Good afternoon. My name is France, and I will be your conference operator today. At this time, I would like to welcome everyone to Facebook's First Quarter 2021 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 session. This call will be recorded. Thank you very much. Ms. Deborah Crawford, Facebook's Vice President of Investor Relations, you may begin.

Thank you. Good afternoon, and welcome to Facebook's first quarter 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. And now, I'd like to turn the call over to Mark.

Hey, everyone, and thanks for joining us today. Before we get started, I just want to take a moment to say that we are very worried about the COVID situation in India and also in Brazil. I'm hoping that we can get this virus under control soon. And in the meantime, we're focused on what we can do to help there. Now, turning to the results. This was another strong quarter. More than 2.7 billion people now use one or more of our apps each day, and more than 200 million businesses use our tools to reach customers. This has been an intense year, and I am proud that we continue to deliver value for people and businesses around the world. Over the past couple of quarters, our business has been performing better than we expected. This has given us the confidence to increase our investments meaningfully in a few key areas that have the potential to change the trajectory of the Company over the long term. On today's call, I'm going to talk about the opportunities that we're pursuing in augmented and virtual reality and around commerce, business messaging, and creators. So first, let's talk about building the next computing platform. I believe that augmented and virtual reality are going to enable a deeper sense of presence and social connection than any existing platform. They're going to be an important part of how we'll interact with computers in the future. We're going to keep investing heavily in building out the best experiences here, and this accounts for a major part of our overall R&D budget growth. Quest 2 is doing better than we expected, even after the holiday season. We continue to see good engagement, and we keep shipping updates that make Quest better and better, including Air Link which enables wireless streaming of games and content from PCs and support for 120 hertz refresh rates. Achieving Quest's high quality in a wireless form factor has been a major breakthrough. Having wires wrapped around you breaks the sense of presence in immersion, and the technology to deliver a great experience wirelessly is advanced, and most companies aren’t going to be able to deliver this, but we believe that it is the minimum bar for a high-quality experience. This quarter we also shared more about our future investments, including neural interfaces for interacting with AR. We started testing our new avatar system, which will be a key part of how people express themselves and connect. One interesting trend is that we're seeing the app ecosystem broaden out beyond games into other categories as well. The most used apps are social, which fits our original theory for why we wanted to build this platform. We're also seeing productivity and even fitness apps. For example, we launched a tool so people can subscribe to services like FitXR to do boxing and dancing in VR just like they would for biking on Peloton. We introduced App Lab, so developers can ship early versions of their apps directly to consumers without having to go through the Oculus Store. Between App Lab and streaming from PCs, we're pioneering a much more open model of app store than what's currently available on phones today. Over time, I expect augmented and virtual reality to unlock a massive amount of value, both in people's lives and the economy overall. There's still a long way to go here, and most of our investments to make this work are ahead of us. But I think the feedback we're getting from our products is giving us more confidence that our prediction for the future here will happen and that we're focusing on the right areas. I want to call out some of the other long-term opportunities that we're really focused on, especially in commerce and business messaging. Commerce has been growing in our services for a while but has become a lot more important as the pandemic has accelerated a broader shift towards businesses moving online. In the last year, we've seen online storefronts stay open even when physical stores closed; going forward, online commerce will continue to offer an increasingly personalized and convenient experience. Commerce ads continue to do very well and drive a meaningful amount of our overall business. We built Marketplace into one of the world’s leading services for people to buy and sell, and I am pleased to share today that more than 1 billion people visit Marketplace each month. We're investing in building for the future of commerce. We launched Shops last year, and there are now more than 1 million monthly active Shops and over 250 million monthly Shops visitors. We're focused on building more native commerce tools across our apps. We recently updated WhatsApp Catalog so businesses can keep them updated from their computers and include what's in stock. We launched Carts on WhatsApp last year, and people have used them to send orders more than 5 million times. We’re also building a broader infrastructure to support commerce, everything from payments to customer service and support, and WhatsApp Payments is now live in India, and we've gotten approval in Brazil to launch shortly too. We're starting to see a meaningful shift in how people communicate with businesses. For many, online commerce is less about websites and Shops and more about messaging. People want to get support and make purchases right from a chat. Smaller businesses want to show their products and take orders via messages, and larger businesses want reliable and secure infrastructure to communicate with their customers. Businesses using the WhatsApp Business API are already sending more than 100 million messages per day. During the height of COVID, total daily conversations between people and businesses on Messenger and Instagram grew by more than 40%. More than 3 million advertisers are already using Click-to-Message ads to direct people to Messenger, and nearly 1 million advertisers have already started using Click-to-WhatsApp ads. Now, the next step is to make it possible to create those Click-to-WhatsApp ads directly from the WhatsApp Business app. We're focused on making it easier for businesses to adopt these services and giving them the tools to handle messages and customer relationships. Our acquisition of Kustomer is going through regulatory approval, and we're looking forward to offering businesses a native way to manage their customer relationships on our platform. We have a long way to go to build out a full-featured commerce platform across our services, and this is a multi-year journey, but I am very committed to getting there. This modern commerce system will bring together a number of areas where we either already have strong offerings, like in ads, community tools, and messaging, with areas like Shops, business messaging, and payments that we're focused on ramping up now. We're also investing more in building out better customer support for our products. For the last several years we've focused heavily on content moderation and privacy work, and I view customer support as the next pillar of the trust and safety work for our services. The last area that I want to discuss today is around creators. I believe that a positive vision for the future of the economy is one where more people get to do creative work that they enjoy rather than jobs that they don't. To achieve this, we need to build out the creative and monetization tools to support this creator economy. People create an incredibly diverse set of content across our services, from long-form writing to live conversations to documentaries and augmented reality filters. Our goal is to support the full range of human expression and to be the best platform for millions of creators to make a living. Part of this includes delivering a suite of tools and products that span all the ways that people want to create and consume content. I believe that at the intersection of every media type and every audience size, there is a compelling experience to build. For example, I recently discussed our audio roadmap. We already support audio calls for private audio communication, but now we're also building out Live Audio Rooms, which we think will be especially useful for groups and communities. We’re building Soundbites for sharing and consuming short-form audio clips broadly, and we're supporting podcasts for sharing and listening to long-form audio. We're also partnering with Spotify to launch a music player in the Facebook app. We also need to connect these experiences with easy options for monetization, whether that's subscriptions, tipping, or enabling creators to give product recommendations and enable commerce. With Instagram and Facebook, we have a unique ability to bring creators and commerce together, and we will share more on that later this year. Together, these efforts around creators, commerce, and the next computing platform are a few of the big areas that we are doubling down on going forward. In each of these, there's a unique opportunity to help people connect in deeper ways and to support a stronger economy for everyone. I'm optimistic that our work in these areas will help accelerate some of the positive emerging trends we're seeing in the world. And now, I’m going to hand it over to Sheryl.

Thanks, Mark, and hi everyone. I hope you’re all safe and healthy. This was a really strong quarter for our business. Our total revenue for Q1 was $26.2 billion, which is a 48% year-over-year increase. We’ve seen good growth in all regions, and we continue to see strong results in verticals that performed well during the pandemic, like E-commerce, Retail, and CPG. Our performance has been driven largely by the continued digital transformation as more businesses shift online. For years, we’ve invested in products and tools to support this shift, and these investments have helped many businesses reinvent themselves during the pandemic. One of the best parts of my job is I get to meet SMB owners and hear what’s on their minds. Many of them tell me how they’ve used Facebook to adapt and grow. At a virtual roundtable with SMBs from Detroit this quarter, I spoke to La’Asia Johnson, who runs an all-natural skincare company called Elle Jae Essentials. When COVID hit and she had to close her store, she started a Facebook Group called The Garden, which now has more than 1,000 members. They give her product ideas, and when she makes the products they suggest, as she says it, they sell quicker than she can keep them on the shelves. By pivoting online, she’s been able to replace all of the income she lost from her store. I also spoke to Ita Reyes, who runs a yoga studio in nearby Ann Arbor. She started doing outdoor classes during the pandemic and needed to get the word out. She couldn’t afford to advertise to everyone in the city, and not everyone in the city wants to do yoga, so she uses personalized ads. This enables her to advertise to people in the area who are interested in yoga or meditation. It’s all done in a privacy-protected way; we show her ad to those people, and we don’t share their information with her. Then they sign up for her classes. Like everyone else, the business owners I talk to want to know what will happen next. Many are all-in online, so even when things reopen fully, they want to do more online than they did before. So understandably, they’re asking us what we’re doing to help them, not just now but for the long run. Part of the answer is continuing to improve our tools and products and creating new ones to suit their needs. And part of it is helping them navigate the headwinds that are coming down the line, whether it’s the iOS 14 changes or potential regulation. On tools and products, we’re all in too. From day one of COVID, we fast-tracked our work to help people buy and sell online. Initially, we focused on getting the experience right for sellers. As Mark said, we launched Shops nearly a year ago. We’ve continued to develop new features to help personalize the shopping experience and work with partners to make transactions as seamless as possible. We’ve created new formats, like Live Shopping, which bring to life the unique commerce experiences our platforms can offer. Now, we’re equally focused on getting the experience right for consumers. We’re rolling out the Shop tab in more countries and exploring new immersive formats, like Product Tags and Drops stickers, that enable more people to shop with creators and brands they love. We're constantly developing and improving our ad products to help businesses reach people where they are and get the best possible return on investment. We continue to see strong growth in Stories ads and video ads, which we’ve invested in heavily. We've also seen strong growth across ads in Facebook Watch, which now has over 1.25 billion people visiting every month. As the number of people watching video grows, we’re developing more opportunities for businesses and creators to reach them. We’re expanding Paid Online Events to more countries. We’re enabling more people to run in-stream ads, including in Live videos. We’re developing ads in short-form videos, where we’re testing the ability for content creators to monetize their Facebook Stories with ads that look like stickers. Regarding headwinds, yes, challenges are coming to personalized advertising, and we’ve been pretty open about that. We’re doing a huge amount of work to prepare. We’re working with our customers to implement Apple’s API and our own Aggregated Events Measurement API to mitigate the impact of the iOS 14 changes. We’re rebuilding significant elements of our ad tech so that our system continues to perform when we have access to less data in the future. We’re part of long-term collaborations with industry bodies like the W3C on initiatives like privacy-enhancing technologies that provide personalized experiences while limiting access to people’s information. It’s also on us to keep making the case that personalized advertising is good for people and businesses, and to better explain how it works so that people realize that personalized ads are privacy-protective. Small businesses don’t have to understand the alphabet soup of acronyms they’ll need to comply with, but they need confidence that they can still use our tools to reach the people who want to buy what they’re selling in a privacy-safe way. We’re confident they can, and that they can continue to get great results as digital advertising evolves. With the roll-out of vaccines, there’s reason to be hopeful. But the pandemic is still causing real hardship for people in many countries, and in particular, like Mark, my thoughts are with our friends and colleagues in India and Brazil right now. If the last year has taught us anything, it’s to not make assumptions, and not expect things to get better for everyone at the same time. Whatever happens, we’ll continue to keep people connected, support the public health response, and invest in ways to support businesses now and in the long term. I want to close by saying how grateful I am to all the businesses who work with us, big and small, who we learn from every day, and to our incredible teams who have supported millions of businesses through this turbulent time and set them up for success now and in the future. Now, over to Dave.

Thanks, Sheryl, and good afternoon, everyone. Q1 was a strong quarter for our business, driven by the sustained growth in the digital economy and our continued success in helping businesses engage with consumers across our services. Let’s begin with our community metrics. We estimate that approximately 2.7 billion people used at least one of our services on a daily basis in March, and that approximately 3.4 billion people used at least one on a monthly basis. Note that these Q1 Family metrics reflect new data from recent user surveys. Further details on our family metrics are included in the earnings slides on our IR website. Our global community continued to grow even as we lapped elevated user growth in the first quarter of last year related to the pandemic. Facebook daily active users reached 1.88 billion, up 8% or 144 million compared to last year. DAUs represented approximately 66% of the 2.85 billion monthly active users in March. MAUs grew by 250 million or 10% compared to last year. Turning to the financials. All comparisons are on a year-over-year basis unless otherwise noted. Q1 total revenue was $26.2 billion, up 48% or 44% on a constant currency basis. We benefited from a currency tailwind, and had foreign exchange rates remained constant with Q1 of last year, total revenue would have been $706 million lower. Q1 ad revenue was $25.4 billion, up 46% or 42% on a constant currency basis. The growth in advertising revenue was largely driven by continued strength in product verticals such as online commerce. Growth was broad-based across all advertiser sizes, with particular strength from small and medium-sized advertisers. Our year-over-year ad revenue growth also benefited from lapping pandemic-related demand headwinds experienced during March of last year. On a user geography basis, ad revenue growth accelerated in all regions. Growth was strongest in Europe at 53%. Rest of World, Asia-Pacific, and the U.S. & Canada grew 47%, 46%, and 42%, respectively. Europe and Asia-Pacific benefited from currency tailwinds while Rest of World continued to face currency headwinds. In Q1, the total number of ad impressions served across our services increased 12%, and the average price per ad increased 30%. Impression growth was driven by both Instagram and Facebook. The increase in average price per ad was driven primarily by lapping depressed pricing levels from one year ago as well as strong advertiser demand. Other revenue was $732 million, up 146%, driven by continued strong Quest 2 sales. We've been encouraged by the sustained strength we’re seeing with sales of Quest 2 since its October launch. Turning now to expenses. Q1 total expenses were $14.8 billion, up 25% compared to last year. Cost of revenue increased 48%, driven mostly by core infrastructure investments, hardware costs related to Quest 2 sales, and payments to partners. R&D increased 29%, driven mostly by hiring to support our core products and consumer hardware efforts. Marketing & Sales increased 2%, with growth in hiring partially offset by lower marketing spend. Lastly, G&A expenses increased 2%, with growth in employee-related costs partially offset by lapping higher bad debt expenses related to COVID in the first quarter of last year. We added over 2,000 net new hires in Q1, primarily in technical functions. We ended the quarter with over 60,600 full-time employees, up 26% compared to last year. First quarter operating income was $11.4 billion, representing a 43% operating margin. Our tax rate was 17%. Net income was $9.5 billion or $3.30 per share. Capital expenditures including capital leases were $4.4 billion, driven by investments in data centers, servers, network infrastructure, and office facilities. Free cash flow was $7.8 billion. We repurchased $4.1 billion of our Class A common stock in the first quarter, and we ended the quarter with $64.2 billion in cash and marketable securities. In terms of sustainability, I’m pleased to report that Facebook’s global operations have now reached net zero emissions and are 100% supported by renewable energy. This is an important milestone for our business, but we also recognize there is more work to do in the years ahead, and we remain committed to our next goal of decarbonizing our entire value chain in 2030. Additional information on our ongoing efforts across environmental, social, and governance areas can be found in our recently filed proxy statement. Turning now to the outlook. We are pleased with the strength of our advertising revenue growth in Q1 2021, which was driven by a 30% year-over-year increase in the average price per ad and a 12% increase in the number of ads delivered. We expect that advertising revenue growth will continue to be primarily driven by price during the rest of 2021. We expect second quarter 2021 year-over-year total revenue growth to remain stable or modestly accelerate relative to the growth rate in Q1 2021 as we lap slower growth related to the pandemic during Q2 2020. In Q3 and Q4 2021, we expect year-over-year total revenue growth rates to significantly decelerate sequentially as we lap periods of increasingly strong growth. We continue to expect increased ad targeting headwinds in 2021 from regulatory and platform changes, notably the recently-launched iOS 14.5 update, which we expect to begin having an impact in Q2. This is factored into our outlook. There is also continuing uncertainty around the viability of transatlantic data transfers in light of recent European regulatory developments. Like companies across a wide range of industries, we are closely monitoring the potential impact on our European operations as these developments progress. Turning now to expenses. We expect 2021 total expenses to be in the range of $70 billion to $73 billion, updated from our prior outlook of $68 billion to $73 billion. The year-over-year growth in expenses is driven by investments in technical and product talent, infrastructure, and consumer-related costs. We remain committed to investing for long-term growth, and our expense outlook reflects the underlying strength of our business and the compelling investment opportunities we see across our products, including consumer hardware. We expect 2021 capital expenditures to be in the range of $19 billion to $21 billion, down from our prior estimate of $21 billion to $23 billion. Our capital expenditures are driven primarily by our investments in data centers, servers, network infrastructure, and office facilities. Turning now to tax. We continue to expect our full-year 2021 tax rate to be in the high teens. In closing, the pandemic during the past year has presented incredible challenges to our global community. During this time, we have worked to help both businesses and consumers stay connected. We remain focused on helping people and businesses navigate the transition out of the pandemic as more regions reopen. With that, France, let’s open up the call for questions.

Thank you. Our first question will be from the line of Brian Nowak with Morgan Stanley.

I have two questions. First, I'm curious about a self-assessment regarding commerce. You've made significant progress with around a million Shops and 250 million Shop visitors. Where do you think you've achieved the most for advertisers and merchants at this point? Looking ahead to the latter half of '22, what are the key areas of innovation you are prioritizing to continue increasing those numbers, including potential options for non-advertising monetization? My second question relates to engagement. While I recognize it's early in the reopening process, I'm interested in your observations regarding user engagement and time spent in regions that are more open, and how you plan to address that in the latter half of the year.

I can start on the first. There’s a lot of commerce activity on our platform already. People discover lots of products through our Feed and Stories ads. It's been our largest ad vertical. COVID really accelerated it, but it's been one of the fastest-growing verticals we've had over the last five years, and we believe that Facebook drives hundreds of billions of dollars of off-site e-commerce GMV today through our ads business. So, we've certainly made a ton of progress there. Our goals going forward are to continue to be the very best place to advertise. We're going to have to do work to do that. As I mentioned in my remarks, we can still use data in a privacy-safe way to get the right ads to the right person at the right time, but we think we are market leaders here. The other work we're doing is to make it easier to sell on our platform. The shopping experience is really well defined in other places, and we are later to that than we were to ads. So, we know we have a lot of work to do. We're working with partners to build some of the parts of the experience that we're not as expert in, and we're integrating products like Shops. We have more than 1 million active Shops and over 250 million people interacting with merchandise per month. We recognize that getting to a really seamless transaction experience is going to take work on our side, and we're going to continue to invest there. For the foreseeable future, ads are going to be the vast majority of our revenue in this area, and that commerce vertical is important to us. We don't need commerce itself or fees to become a big part of what happens to make the investment worthwhile, but we really have to focus on helping more businesses move online and have a great experience on our platform. That, along with that, makes this a worthwhile investment for us.

Hey Brian, it's Dave. I'll take the second question. So, broadly, what we're seeing is engagement trends going back to a more normalized level. So, if you think about the past year, it's been pretty noisy because of COVID. In the first quarter of 2020, we saw a significant increase in engagement as a result of the pandemic, and we've seen some of those trends subside as the year progressed and we saw gradual phase down of lockdowns. I don't think anything hugely dramatic, but it's something that we're seeing in the engagement trends. That's one of the factors playing into price being a bigger driver of growth on the revenue side because of the impression growth being lower. I'd say, COVID is certainly a factor in that. On the revenue front, I think we're seeing continued strong demand with products, and services spend is coming back. So, that’s a quick landscape of what we're seeing with the COVID impacts.

Our next question is from the line of Justin Post with Bank of America. Please go ahead.

Great. Thank you. Maybe one for Mark and one for Dave. I think there are some questions on engagement, just because you see strong growth in things like TikTok or maybe Snap, but you've built some super platforms within Facebook with the Watch usage and Marketplaces. Could you comment on what you're seeing with overall engagement? And as people use these over new platforms, is it growing time spent on other factors? Then, the second question, maybe to Dave, any surprises with the iOS 14-5 update? Any comments on what you've seen with users who have already opted out of tracking before this update?

Hey Justin, it's Dave. Yes, I can take both of those. So yes, on the impression growth front, I think we're seeing a couple of factors. We talked about the COVID impact and the return to more normal levels, and that's affecting some of the impression growth. The second factor that we're seeing is really strong engagement on video, particularly internationally. We're pleased with that. I’d point to a couple of examples there. Facebook Watch now has 1.25 billion users. Also, Reels is starting to get traction and doing well on Instagram. Now, video currently has relatively fewer impressions on a time spent basis. So, that's playing into the engagement trends as well. Finally, I would say we are seeing competition in News Feed from our video products and others’ as well. So that's factoring into it. Regarding any surprises with iOS 14-5, look, I think it's really early. They just began rolling out the update, and the penetration rates are very low at this point. A couple of things I’d say: We’re concerned about the impact this update may have on small businesses’ ability to use their advertising budgets effectively. The impact on our own business, we think, will be manageable. We expect it to be a headwind for the remainder of the year, but we're making encouraging progress, as Sheryl mentioned, on our own solutions to help advertisers navigate these changes. This includes helping advertisers work with the Apple API as well as our own approach to using aggregated data for targeting and measurement called Aggregated Events Management. The goal is really to maintain and even improve performance with less data. Just in addition to these mitigations, we're also seeing very strong overall ad demand, which contributes to a more positive outlook for 2021. Overall, the impact of the Apple approach is much larger than this particular update around third-party data usage. Apple has a number of private APIs on hardware and software that advantage their own products and services in ways that are challenging, and we face that issue in places like our messaging products and even with the hardware products we're launching. We generally don't think that this closed approach is the best one for the industry from an innovation perspective.

Our next question is from the line of Doug Anmuth with JP Morgan. Please go ahead.

One for Mark. Mark, you highlighted the three areas where you're doubling down across AR and VR, commerce, and the creator economy. Hoping you could talk about whether you view these efforts as helping Facebook control its destiny more as a platform, perhaps giving you more first-party data and whether they insulate you from other ecosystems over time? Thanks.

Sure. I can talk about that. I think we mostly think about these things from the perspective of improving the experiences that we can build. Augmented and virtual reality, I have thought about for a long time because I think that it's sort of the holy grail of delivering a sense of presence and the type of social experiences that you would want to build. Up until now, we have been constrained to a web browser, and in some cases, increasingly restrictive mobile app rules. I think that in the future environment where you'll be able to feel like you're really present with someone else, that's going to be really powerful. It's going to unlock a bunch of experiences we wanted to build for a long time, and that's what I'm excited about. Similarly, on the commerce side, part of this is motivated by wanting to help small businesses sell more across our platform. A lot of it is about making the consumer experience better. A lot of times, you click on an ad, you see an interesting ad, and it takes you to a website, which won't necessarily have full context on who you are; the payment experience will be clunky in doing that. I believe that opportunity exists to make that all a lot more seamless, which bolsters the experience for users and improves conversions for businesses. Our approach will largely start with having built this robust ad system and working our way down the experience from there, making it so businesses and creators have Shops and the ads link into Shops to create a native shopping experience. As our payment systems improve and more people have credentials on file, I think this will become an increasingly common part of the user experience.

Our next question is from the line of Ross Sandler with Barclays. Please go ahead.

A question for Mark. Recently, there were congressional hearings on this concept of algorithmic amplification or how algorithms on Facebook or Instagram surface content to maximize engagement. Would you characterize this as fair? If you were forced to change how these algorithms work, what impact would that have on engagement? Ten years ago, the News Feed was kind of the whole story, but now we're talking about many different areas within the apps. How much engagement is driven by algorithmic content versus utility-style engagement, like using Messenger or Marketplace?

Sure. I can start taking this, and then Dave, you can jump in if you want to add anything. Overall, I think that the narrative you are pointing to is dramatically overstated by critics. We do not optimize our systems to increase the amount of time spent in News Feed. I explicitly do not give our News Feed team or the Instagram feed team goals around time spent. Our belief is that if we build a product that's more valuable, people will engage more. But you should start by trying to build something that's more valuable, not by trying to increase the time people spend. We've done that for years, and I think it’s led to good results. From that perspective, I know that what you're saying is something that some folks like to throw around. I think the more that different regulators or other folks dig into this, I think our practices here are quite robust. We don't want extremist content on our services. We go out of our way to try to reduce that because it's in our business interest. Consumers don't like it and advertisers don't want to be near it. I don't think this kind of narrative about the Company is accurate, and we've tried hard to dispel it. We will continue to work on that. News Feed is still a huge part of the products and the Instagram home feed, but increasingly, Stories is a big deal on Instagram. Many use Explore and IGTV. Video and Watch on Facebook are quite big. A lot of engagement happens in messaging apps as well. There are many different things that people are doing across the services, but Dave can jump in with any more color if he wants.

I'd add that we invest more than anyone else in the industry on safety and security to keep bad content off the site before it gets ranked and put into what people see. We have over 35,000 people on the safety and security side and have the most robust set of content policies out there. We do a quarterly public call around our content review process and procedures. So, on that front, before it even gets into the algorithm, it's my belief that we do more than anyone else in the industry.

Our next question is from the line of Youssef Squali with Truist Securities. Please go ahead.

I have a two-part question on VR for Mark. Mark, you've been talking about VR for a long time now, basically every quarter. I wonder what happened this particular quarter that compelled you to want to double down on virtual reality? What was the realization this quarter that made you want to do that? Is there a need for Facebook to perhaps want to own a studio or a series of studios to help rollout content to drive adoption because the other friction point is price, and you've already lowered the unit to $299, which is a compelling price. Thanks.

I can start with this, and then Dave can jump in on the second point, if you want to add anything. In terms of what changed, I think the big piece here is that Quest 2 is doing quite well. I don't want to overstate it because, compared to large platforms, it's still relatively small. However, there's been a very real inflection in terms of adoption and engagement with Quest 2. It feels like there's something about the quality we hit and the price we hit, combined with the fact that it's wireless. It will be hard for anyone else to meet these attributes. Some might try to ship a claim of higher quality with a wire, but I don't think consumers will want that. I also observe how the team is executing and the products in the pipeline. I want to ensure we can really go all in and deliver here. Quest 2 has been a meaningful step up from Quest 1 concerning the progress we're seeing. Content is a part of this, and we have a team internally focused on first-party, second-party, and third-party content and forging partnerships with studios. This is significant. Quest has, by far, the best lineup of VR content, and the roadmap ahead is exciting, with some forthcoming products that I anticipate will make a big difference.

Yes, Mark. I wouldn't have much else to add other than to say we have called out investments in Facebook Reality Labs as a major investment driver in our expense outlook. It’s an ongoing investment area, and studios, as Mark said, and content is an important part of that.

Our next question is from John Blackledge with Cowen. Please go ahead.

Two questions. One on AR, VR. Mark, as you're building and investing in the platform, what do you expect AR and VR to be more widely adopted? What ultimately drives fast-paced accelerating consumer adoption? And then, second question for Dave. Cost growth was lower than expected in Q1. You slightly raised full year at the midpoint. Anything there that you could call out? Thank you.

I can talk about the first piece, and then Dave can take the second part. In terms of when these platforms will be more adopted, I think a lot of it is about form factor and use cases. Quest 2 has hit a key point, but I think there's still further we want to go on the form factor. The wireless aspect is crucial. Products with better graphics might be developed, but with a wire, it hurts the immersion because you don’t want to have a wire around your neck while using it. The use cases are also important, and I'm seeing promising signs that we're expanding beyond gaming; it's still primary, but we're seeing engaging social experiences, productivity applications, and other promising uses. I don’t want to overstate this because it's still early, and all these things have to develop, but those are promising signs. Regarding AR, we still haven't reached the point where it will be broadly accepted; a pair of glasses that look normal is necessary for that mainstream acceptance, which is quite the technical challenge ahead of us.

Just on the Q1 total expenses, I called out some of the items in my comments. I think you've got factors like relatively lower marketing spend compared to Q1 of last year where growth was lower. We had bad debt expense in Q1 that I think was not unique to Facebook but affects other companies as well when expectations on collectibility were impacted by COVID. Looking forward, the strength of the business is giving us confidence, and we're looking for areas to invest more. We continue to invest in research and development across the priorities that Mark outlined. Additionally, we’ll see a pickup in marketing in the remainder of the year. This is what's driving the acceleration of expense growth as you look forward.

Thank you. Our next question is from Lloyd Walmsley with Deutsche Bank. Please go ahead.

Thanks. Two questions. First, Sheryl, in the past, you've talked about advertising being a relative ROI gain. When you think about the shift from iOS changes, would this be an operational short-term headwind to a tailwind as other advertising avenues lose their ROI on a relative basis? Secondly, can you walk us through what you think Facebook can uniquely bring into e-commerce that might make for a better user experience? Is that AR, VR, or other features?

Yes. On relative ROI, you're exactly right. People are going to advertise across various channels, looking for relative ROI. If a signal diminishes, it goes down everywhere, we will compete differently. Our goal is to ensure that we can still do personalized ads, and we believe our relative competitive advantage is that our ads are more personalized. It’s crucial for small businesses like the yoga studio I mentioned earlier because they can’t afford to cast a wide net. They want to advertise to those specifically interested. We believe we will still be relatively better positioned than most other digital players. But as the signal lessens, we’ll need to rebuild that capability in our system, but I don’t have a sense of the timing of these changes. It's early, and regulatory shifts have yet to occur. On the consumer experience side of shopping, we launched many shopping tools, and we've seen broad business adoption. We need to enhance the consumer side of the experience, where we can stand out. We have people doing loads of activity on our platforms, and more looking for and discovering products. We've been strong at the top of the funnel; now we want to help move people down the funnel. We think we can do this, but it will take time for people to adapt. However, our long-term competitive advantage lies in the sheer number of users and their engagement with our platforms, and we’re optimistic about our prospects in e-commerce.

Our next question is from Colin Sebastian with Baird. Please go ahead.

First, Mark, maybe a follow-up on VR and AR. Can you comment on the connection or synergies you see between Reality Labs and the other priorities around commerce, communications, and creation? Are those collaborative initiatives, or are they still somewhat siloed in terms of their plans?

They're good questions. I think right now, when a platform is in its infancy, it’s beneficial to centralize the development in the organization. But as things start to build out, you want to get the full energy of different app teams involved in building toward that. We need to balance centralization and decentralization over the coming years. Regarding payments, both Facebook Pay and our upcoming launch of Diem will be essential for commerce. We want to enable payments seamlessly for consumer transactions across all these platforms.

Our last question will be from the line of Michael Nathanson with Moffett Nathanson. Please go ahead.

I have one for Mark and one for Dave. Mark, regarding the creator economy, I'm interested in where you see the opportunity and what you think you could add as the biggest value-add for creators that's not being done today?

I know there are several important components creators need. One is creative tools to share the full range of expressions. The second is connecting that work with a large audience of people. The third is monetization. We're strong on connecting creators with their audiences and monetization. We believe building creative tools is important, and if we become the best place for creators to make a living, we can improve content across the services. Thus, right now, we focus on helping creators monetize their work and build their community, with the intention of expanding tools for creators overall.

So, Michael, regarding pricing in the auction, the simple story is that demand for ads has been higher than we predicted. If you had to pick one vertical, it would be commerce that outperformed. Almost every vertical performed strongly. We’re still seeing recovery in some verticals that struggled due to COVID, like travel, but we’re starting to see some signs of life there. The two-year compare you mentioned is helpful because it smooths out some of the noise in the year-over-year revenue growth rates from 2020 compared to 2021. We expect a more normalized deceleration rate, not just volatile growth from weaker quarters going into stronger ones as we progress through the year. Strong demand across the board has driven our ad pricing positively.

Great. Thank you again for joining us today. We appreciate your time. We look forward to speaking with you again.

This concludes today's conference call. Thank you for joining us. You may now disconnect your lines.