The first one around engagement and overall time spent among the users. Mark, you guys are making a lot of changes around AI and Reels, etc. It's encouraging to hear the stats about 30% increase in time spent with Reels across Facebook and Instagram. As you're studying those users that are using more Reels, are you seeing total time among those users grow? Said another way, are all these changes proving to be incremental? That's the first one. And the second one on headcount growth. Understanding we're expecting a slowing of headcount in the back half, but Mark, to kind of go to your points about at some point, you see headcount decline. Should we think about '23 as being a year in which headcount declines for the company? Dave Wehner (CFO): Yes, I can address both of those questions, and then Mark can provide additional insights if he wishes. Reels contributes positively to time spent, although it does have some cannibalistic effects. Overall, the net impact is favorable. We believe some engagement is transitioning from areas like Feed and Stories to Reels, which aligns with our strategy to promote Reels to a wider audience. In terms of headcount growth, we are not setting any specific targets for 2023 yet. As Mark mentioned, we are slowing down our headcount growth rates and plan to maintain greater discipline moving into 2023. As we approach budget discussions, we will provide clearer guidance on that. null (Operator): Our next question is from Justin Post with Bank of America.

In the headwinds, you didn't mention TikTok. Are you seeing any dollars or advertisers pull that could be moving over there for maybe lower CPMs? Any thoughts on competitive headwinds? And then second, just a quick question on guidance. Is there contemplated pressure on quarter revenue in 3Q versus 2Q because of the Reel usage increases? Sheryl Sandberg (COO): I'll take the first question. We exist in a really competitive advertising market, where advertisers have broad opportunities to advertise both offline and online and there are almost endless options. So we know we have to earn our share and continue to deliver great ROI and be able to measure results. And that's why we're focused on the continual product improvements that we talk about in these calls quarter-over-quarter and we'll continue to do going forward. Dave Wehner (CFO): And Justin, let me make sure I got that question. I think you were asking about Q3 and just pressure on Q3 because of Reels usage. Mark mentioned that we are really excited that the run rate on Reels crossed $1 billion, but it is overall because engagement is shifting to Reels. It is an overall headwind on the business. We haven't specifically quantified that, but there is a headwind on the business as Reels grows. In the long run, we, of course, believe that this will be a tailwind on revenue, but that's not happening in 2022. We're optimistic that it can be in the long run. But in general, the pressure that we're seeing on Q3 is overwhelmingly a macro one, where we're seeing sort of broad-based weakness across most of the verticals. null (Operator): Our next question is from Eric Sheridan with Goldman Sachs.

Two, if I could. One, in terms of honing the focus on investments inside the company and reexamining the cost side. How should we think about the mix between Reality Labs and Family of Apps and what the impact might be on relative loss or margin structure of the two segments as you hone the cost structure of the company and think about that investment cycle in both areas of the business? That would be number one. And number two, maybe just following up on Justin's question and broadening out a little bit. Is there any way to unpack some of the impact of macro, which is clearly outrunning some of the easier comps you'll be facing in Q3? Because we're lapping IDFA from a year ago, there was an easier comp on top of just IDFA and yet implied is that the rate of growth continues to sort of weaken in Q3 versus Q2. So maybe unpacking a little bit some of the headwinds versus tailwinds in Q3 to Q2 would be helpful. Dave Wehner (CFO): Yes, I can address those points. If anyone has additional information, feel free to chime in. Regarding our investment strategy, we are focusing on the company's key priorities. One major area of focus is our investment in the Metaverse and Reality Labs, where we plan to increase our spending. However, we will maintain discipline across the entire organization. In terms of our Q3 comparisons, you're bringing up a significant issue. As we approach the latter half of this year, we benefit from comparing against last year's completion of the Apple iOS rollout in Q3 and Q4, which positively influences our year-over-year growth rates. However, this benefit is being countered by the overall macroeconomic environment and the challenges we face. There are indeed complex factors at play. At a high level, the environment for digital advertising remains tough, influenced by several compounding issues. Economic uncertainty is impacting the markets, and we are comparing against periods that still experienced benefits from COVID in vital sectors, such as e-commerce. Additionally, the challenges related to signals may be affecting advertisers' spending decisions. Ultimately, we see a macroeconomic environment that is largely negating the advantages we would have gained from comparing against last year's iOS 14 rollout. null (Operator): Our next question is from Mark Shmulik with Bernstein.

Two questions, if I may. The first remark, back to the discovery engine pivot, certainly a big change for the platform, and certainly understand users' hesitancy on kind of any changes. But beyond the flywheel effect of sharing, any more color you can share on what would differentiate the discovery platform here on Facebook and Instagram versus some other platforms would be much appreciated. And then secondly, on the buyback cadence, is there any right way to think about that? I know the buybacks kind of went down a little bit this quarter. And I've also noticed it kind of seems to trend along with free cash flow generation. Is that the right way to think about the buyback strategy going forward? Mark Zuckerberg (CEO): You want to take buybacks and then I'll take the product question? Do you want to go first? Dave Wehner (CFO): I can do buybacks first. So thanks, Mark. Obviously, we look at a lot of factors when it comes to our buyback program. We still have a substantial amount remaining in the buyback program and then we expect to continue to have buybacks as part of our capital allocation strategy going forward. So no real change in posture to announce there. We'll continue to be looking at capital return opportunities over time. Mark Zuckerberg (CEO): Great. Yes. Regarding the discovery engine, there are several important aspects to consider. One major point is that social content from people you know will continue to be very significant. Following others is a key indicator. Ten years ago, the AI technology did not effectively determine your interests beyond the accounts you followed. The connections you had were a unique signal of interest. Nowadays, AI has advanced and can identify things you might be interested in, even from accounts you don’t follow or entire topics in which you don’t follow anyone. This opens up a larger variety of content that could interest you. The social component of our platform will always be crucial and distinctive. On the discovery engine, our approach differs from many competitors because we incorporate various content formats. I mentioned this in my initial comments. The AI we're developing does not solely focus on videos or short-form video. It also encompasses text, links, photos, and community discussions. One intriguing AI challenge is creating a large model, called an embedding by researchers, which extracts meaning from posts into a complex mathematical space. This capability will enhance the user experience on Facebook and Instagram, providing a different offering than competitors that focus only on one content type. People will not want to be limited to just one format, and they will continue to care about updates from friends and family. This evolution will lead to a broader range of engaging content, improving the service overall. Additionally, we face the business challenge of effectively monetizing Reels. As I mentioned earlier, it is currently on track but generating less revenue than the rest of the Feed. However, we are optimistic about improving this. As engagement on the platform increases, it will create positive momentum for the business as well. null (Operator): Our next question is from Doug Anmuth with JPMorgan.

I have a question for Sheryl and another for Dave. Sheryl, could you share your thoughts on what stage you're in regarding the development and implementation of ads that require less data for advertising? Do you think it's possible to eventually revert to the targeting and measurement capabilities we had prior to the platform changes? And Dave, if there is a further slowdown in the macro environment next year or if revenue growth stalls for other reasons, are you ready to adjust overall expense growth to a similar level to maintain margins and profitability? Sheryl Sandberg (COO): I can start. I'm not entirely sure I'm a baseball expert, and I can't pinpoint an exact inning, though I believe there are nine in total. Regardless, I think we are still in the early stages of this process. We have effectively utilized data in a privacy-safe manner to achieve measurable results and personalized advertising for our clients. We have taken the lead in this area. Now, we're entering a new phase where we must employ the same targeting and measurement strategies with reduced data. I believe we still have a lot of progress to make in this regard. We plan to advance by investing in our own resources, artificial intelligence, and machine learning. We'll also roll out new products that assist both us and advertisers in measuring results while sharing less data, as I mentioned earlier. It's important to recognize that this is not an issue we face alone; it's a challenge that anyone operating on the Apple iOS platform encounters. The industry is collaborating, with many players working together to find solutions. Dave Wehner (CFO): Doug, I just wanted to first kind of hit the premise of the question, which is if we continue to see macroeconomic challenges. It's just historically, macroeconomic challenges are often linked to some sort of cyclical effects. We do know there's lots of things going on in the broader economy that point in that direction, including rate hikes and the like. So we do think there is a cyclical component of this. We know that advertising can be especially subject to these cyclical pressures. We do think that long term, digital within advertising continues to have a very positive future. And we think that we are positioned to continue to grow engagement nicely and build the best products in digital, in the market. So we're quite confident that as the market conditions improve, we'll continue to be able to return to nice levels of growth. But we also, I think, have demonstrated that we're willing to take into account the market environment as we plan our overall expense and capital base. So we'll continue to monitor that as we go into future budget and planning cycles. null (Operator): Our next question is from Michael Nathanson with MoffettNathanson.

I have two questions, one for Sheryl and one for Mark. Sheryl, I'm curious about how Reels has grown faster than Stories. You reached $1 billion, but at the same time, you mention that it's more challenging to monetize. What factors do you think contributed to the quicker adoption? Additionally, when you discuss sticking points with advertisers, what issues do they need to address to allocate more funds to Reels? Mark, regarding an earlier question about the advantages at Facebook, we’ve previously argued that the main advantage was the vast social graph of billions of people, families, and friends. Do you believe that what you are creating now with AI and digital content represents a more effective advantage and a better business model than before, considering the high barriers to entry that were established by the social dynamics of the network you built? Sheryl Sandberg (COO): So I'll take the Reels one. On Reels, we have a playbook where we, I think, do a very good job building products that consumers love to use and then building ad formats which match those products so they can integrate nicely into the consumer experience. So we learned from Stories how to do that, and I think part of the faster adoption of Reels ads is that we are getting better at this. We know we need to make it really easy for advertisers to create that content. We know we need to create the ad formats. We know we need to give them measurable tools, and we've gotten better at selling the next product, and I think we'll continue to get better at that going forward. But as you do say, there are still some challenges. Video is harder than photos, than static photos. Small businesses are better at static photos than they are at video. So this is a new format that we have to help them use. I think we have a number of tools that are working. We have a number of tools in development. But the idea is to help businesses really easily create those Reels ads, really easily test them so they can iterate and keep improving as we do this. So I think it's very promising, but we've got some hard work ahead of us. Mark Zuckerberg (CEO): Yes. In terms of establishing sustainable competitive advantages, the social graph, which you mentioned earlier, has been accessible via phones for over a decade. I don't see that as a primary differentiator for us. We consider ourselves a serious technology company, investing heavily in infrastructure. Culturally, we emphasize learning and adapting more rapidly than our competitors, which I believe are key advantages. The AI infrastructure we're developing has the potential to surpass others in the industry, enhancing our products over time. Ultimately, my focus is on driving the company to learn and iterate faster than we have in the past and compared to others in the sector. If we can achieve this effectively, our success will continue. However, if we fail to maintain this momentum, we could fall behind, as it's a highly competitive landscape. Our success with Facebook, Instagram, and other social apps stems from our relentless commitment to continuous improvement. We're applying the same dedication to AI, and I’m optimistic about the results we've seen so far. This is a significant initiative for us, backed by multi-year roadmaps. We're now impacting billions of lives and developing robust technologies, which are long-term commitments. Yet, the foundational principles of building a forward-looking company still hold true. I believe this will serve as our sustainable advantage. Moreover, if we can enhance our recommendation systems through AI, it will improve Facebook and Instagram and make our ads more effective. This is why I highlighted AI as a major technological wave in my opening remarks; it is fundamentally important to our business. We need to execute effectively in this area, and I'm seeing promising results emerging. null (Operator): Our next question is from Youssef Squali with Truist Securities.

Just, I guess, a follow-up on Reels and thank you for the $1 billion run rate commentary. But just kind of stepping back, how far behind is monetization of Reels versus maybe Instagram Stories right now? I think you mentioned earlier that it's already tracking ahead versus when Instagram Stories were launched. Just trying to get a sense of how long before we get to parity. Is it a matter of several quarters or several years? And maybe how quickly did Stories get to parity with News Feed back in 2018? And Mark, how important is M&A to you accomplishing your vision of the metaverse? And I ask because one of the regulatory agencies just today announced a lawsuit to block your acquisition of Within, a seemingly pretty small VR fitness app. Dave Wehner (CFO): Yes. In terms of Reels monetization and our journey with Stories, we really started rolling out Stories in earnest around 2018. It wasn't until this year that we achieved parity in monetization and time spent compared to Feed in developed markets. This has been a multiyear journey, and we are still early in this process with Reels. While we're proud of our current run rate, we have a long way to go in monetization. We've been good at closing the gap with Stories, but there are unique features in each format that make direct comparisons difficult. Nonetheless, we are optimistic about making progress in that area. As for mergers and acquisitions, they are definitely part of our strategy, and we will continue exploring opportunities. Regarding the recent announcement about the FTC seeking to block the Within acquisition, I refer you to our statement in the newsroom. We believe acquiring Within would benefit competition, expand the VR ecosystem, attract new users to VR, and enhance the environment for both new and existing developers. We do not agree with the FTC's position on this matter. null (Operator): Our next question is from Brent Thill with Jefferies.

Dave, as you reflect on the current downturn compared to previous ones, many are curious if you believe this downturn is less severe or if it will last longer. What are your thoughts on the duration of the situation we are currently facing? Dave Wehner (CFO): Thanks, Brent, for your question. There are several unique factors at play in our current situation. One of these is that we are comparing against very strong periods of online advertising during the pandemic. This downturn coincides with a shift back to offline behavior, which intensifies the effects of what appears to be a cyclical finance-driven downturn along with the return to more offline habits. The online ecosystem is experiencing some unique challenges that complicate these cyclical effects due to the tough comparisons. This has impacted not just us, but others as well. As for predicting the cycle's duration, I will leave that to more qualified economists to determine. It's clear that the ongoing challenging environment is reflected in our Q3 guidance. null (Operator): Our next question is from Ross Sandler with Barclays.

Great. It's kind of something others have already asked on this call but maybe we could flesh it out a little bit better. But you talk about medium term, gaining competitive advantage and gaining back market share on the revenue side. But I think some folks on this call are doubting that looking at the 2Q numbers, which obviously have like IDFA and Reels in there, but the 3Q guide compared to the likes of Google, Amazon, TikTok and the numbers that they're putting up. And if you look at previous times where you've gained competitive advantage, you also had a big data advantage that seemingly you may not enjoy post-IDFA anymore versus those other companies. So can you maybe flesh out either specific products that you are working on, that you're pumped up about that could drive that competitive advantage on the revenue side and when that might happen? Is this a 2023 event or is this more kind of like long term that we think will claw that back? Dave Wehner (CFO): Yes. Thanks, Ross. I think there's a lot in there. So why don't I, at least, just take the components of it that I think that we can kind of address? I think Sheryl and Mark both outlined some of the areas that we're really focused on, on the revenue side. Reels is obviously, right now, a tailwind to revenue, but we're excited about continuing to grow engagement on Reels and then grow monetization on that over time. So we think that's a very interesting venue for our clients to explore and advertise on, and that's going to create some real opportunities for them and us over time. We're also investing in AI to make our ads products better and we're excited about what we can do there. And Sheryl talked about some of the different products there. So we think that those are a couple of examples of things that will position us well. As it relates to kind of competitive dynamics, I think there's a lot of different things going on in the industry. Different companies are affected differently or not at all or not as significantly by things like the headwinds related to the iOS changes. There's also just different mixes of vertical businesses that affect how different companies are affected by the current economic climate and the COVID lockdown. So you've got a lot going on, but we're confident in our ability to continue to build the best products for users to be engaged as well as building great advertising products for businesses who want to reach those consumers. Deborah Crawford (Head of Investor Relations): Operator, we have time for one last question. null (Operator): Our last question will be from Mark Mahaney with Evercore ISI.

A couple of things. Dave and Sheryl, just wanted to wish you best of luck going forward, and Sheryl, particularly want to congratulate you. I think $5 billion to $120 billion over 14 years, that's pretty impressive, so congratulations. Wish you all the best going forward. Two questions. One on AI. Mark, you talked about the advantages of AI. Any update on how AI is done in terms of tackling content moderation issues? Do you feel like you've made some breakthroughs there? And then, Sheryl, you talked about this click-to-message marketing opportunity, and you've mentioned a couple of times over the last couple of calls, it's a couple of billion in revenue, but particularly strong, I think, in Latin America and the Rest of World. Any thoughts on the opportunity for that as a business within North America and Western Europe? Is it just culturally different or are there certain things that can be done to make it just as good, as strong in those markets as it is in the others? Mark Zuckerberg (CEO): Yes, I can take the first question on AI. Yes, on content moderation, most of this is done through AI today. And every quarter, we release a community standards enforcement report, where basically, the main metric is what percent of the harmful content to our systems, identifying and taking action on before someone has to report it to us. And those metrics are generally moving in the right direction and different things going on in the world make them sometimes fluctuate. But in general, we've made a lot of progress there over the last few years, and I'm quite proud of that. We focused a lot of AI efforts there. And at this point, a lot of the newer AI efforts that we have, and we're obviously going to continue that work as well. But a lot of the new efforts are focused on recommendations of content and in these large sparse models that can do better content and ads recommendations with a much larger model with even sparse data. So yes, I'm pretty optimistic about that overall. All right. Sheryl? Sheryl Sandberg (COO): Mark, I appreciate your kind words and thank you for this question, which will be the last one I address. It's the perfect note to conclude on because we're very excited about this aspect of our business. Click-to-Messaging ads are among our fastest-growing ad formats, already a multibillion-dollar segment for us, and growing at double-digit rates. This aligns with our strategy of facilitating consumer engagement that businesses can tap into, allowing consumer behavior to develop first and then working with businesses. Messaging is rapidly expanding globally, and we have highly engaged and widely used messaging platforms. Consumers are already using these platforms extensively, and businesses are increasingly adopting them as well. We've seen this trend in other regions, and it's now developing in North America and Europe too. We firmly believe this continued growth will occur worldwide. Consequently, click-to-messaging ads present an ideal opportunity, enabling a transition from discovery to establishing direct relationships with businesses. In a landscape that demands more efficiency with less data, these ads create direct connections between businesses and consumers, simplifying ROI measurement. We are investing heavily in this area, which allows consumers to message businesses across multiple platforms including Facebook and Instagram feeds, Messenger Stories, WhatsApp, and Instagram Direct. The numerous entry points facilitate genuine engagement and demand. To illustrate, RoamHowl Creative, a small business consultancy, utilized click-to-messaging ads for lead generation and found that they produced 2.3 times more qualified leads compared to their typical website conversion ads, all while achieving a 57% lower cost per lead. Importantly, this metric is even more valuable as it allows for direct measurement and attribution to our platform. We remain extremely optimistic about this area of our business, confident that it will succeed and is already thriving globally. Deborah Crawford (Head of Investor Relations): Great. Thank you, everybody for joining us today. We appreciate your time and we look forward to speaking with you again. null (Operator): This concludes today's conference call. Thank you for joining us. You may now disconnect your lines.