is word-of-mouth marketing at an unprecedented scale.
In an increasingly crowded world, this is essential for the world's largest global companies, as well as the small business around the corner. We believe we are very well positioned to compete for advertising dollars throughout the entire marketing funnel. From the very top, where companies focus on generating demand, to the bottom, where the focus is on fulfilling demand. The majority of the advertising spend that has migrated online to date has been for demand fulfillment, which happens when a customer already has intent to purchase. Search advertising has been the primary driver of this migration. Facebook is also affected at the bottom of the funnel, with gaming being a primary example. We believe that Facebook also helps marketers build brands and generate demand. This is important because the majority of the $600 billion global advertising market is spent on demand generation.
Over the past quarter, we have made important progress in our monetization efforts in three areas. First, rolling out new ad products. Second, demonstrating the ROI of Facebook ad spend. Third, making it easier for businesses to advertise with us. I'll start with the new products we've introduced. Earlier this year, we launched Sponsored Stories in Facebook News Feed. Sponsored Stories are regular stories that people see in their News Feed already, updates, likes, comments posted to Facebook every day, that a marketer pays to highlight. For example, if I post a positive review of a product I purchased at Walmart, about 20% of my friends would see the post, depending on things like when they check their News Feed. Using Sponsored Stories, Walmart can pay to boost distribution of this post so a larger percentage of my friends see it.
Delivering social messages in Facebook's News Feed is an extraordinary opportunity for marketers. On the web, people spend more time using Facebook than any other service by far. We believe this is true on mobile devices as well. Moreover, Facebook users spend a large percentage of their time on News Feed. Sponsored Stories enable marketers to interact with their customers where their customers are spending their time. Our early results are encouraging. As measured by click-through rates, Sponsored Stories in News Feed perform multiple times better on both desktop and mobile than ads in the right-hand column. Sponsored Stories in News Feed are the cornerstone of our mobile monetization strategy. News Feed functions in exactly the same way, whether you're on a desktop or phone. This is important because we avoid the dilemma faced by other industry players: where to put ads on a smaller screen.
With News Feed, marketing is incorporated seamlessly into the user experience on mobile devices. We recently enabled our advertisers to buy ads exclusively in mobile News Feed. We're seeing strong interest, particularly from our clients who know mobile is critical to reaching new customers, especially in emerging markets. As always at Facebook, the user experience is paramount. We've been deliberate in introducing Sponsored Stories in a way that maintains the experience users have with our service. As we continue to roll out Sponsored Stories in News Feed, we are carefully monitoring user engagement and sentiment, and we're pleased with the results to date. We believe that Sponsored Stories in News Feed has the potential to be among the most relevant ad formats for marketers.
As Mark mentioned, in the short amount of time since launch, by the end of Q2, we were already generating more than $1 million a day for this product, with approximately half of this generated in mobile. In Q2, we also began testing another new ad product. The Facebook Ad Exchange, or FBX, allows marketers to bid in real time for ad impressions on Facebook. Real-time bidding is a standard industry practice to help advertisers reach the right customer at the right time, and it will help us deliver more relevant ads to users. We're in an early alpha test with FBX, but advertiser interest is strong. eMarketer estimates this market to be approximately $2 billion in the U.S. alone. A second area of progress this quarter has come from our efforts to better demonstrate the effectiveness of ad spend on Facebook.
Today, nearly every one of the global Ad Age 100 advertisers spends with us every quarter. To date, most only allocate a small slice of their budget to Facebook, even though their customers spend large amounts of time using our service. This imbalance represents a substantial opportunity for us if we can educate the market about the ROI our ads deliver. We have partnered with Nielsen to demonstrate that Facebook ads are not just seen, but remembered. Studies of over 500 ad campaigns show that on average, Facebook ads drive 98% better ad recall and 31% higher brand awareness than non-Facebook online ad campaigns. Independent research has also demonstrated that social context significantly increases both ad recall and brand awareness of Facebook ads. This is not surprising, since people are more likely to remember a message that comes from a friend.
We recognize that ad recall is important, but it's only the first step in delivering results for marketers. Marketers' ROI is generated when the cash register rings. We're making great progress measuring our ability to help marketers generate sales. Independent analysis of more than 60 campaigns, 45 of which were completed in the first half of this year, show that 70% of those campaigns delivered a return on ad spend of three times or better, and 49% of those campaigns delivered a return of five times or better. I'd like to share a few examples. Electronic Arts recently spent $2.75 million promoting Battlefield 3 on Facebook. They attributed $12.1 million of their sales to these ads, translating to a 4.4 times return on their Facebook marketing spend. Barclaycard repurchased Facebook ads as a part of a direct response strategy to promote NFL team-branded credit cards.
They targeted the ads to people based on the specific teams those people liked. Their Facebook ads generated a 40% higher conversion rate than any other online ad platforms they used in the campaign. This made their cost per acquisition 48% lower on Facebook than from other online ad buys. In total, 60% of the approved credit card applications from the campaign came from Facebook. Wooga, an international games developer, used mobile News Feed to drive installs of its Diamond Dash game. They increased downloads by 26% in the U.S., 29% in Germany, and 37% in France, all at attractive cost per app install. This is just the beginning of our important effort to educate the market about the ROI Facebook ads deliver. We will continue to work account by account and campaign by campaign to demonstrate the value we provide.
Finally, our third area of progress has been to make it easier for small and medium-sized businesses to advertise on Facebook. Local business advertising is considered by many to be the holy grail of internet advertising because the market opportunity is so great. This has proven difficult, however, because small business owners often lack the time or ability to adopt new technology. Facebook is uniquely accessible to them, as they typically learn to use Facebook by setting up personal profiles or timelines. They discover the value our service can provide them as business owners. Many of the world's approximately 60 million business owners are already Facebook users. Over 11 million businesses already have Pages on Facebook. Over seven million of these Pages are actively used each and every month. In addition, hundreds of thousands of small businesses advertise with us.
By making it easier to create a business Page and run ads, we believe we can increase the number of small and local businesses who use our tools. In the last quarter, we began testing simpler ads and easier purchase flows. For example, Page owners can now turn a post into an ad campaign with just a few clicks. We're still in the early days of building our monetization engine. For the rest of 2012, we plan to focus on the same priorities I have discussed, in particular, the ramp-up of Sponsored Stories and News Feed. If we are successful working with advertisers to increase the amount of content they generate that is social and engaging enough to promote in News Feed, we believe we should be able to increase our revenue on both PCs and mobile devices.
In 2012 and beyond, we will also continue to invest in developing new products, particularly in mobile, and in educating the market on the value we deliver. We believe the world is becoming increasingly social and personal, the future of marketing depends upon building word-of-mouth at scale. We offer the best tools for marketers to not just participate in, but to shape this evolution. This will close the gap between the audience we deliver and our share of advertising budgets. Now I'm happy to turn it over to David to walk you through our financial results for the quarter.
Thank you, Sheryl, and good afternoon, everyone. Thanks for joining us on the call today. I'm going to walk you through our Q2 progress against our key financial metrics related to revenue, users, and expenses. As Sheryl mentioned, revenue in the second quarter was up 32% from last year. The strengthening of the dollar cost us a few percentage points of revenue growth, which would have been 36% with constant exchange rates. Ads revenue was up 28%, driven by an 18% increase in the number of ads delivered and a 9% increase in the average price per ad. The increase in ads delivered was primarily due to user growth and also benefited from the net effect of product changes that increased the average number of ads per page relative to last year.
Ad impressions continued the recent trend of growing more slowly than users, as more of our usage is on mobile devices. This trend is particularly true in markets such as the U.S., where smartphone use is expanding rapidly. The overall number of ads delivered in the U.S. this quarter decreased 2% year-over-year, despite a 10% increase in daily users and despite the increase in ads per page from the product changes I mentioned earlier, as daily web users in the U.S. declined in favor of mobile users. We're seeing similar trends in other developed markets. The 9% increase in price per ad was driven primarily by the United States, where CPMs increased by over 20%, due in large part to the ramp-up of Sponsored Stories in News Feed on both PCs and mobile devices.
Sponsored Stories in News Feed are displayed where the user's primary attention is and are stories that we believe users will find engaging based on their interests and connections. That makes Sponsored Stories in Feed more relevant, resulting in stronger click-through rates and higher prices. Price per ad also increased significantly in Asia and the rest of world markets. These markets are growing more rapidly in terms of users and therefore are receiving a growing share of our ad impressions each quarter, so we're pleased to see continued improvement in pricing. The relatively faster volume growth in Asia and rest of world does have the effect of reducing our worldwide average price per ad due to the relatively lower pricing in those markets.
In Europe, price per ad decreased a few percentage points compared to last year, similar to what we saw in Q1, and we believe due in large part to the overall macro environment there. Over the long term, we continue to believe that we have a significant opportunity to increase CPMs. There are a number of potential drivers, including increasing the number of Sponsored Stories delivered in News Feed across desktop and mobile, improvements in our ad products, including better targeting capabilities, increased advertising demand as we continue to demonstrate ROI and as our clients get better at creating social and engaging ads, and overall growth and development of online ad markets globally. Payments revenue for Q2 was $192 million. For the past three sequential quarters, payments revenue has been essentially flat.
We believe this trend is due to the fact that gaming in general has been growing mainly on mobile devices, where our payment system is generally not utilized. We're continuing to invest in the gaming ecosystem on facebook.com, for example, with our new Facebook App Center, which is designed to help people discover new games and other types of apps as well. In terms of revenue per user, ARPU increased by double-digit rates in North America, Asia, and rest of world, and by 8% in Europe, and worldwide ARPU was $1.28 in the quarter. Our higher user growth in geographies with relatively lower revenue works to weigh down worldwide ARPU and the global growth rate. Staying with user metrics for a minute, we ended June with 955 million monthly users, up 29% from 12 months earlier.
On average in June, 552 million people accessed Facebook each day, up 32% from a year ago. Relative to last quarter, Brazil, India, and Japan were key contributors to our growth in daily users. 58% of our monthly users were active daily users of the product, which we view as a positive measure of user engagement. In addition, engagement patterns remained steady or grew across user groups, as measured by the percentage of people creating content or providing feedback such as likes and comments, and by the amount of content and feedback created per person. We're encouraged that growth and engagement have remained strong as our network has expanded, and as we've added later adopters to the service. We view this strong engagement as a sign of the utility of the service and the network, and as the foundation for everything we're trying to accomplish.
A couple of points on user metrics. First, we reviewed our methodology for estimating users by geography, and as a result, have made small adjustments to the geographic distribution of users as of the March 31st measurement date. Second, we also refined and improved our methodology for recognizing what we call duplicate or false accounts. These refinements resulted in an increase in our estimate of duplicate or false accounts relative to our earlier global estimate, primarily driven by emerging markets such as Turkey and Indonesia. Please see slides 18 and 19 for more detail. Since authentic identity is so important to the Facebook experience, we'll continue to try to improve our user measurement techniques with the goal of ensuring that every account on Facebook represents an authentic, unique individual. Turning now to expenses. In Q2, our GAAP expenses were $1.93 billion.
As planned and described in our prospectus, the biggest expense item was stock-based compensation, including associated payroll tax, which totaled $1.3 billion in the quarter, driven by the completion of our IPO and the recognition of expense for RSUs granted between 2007 and 2011, which had a vesting condition tied to the IPO. Please take a look at slide nine for more information on the past and expected future flow of stock comp expense. Excluding the effect of stock comp, our remaining expenses increased 60% to $669 million, driven by headcount growth and infrastructure. Headcount at the end of the quarter was just under 4,000, a year-over-year increase of about 50%. While we will seek to remain disciplined in our spend across the company, hiring top talent remains a key priority, enabling us to aggressively pursue the opportunities in mobile, platform, and monetization that Mark and Sheryl discussed earlier.
In the second half of 2012, we expect our operating expenses, excluding stock comp, to continue to increase significantly relative to our spend in the second half of last year, probably at a slightly higher growth rate than we observed in Q2. While we ultimately believe Facebook's business model should support attractive operating margins, at this early stage of our growth, investment is a top priority as opposed to managing for a target margin. Therefore, you can expect us to continue an aggressive pace of investment in R&D and infrastructure in particular. We had a GAAP operating loss of $743 million in the second quarter. Excluding the effect of stock comp, our operating income would have been $515 million, representing a 43% operating margin. Our effective tax rate for Q2 was 79%, driven by the fact that a portion of our stock comp expense is not tax deductible.
Excluding the effect of stock comp, our tax rate would have been approximately 40%. We expect that over the long run, our tax rate will be similar to the rates of other U.S. technology companies that have a similar mix of business inside and outside the U.S. The future reduction in our tax rate will occur gradually over several years. As described in our prospectus, the amount of cash tax we pay in 2012 and thereafter will be significantly different from the tax provision we report on our P&L due to the deductions we expect to get from vesting of RSUs and exercise of options. At today's stock price, we estimate we will have a tax deduction of around $13 billion that would reduce our cash taxes for several years. Our net loss for Q2 was $157 million or $0.08 per share on a GAAP basis.
Excluding stock comp, net income in Q2 was $295 million or $0.12 per share, compared to $285 million or $0.12 per share in Q2 last year. We purchased $413 million of property and equipment in Q2 and acquired another $52 million of equipment financed through capital leases. As noted in our prospectus, for 2012, we expect to invest approximately $1.6 billion-$1.8 billion in capital expenditures, including equipment purchased through capital leases. We ended Q2 with $10.2 billion in cash and investments on our balance sheet. As we look to the second half of 2012, we're encouraged that the network of people using Facebook continues to grow and that engagement is strong. We remain focused on building out better and deeper social experiences for the people who use Facebook, while at the same time executing on the monetization strategies and initiatives outlined today.
Thank you for giving us the opportunity to discuss our progress. We're committed to providing you with balanced and thorough disclosure, and we welcome your feedback today and in the future in terms of how we can make our communications most helpful to you. On a related note, I want to welcome Deborah Crawford, our new Director of Investor Relations, who you heard from at the beginning of the call. Deborah's been with us for three weeks now, and we're thrilled to have her leading our IR efforts. Now we'd like to open the call for questions.
At this time, I would like to remind everyone, in order to ask a question, please press star then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Spencer Wang from Credit Suisse. Your line is open.
Thanks. Good afternoon. I guess maybe for Sheryl. I was wondering with respect to the Facebook Advertising Exchange, based on
Some of the initial tests, could you just talk about how that may impact monetization as you roll that out? The second question is on the Yahoo patent deal. Just beyond the IP, can you talk about or provide any details on the advertising partnership or the expanded distribution agreement part of it? Thank you.
Sure. Facebook Ad Exchange is our real-time bidding offer, which lets advertisers bid in real time on a specific ad impression. The goal of this is to show people more relevant ads. This is something third parties have been doing across the web for a while. For us right now, we're at a very early alpha stage test, so we don't have more information to share. We're really encouraged by how interested our advertisers and customers are, because this gives them an opportunity to connect the users, our users, that they're trying to reach to other things they do across the web. On the Yahoo deal, the Yahoo deal had two parts. The first part was a cross-license of all the patents, and the second part was a partnership where we would work with Yahoo on tentpole anchor events such as the Olympics.
We were really pleased to sign the Yahoo deal because it really extended the platform relationship we've had and really brought us back to what was a very good relationship we'd had historically with an important client. I think we'd also like to take the opportunity to congratulate Marissa on her new job at Yahoo.
Your next question comes from the line of Mark Mahaney from Citigroup. Your line is open.
Great, thanks. Two questions for Mark. You talked about the engagement. Have you seen any trends in terms of engagement with the younger cohorts? Anything that indicates a decline in engagement? Then broadly, how do you think about the size of the company, Facebook, relative to other leaders in the technology space? Runs pretty thin. I think you've tried to have a pretty lean organization. As you think about the three elements or the three broad growth areas for the company in the future, is there any change in your thinking about how big the company physically needs to be? Thanks.
Sure. Just to take the first one first, I think what we're seeing is pretty steady growth and engagement in all these cohorts, including the younger ones. Really nothing out of line with the overall metrics there. On your second question about the overall size of the company, we've always been significantly smaller per employee compared to the number of people who we serve in the world. It's really baked into the company that we have to build systems and software that take into account the leverage that employees here have, that's actually one of the reasons why a lot of people love working here and one of the biggest reasons why people cite for wanting to join the company and staying here. It's also affected the strategy, right?
I mentioned we believe that all these consumer products, and maybe even more than consumer products that people use, will become social over time. We can't build all those things ourselves, so we focused on building this platform. Over time, it might make sense for us to build more of these things ourselves, but because of the scale that we're at, we really focus on the three things that I laid out today. This shift towards mobile is incredibly important. Building the highest quality applications and products is really critical. Building a platform so that the million and more developers who use Facebook can build these products is the highest leverage thing that we can do. We think that social ads are just going to monetize much better than non-social ads as we increase the % of our overall advertising that has social context in it.
That's kind of where we are. We're basically growing by trying to find as many talented engineers as we can, for the most part. I think for the foreseeable future, we're just going to be way smaller than other companies that address significant or comparable size user bases.
Your next question comes from the line of Jason Maynard from Wells Fargo. Your line is open.
Hi, good afternoon, guys. One of the questions I'm curious on the mobile front is when you look at monetization, I think there's a lot of different views on how this will play out over the next couple of years. I'm curious, just philosophically, do you think that it is important to own the entire experience, i.e., integrated device, versus being, if you will, purely an application? Do you think it's, if you will, a federated view of kind of a platform feeding into many applications? How do you think about the different scenarios on that front and how that could potentially work for Facebook?
Well, Facebook is the most used app on basically every mobile platform, right? When we think about what we want to do right now, we want to increase the depth of the experience in addition to just growing users. We've thought a lot about this question of, and I even talked about in my opening remarks today, we want to not just have apps that people use, but also be kind of as deeply integrated into these systems as possible. We want to support a development ecosystem where other apps can build on top of Facebook. That's why you'll see us do things like support Apple and the iOS integration that they wanted to do.
There are lots of things that you can build in other operating systems as well that aren't really like building out a whole phone, which I think wouldn't really make much sense for us to do. I think that there's a big opportunity for us here. The amount of time that people spend in the apps is greater. People come to the apps and use Facebook more when they have mobile phones, and I think we're really much closer to the beginning here than the end in terms of what we can do. If you use the apps today, they're relatively basic compared to what I think anyone can imagine they would want from their Facebook experience on a phone.
Your next question comes from the line of Doug Anmuth from J.P. Morgan. Your line is open.
Great. Thanks for taking the question. Just wanted to ask two things. First, Sheryl, you provided some color on click-through rates on Sponsored Stories, relative to those ads on the right-hand rail. Was hoping you could provide a little bit of color on what you're seeing in pricing here on a relative basis early on. David, perhaps if you could talk a little bit more about the potential for margin expansion going forward, how you're thinking about that potentially into the back half of the year in 2013. Thanks.
Sure. Thanks for your question, Doug Anmuth. This is David Ebersman. I'll start on the pricing and then Sheryl Sandberg can chime in. We're very pleased by what we've seen in the early ramp-up of Sponsored Stories in feed, in both desktop and mobile. It's important to note that it's early, we have a relatively limited amount of volume that we've put into the system at this point. I think the test over the second half of the year that we're excited to see happen is working with advertisers to increase demand for Sponsored Stories in feed, creating better social content that we can put in feed without having a deleterious effect on the user experience, and seeing where that takes us in terms of clicks and prices and things along those natures.
While the early data is quite positive, it is at low volume, so we just have to be careful about extrapolating from it. In terms of margins, not a lot to add to what I said earlier in the call. At this point in time, we are growing the business really focused on the opportunities that we see to invest in and the importance that they could have and should have for the long-term business that we can build. We're more focused on making sure that we're positioned to capitalize on what we're trying to do in mobile and platform and social ads, and not trying to optimize for a short-term margin target.
In the long run, I think we have the kind of business that because we have such a large network and so much value comes from the content that is created and distributed by the members of the network, to have a business that works really efficiently.
I'll just add one thing, which is, while we're not commenting on pricing specifically because it's early, it's really worth noting that higher click-through rates lead to higher CPMs over time, even without pricing changes.
Your next question comes from the line of Herman Leung from SIG. Your line is open.
Hello. Hi. Sorry about that. Wondering if we can talk about some of the penetration of some of the social ads that you guys have on the platform, wondering the level of penetration of social ads that you have today on the site, and the opportunity. I have a quick follow-up.
Fewer than half of our ads are social. It's an increase. We're very focused on increasing the percentage of our ads which are social in nature. We know from a large number of studies in working with advertisers that the ads that are social have higher engagement rates from users, much higher ROI for advertisers. Driving that percentage up is really important to us. It also feeds into the Sponsored Stories in News Feed strategy that I spent most of my remarks talking about, which is that we put things in News Feed that are most relevant. The more social context the ads have and the more relevant they are to our users, the more we'll be able to drive up the percentage of our ads that go into News Feed.
Just to add, just to make sure that we're communicating this clearly, a very small percentage of our ads are Sponsored Stories in News Feed at this point. We just started with that product recently. We're being very careful in terms of the volume that we put into News Feed because it's such a core part of the user experience.
Your next question comes from the line of Scott Devitt from Morgan Stanley. Your line is open.
Thanks for taking my questions. I had two, please. Given the various testing that you always seem to be doing around products and monetization, you've talked a lot today about the success of Sponsored Stories. I was wondering if there are other areas that are looking promising to you based on recent testing? Secondly, from our calculation, the DAU to MAU ratio declined moderately sequentially, both in North America and Europe, was wondering what you would attribute that to. Is it seasonality? What are you doing to drive engagement in those regions? Thanks.
I can take the first part. Yes, the Sponsored Stories have shown really good results. We are also seeing good results from other ads on the site that have social context. As we've rolled out more ways to make your ads social, we see increasing engagement, increasing ROI from those ads. FBX is early, but our initial testing showed very promising results for advertisers as they are able to connect what they're doing elsewhere across. It's also worth noting how optimistic we are around our early testing around mobile. Mobile for itself is an inherently social experience. Our service is inherently social. What people are doing on their mobile devices is consuming their News Feed and sharing.
Really the big accomplishment we've had in ads over the last quarter or two as we've rolled Sponsored Stories into News Feed and on mobile has been very promising for us because the results show that users engage with those ads and advertisers get a high ROI from them.
As far as the DAU relative to MAU comparison, we remain really pleased with the percentage of our monthly users who come back every day. We sort of assumed earlier on in our history that as we further penetrated the market of people in the world and got into late adopters, that number would go down, and we've seen that just consistently go up, which I think speaks to the value of kind of the network effects. The more people that use Facebook, the more interesting it is. That number doesn't tend to move dramatically from quarter-to-quarter. It's a slow-moving number. It did decline fractionally from Q1 to Q2, as you noted. I think that two things there.
One is that we did make some changes to what we've described earlier as background pinging, or I think we called it automatic background activity in the prospectus, which is when phones contact our servers without there being a user active on the other end, just to download information. We see that on several of the mobile services. It helps you to have more information from Facebook when you do check your phones. We try and understand what that looks like in terms of technically, so that we don't count that as usage, and we sort of continually make some changes. That had some impact on the apples-to-apples nature of the DAU comparison, June versus March. You asked about seasonality. I don't know that we have a great handle on the seasonality effects as it relates to by month. We tend to see things like holidays.
There'd be some drop in daily levels engagement. It depends on what month holidays and other things happen in.
Your next question comes from the line of Anthony DiClemente from Barclays. Your line is open.
Good afternoon. Thanks for taking the questions. One for Mark and one for David. Mark, wondering if you can give us an update on your acquisition of Instagram. I know it's early, but would be curious to hear how the integration and acquisition is helping your efforts on mobile and monetization, and if there are others out there, other acquisitions like Instagram out there that you see as potentially desirable, other acquisitions like that one. David, just wondering on the outlook, most of the models have 2Q as the lowest quarter of the year in terms of year-over-year growth in revenue. I guess, can you validate or confirm that? Is the 2Q the lowest quarter of the year in terms of year-over-year growth? Thanks.
Sure. To the first one, the acquisition hasn't closed, right? There's been no integration or anything like that, and there will be an update when that happens. In terms of what else we might acquire, our strategy has primarily been to buy companies for talent, right? We have this very entrepreneurial culture where we want the type of people inside the company to take risks and be the type of people who would want to build out whole companies on their own. Often the best way to find a lot of those people is to find people who are building companies who maybe are working on a problem where they think that they'd have more leverage if they joined Facebook. X of Instagram, most of the acquisitions that we've done fit that category, and that will continue to be the approach going forward.
To your second question, if you sort of start by looking backwards a little bit in terms of how revenue has grown to get us to where we are today. A couple of years ago, we had $200 million in revenue, and obviously have grown a lot. It's sort of a combination of, I would say, two things. A series of ongoing optimizations that we make every day in trying to make the business work better, increase advertiser demand, better ad formats, et cetera. On top of that, major changes that we make, like the introduction of payments, which really started impacting the business late last year, or fundamental changes to the product and how we advertise on it.
When we look forward to the second half of this year, I think we'll continue to make the kinds of optimizations we're always making to try and drive more advertiser demand, better targeting of ads, et cetera. The big priority and the big opportunity for us is what we're doing with Sponsored Stories and News Feed. I think it's just difficult to forecast what that's going to look like because we're still early into it. We started putting Sponsored Stories in News Feed earlier this year, but really didn't ramp that up substantially until really June of this year, is when the numbers, we started putting more volume in. Thus far, we feel like we're in a really good position because as we've ramped up to where we are today, we see high levels of advertiser demand and good levels of user engagement.
The forecasting part is difficult because we're going to proceed slowly with this. We want to be sure. The biggest mistake I think we could make is to move too quickly and to find ourselves in a situation where we're having an impact on user engagement that we didn't anticipate or is hard for us to manage. I think as we continue to ramp up, we will learn from each change we make and see how quickly or what kind of speed of ramp-up makes the most sense for us. I think right now, trying to forecast that is difficult.
Your next question comes from the line of Heather Bellini from Goldman Sachs. Your line is open.
Great. Thank you very much. I just had a follow-up on that, David. In terms of how do you gauge how often to show Sponsored Stories? What type of feedback are you looking for from people to know that maybe you're showing them too many in News Feed or that you have the ability to maybe put the foot on the gas pedal a little bit more? I also wanted to know if these are rolled out globally at this point, so to everybody. I guess the last question maybe for Mark would be, or Sheryl, how do you see local fitting into the mobile experience, and where do you see advertisers in terms of leveraging what Facebook can offer there?
For Sponsored Stories, in terms of rolling it out, what we're doing is we're looking at two things very carefully. We're looking at the social context to make sure it's really relevant. The better stories we can generate where people are interacting with things that are monetizable, the more Sponsored Stories we can roll out. We're also looking really clearly at user reaction. The good news for us is that it's easy for us to measure user reaction because we can see if users are sharing, clicking like and comment, if they're engaging with those stories. We can look at how much they're engaging with those stories relative to others. We've also been pretty careful, even when both of those metrics are high, at just limiting the number of Sponsored Stories as we roll out.
We've been fairly cautious on only rolling out a certain amount. We intend to be continually cautious as we really work on user demand, on user perception. We have not rolled out Sponsored Stories in News Feed across all countries. There are certain countries that we're still working out some issues. It's not entirely globally rolled out. With apologies, I'm not sure I remember this. Local. Yeah, I knew there was a third part of the question. Yeah, local is huge. We've always talked about it. I think I mentioned in my remarks, local is the holy grail of the internet. Everyone is about to get people into local. This is something, certainly in my history of working in this industry, I've spent a lot of time on. The problem is that local businesses are just not very tech-savvy.
If you look at local businesses in the U.S., obviously one of the more developed markets, something like more than 40% of them have no web presence at all. They don't adopt things that are really, in our view, might be something that we would think they would obviously adopt. This is where I think Facebook has a huge competitive advantage because those same local business owners are using Facebook as users. While they won't adopt something for their product, they've set up their profiles or their timelines. When they use the product, they start to see messages from other businesses. They start thinking, "Wow, this could work for my business as well." The product we want them to use, which is Pages, is also incredibly similar to their timeline or profile.
The leap the small business owner needs to make is just smaller here than we think it is with anyone else. The numbers bear that out. We have so many, as I mentioned before, 7 million small businesses that are using their Pages on a monthly basis, which is something we've done without any really targeted marketing effort to them at all. Hundreds of thousands of those get upsold into becoming advertisers. Our push, which I mentioned in my remarks, to make it easier for them to advertise. The thing we rolled out last quarter, which is you can just take a post you're doing on your Page and make it super easy to advertise. I think those things will make a business a really big difference in accelerating this even further.
Your next question comes from the line of Laura Martin from Needham & Company. Your line is open.
Hi there. Thanks for taking the question. A couple for Mark. Mark, we've been writing a lot about the optionality or the option value of the Facebook platform globally, and I guess I'm really interested outside the visible revenue streams, which today are payments and advertising. Could you talk through how you're thinking about commerce on this platform and also video? Because video is one of the most shared things as you know. If we think about over the next three to five years, other revenue streams, how do you think philosophically about what Facebook could become over a longer period of time in terms of revenue streams?
Sure. The basic approach that we have for now is because we're building out this platform and other companies can build on top of that, and you can view our business as an advertising and payments business. You could view it as there will be these companies that help to transform these industries, and we will get some portion of the value that comes from that we're helping to provide, right? In gaming, for example, we think that we're helping to provide a lot of the value, we end up getting a relatively high percentage of the revenue that comes into those companies. Whereas in something like music or some of the media companies that are now getting built using Open Graph, I think we aren't providing quite as much of the percentage of the value as with games.
The overall amount of the revenue that comes to Facebook through whatever the breakdown of ads and payments is, I think will be somewhat less. A lot of people will do that stuff, too. I think the real way to think about this is that over time, more and more nuanced experiences will become social, right? Gaming is such a basic thing that people want to do with their friends. Even with a relatively basic platform, people could build that ecosystem out. Some of the media stuff required more nuance. I think commerce will require a little more, and so on. As these things get built out, I think we'll build out the tools to both enable those products to get built and to be able to capture some percentage of the value that we're helping to create.
I don't really have any more plans that I'm going to share with you today about our product roadmap or anything like that.
I think one thing to think about in the commerce area or in other areas like video, is that our view of the world is things become increasingly social, and that takes time. Gaming was obviously first, but people are informed when they purchase things by their friends, and the commerce companies that are really adapting social are seeing good responses. Fab is one of them. Fab is very early on in its history, but it's a truly social shopping experience, and they're seeing 20%-40% of their traffic from Facebook on a daily basis, as well as a very good return on their investment on ads that their CEO's been talking about publicly.
We look out at what people's shopping behaviors are, so much of those shopping behaviors really are social, that we think there's a big opportunity for the social context that we offer to be a major part of how people discover products. Operator, next question, please.
Your next question comes from the line of Kenneth Sena from Evercore Partners. Your line is open.
Hi. Thank you. We hear from marketers a lot that the platform is relatively complicated still in terms of the ad products offered and services. How long or how quickly can marketers expect to see that simplified? Also, in terms of the App Center, can you give us any sense of the economics behind that arrangement? Is there a rev share? If so, how does that compare to your standard 30% on your platform for payments? Finally, if you could look back over the last few months in terms of going public, is there anything that you would redo? Thank you.
I'll take the first two of those, and hand over the third. When you think about the advertising experience on Facebook, it is complicated to date, and that's mainly because we're a completely new kind of marketing. We're not TV, we're not search. We are a third medium. That presents a challenge because the messages that talk at consumers on other platforms need to really be adapted and changed to be more inclusive. The right ad on TV or on search is the wrong ad for Facebook. Facebook marketers need to learn how to make their ads really a two-way dialogue with consumers. We also have a measurement challenge. When you see an ad on Facebook, you don't go and click to a purchase right there, but you're more likely to search later on and buy a product or to walk into a store and buy a product.
We have the challenge of teaching marketers how to develop social marketing and then working with them so that we can tie the consumer experience of seeing a Facebook ad and interacting with that brand to a purchase that happens later on. That's why we're so focused on the market education. With our clients who have done a lot with us, I think they are learning a lot on growth trajectories and seeing very positive returns. It took a long time for the TV market and advertising to be truly understood. It took a long time for search, I think we're still in that learning curve with a lot of our clients. The good news is that our results are so strong.
The ROI results I talked about in my remarks, where we've now done 60 campaigns, if you talk to CMOs, those ROI results of getting to three times their ad spend or five times their ad spend or better are truly good, compare very favorably with anything else marketers do. Our view is that if our ads work and we continue to make our ads work and they work for advertisers and our users, we'll be able to educate the market over time. How quickly that will happen will depend, but we feel like we're on a good part of that growth trajectory. In terms of the App Center, the goal behind the App Center is that we believe social discovery will lead to app installs.
You are more likely to want to use an app your friends are using, than you are one that the generic population represents. Right now, we are not offering paid apps, so the revenue share issue you're talking about is not something we have a product to deal with right now.
Ken, you asked about lessons learned looking backwards. Obviously, we're disappointed about how the stock has traded, I think the important thing for us is to stay focused on the fact that we're the same company now as we were before. We've got the same opportunity in front of us to build something really important and valuable over time. If we stay focused on building great products, we expect and we want to be judged based on the quality of the experiences we build and the value we can create over the long term.
Your next question comes from the line of Ben Schachter from Macquarie. Your line is open.
Hi, guys. I had some phone problems, I apologize if you got these already, one question for Mark and one for David. David Ebersman, when you're thinking about visibility into the back half of the year and how quickly ad revenue is ramping, how does that look versus sort of expectations that were earlier in the quarter pre-IPO? A similar question on the OpEx growth. Do you have more visibility, less visibility? How do things look now versus where they were just before the IPO? Mark, on the topic of sort of information in the News Feed that a user did not specifically ask for, trending stories or trending video and certainly Sponsored Stories. Beyond click-through rate, how do you think about measuring and understanding that user experience so you know not to sort of go over the edge and degrade the user experience? Thanks.
Sure. I mean, in terms of the methodology for building News Feed, at any given point, we have a lot of different tests of different algorithms running, we measure engagement of everything downstream from News Feed in the whole system, right? Obviously clicks and engagement and feedback in News Feed, how many people want to share, also how many page views and how much time people spend on Facebook overall, ad performance, everything down to all of the different tweaks that we do in News Feed, user sentiment as well. I think we have pretty robust systems that are built out around this, one of the things that I think is pretty interesting is what we've seen is that we can put in good sponsored content and have it not degrade those metrics.
That's really what we're trying to do, is we're rolling some of these Sponsored Stories out more conservatively because we want to make sure that the quality is very high. We're basically continuing to run those tests to make sure that we are producing the best product that we can.
Ben, thanks for your question on the looking forward part. I think the two things you asked are pretty different, at least from my standpoint. Trying to project operating expenses is, while not easy or precise, we have a fair amount of understanding of how things are trending and what we expect to spend in the second half of the year. That's why we provided a little bit more specifics in my opening remarks or my prepared remarks about what we expect in terms of operating expense growth. I think revenue growth is just harder to predict, and it's particularly hard to predict when you're really focusing on a new product that you're in the early stages of launching, as we are with Sponsored Stories and News Feed.
As I said, we're pleased with where we are, where we were at the end of June, where we are now, and that's going to make, we hope, a sizable impact on what kinds of performance we can deliver, not just in the second half of the year, but over a longer-term horizon, because we think this can be fundamentally a really important marketing product.
Operator, we have time for one last question. Your last question comes from the line of Daniel Salmon from BMO Capital Markets. Your line is open.
Hey, good afternoon, guys. My question was on the Preferred Marketing Developer program, where I think you're up to around 330 formal partners today, with a great many of them qualified for apps. Around 50 or so, I think around 20, 50 for ads, 20 for insights. Just wanted to see what your expectations are to see those numbers, both the total number of PMD developers growing and in those two categories in particular.
I think we're very optimistic about our platform partners. Our goal is to take everything people do, or at least close to everything people do, and make it social. What we do is provide technology for our platform partners to do that. How many people go into specific programs is not the thing we most focus on. We focus a lot on how many developers out there are using our tools, how many of the apps that are growing quickly, how many of the services people are growing quickly are using tools like Open Graph as well as ads, so that we can build an ecosystem. Mark said in his remarks that we really believe that we're going to provide the identity and the social layer for everything that happens across web, across mobile.
Given the size of our graph, this engagement people have with us, which even as we grow, is not just staying flat, but in many ways increasing. We're very optimistic that if you were choosing to develop a service, you would choose to do it with us. We really consider ourselves a partnership company, that means that we want to take social companies and make them big and big companies and make them social. We think bringing what Facebook provides, which is your friends, makes every service better.
I will now turn the call back over to management.
All right. Thank you very much. We're grateful to all of you for joining us today. We look forward to speaking with you again next time.
This concludes today's conference call. You may now disconnect.