My name is Jay, and I will be your conference operator today. At this time, I would like to welcome everyone to the Facebook Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer 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 Q3 earnings conference call. Joining me today to talk about our results are Mark Zuckerberg, CEO Sheryl Sandberg, COO and David Ebersman, CFO. Before we get started, I would like to take this opportunity to remind you that our remarks today will include forward looking statements. The 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, our annual report on Form 10 ks and our most recent 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 earnings 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 has been a busy quarter at Facebook where we've planted the seeds to achieve our long term goals with Internet.org, our AI group and our efforts to build the knowledge economy. We continue to see strong overall engagement and are making good progress in our strategy, especially in mobile. This contributes to the results we reported today, strong revenue growth, strong growth in daily actives and good growth in engagement as our ratio of daily actives to monthly actives continues to grow. We've also reached new milestones as a mobile company.
Now 49% of our revenue comes from mobile and 48% of the people who use Facebook in any given day are only accessing it from mobile. That's almost half of people only using Facebook from their phones and it's a pretty incredible sign of how Facebook has evolved over the last year. On our last earnings call, I talked about our 3 big goals for the next phase of our company: connecting everyone, understanding the world and helping to build the knowledge economy. Connecting everyone means giving everyone in the world the power to use the Internet and stay connected to the people and things that matter to them. Understanding the world means helping people not to share day to day updates, but also building up long term knowledge about the world and being able to answer questions for you that no other service can.
Building the knowledge economy is about helping people create growth and jobs and supporting a larger economic shift in the world based on information and ideas. This framework is how I'll think about our progress as a company over the next few years. So I think it's a useful way to look at our progress over this quarter as well. Let's start with connecting the world. This quarter, we took an important step.
In August, we launched Internet.org, a global effort with Samsung, Ericsson, Qualcomm and other industry leaders to make affordable Internet access available to everyone in the world. Today, only about a third of the world's population is online and the Internet is growing more slowly than you'd probably expect, less than 9% a year. We want to change this. Our mission has always been to connect the world and to us that means everyone. When the next 5,000,000,000 people have a chance to use these basic services and participate in the global economy, that's going to create huge benefits for everyone in the world.
By working together on technology and new business models, we think we can help accelerate the process of connecting everyone. We believe we're in a unique place to help encourage broader growth of the Internet because so much of what people do on the Internet is use Facebook. According to Comscore, around 20% of the time that people spend in apps in the U. S. Alone is in Facebook services.
And when you ask a lot of people in developing countries what service they care about using most, the answer is often Facebook. We're already trying to make access to Facebook cheaper and we think that all the same tools and innovations that we're developing to do this can be applied to other basic Internet services as well, like messaging, search, weather and Wikipedia to make those services cheaper or free to deliver. We also recently acquired Onavo. This is a team that builds world class data compression technology and mobile analytics and they'll play an important role in helping us build more efficient technologies and services that use less data. Of course, no single company can do this alone and we're working closely with our partners to develop our future plans.
It's still very early for Internet.org and we'll have more to say in the months ahead, but I'm very excited about this effort and I'm grateful to our partners for being a part of it. Next, let's talk about understanding the world. What I mean by this is that every day people post billions of pieces of content and connections into the graph. And in doing this, they're helping to build the clearest model of everything there is to know in the world. A big part of why this works is that people can share things with any audience they want.
They don't have to share publicly with everyone at the same time. They can share with just their friends. So this means that the model of the world that people are building in our systems includes things that people only want to share with just a few people. This has the potential to be really powerful. But right now, we actually do very little to utilize the knowledge that people have shared to benefit everyone in our community.
The service we invest in the most is News Feed, which gives you a great sense of what's going on with your community today. News Feed has proved itself incredibly useful for people and is the most used app on people's phones by far. But this is just the start of what's possible. And when we get to the point where we can easily where anyone can easily ask any question to Facebook and get it answered by our community, that's going to be very powerful. In the last quarter, there have been several important evolutions in our strategy of understanding the world.
The first is around graph search. At the beginning of this year, we announced the 1st beta version of the service on desktop and had indexed more than 1,000,000,000,000 connections between people and things. In the last quarter, we started testing what we call post search, which allows you to search all of the unstructured text and posts that people have ever made on Facebook, about 1,200,000,000,000 more posts. The folks on the team who have worked on web search engines in the past tell me that the graph search corpus is bigger than any other web search index out there. It's still early for graph search because it's still in beta, only in English and we haven't launched our mobile version yet, but it's something I'm really excited about.
Another evolution in our progress to understand the world is around our approach to building mobile apps. Our goal has always been to help people share anything they want with anyone they want. Historically, we've done this by building a lot of features into the core Facebook app. But we also have a few separate apps that are widely used, like Instagram and Messenger, our standalone messaging app. These are each large services that help people share in different ways.
Instagram enables more than 150 monthly actives to share beautiful photos, often more publicly than people would want
to share on Facebook.
Messenger is part of how people send billions of private one to 1 and group messages every day. And with the latest release of the app yesterday, we're continuing to add features and make this a better experience. In the future, we expect to develop more of these services to help people share different content with different groups of people and we'll continue to build out Messenger as a better distinct messaging experience. There's one more evolution in our strategy to understand the world that I want to mention. In September, we formed the Facebook AI Group to do world class artificial intelligence research using all the knowledge that people have shared on Facebook.
The goal here is to use new approaches in AI to help make sense of all the content that people share, so we can generate new insights about the world to answer people's questions. We started assembling a team of some of the best people in the field to work on these problems. We also announced the acquisition of Mobile Technologies, a speech recognition and machine translation company that will help extend our work in the field beyond just photo recognition to voice. Over time, I think it's going to be possible to build services that are much more natural to interact with and can help solve many more problems than any existing technology today. I'm excited that we're working on this problem and I'm looking forward to us doing a lot more here.
Finally, let's talk about the progress we've made towards building the knowledge economy. The key to building the knowledge economy is building tools for everyone to use information to do their jobs better. So in addition to connecting everyone and understanding the world, we're also focused on building these services for businesses as a way to accelerate the growth of this new economy. The way businesses will experience this effort is that we'll keep building better services for them to reach their customers with higher quality ads more efficiently with better targeting, better analytics and using richer formats. The way people will experience this effort is that the ads they see will become more and more relevant to their lives.
Last quarter, I started talking about how our approach going forward would be to grow our business through improving the quality of our ads rather than by just increasing the quantity. This quarter, we've continued to do this and the results show our approach is working. We've been able to deliver better content and grow business for our customers and ourselves. We're finding that a lot more people are finding our ads useful and engage and engaging with them and the average daily active is engaging with more than 1 ad per week. Most people probably wouldn't expect to engage with ads that often.
So I think it's a great sign that people are finding ads useful and they're adding value to the experience on Facebook. I think there's still a lot of room to improve the quality of our ads and grow our business over time. So this is something that we're going to keep on investing in going forward. So that's my update on how we're thinking about the next big changes we want to make in the world, connecting everyone, understanding the world and building the knowledge economy. We made a lot of progress this quarter and I want to take a moment to thank everyone who works at our company and everyone who is a part of our community for all that they do to make Facebook great.
Looking ahead, you can expect us to keep preparing for the future even as we keep on building momentum today. As I said in our original S-one filing, we don't build services to make money, we make money to build better services. This approach has served people who use Facebook, marketers and our entire Facebook community well. It's a different way of looking at the world, but it's how we're going to keep succeeding as a company. Thank you for being with us today.
And now I'm going to hand it over to Cheryl.
Thanks Mark. We continue to see strong growth in our ads business, especially mobile. Q3 total ad revenue grew 66 percent year over year to $1,800,000,000 and mobile ad revenue grew to 49% of our total ad revenue. This is a remarkable milestone in the short time since we introduced mobile newsfeed ads just last year. Similar to last quarter, our performance was very broad based with strong growth across all geographies and types of marketers.
At the same time, our overall user engagement metrics remain strong. We think this validates the careful approach we're taking to building our ads business. I'd like to highlight some of the key drivers of our performance this quarter. These are to a large degree the result of investments we've made over the past few years and they will continue to be our priorities going forward. The first driver is the continued growth of mobile engagement around the world.
In 2013, for the very first time, people will spend more time with digital media than watching TV. EMarketer estimates more than 5.25 hours a day on digital services, including mobile, compared with 4.5 hours watching TV in the U. S. Facebook is well positioned to benefit from this shift. In the United States, Facebook, including Instagram, gets 1 in 8 minutes people spend on the desktop, but 1 in 5 minutes on mobile.
According to Comscore, Facebook and Instagram have more mobile time spent than many of the next largest services, including YouTube, Pandora, Yahoo! Twitter, Pinterest, Tumblr, AOL, Snapchat and LinkedIn combined. Along with this engagement, we believe that we have the best mobile ad product with ads that are integrated unit into news feeds where people spend the most of their time on Facebook. As people shift where they spend their time, marketers are starting to follow. Our results today show that we're benefiting from this shift to mobile and we believe this shift will continue and will continue to benefit us.
Today, mobile represents 12% of consumer media time, but it's still only 3% of ad budget. The second driver of our performance is an increasing number of marketers spending their ad dollars on Facebook. From brands to direct response to local businesses to developers, more marketers are advertising on Facebook because they recognize that our ads work to drive sales. This growth is taking place globally. In the Q3, the number of Facebook advertisers in EMEA nearly equaled the number in North America, reflecting global growth in our online advertising.
The 3rd driver of our growth is product development. We're working in a number of areas to make the ads people see on Facebook better. More targeted ads are better and we're improving our ad targeting to increase relevance. We're investing in features custom audiences and partner categories to improve targeting. These are great tools that are still in their early days and we will continue to invest.
We also want to make it easier for marketers of all sizes to buy ads and measure their impact. In late September, we rolled out ad format changes to make ads look more consistent across Facebook and we reduced the number of ad units marketers have to choose from to reduce complexity. And then earlier this month, we rolled out a full redesign of our ad buying tools to simplify the ad creation process. Advertisers now select from 1 of 8 business objectives such as website conversions or app installs. We think these product investments make it easier for marketers to achieve their goals.
We're also expanding our products for developers. We already have launched mobile app install ads and these are going very well. And we now launched mobile app install ads for engagement. These ads help businesses and developers and businesses reach people that have already installed their app and directs them back to increased engagement. We believe these apps are a nice complement to our install ads and represent a unique opportunity.
We also continue to invest in helping brands see that our campaigns increase in store sales. We recently launched outcome measurement for the telecommunications industry. An initial test showed that more than 90% of people who made a purchase after viewing a Facebook ad had never clicked on that ad. This shows that impressions matter and focusing only on clicks does not tell the whole story. Similarly, a recent study by Kenshu, one of our leading preferred market developer partners proved this point.
The Kenshu study found that marketers who used multi touch attribution to measure campaign ROI credited 12% to 30% more value from Facebook than marketers who use last click attribution. But we still have work to do. Brand marketers aren't moving as quickly as we would like and we believe measurement is key to influencing me as advertisers. Another important trend influencing our growth is our preferred marketing developer or PMD program. Over the past 2 years, we've invested in building an ecosystem that supports all types of marketers and PMDs help those marketers advertise effectively with us.
Today, this program is a community of hundreds of technology and service companies spread across more than 45 countries. In summary, we think our strong performance this quarter further validates that our ad strategy is working. Marketers are responding favorably as we heard during Ad Week in New York. Our messages around reach, targeting and measurement are resonating and we'll continue to reinforce them. Our ads are getting better and we still have a long way to go.
Moving forward, our focus remains the same, continuing to capitalize on the shift to mobile, increasing the number of marketers who advertise with us and continuing to invest in our ad products. We believe that we're in the early stages of a major transitioning in advertising and we're uniquely positioned to capitalize on that opportunity. Now David.
Thanks, Sheryl, and good afternoon, everyone. Q3 was a strong quarter for us in terms of our financial results. Our business grew rapidly around the world and we're pleased with our performance across our key financial metrics, highlighted by the fact that Q3 was our first $2,000,000,000 quarter in terms of revenue. Let's start with the size and engagement of the Facebook community, which continues to grow. 728,000,000 people used Facebook on an average day in September, up 25% from last year.
Growth continues to be driven by mobile. In Q3 for the first time, daily actives on web declined year over year, albeit very modestly. Daily users represented 61 percent of the 1,190,000,000 people who accessed Facebook during the month of September and our overall engagement data remains strong. Also as we announced in September, Instagram now has over 150,000,000 monthly actives. I want to say a few words about youth engagement on Facebook.
As we've said previously, this is a hard issue for us to measure because self reported age data is unreliable for younger users. So we've developed other analytical methods to help us estimate usage by age. Our best analysis on youth engagement in the U. S. Reveals that usage of Facebook among U.
S. Teens overall was stable from Q2 to Q3, but we did see a decrease in daily users, specifically among younger teens. We won't typically call out such granular data especially when it's of questionable statistical significance given the lack of precision of our age estimates for younger users. But we wanted to share this with you now since we get a lot of questions about teens. We're pleased that we remain close to fully penetrated among teens in the U.
S. Our monthly user numbers remain steady and overall engagement on Facebook remains strong. We'll continue to focus our development efforts to build products that drive engagement for people of all ages. Turning to the financials. Total revenue in Q3 was $2,000,000,000 up 60% and ad revenue was $1,800,000,000 up 66%.
Exchange rates had no meaningful impact. Revenue growth was strong around the world with each of the 4 geographic regions we report on growing by more than 50% versus last year. The primary drivers of ad revenue growth were an increase in the number of and the strong performance of newsfeed ads, an increase in the number of marketers using Facebook and increased demand in our system. In Q3, overall ad impressions were up 16% and the average price per ad was up 42% compared to last year. The growth in ad impressions was primarily due to more people using our service combined with the impact of a price floor reduction late in Q3 last year.
The growth in price per ad was primarily due to the increase in news feed ads. In the U. S. And Canada, where last year's price floor change had a smaller impact, ad impressions decreased 8% and average price per ad increased over 60% compared to last year. The decrease in ad impressions despite an increase in the number of users in the U.
S. And Canada was due to the continued migration of usage to mobile devices where we show fewer ads per person compared to web. The greater than 60% increase in average price per ad in the U. S. And Canada was primarily due to the increase in the number of newsfeed ads shown on both mobile and web.
Due to their high engagement levels, newsfeed ads have a significantly higher price per ad than right hand column ads. Therefore, the mix shift of our ads towards a higher percentage being in Newsfeed versus right hand column is driving up our average price per ad. Mobile ad revenue in Q3 was approximately 49% of our ad revenue, up from 41% in Q2. The sequential quarterly growth of mobile ad revenue was due to 3 factors: an increase in the average price per mobile ad, an increase in the number of mobile users and an increase in ads shown per mobile user. Looking now at web, ad revenue from web usage decreased both sequentially and year over year.
Web ad revenue includes both newsfeed ads on web and right hand column ads on web. Revenue from newsfeed ads on web increased significantly in Q3 sequentially and year over year driven largely by an increase in the number of newsfeed ads per web user. The increase was not enough to offset the revenue decline from right hand column ads. Total payments and other fees revenue was up 24% year over year to $218,000,000 and roughly flat sequentially. Payments revenue from games was up 18% from last year, but we believe 12% represents the best apples to apples comparison adjusting for accounting items such as the change in revenue recognition timing from late last year.
Overall ARPU of $1.72 per user was up 33% compared to last year. We saw a 43% increase in the U. S. And Canada and greater than 40% gains in each of the other three regions we report on. Turning now to expenses.
In Q3, our total GAAP expenses were 1 point $28,000,000,000 On a non GAAP basis, excluding stock compensation, total expenses increased 40% to $1,030,000,000 driven by higher headcount and infrastructure spend. We ended Q3 with just under 5,800 employees, up 34% from last year and we continue to be pleased with our success in attracting talent. Our Q3 GAAP operating income was $736,000,000 representing a 37 percent operating margin, up from 30% last year. And on a non GAAP basis, operating income was $987,000,000 up 49% margin, up from 42% last year. Our GAAP and non GAAP tax rates for Q3 were 41% 36%, respectively.
GAAP net income was $425,000,000 or $0.17 per share. Non GAAP net income was $621,000,000 or $0.25 per share, up around 100% from last year. In Q3, we spent $284,000,000 on CapEx and free cash flow was $666,000,000 Looking at our balance sheet, we ended Q3 with $9,300,000,000 in cash During the Q3, we repaid our $1,500,000,000 term loan and replaced it with a new $6,500,000,000 line of credit, which is currently undrawn. We'll continue to manage our balance sheet to meet our liquidity needs, protect the business against risk and provide us with flexibility to invest in new opportunities to grow the business. Now let's look forward.
We continue to believe that improving the quality and relevance of newsfeed ads provides us with a big long term opportunity. However, as we think about the future, we do not expect to significantly increase ads as a percentage of News Feed Stories beyond where we were at the end of Q3. This is important because increasing ads in news feed has been a meaningful driver of our revenue growth in 2013. So this should be factored into your expectations for next year. Turning to payments revenue.
Remember that in the Q4 of 2012, we recognized revenue from 4 months of payments transactions. So for that reason, we expect payments revenue will be down this coming Q4 compared to last year. Looking at expenses, we now expect that our 2013 total non GAAP expenses including cost of revenue, but excluding stock compensation would likely grow around 40 5%. In terms of our tax rate, we expect that our Q4 and full year non GAAP tax rates will be a few percentage points higher than our Q3 rate. Finally, we expect our 2013 CapEx to be in the neighborhood of 1,400,000,000 dollars This is down from our prior estimate of $1,600,000,000 due to a combination of efficiency gains and changes in timing of our planned purchases.
To sum up, in Q3, we made great progress against our key financial objectives, growing revenue, investing for growth and positioning the company to maximize long term returns for our shareholders. And we remain excited about the opportunities ahead. Now we're ready to open the call
Your first question comes from the line of Heather Bellini with Goldman Sachs. Your line is open.
Great. Thank you for taking the question. I just had 2, one for Mark and then one for Sheryl or David. Mark, the first one, I mean, as Facebook's value proposition is connecting the world, how should we expect Facebook in the future to more specifically leverage geolocation data to advertisers to make the ads even more useful for your users? And over what time frame should we expect that to kind of play out in your mind?
And then the second question for Sheryl or David would just be, you talked about brand advertisers taking a little bit more time, I think, than you would have been than you might be than you might have liked. Just wondering if you could help share with us how your mix between Doctor and brand advertisers has kind of played out over the course of the year, if you could just give us some rough ideas? Thank you.
So the way we think I'll take both actually. The way we think about using location data is that every time we use data, we use it in accordance with the privacy controls we offer people and we are working hard at making our ads better targeted. And over time, I think you'll see the industry continue to evolve to get better at targeting more ads. We certainly see it's a significant upside for us to get better at targeting more ads, not just from geolocation data, but from all kinds of different data we get based on what users do with our service. On brand advertisers, we don't break out the different marketer segments.
Our results this quarter are based on growth in all marketer segments including brand and we continue to make progress. We have every one of the Ad Age Global 100 have advertised with us over the past year. My comment was based on the fact that marketing spend is just not keeping pace with the transition to time online in mobile in that segment of the market. And since that segment of the market is so big, helping that transition happen presents significant upside for us. Our focus there is measurement.
We have to show brand marketers that our ads drive in store sales and we work on that. We work on that client by client. To share a few examples from this quarter, Cadbury in the UK worked with us to sell their Creme Egg products kind of fun the day before Halloween to talk about candy to 16 to 24 year olds. They used Facebook generated Facebook media for user generated posts along with TV. They reached 15,000,000 people.
21% of those people, they only reached on Facebook, not TV. And the combined impact of TV and Facebook where sales were up 9%. Another example because it shows how we can move awareness is the Alfa Romeo 4C launched in Portugal. And they did a pretty cool thing where a person could do a test drive with a Formula 1 driver and they got the highest buzz they've ever had in Google Trends for a product launch.
So for us, we think
it's a big opportunity ahead of us and you have to work on these clients account by account, client by client, But we think as the shift to mobile and digital happens, it's a big opportunity and we're focused on helping that shift happen.
The next question comes from Scott DeVit with Morgan Stanley. Your line is open. Hi, thanks. Cheryl mentioned some of the tools that have been added to make it easier for advertisers to access and use the ad platform. One example was objective based ad buying.
And I was just wondering how much you would attribute reduction in friction like the examples that were referenced on the call leading to direct and immediate increases in inflow of ad dollars versus being more gradual in nature? And then secondly, for Mark, the concept of the knowledge economy, I was wondering how you envision what the consumer will be doing on the site 5 years from now as today is more about sharing and sharing is more developed in search and product integrations? How you think about that relationship between those three activities on the site over a 5 ish year time horizon? Thanks.
On the first, our growth overall is based on the strong performance of newsfeed ads, an increase in the number of newsfeed ads per user and also more marketers. And the simplification of products has actually been very important in attracting new marketers. If you look at the new advertisers we acquired in Q3, 62% of them started with either promoted posts or promoted page life, which are the most simple of our advertising format. So we think continuing to roll out very simple ways to become an advertiser is driving our growth and we'll continue to. The larger question you asked was based on our focus of business objectives and that's actually a really big deal for us.
We are now getting to the point where our ad product support really helping marketers achieve their core business objectives. So before people used to buy via the product, what product do you want to buy And now they're buying from us by identifying, I want to get mobile app installs. I want to get mobile engagement. I want to get website conversion. I think the fact that we're pivoting to focus on those end business results and making everything else, including social, part of meeting those business results is a really important part of our strategy.
It's driving our growth and I think it's going to continue to.
The next question comes from Mark May with Citigroup.
Sorry, operator, can we just go back to the second half of that question?
Yes. I just want to answer the part of the question about the product experience over time. I believe there are 2 pieces of this that we're thinking about related to the knowledge economy. The first is just helping our customers use information better to grow their businesses and create jobs, right? So we're thinking about small businesses and making it so they can have better insights into who their customers are and better ability to reach them, developers being able to use better analytics for being able to find new customers as well.
And those are a lot of the inspiration and the strategy behind the ad products that we're delivering. On the side of the product experiences that we're creating for people who use Facebook, right now I do think that the Facebook experience is very push based and that you go to Facebook and we're suggesting content to you through something like News Feed. And over time I think we're if we do a good job, we should be able to create more value through all of the knowledge that has been shared over time that we're not really surfacing on a day to day basis right now in terms of helping people answer a lot of different questions that they have around the world. And that's the direction that we're starting to go in with graph search and a few other areas as well. But it's pretty early.
So I think around a 5 year time frame like you were saying hopefully we'll have made pretty significant progress towards going in that direction.
Great. Next question?
The next question comes from the line of Mark May with Citigroup. Your line is open. Thanks for taking my questions. Maybe the first one for Sheryl and then David. It seems like that a year and a half ago around the time of the IPO, the company is very focused on top of the funnel brand related advertising.
But over the last year or so, it's been much more around direct response. But certainly, get the sense that on the top of the funnel brand is starting to move in a more meaningful way. What are you what's the company doing and what are some of the main projects that you're working on that you think will really start to move the dial on the top of the funnel segment of the market? And what role does video maybe play into that? And then for David, regarding the ad load comment, had ad load not increased in North America, what give us a sense of what the ad revenue growth would have been if you normalize for that?
Thanks.
So top of the funnel ads remain really important to us, and again, our growth this quarter was very broad based, including top of the funnel ads. Reason they're important is that Facebook is such a unique and powerful discovery place. When you're on Facebook, you are open to discovery, you're open to getting messages and that's what we're seeing with newsfeed messages from friends and with ads as well. The key for us is measurement. The way we're really going to make progress is better measurement.
It's easier to understand and measure a click that goes through to an online sale. It's harder to measure how you households that see ads and don't see ads change their purchase behavior in stores. The thing I think we've done a lot over the last year and we're continuing to do that is put those measurements in place. So I talked on in my opening remarks about measurements for telecom. We've also done a ton of work around CPG, so that we can look at households that saw an ad, households that didn't saw an ad and what their difference is.
So To share one more example, Mondelez did a promotion with us for the Nilla wafer in the U. S, they were targeting 35 to 44 year old females and moms. Because we were able to do this type of measurement that we couldn't have done a year ago, we were able to show that they got a 5x return on their ad spend. We measured households spending who saw their ads versus households who didn't saw their ads and there was a 9% difference. They were also able to tell that a lot of the 9% was driven by new buyers of their products, which is what they want.
So I do think we have a big opportunity. I do think the brands are going to continue to need to be convinced account by account that this moves products off shelves and that's what we're doing.
Mark, thanks for your question. This is David. So, it's really not possible to tease out individual contributions because the way the auction works, everything is interdependent. So if we have fewer ads, that's going to play out with different pricing and other sorts of things. So I can give you sort of our best feel for it, but I can't quantify it precisely.
If you look at overall ad revenue growth, for example, in the Q3 compared to the Q2, there's probably three factors that are contributed materially that are important to understand. 1 is just growth in users. 2nd is growth in demand, which plays out into pricing. And then the 3rd is an increase in the number of ads that we showed in News Feed per users. I'd probably order the ad load probably 3rd of the 3 relative to the sequential growth.
I think it plays out a little bit differently on mobile versus web. On mobile, we really increased the number of ads as a percentage of the overall mobile experience quite modestly in the Q3 versus the Q2. On web, the increase in the number of ads or the percentage of ads in the web newsfeed experience went up bids in the Q3 versus the second.
The next question comes from Douglas Anmuth with JPMorgan. Your line is open.
Great. Thanks for taking the question. I just wanted to ask you about 2 things. First on video, can you talk about what you've learned from the recent launch of video on Instagram and how that may have shaped your thinking on rolling out video ads on Facebook? And then secondly, just following up on the ad volume.
Just to clarify, when you're saying the ad volume won't necessarily increase anymore beyond where it was at the end of 3Q, is that on average or in the more penetrated markets? And then can you comment relative to the 5% of Stories in the newsfeed that you mentioned last quarter?
So the experience with video on Instagram has been very positive so far, right? And I think that we proved through that that having clips that autoplay can be a good experience in line in a feed and that people really feel like they're in control of the experience because they can scroll away if they don't like the content. If it's good content then that can be really good. So we're heartened by that. This is an important launch for Facebook overall because the addition of video content to the stream could be one of the most positive things that we've done in a long time for making it more engaging.
But if we do it poorly then it could also be a negative thing. And we're trying to take our time to make sure that we do this in a very positive way and I'm pretty confident that we will. But that's why you're seeing us take the process that we have on this.
And I'll add on video ads. We do have a video ad product today because anyone can embed a video in page posts. And we're actually seeing very good results particularly around entertainment and media. This is driving some of our ad spend. And the area remains pretty exciting because this is a very compelling way for marketers to tell their story.
So Doug, you asked about what we mean when we say ad volume won't increase. So the first thing I would say is I would frame that in the context of sort of as a percentage of the newsfeed experience. So obviously, if we can drive more engagement that provides more opportunity for us to show more ads. In general, I think your question sort of referenced whether this was geographic. The ad load in News Feed is reasonably consistent across the world.
It's a little bit less in the least developed markets because we have less advertisers there, but it's not grossly different. So I think that comment sort of holds generally across most of the markets where we make our advertising dollars. In terms of relative to the 5%, so what we said last quarter was that of the total volume of stories in news feed about 5 web percentage did go up. So if you sort of mix those 2, The web percentage did go up. So if you sort of mix those 2 together, be modestly higher than the 5% number from Q2.
The next question comes from Justin Post with Merrill Lynch. Your line is open. Justin Post with Merrill Lynch, your line is open. The next question comes from Mark Mahaney with RBC Capital Markets. Your line is open.
Great, thanks. Two questions. First, David, could you just give us some color on why the reduction in the OpEx growth for this year? Were there certain investment projects you decided to cut and what were those and why? And then secondly, Mark, this kind of 5 year vision of moving towards going from push based to pull based that opens up a lot of opportunities.
I mean that's been kind of the sauce maybe behind Google and its interesting part of Twitter, etcetera. But could you talk about the challenges in order to get there and maybe both in terms of the user experience, the advertiser opportunity, how difficult substantial the technology challenges are to get there? It's a very different direction and there's a lot of opportunity, but how do you get from point A to point B? Thanks.
Hi, Mark. In terms of OpEx growth, so we're continuing to invest aggressively in the business with sort of particular emphasis on technical hiring and building out our infrastructure. At the same time, we're trying to do this in a disciplined fashion, making sure that all the investments we make and the dollars we spend are spent wisely in terms of furthering our mission and creating returns for the company. I'm really quite pleased with how things are going in that regard in 2013. From an R and D standpoint, we're really on track or if anything ahead of where we expect it to be in terms of hiring and spend.
And that's really the most important area for us in terms of investing to drive future growth. In other areas of the business such as cost of revenue, G and A, marketing and sales, I think we're ramping up spend less than we anticipated for a couple of reasons. One is better success than we expected in some of the efficiency projects that are helping to keep the company small even as revenue ramps up. A second reason is some slower than expected ramp up in both hiring and new projects. And then the 3rd contributing factor is just we have in the budget some expectations for sort of the unplanned stuff comes along that can drive spend like an asset acquisition or something like that.
And we really haven't spent as much money as we've expected in sort of the unplanned areas.
Yes. And for your question about, how do we make the knowledge that's been shared in Facebook more useful. I mean the first thing that we needed to do is just index it all and build the infrastructure to start being able to use it in different ways. I mean the first beta for graph search we'd indexed more than a trillion connections, friendship connections, group memberships, like connections. And then for post search, we indexed more than a $1,000,000,000,000 of the posts that people have put into the system.
And the basic insight that we think we're operating on here is that right now a lot of the behavior and engagement on Facebook is very day to day, right? I mean you're sharing something and Facebook is the best place for you to share photos or an event that's going on in your life and for you to go to News Feed and see what's going on with the people around you. But what's happened is that over the past almost 10 years of this behavior, this amazing base of knowledge has been built up that's trillions of pieces of content and information that now we're just trying to find different ways to expose and basically make that more useful to people instead of just the stuff that has been shared in the last day or so. So graph search is one way that you can see that coming to light in terms of people being able to do directed queries for different types of content. There are other kind of services that we think we can build as well that just give people more utility from this corpus of knowledge that's been built up.
And that's going to be a big focus for us over the next few years.
The next question comes from Justin Post with Merrill Lynch. Your line is open. Thank you. I hope you can hear
me this time. Mark, after a successful revenue year, you kind of start next year with a clean slate and you highlighted some big ambitions in your prepared remarks about access and improving search. Just maybe remind us how you think about driving profit growth as you look at the company relative to kind of your long term objectives for the company? Thank you.
Well, I mean, we care a lot about that in terms of the shareholder value that we're generating as well. And I think the recent results and what I said at the end of my remarks there was that we're going to keep on planting seeds for future growth while continuing to build momentum now. And I think that's the philosophy that we've taken in terms of building the company. We generally want it to be profitable and such. But I don't think we're going to commit or have any specific guidance on this right now.
The next question comes from Carlos Karshner with Sanford Bernstein. Your line is open.
Thank you. Mark,
can you talk a
little bit more about how the knowledge in the Facebook graph compares with the knowledge in the overall web today qualitatively and quantitatively. And if you're planning to connect the worldwide web graph to the Facebook graph when you think about the answers that you're going to give people in the future. Secondly, there is draft regulation in the European Commission and in Brazil at least that may require Internet companies such as Facebook to store all their data locally. What do you think would be the impact on Facebook's CapEx and expenses if these regulations are indeed implemented? Thank you.
Yes, sure. So on your question about the graph, Facebook the graph that people share on Facebook versus the web overall, I think they're pretty different. So in terms of quantity, they're getting to a pretty comparable size. So engineers on the graph search team have told me folks who have worked on other web search engines before told me that the scale of things like post search are as big or bigger than any web search index that's out there. But I know they're just different use cases with different kinds of knowledge and companies have done that and they're doing a good job at that.
But there's different kinds of knowledge. That I think is kind of latent inside Facebook that we need to that I think is kind of latent inside Facebook that we need to do a better job of surfacing that. So that's going to be the focus on that. I mean over time there are a lot of possibilities for things that we can do and I don't I'm not really ready to talk about a lot of them today. But you can kind of look at what we've launched in the couple of graph search launches that we've done so far and we're pretty early in that journey.
And Carlos the second part of your question was about draft legislation or discussion about companies needing to store data locally in various countries. It's an interesting question and definitely something we're tracking, but the answer is really going to depend on the details of what that looks like. It's very hard to assess what kind of implications it would have for like Facebook without understanding what we would need to do. So, we'll continue to pay close attention to it, but really, really hard to give you anything in the way of a specific answer at this point.
The next question comes from Jason Helfstein with Oppenheimer and Company. Your line is open.
Thanks. Can you give us some color on how many advertisers you guys ended the quarter? How that grew? And then if there's a way to think about how many advertisers have claimed pages, so we can get a sense of how deep the penetration is because it looks like you guys are more successful than other companies and growing at a faster rate, particularly on the local penetration side. Thanks.
So last quarter, we reported that we had 1,000,000 active advertisers and that number continues to grow and continues to grow healthily. We believe globally we have 20,000,000 small businesses of local businesses of some kind who have pages. So obviously, just a fraction of those are advertisers. And I think it's one of the most exciting opportunities in front of Facebook. It's really hard to get small businesses to use technological products.
And 20,000,000 small businesses are using us and we haven't gone out and done aggressive sales efforts to make that happen. Going from having a page that you're using for organic distribution to paid distribution, is something we're very, very focused on. It's why we roll out these simple products. And I think our track record at doing that is good and we plan on getting better at it.
The next question comes from Ross Sandler with Deutsche Bank. Your line is open.
David, sorry to beat a dead horse, but back to the ads per user comment. But can you just give us some color on, I guess, since you guys started the mobile news feed ads a year and change ago, how much CPC and click through rate improvement you've been able to drive? And should we think about it going forward if mobile users are growing at 18% in the UK, 20% in the U. S. And I think 60% for ROW, Should we think about revenue growth as a slight premium to that, but somewhat correlated to that?
Thanks.
Sure Ross. So I think if you look back over the last year, one of the sort of some of the metrics that I think have been most positive for us have been as we've ramped up from a very low volume, very few ads shown in News Feed to larger numbers, what one could reasonably have expected given the way the auction dynamics work is that the pricing would really come down as we were delivering more clicks and as we were diving deeper into the pool of advertising demand. And the way pricing has really held up and click through rates have held up and CPCs have held up as we've progressed through this over the last year I think has really validated our confidence that newsfeed ads were going to be a really important product that could really drive the performance of the business. So we remain really encouraged and pleased by that. Going forward, clearly, we will try to continue to grow the user base as you described and that's been an important part of our revenue growth since the company started.
And the other opportunity is for us to continue to improve the quality, the relevance and the performance of the ads and to drive up pricing by bringing more demand into our system. We're certainly I think doing a good job of that right now and we've got to continue to
execute. The next question comes from Eric Sheridan with UBS. Your line is open. Sure. Thanks, guys.
Two quick
questions. 1, following up on the last one with respect to ROI around advertising products going forward, I guess maybe more for Sheryl, but how do you guys think about the dialogue between advertisers and yourselves about ROI and how much of that fits with measurement and attribution tools that you guys need to develop internally versus what they need to think about in terms of the ROI on your properties versus other online and offline properties? And sort of second question on mobile app install ads, question about sort of advertiser base and how that sort of developed since the product has been launched. Thanks.
To the first question, it's really both. In order to measure all the way from seeing a Facebook ad through to a purchase, particularly one that's offline, That takes work and tools on our side, including the data systems. And it also takes thinking about measurement on their side. The industry overall is moving. We've been really pleased to see more embracing of multi click over last click attribution.
You can see that happening with a number of big players in the industry. The PMDs are really important here. The PMDs are good at helping people and helping marketers measure. But really the development measurement systems take our measurement, take industry measurement, particularly for brand advertisers, they also take some rethinking of the ways they have measured ads and ads performance before. And we work very closely with our clients on that.
On mobile app install and mobile engagement ads, we are very focused on growing across the board. We want growth in all of our marketer segments and we want growth that's broadly across the world. Developers are a really interesting place for us because we think not only do we have we think the best mobile ad product in general because people spend a lot of their time in newsfeed, they spend more time in newsfeed than they spend on any other part of our service. That gives us an opportunity to sell ads broadly, but it also gives us a great opportunity for developers because what developers want people to do happens on their mobile phones and on their desktop. Mobile app install ads have been very successful for us and they're interesting because the mobile app install market didn't even exist a few years ago.
I think the move to rollout engagement ads further deepens our relationship with developers and shows that we can help get them users and then we can get those users to continually use their products. So we're pretty excited about this part of the market because we think it can grow so quickly And we think our ad product and offering is so unique.
The next question comes from Peter Stabler with Wells Fargo. Your line is open. Good afternoon. Thanks very much for taking the questions. You introduced hashtags in June and I'm just wondering if you could comment on usage trends, how strategically important hashtags are to indexing the knowledge graph going forward and whether hashtags could become a meaningful part of an ad targeting opportunity in the future if usage catches on in a significant way?
Thank you.
The launch of Hashtags was more just following behavior that we see from people. All we really did was take hashtags that people were putting into the product and make them link so that people could find other posts that had the same tag. The efforts that I think you're latching onto is basically we are putting some more effort now into both public content on Facebook and more private content, right? So as there are a bunch of different sets of people that a person will want to share with. One is all of their friends, but a lot of the sharing and communication that's done is 1 on 1 in messaging or with small groups or with the community.
And then there's a large set of content that's public, which is often very high quality content as well. And we have efforts in all of those areas to make it so that people can share all of those different kinds of content on Facebook. And that's going to be something that we're going to continue to do.
The next question comes from Brian Nowak with Susquehanna. Your line is open.
Thanks. I have 2, please. You continue rolling out a lot of new products. I was wondering if you could speak to the traction and kind of any of the user adoption of the early topical and interest trending that you've rolled out? And then last quarter, you talked about strength in e commerce, driving some of the advertising.
What verticals would you speak to this quarter? And what are the guys are heading into the holiday season? Are you still seeing e commerce as being a big driver again? Thanks.
Yes. So you're asking about the effectiveness of some of the public content efforts that we've done. And I think it's starting to do very well and we're very pleased with it. Some of the questions that we've gotten have asked if this is an area that we've started focusing on recently, which actually it isn't. It's something that we've been working on for a while, but I think the questions as a sign that the results are starting to be quite good and folks are starting to notice the traffic that we're driving and the higher quality content that's public that people are coming across on Facebook.
So we're going to keep on focusing on this. It's not just about public content. It's about giving people the power to share with every different audience that they want, whether it's the most private one on one communication and thread, up to the most public content that you want to get out for everyone in the world to be able to consume. We're just going to keep pushing on all of that.
To your second question, direct response including e commerce continues to perform well. We have high click through rates, competitive CPCs that were attractive for marketers. When you think about verticals, I think we have really tremendous opportunity in basically all of them. Things that are performing particularly well right now, financial services, media and entertainment, e commerce, professional services. But even if you look to a vertical like auto that we haven't historically been strong in, I think we're starting to make real inroads client by client, like the Alfa Romeo case study I showed, because we have such a great opportunity to engage the people they want to reach.
Our targeting is also getting better. So with custom audiences and partner categories, we're able to identify here are the people you want to show your ad to who we believe are in the market to buy a car, for example. And so the combination of the measurement work we're doing and the ability to target, I think means we have a strong play in every vertical.
The next question comes from Richard Greenfield with BTIG. Your line is open.
Hi. Really wanted to ask you about the Instagram blog post that you put up the other week where you stated specifically that I think the quote from the blog was you want ads to be creative and engaging. And that seems pretty different than most of the advertising that I've seen on Facebook, whether on mobile or on the desktop. And I wanted to ask you kind of how do you think or is it possible that if this strategy of advertising works well on Instagram, could we actually see a new form of advertising appear on Facebook sometime in 2014 or 20 15?
So what we announced last week is a small test with 10 advertisers to start showing ads in the Instagram feed. And we're excited about it because there's a lot of interest and a lot of excited brands. When you think about ads being exciting and engaging, I think we think about 2 things. We think about ads that fit the format of the product that they're part of. So the Instagram ads right now are the pictures and videos, which are exactly what people post on Instagram.
If you look at the progress we've made with our newsfeed ads, those ads, both in the size, the shape, they got larger when they moved over from the right hand side, right hand column, but they're also meant to be as exciting as engaging as the content. So our goal is that we want our ads to be as good as the user shared content. Some of them are, a lot of them aren't. We have a lot of room to grow in improving that quality. But in terms of the excitement you'll see or the interest, that is our goal and we're just going to match the format of the product we're working with as we roll out ads.
Operator, we have time for one last question.
The next question comes from Brian Weiser with Pivotal Research.
I'll take another crack at the number of businesses advertising. I was wondering if you could quantify the number of new small business business perhaps or number of advertisers going beyond that $1,000,000 in the quarter. The reason I ask is I'm trying to understand to what degree that maybe the shift of spending mix towards smaller businesses may have contributed to margin expansion. And maybe you could talk about the margin profile that different segments of marketers bring to your business.
So we don't break out our business by market or segment and we don't give margins by market or segment. But to help answer your question, we've seen strong growth across all of our market or segments. All of them are growing, brands growing, direct response and e commerce are growing, SMB and local businesses are growing, developers are growing. We definitely think there is a big opportunity both to grow same store sales of our large clients, particularly with the shift that's happening from TV to digital and mobile. We think that there's a really exciting opportunity.
We also think SMBs are a big opportunity for us. And certainly in an advertiser base of over a 1000000 advertisers, the great majority of those are obviously the small to medium sized businesses. We worked hard on our sales efforts so that we have the right sales and support effort to meet our clients. We care about our margins. Certainly simplified products such as we've rolled out over the last year make it easier and cheaper for SMBs to use our products, easier for them and cheaper for us.
And we will continue to focus on the automated tools that help. I think the most important thing we've done on this goes back to an earlier question about focusing on marketer objectives. Before we were asking marketers to come in and choose what ad products they were buying. With our shift to focusing on marketer objectives, it's easier for everyone from the largest to the smallest. A small business owner can come in and say, I want my app installed or I want web conversions or I want web clicks.
And then we are doing the harder work of figuring out what products are there, figuring out which of those ads should have social context so that we can meet those objectives. I think that move of moving more towards using their language and focusing on their business needs is a simpler product for them. It will help gain us more marketers and it helps us work with them in a more efficient way.
Great. That's it. Thank you for joining us today. We appreciate your time and we look forward to speaking with you again next quarter.
This concludes today's conference call.