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 First Quarter 2020 Earnings Conference Call. [Operator Instructions] Ms. Deborah Crawford, Facebook's Vice President of Investor Relations, you may begin.

Thank you. Good afternoon and welcome to Facebook's first quarter 2020 earnings conference call. Joining me today to discuss our results are Mark Zuckerberg, CEO; Sheryl Sandberg, COO; and Dave Wehner, CFO. Before we get started, I would like to take this opportunity to remind you that our remarks today will include forward-looking statements. Actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause these results to differ materially are set forth in today's press release and in our annual report on Form 10-K 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 may 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. Finally, we hope that everyone listening today is staying safe. The vast majority of us at Facebook our working productively from home and everyone on this call this afternoon has dialed in remotely. And now I'd like to turn the call over to Mark.

All right. Thanks everyone for joining us today. Before we get started, I also just want to say that I know this is a very hard time for a lot of people. I know a lot of you are calling in from New York, where this has been particularly tough, although, almost everyone has been affected by what's going on in some way. So just want to start by acknowledging that and taking a moment to thank everyone working on the front lines to help all of us get through this. There is a lot of uncertainty now about the world and what it will look like over the coming months. And Sheryl and Dave are going to give some more context on what that means for our business. The impact on our business has been significant, and I remain very concerned that this health emergency and therefore the economic fallout will last longer than people are currently anticipating. And while there are massive societal costs from the current shelter-in-place restrictions, I worry that reopening certain places too quickly before infection rates have been reduced to very minimal levels will almost guarantee future outbreaks and worse longer-term health and economic outcomes. So, with that said, I want to use this time today to discuss how we're responding to COVID, what we're seeing across our services, and some reflections on how we plan to run the company going forward. So, responses have been focused on three areas; helping people stay connected while we're all apart, assisting the public health response, and working on the economic recovery especially for small businesses. And I'll start with how we are assisting the public health response. The first step here is connecting people with authoritative health information. And we built a COVID-19 information center with…

Thanks, Mark, and hi everyone. As Mark said, this is an extraordinarily challenging time. It's a public health emergency, a global economic crisis and a time of great anxiety and personal tragedy for so many. My heart goes out to everyone on this call who has lost someone they love, and to everyone for the many ways so many are suffering. Mark talked about how our company has responded during this emergency to keep people safe and informed. How we see our responsibilities and how we are thinking about the future. I'm going to talk more about the impact we have seen in our business and what we are doing to help other businesses survive and recover in this changing landscape. Our total ad revenue for Q1 was $17.4 billion, which is a 17% year-over-year increase. After a strong start to the quarter, we saw a significant impact on our business as a consequence of the pandemic from the second week of March onwards. This impact has not been felt evenly. We've seen strong growth in gaming and relative stability in technology and e-commerce, which is one of our largest sectors. There are few contributing factors here. First, as people stay at home, these sectors are seeing more use of their products and services. Second, advertisers in these sectors tend to optimize for measurable objectives and we are generating sales at lower prices due to the overall reduction in ad demand. On the other hand, we've seen significant declines in travel and auto as these industries have been hit particularly hard. These trends are continuing in the first two weeks of Q2, and Dave will share more on this shortly. Companies of all types are adapting to a world where people aren't walking into their stores or seeing their brand…

Thanks Sheryl and good afternoon everyone. Echoing Mark and Sheryl's comments, my thoughts are with everyone facing challenges during this difficult and unprecedented time. Before turning to results, I wanted to comment briefly on Facebook's operating posture during the crisis. We took early action to ensure that all employee -- our employees were safe and moved to a global work from home stance on March 6 in the week prior to the WHO declaring COVID-19 a global pandemic. We are currently operating with over 95% of our full-time employees working from home with safety being the number one priority for those essential workers who need to come into our data centers and other facilities. We have been able to support our existing employees and on board new employees throughout this period. While we are by no means operating at 100% of capacity across every dimension of our operations, we have continued to ship new product releases, maintain service availability, review content and stay connected with our business customers. Given the circumstances, we have been pleased with the dedication and professionalism with which the Facebook team is tackling the challenges presented by this crisis. Now, turning to the results. The COVID-19 pandemic is having a broad impact on our community metrics, revenue, expenses and business operations. Our community metrics reflected increased -- reflect increased engagement as people around the world of shelter-in-place. It's gratifying that people are using our family of apps to stay informed and connect with people and organizations that they care about. In March, we estimate that on average 2.3 billion people used at least one of our services on a daily basis and that approximately 3 billion people were active on a monthly basis. We have seen increased usage across all of our services, particularly in markets…

We will now open the lines for a question-and-answer session. [Operator Instructions] Your first question comes from the line of Brian Nowak from Morgan Stanley.

Thanks for taking my questions. Hope everyone is safe. I have two. Just the first one for Sheryl or Dave. I appreciate all the color on the different ad verticals between gaming, e-commerce, travel, and autos, etc. I guess I'd be curious to hear about sort of what happened in the decline in the ad business you saw in March compared to the stability in April. Sort of what changed in those verticals? And then understanding you're not giving guidance, but talk to us about some of the key verticals that would be needed to sort of bring the business back to growth as we go throughout the year? And then the second question for Mark, you talked a little bit about SMBs. I'm curious to hear about some of the key investment areas and initiatives you really think you need to execute on to make the SMB offering more comprehensive in '21 and beyond?

Okay, Brian. Do you want to take that Sheryl?

Why don't you go first, and I'll take the second.

Okay.

You take the first, and I'll take the second.

Yes, sure. Sorry. We're doing our coordination. So, Brian, yes, the trends that we saw in the end of Q1, we saw pull back, pretty broad based pull back especially concentrated in some of the areas that we talked about, things like travel and auto, but really kind of broad-based, large and small advertisers. We saw a relative strength even then in a few categories like gaming, where you have always-on campaigns that we're able to pick up some supply, because the lower pricing kind of cleared at the levels that those advertisers were trying to acquire users at, so that is one of the benefits of the auction. And then e-commerce, we've seen -- it was not a strong as gaming, but we've seen that show signs of stability as well. And all of those trends sort of continued into Q2, so I don't think there's a lot of vertical shifts, but I think we are seeing e-commerce sort of do reasonably well. What we're seeing is really, I think pretty straightforward. We're seeing people who are driving towards online conversion events do well because they're able to kind of bid in the auction and get those users and get those results that they're looking for, and people who are like looking for offline or more top of funnel brand, there we've seen more pullback instead.

To your second question on SMBs, there’s really two parts to this. One is, what are we doing now to help SMBs weather the storm and come back to business and be able to pay their employees. And the second is the ongoing ad work we do. On the first, I think we've been really focused. We came out early with our $100 million grants program, and we're rolling it out very aggressively around the world trying to get money to people very quickly, and we're building specialized products we never would have thought of before. Fundraisers were something that we did for non-profits or people, not small businesses. So, in this very difficult time for SMBs, we're really focused on doing everything we can to help them survive and even thrive as they help transition online. SMBs are also a major part of our business going forward. And on there, it's really the execution we do quarter-after-quarter to make our ads perform. We offer very personalized ads that can be directly targeted at small groups. We do that in a very privacy protective way and those ads are often most important for small businesses who can't afford to buy broad based media. And so all of the work we do to continue to allow targeting, all of the work we do to make the ads more personalized, all of the work we do to make free tools available, which is important for all the online businesses who use our free tools, there are 140 million of them as well as the 8 million, who are our advertisers, and the funnel between those. That's the nuts and bolts of our business. We work on it every day. We're continuing to work on it every day through this crisis, and we'll continue beyond that.

Mike, we'll go to the next question.

Your next question comes from the line of Doug Anmuth from JP Morgan.

Great. Thanks for taking the question. I have two, I think probably both for Mark. First, I was hoping if you could talk more about the functionality of WhatsApp and perhaps other platforms as you expand in India with the Jio platform’s partnership. Are there other markets where you could see something similar or is this strategy here unique to India? And then second, just given the increased engagement with communication tools and voice and video in particular how is that translating into increased activity in the feed and within stories? Thanks.

Sure, I can speak to the first one, and David can see if there are any stats in particular to share on the second one. I mean for commerce on WhatsApp more broadly, we're very focused on making it, so that small businesses can have a presence on all of the apps, right, Facebook, Instagram, WhatsApp, and Messenger and can communicate organically with people and then increasingly can do things that can help them drive transactions. So we started rolling out things like catalogs in WhatsApp, we're working on payments to be able to complete transactions, and we've rolled out a new ad format, click to messaging ads, where basically a lot of small businesses and different businesses are finding that their message threads with people perform better for driving sales than their websites or other presences. They basically buy ads inside Facebook or Instagram that sends people to chat threads. And then, as we build out all these tools around that -- around making those threads more valuable, we think that those ads will only increase in value, which is the way we're currently thinking about that business. In India with Jio; Jio has had this vision for a while, I want to be careful not to put words in their mouth, but just from what they've basically described both to us and publicly about their JioMart vision is, there are millions of small businesses and shops across India, and they want to try to help get them on to a single network that you'll be able to communicate with through WhatsApp and do payments online through WhatsApp. So, I think that that is a great, very large example of how we can wire up and help small businesses in the country where we have the largest WhatsApp community. But certainly all the products and technology that we're building to enable that partnership are going to be things that we want to do around the world. So, we're very excited about working with them to drive this vision forward and then extending it everywhere over the coming months and years. Dave, I don't know if you want to say anything about the second point. I think it's at a high level, I mean you may have stats that you want to share. But I think it's, we have seen a broad-based increase in use of the products. It's hard to know what is just correlated with the pandemic versus people are doing more video chat or messaging, so therefore they also connect more in other parts of the products, but I do think, overall, we believe that providing a broad set of social tools for people is -- and just providing more value for people does include all of the different services which is important because as you know, some of the services for our business we include ads in and some we don't.

Yes. And the only thing I'd add there is, we talked about 39% increase in ad impressions and that's really driven by engagement increases on our feed products and stories products as well as the search that we've seen in the video and messaging. So it really wasn't limited to video and messaging, it was broad-based as Mark said, and that's creating supply on the ad impression side as well.

Your next question comes from Justin Post from Bank of America Merrill Lynch.

Great, thanks. Sheryl maybe you could talk a little bit about the ad auction dynamics. Are you seeing e-commerce and digital replace auto and other categories and how efficiently is that auction working? And secondly, can you give us any color on percent of ads that come from direct response versus brand or maybe CPC bidding versus CPM? Thank you.

I can take that Justin. In terms of the ad auction dynamics, yes, I mean, we are seeing, when verticals doing better than the other or people fall out of the auction we have very dynamic content, it's -- and so we're able to backfill that with other bids from other clients. So we're seeing a lot of bidding into the system from gaming and e-commerce as prices come down it's also more economic and they can get the ROIs that they want. So it's a natural way in which those -- that happens and you see a replacement effect there. So that's working well. Far more -- by far the majority of our revenue we haven't given a specific number on what is direct response. But it's really for many years driven our business. It continues to drive our business and I would say if anything COVID is accentuated the importance of people who are bidding for online conversions. And so, I think we've seen a fall-off in some of the more sort of broad-based brand advertising right now and really a focus on those things that are driving direct results today, which isn't really surprising given the economic climate.

Your next question comes from the line of Ross Sandler from Barclays.

Just a follow-up to the last question. I think about four years ago, you mentioned that the top 100 advertisers were just under 25% of revenue and coming down. So I guess, how does that mix look today? And Dave, I think you mentioned, large and small advertisers were kind of pulling back in March and into April at about the same rate, but any more pronounced desal from large versus small. Any color there? And then second question is Mark, you mentioned in your opening remarks that something along the lines of high margins are important to the company, especially given the economic environment. So, how do you think about balancing levels of investment with revenue over the long-term. As you're thinking around that changed versus I think you mentioned that comment maybe two years ago, has anything changed in the way you're thinking about margins? Thank you.

Hey Ross, it's Dave. I'll take that first one. Yes, we've seen sort of a pullback of advertising from both large and small advertisers. And I would say, given the uncertain economic climate, we know SMBs are getting hit hard, but our business is quite diversified and there is no one size fits all for SMBs. We've got some businesses that are obviously suffering greatly from the shelter-in-place orders and then we have SMBs, who are also digital natives and have online objectives and those are doing relatively better. So we've got SMBs, who are in gaming and e-commerce and the like. So, we are seeing I think a fairly diverse range of SMBs. And I would say in terms of the diversity of our business that's, that remains very high. We're not concentrated. But we haven't updated that specific stat that we gave back four years ago. We remain very diversified from an advertiser perspective.

And I can talk to the margins a bit. Overall, I think during a period like this there are a lot of new things that need to get built. And I think it's important that rather than slamming on the brakes now, as I think a lot of companies may, that it's important to keep on building and keep on investing in building for the new need that people have and especially to make up for some of the stuffs that that other companies would pull-back on, and I think that's in some ways that's an opportunity, in other ways, I think it's responsibility to keep on investing in the economic recovery. So that's in the near-term. But the other reflection that I've had is that, I think if you're going to have a business, which is primarily advertising, which is our plan for the long-term, then I think you have to recognize that advertising is more volatile and sensitive to the macro economy, and therefore if you're going to have this kind of a business, I think you really want to maintain high margins. So that way when we go through periods like this, you can make sure that we remain stable and healthy and able to keep on building the things that are important for the long term. So what I guess I'd want to just be clear on is that, we are willing to accept a reduction in margins in the near term, but we understand and I personally have an appreciation for the importance of maintaining high margins over time. So, it's not that we're going to kind of take things down this year and then continue taking things down a lot in the future. I think over the coming years if we invest a lot more now, I think we are going to look for ways to manage expenses to make sure that we can maintain high margins overtime.

Your next question comes from the line of Youssef Squali from SunTrust.

Great. Thank you very much. Two questions. Mark, can you discuss the performance of your gaming platform including Oculus so far. How satisfied are you with the traction there? And what are you doing to better position the company to take advantage of the increased engagement we're seeing on other platforms, continuing platforms and maybe Dave or Sheryl, can you speak to the trend you're seeing in markets where COVID-19 hit earlier say may be January and February, and how they are performing today and any learnings from these markets? Thank you.

Sure. So I can talk a bit about games. We have a few big areas of investment here. One is just in our mobile apps, massive amount of growth in live streaming. That's -- I talked about live video in my opening remarks and people live streaming gaming content is certainly one big category that's growing quickly and that we're investing a lot in. So that I think is going quite well. We recently had some pretty big launches of an app in that area, and we're going to keep on investing there. Then on the virtual reality side, this has always been a long-term vision. Quest has surpassed our expectations. I wish we can make more of them faster during this period. I do think that it's one of those areas where as people can't go out into the world as much, the ability to have technology that allows us to be physically present or feel present even when we can be physically together, whether that's Quest or Portal or any of the software that we're building around video presence that stuff is certainly seen especially large spikes in usage and it's possible that this brings accelerate some of the trends around adoption of things like virtual or augmented reality. But I'm not sure what will happen there long-term? But in the near term, I'm quite pleased with how Quest is doing and I wish we could make more of them.

Youssef, I'll take the second part of that question. So I think it's probably the market that would be most instructive would be a market like China, but I think for us China is a bit different, because we don't have users in China. So the business there is China-based advertisers reaching people outside of China. So it's hard to extrapolate too much from that. We did see a pullback of revenue in China earlier in the quarter, and we have seen a recovery there, and a recovery -- but one thing that's hard to know is part of that is really kind of mixed up in the vertical -- verticals as well. China tends to for us index pretty highly with gaming and e-commerce and those segments that are driven towards online outcomes, where we're seeing relative strength. So it's hard to really read too much into the experience.

Your next question comes from the line of Eric Sheridan from UBS.

Thanks for taking the question. Maybe two if I can. One bigger picture one dovetailing all the comments around e-commerce. I'm curious if there's anything you're seeing in terms of the behavior of users on the platform that would make you want to accelerate or change the path of product development to capture some of the supply and demand you might be seeing as people want to sell in an omnichannel world and some of the demand that might be there on the buyer side to connect e-commerce broadly across Facebook's properties as an output of the current environment? And then Dave, maybe if I could just ask one quickly, I don't think you called it out, but I am curious if you could identify the credit loss assumption in the quarter and what the number might have been or is that something we might have to wait for the 10-Q for? Thanks so much.

Mark, do you want to take the e-commerce or you want me to do both?

I mean, I can talk to it briefly and then you can add to it if you think that there is more. We are seeing increases in some of the consumer behavior around this, but I think the bigger thing is just that for all the small businesses that we serve and a lot of small businesses that are out there that are still primarily physical, there is a -- there has been a big push to get online and to do more selling online. And I think there are lots of opportunities for us to support them in building the tools that they need to do this. We're seeing a lot of businesses that work primarily physical. Now moving towards selling stuff online for the first time, and we're seeing a lot of businesses that already had a digital presence, now really transitioned to having their digital presence be primarily -- be their primary presence. And that, I think that that trend, while there may be some short-term spike, I do think plays into a pre-existing long-term trend. And we'll certainly want to accelerate that aspect of our product road map to make sure that we can serve a lot of those businesses during this period when it can help them with the recovery and get through this. So we're working on a lot of work streams there. We'll hopefully have more to share over the coming weeks.

Yes. Eric, on the bad debt expense that increased by $193 million. So that will be the number that's in the Q and the majority of that relates to charges. Obviously that we're taking related to the COVID-19 pandemic in our views on collectability of certain accounts in that environment.

Your next question comes from the line of Mark Mahaney from RBC.

Thanks. Two questions. Mark at the very beginning, you talked about the economic fallout possibly lasting longer than people think. Just any detail behind that. Is there something you're seeing in the data's that you've got reaction? And then following up a little bit on Eric Sheridan's question, these kind of events, crises can create new, I don't know paths or whatever. So you talked about shopping. What about WhatsApp there's a surge in usage of WhatsApp. Is there something that's happened that makes it more interesting more -- for long-term more interesting as a monetization vehicle because of the surge and usage of WhatsApp. Thanks.

Yes, I can take those two. I think that we'll see a meaningful economic hit if I had to predict for the period of the health emergency. And so I think that as Dave said in his comments, the efficacy of the shelter-in-place orders and how well that's going, I think will be a big determinant of how long and how painful the economic fallout is from this. So there is certainly a range of outcomes that I don't think I have any particular insight that that's not public or that you don't have. But I worry that this could be worse than at least some people are predicting. The other question was monetization on WhatsApp. I think that there is a huge opportunity on WhatsApp if for no other reason than that it has 2 billion people using it and we haven't done significant work on building out the business yet. I mean we have some tools there, but we're still early in the phase of -- we've built out WhatsApp Business. There is tens of millions of businesses that are signed up and that are using that. So it's -- there is tremendous demand people want to communicate with businesses and we've been in the process of building out the infrastructure to do payments and more commerce, ad units like what I mentioned around quick to messaging ads are performing well. So, I think all the indicators are positive; but it's just a generally untapped opportunity so far, and one that we are that I think it's very exciting to build out over the coming years.

I think Deborah is trying to say that there is one last question.

Yes. Thank you.

If we could just take one last question, please.

Your last question comes from the line of Colin Sebastian from Baird.

Great. Thanks for taking my question. I guess first, Dave, I was hoping, I know this is not a key focus right now but any updated thoughts or timeline on some of the targeting and measurement headline -- headwinds that you spoke about on the last call? And then with respect to both the ongoing investment priorities as well as the slower growth in headcount, is there any way you could articulate which areas are seeing that slowdown versus those that are getting full support? Thank you.

Sure, Colin, I can take both of those. Yes, I mean the targeting headwinds are having an impact on the business, but obviously that's dwarfed by the impact that COVID-19 is having right now. We continue to see the three factors around targeting, and this hasn't changed the regulatory pressures with GDPR and CPPA and similar regulations. The moves by platforms that make third-party targeting and measurement more difficult, and then our own moves on launching privacy controls. So, these are impacting the whole industry, and we believe we're relatively well positioned. We've got a lot of first-party signal. That said, I think this will have a broad impact on return on investment and could affect what advertisers are able to find and acquire customers effectively for their businesses, may not be able to grow as quickly as they otherwise could and that could have a negative impact on their growth in the economy and obviously revenue for us. So certainly, it's a challenging time to make it tougher for businesses to grow, but we're certainly -- continue to have that headwind in the longer term.

Great. Thank you for joining us.

And I'm sorry, I forgot investment priorities. We're continuing to focus on recruiting on the tax side. So product and engineering. So we're sort of fully going down that path. That's was our core product and innovation efforts. And we are slowing down headcount in business function. So some of the functions related to things like advertising sales is slower in those departments, given the overall economic climate. And then there are certain areas that we're just finding efficiencies, there's less travel, there's less entertainment. And I think that may persist for quite some time. So we're seeing savings there and we're going to be looking at getting marketing efficiencies, because obviously prices are coming down on the marketing front, so that we can get the same impact for less dollars and also look for efficiencies on marketing spend. So those are the areas that I would call out.

Right. Thank you for joining us today. We appreciate your time. Stay safe everybody, and we look forward to speaking with you again.

Thanks, everybody.

Ladies and gentlemen, this concludes today's conference call. Thank you for joining us. You may now disconnect your lines.