Good afternoon. My name is Frans, and I will be your conference operator today. At this time, I would like to welcome everyone to the Meta Fourth Quarter and Full Year 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. The call will be recorded. Thank you very much. Ms. Deborah Crawford, Facebook Vice President of Investor Relations. You may begin.

Thank you. Good afternoon and welcome to Meta's fourth quarter and full year 2021 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. Our 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 as well as in our quarterly report on Form 10-Q filed with the SEC. Any forward-looking statements 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.

Hi, everyone, and thanks for joining today. This was a solid quarter for our products and business. It was also an important one for our company. In October, we announced that Meta would be our new name and we laid out our vision for the metaverse. When we shared our plans to connect, I said this is not something we’re going to do on our own. The metaverse will be built by creators and developers; it will be interoperable, and it will touch many different parts of the economy. In the months since, it’s been exciting to see lots of other companies share their own plans for the metaverse and how their experiences and products might show up too. I look forward to partnering with a lot of them as we work to bring this to life together. Last year was about putting a stake in the ground for where we’re heading, and this year is going to be about executing. Today, I’m going to discuss our seven major investment priorities for 2022, and they’re Reels, community messaging, commerce, ads, privacy, AI, and of course, the metaverse. These are the areas that we’re putting a lot more talent and budget towards. But before I get to that, I want to briefly touch on our Q4 results, which I know Sheryl and Dave are going to go deeper on. I’m proud of the work that our teams did here. We shipped products, our community continued to grow, and businesses of all sizes turned to us to help them reach people. But there are two things that I want to call out that are having an impact on our business. The first is competition. People have many choices for how they want to spend their time and apps like TikTok are growing very quickly. This is why our focus on Reels is so important over the long term, as is our work to make sure that our apps are the best services out there for young adults, which I spoke about on our last call. The second area, and related to this, is that we’re in the middle of a transition on our own services towards short-form video like Reels. As more activity shifts towards this medium, we’re replacing some time in News Feed and other higher monetizing services. So as a result of both competition and the shift to short-form video, as well as our focus on serving young adults over optimizing overall engagement, we’re going to continue to see some pressure on impression growth in the near term. Now I’m confident that leaning harder into these trends is the right short-term tradeoff to make in order to get long-term gains. We’ve made these types of transitions before with mobile feed and Stories, where we took on headwinds in the near term to align with important trends over the long term. While video has historically been slower to monetize, we believe that over time short-form video will monetize more like feed or Stories than like Watch. I’m optimistic that we’ll get to where we need to be with Reels, too. Ultimately, our continued success relies on building new products that people find valuable and enjoy using. In a competitive marketplace, we're focused on understanding the areas that we need to deliver on for people and executing against this strategy. Dave is going to share more on these impacts to the business in a minute. But before we get to that, I want to discuss our investment priorities for 2022. The first one is Reels. It’s clear that short-form video will be an increasing part of how people consume content moving forward, and Reels is now our fastest-growing content format by far. It’s already the biggest contributor to engagement growth on Instagram, and it’s growing very quickly on Facebook too. As we continue to improve the tools for creators and ranking for the people watching, and as we roll out the product everywhere across the world, we expect that this will continue growing quickly. Looking ahead, we’re investing in simplifying video across Instagram, building more great creative and monetization tools for creators, and helping more people discover and interact with relevant Reels. The next investment priority is community messaging, which is about chatting with groups of people that you have something in common with, whether that’s a shared community, interest, or experience. We already run some of the world’s most popular messaging platforms where people connect one-on-one or in groups with friends, family, and colleagues. We’re seeing people increasingly want to share more things in messages that they would’ve previously maybe posted to feed. The popularity we’re seeing with apps like Slack in the workplace, or Discord or Telegram reflects this trend too. We’re going to help people on WhatsApp better organize their group chats and make it easier to find information for the communities they’re a part of, such as parent groups or neighborhoods. We’re also building Community Chats on Facebook and Messenger for real-time conversations within those groups and communities. I also want to call out business messaging, since it’s an area where there’s real momentum. We estimate that there are more than 1 billion users connecting with a business account across our messaging services every week. We’re partnering with companies like Uber and JioMart to help people book a ride or have their groceries delivered right from a chat. We’re building new tools to make online buying better for people and easier to manage for businesses. We believe that this can be an important business for us in the years to come. We're also making good progress on our broader commerce efforts. We already help a lot of businesses reach new and existing customers with personalized ads, and our commerce tools are an extension of that. It’s a seamless way for people and businesses to buy and sell through our apps. Our strategy here since introducing Shops a year-and-a-half ago has been to make it as easy as possible for people to make a purchase after discovering a new brand or product without having to switch over to a browser or reenter their payment info. Sheryl will share more about our progress here, including some of the success we saw over the holidays. Next up is ads. With Apple’s iOS changes and new regulation in Europe, there’s a clear trend where less data is available to deliver personalized ads. But people still want to see relevant ads, and businesses still want to reach the right customers. We’re rebuilding a lot of our ads infrastructure so we can continue to grow and deliver high-quality personalized ads. The next two investment priorities that I want to discuss focus on the infrastructure that underpins all our products. The first is privacy. We’ve made huge investments in strengthening our approach to privacy, including rebuilding our privacy program and our privacy review process. We made updates to bring greater privacy to our products, including end-to-end encrypted backups and disappearing messages on WhatsApp, and end-to-end encrypted voice and video calling on Messenger. Over the next few years, we’re focused on building out a major privacy infrastructure project that will encode our privacy commitments at a deeper level of our technical foundation to make them more durable and make product development faster in this evolving environment. Now onto AI, this is one of the areas where we’ve routinely seen stronger returns on our investments over time than we’ve expected. Advances in AI enable a lot of the experiences that I’ve talked about so far; it enables us to deliver better ads to people while using less data; it's core to our safety and security work; it’s meaningfully improved the relevance of Reels and overall content ranking in general; and it plays a big role in our commerce efforts. Artificial intelligence is going to play a big role in our work to help build the metaverse. We just announced our AI Research SuperCluster, which we think will be the world's fastest supercomputer once it is complete later this year. This will enable new AI models that can learn from trillions of examples and understand hundreds of languages, which will be key for the kinds of experiences we’re building. Looking ahead, we’re focused on further scaling our computing power and transforming our AI infrastructure through advances in foundational research, as well as improvements to data center design, networking, storage, and software. Now the last investment priority here is the metaverse. We’re focused on the foundational hardware and software required to build an immersive, embodied internet that enables better digital social experiences than anything that exists today. On the hardware front, we’re seeing real traction with Quest 2. People have spent more than $1 billion on Quest store content, helping virtual reality developers grow and sustain their business. We had a strong holiday season, and Oculus reached the top of the App Store for the first time on Christmas Day in the U.S. We’re working towards a release of a high-end virtual reality headset later this year and we continue to make progress developing Project Nazare, which is our first fully-augmented reality glasses. As for software, Horizon is core to our metaverse vision. This is our social VR world-building experience that we recently opened to people in the U.S. and Canada. We’ve seen a number of talented creators build worlds like a recording studio where producers collaborate or a relaxing space to meditate. This year, we plan to launch a version of Horizon on mobile too, that will bring early metaverse experiences to more surfaces beyond VR. While the deepest and most immersive experiences are going to be in virtual reality, you'll also be able to access the worlds from your Facebook or Instagram apps as well, and probably more over time. This will enable us to build even richer social experiences where you can connect with friends in the metaverse whether they're in VR or not. We’re also focused on avatars, which will be how you represent yourself in Horizon and across other developers’ experiences in the metaverse. In December, we rolled out our Meta Avatars SDK to all Unity developers on Quest, Rift, and Windows-based VR platforms, letting developers bring Meta Avatars to their own VR experiences. We just announced an update that lets you further customize your avatar to better express yourself, and we’re introducing digital clothing too, starting with an NFL partnership so you can cheer on your favorite team. You can use your avatar across Quest, Facebook, Instagram, and Messenger. This serves as another bridge between our 2D social apps and 3D immersive virtual reality experiences. We have a lot of work ahead to make avatars as expressive and high-fidelity as they need to be to fully represent us and help us feel present with one another. I am very excited for the advances we’re making here. Making meaningful progress across all seven of these areas will improve the services we offer today and will help power a more social, intuitive, and entertaining metaverse, where people, businesses, and creators can all thrive. This fully realized vision is still a ways off. Although the direction is clear, our path ahead is not perfectly defined. I'm pleased with the momentum and the progress we've made so far, and I’m confident these are the right investments for us to focus on going forward. 2022 is the first page of the next chapter for our company. I’m grateful for all the talented teams at Meta and our partners for executing on this important work. Of course, I also appreciate all of you who are on this journey with us. Now, here’s Sheryl.

Thanks, Mark, and hi, everyone. Our total ad revenue in Q4 was $32.6 billion, which is up 20% year-over-year. The close of the year also marked the first time our business generated more than $100 billion in annual revenue. I want to congratulate our teams and thank our partners for helping us reach this milestone. Throughout 2021, we saw solid growth, which continued in Q4. But there were a number of dynamic factors that created headwinds for us this past quarter in addition to those Mark described around competition and our shift to short-form video. We were lapping a period of strong demand in 2020 that benefited from very strong growth in online commerce, which has since slowed. Q4 was also the first holiday season after Apple's iOS changes, which have had an impact on businesses of all sizes, especially small businesses who rely on digital advertising to grow. This will continue to be a factor in 2022. We've also heard from advertisers about other macro trends that contributed to the headwinds in Q4, including global supply chain disruptions, labor shortages, and inflationary pressures. A number of industry reports have pointed to people shopping earlier in the holiday season to avoid potential supply chain issues and shipping delays. This aligns with the behavior we saw from advertisers, many of whom front-loaded their spend earlier than usual. Mark talked about seven areas of investment. I'd like to talk about our progress in three of those: ads, commerce, and messaging. First, ad. Like others in our industry, we faced headwinds as a result of Apple iOS changes. As we described last quarter, Apple created two challenges for advertisers: one is that the accuracy of our ads targeting decreased, which increased the cost of driving outcomes; the other is that measuring those outcomes became more difficult. These challenges are complex and interrelated. We're working to try and improve things, for example, by making progress in closing the underreporting gap for iOS web conversions and by introducing tools like our aggregated event measurement solutions to deliver better insights for advertisers. These efforts will help to mitigate some of the challenges, but we expect the overall targeting and measurement headwinds to moderately increase from Apple's changes and from regulatory changes in Q1 and throughout 2022. On the shift to short-form video, I want to emphasize that while we’re going through a transition, we’re optimistic. Right now, Reels monetizes at a lower rate than Feed and Stories, but we expect this to improve over time. We’ve made successful transitions before, such as the shift from web to mobile, and another shift from Feed to Stories. We have a playbook here. The experience we have from monetizing Stories is directly applicable, so we’re not starting from scratch. We think that over the long term this shift will be a success for us and our partners too. Second, commerce. We launched a number of new tools in Q4. We released new features like ratings, reviews, and community replies to product questions, and significantly improved Checkout stability. We brought Shops to Groups and started testing Live Shopping for creators, offering an early glimpse of the immersive shopping experiences that will be possible in the metaverse. Our commerce strategy remains focused on three areas: continuing to be the best place for advertisers to find customers and get strong ROI; making it easier to sell on our platform; and improving the customer experience. We still have a lot of work to do compared to other mobile and web shopping experiences, but we’re seeing promising early signs. For example, The Laundress, a premium fabric care and home cleaning brand from Unilever, aimed to build awareness of a new line it developed with musician John Mayer. In November, they launched exclusively on Instagram for 24 hours, hosting a Live Shopping event with a conversation between John Mayer and Laundress Co-Founder Lindsey Julia Boyd, where viewers could buy the new products during the live stream. The hour-long event generated over $40,000 in sales. Overall, we’re pleased with the engagement we saw with our commerce tools over the holiday season and view Q4 as a promising milestone in our multi-year journey. Third, business messaging. Our focus is on helping businesses and consumers connect. Our largest monetization effort is Click to Messaging ads, where you click on an ad in your Facebook or Instagram feed, and it opens a chat with the business in Messenger, Instagram Direct, or WhatsApp. It’s a great way for businesses to drive engagement. We’ve seen lots of demand from consumers wanting to use our messaging apps for everyday services like utilities, financial services, education, and travel. In Q4, we expanded the types of information people can choose to receive from businesses and the formats in which they can interact. We’re continuing to invest in new tools to make it easier for people to get help and make purchases right from a chat. More than 150 million users globally now view a business catalog on WhatsApp each month. New features like Collections on WhatsApp help businesses organize their products and make it straightforward for people to find things to buy. As we enter 2022, our focus is where it has always been: building products that help people connect and businesses grow. We’re making long-term investments to evolve our business and continue to drive real value for our partners. Coming year, we’ll continue to invest in things that improve ad performance for our clients, in short-form video like Reels, and in making the commerce experience better for consumers and marketers on our platforms. As ever, I’m grateful to our partners around the world – big and small – who we learn from every day, and to our teams at Meta who work so hard to help businesses through the holiday season and beyond. Now, here’s Dave.

Thanks, Sheryl, and good afternoon, everyone. As we announced in October, beginning this quarter, we are reporting revenue and operating income in two segments: Family of Apps and Reality Labs. I will begin by discussing our consolidated results before moving to segments and ending with our outlook. All comparisons are on a year-over-year basis unless otherwise noted. We delivered solid results in the fourth quarter, ending a strong year for our business as full-year 2021 total revenue grew 37% to nearly $118 billion. Q4 total revenue was $33.7 billion, up 20% or 21% on a constant currency basis. Unlike the first three quarters of 2021, we experienced a currency headwind in Q4, and had foreign exchange rates remained constant with Q4 of last year, total revenue would have been about $307 million higher. Q4 total expenses were $21.1 billion, up 38% compared to last year. In terms of specific line items, cost of revenue increased 22%, driven primarily by Reality Labs hardware costs, core infrastructure investments, and payments to partners. R&D increased 35%, driven primarily by hiring to support Family of Apps and Reality Labs, as well as increased Reality Labs R&D operating costs. Marketing & Sales increased 34%, mainly driven by marketing spend and hiring. Lastly, G&A increased 107%, driven primarily by legal-related costs and employee-related costs. We added over 3,700 net new hires in Q4, the majority in technical functions. We ended the quarter with over 71,900 full-time employees, up 23% compared to last year. Fourth quarter operating income was $12.6 billion, representing a 37% operating margin. Our tax rate was 19%. Net income was $10.3 billion or $3.67 per share. Capital expenditures, including principal payments on finance leases, were $5.5 billion, driven by investments in data centers, servers, network infrastructure, and office facilities. Free cash flow was $12.6 billion. We repurchased $19.2 billion of our Class A common stock in the fourth quarter, and we ended the quarter with $48.0 billion in cash and marketable securities. Moving now to our segment results. I’ll begin with the Family of Apps segment. Q4 Total Family of Apps Revenue was $32.8 billion, up 20%. Q4 Family of Apps ad revenue was $32.6 billion, up 20% or 21% on a constant currency basis. On a user geography basis, year-over-year ad revenue growth was strongest in Asia Pacific at 31%. Rest of World, Europe, and North America grew 28%, 20%, and 15%, respectively. Currency was a modest headwind in all international regions. In Q4, the total number of ad impressions served across our services increased 13% and the average price per ad increased 6%. Impression growth was primarily driven by Asia Pacific and Rest of World, while impressions in North America declined 6% year-over-year. On a global basis, impression growth benefited from ad load increases and user growth. This was partially offset by engagement-related headwinds as we faced increased competition for people's time and a shift of engagement within our apps to video surfaces like Reels, which show fewer ads than Feed or Stories today. Pricing growth was broad-based across regions. Worldwide pricing growth slowed from the third quarter as we lapped stronger growth in the year-ago period and faced currency headwinds. Pricing was also negatively impacted by advertisers facing challenges from macroeconomic factors and measurement and targeting headwinds. Family of Apps other revenue was $155 million, down 8% due to a decline in payment revenue earned from games. Family of Apps expenses were $16.9 billion, up 35% due to higher legal-related costs, employee-related expenses, marketing, infrastructure-related costs, and payments to partners. Family of Apps operating income was $15.9 billion, representing a 48% operating margin. We estimate that approximately 2.8 billion people used at least one of our Family of Apps on a daily basis in December, and that approximately 3.6 billion people used at least one on a monthly basis. Facebook daily active users were 1.93 billion, up 5% or 84 million compared to last year. DAUs represented approximately 66% of the 2.91 billion monthly active users in December. MAUs grew by 115 million or 4% compared to last year. Facebook user growth was impacted by a few headwinds in the fourth quarter. In Asia-Pacific and Rest of World, we believe COVID resurgences during prior periods pulled forward user growth. User growth in India was also limited by an increase in data package pricing. In addition to these factors, we believe competitive services are negatively impacting growth, particularly with younger audiences. Within our Reality Labs segment, Q4 revenue was $877 million, up 22%, driven by strong Quest 2 sales during the holiday season. Reality Labs expenses were $4.2 billion, up 48%, driven by employee-related costs, R&D operating expenses, and cost of goods sold. Reality Labs operating loss was $3.3 billion in the fourth quarter. For the full year 2021, Reality Labs operating loss was $10.2 billion. Turning now to the outlook. We expect first quarter 2022 total revenue to be in the range of $27 billion to $29 billion, which represents 3% to 11% year-over-year growth. We expect our year-over-year growth in the first quarter to be impacted by headwinds to both impression and price growth. On the impressions side, we expect continued headwinds from both increased competition for people’s time and a shift of engagement within our apps toward video surfaces like Reels, which monetize at lower rates than Feed and Stories. On the pricing side, we expect growth to be negatively impacted by a few factors. First, we will lap a period in which Apple’s iOS changes were not in effect, and we anticipate modestly increasing ad targeting and measurement headwinds from platform and regulatory changes. Second, we will lap a period of strong demand in the prior year, and we’re hearing from advertisers that macroeconomic challenges like cost inflation and supply chain disruptions are impacting advertiser budgets. Finally, based on current exchange rates, we expect foreign currency to be a headwind to year-over-year growth. As noted on previous calls, we also continue to monitor developments regarding the viability of transatlantic data transfers and their potential impact on our European operations. Turning now to the expense outlook. We expect 2022 total expenses to be in the range of $90 billion to $95 billion, updated from our prior outlook of $91 billion to $97 billion. Our anticipated expense growth is driven by investments in technical and product talent and infrastructure-related costs. We expect 2022 capital expenditures, including principal payments on finance leases, to be in the range of $29 billion to $34 billion, unchanged from our prior estimate. Our planned capital expenditures are primarily driven by investments in data centers, servers, network infrastructure, and office facilities. As we discussed previously, this range reflects a significant increase in our AI and machine learning investments, which will support various areas across our Family of Apps. While our Reality Labs products and services may require more infrastructure capacity in the future, they do not require substantial capacity today and, as a result, are not a significant driver of 2022 capital expenditures. Regarding tax, absent any changes to U.S. tax law, we expect our full year 2022 tax rate to be similar to the full year 2021 rate. Separately, today, we announced that our Class A common stock will begin trading on NASDAQ under the ticker symbol META in the first half of 2022. The new ticker symbol aligns with our rebranding from Facebook to Meta. In closing, 2021 was a strong year for our business and an important year for the company as we aligned our corporate identity with our long-term ambition to build the next generation of online social experiences. We are investing aggressively in 2022 to support our product roadmap as we work to deliver new and engaging experiences for people and support the businesses and creators who rely on our services. With that, Frans, let’s open up the call for questions.

We will now open the lines for question-and-answer session. Our first question is from the line of Brian Nowak with Morgan Stanley. Please go ahead.

Thanks for taking my questions. I have two. The first one on the Reels transition. You talked about how you've been through other transitions in the past with Mobile and Stories, etc., and you successfully navigated through. Is there anything that's unique or more challenging about the Reels transition that makes you think it could take potentially longer to sort of scale those ad products for this format as opposed to other formats in the past? Then the second one, Dave, when you sort of talk about the headwinds around ad targeting and measurement becoming larger in the first quarter and in 2022, is there anything other than sort of year-on-year data comps there? Or are you expecting other changes from a signal perspective? Maybe help us understand any further changes you expect to come on the signal loss perspective? Thanks.

Yes, thanks, Brad. I can probably take both of those. So on Reels, there are many characteristics of Reels that make it quite similar to the transitions that we've gone through before. As in the past, when we were focused on Stories, we're really focused on consumer experience and making short-form video work effectively on both Instagram and Facebook, and we're already seeing that to be the biggest driver of growth on Instagram, and it's growing very quickly on Facebook. We're really encouraged by what we're seeing, but we're focused on making the consumer experience right. Over time, we do think it's a format that will work effectively for advertising, and we think the experience we have for Stories will lend itself well to the Reels format. We're confident in our ability to monetize over time, but right now, there are relatively few ads in Reels. It's definitely something that from an impression growth and monetization perspective is going to be a headwind. On iOS 14, we saw the revenue impact with iOS 14, and that was in line with our expectations and similar to the Q3 headwind. But as we go into 2022, we'll be lapping a period in which in Q1 and Q2 those headwinds were not in place in the year-ago period. This definitely makes for a tough comp in the first half of the year, and we believe the impact of iOS overall as a headwind on our business in 2022 is on the order of $10 billion, so it's a pretty significant headwind for our business. We're seeing that impact in several verticals. E-commerce was an area where we experienced a meaningful slowdown in growth in Q4. Similarly, we've found other areas like gaming to be challenged. But on e-commerce, it's notable that Google called out seeing strength in that very same vertical. Given that we know e-commerce is one of the most impacted verticals from iOS restrictions, it makes sense that those restrictions are part of the explanation for the difference between what they were seeing and what we were seeing. If you look at it, we believe those restrictions from Apple are designed in a way that carves out browsers from the tracking prompts Apple requires for apps. What that means is that search ads could have access to far more third-party data for measurement and optimization purposes than app-based ad platforms like ours. So when it comes to using data, you can think of it as not being an apples-to-apples comparison for us. As a result, we believe Google Search ad business could have benefited relative to services like ours based on a different set of restrictions from Apple.

Our next question is from Eric Sheridan with Goldman Sachs. Please go ahead.

Thanks so much. Maybe two questions, if I can. First, following up on Brian's questions about Reels. I think when we've gone through these transitions before, you've talked a little bit about what you're seeing from an engagement standpoint about Reels and how levels of engagement compare to other forms of engagement from a consumer perspective on the property and what the differential might be in terms of wallet's early innings in terms of differential ad pricing and how you think to close that gap. Is there any willingness you're able to give us on both engagement levels or pricing differential, so we can think through what the transition scope might need to be? And then, Sheryl, on the last call, if I remember correctly, you talked about elements of as we move into Q1 in the first half, some of the workaround efforts that the team were trying to implement would start to show some efficacy. Can you give us an update on where you stand internally on workarounds and broader advertiser community acceptance of some of the workarounds on targeting and measurement as we move into the first half? Thank you.

Sure. I can start with your first question on some of what we're seeing on engagement. Reels and short-form video overall are very engaging. People are spending a lot more time. I think I mentioned this in my script up front—that it's growing very quickly. This is already the biggest contributor to engagement growth on Instagram. I think it's one of the biggest contributors that we're seeing to positive engagement on Facebook too already. In going back to the last question, there was a question on what the similarities and differences were to what we've seen in the past. The big similarity is that this is not the first time that we've gone through a major format evolution. What these transitions all had in common—from Desktop Feed to Mobile Feed, Feed to Stories, and now to Reels—is that in the beginning, our ad system and business are not as tuned for the new format. As the engagement of the new thing starts to replace some of the engagement in the old thing, it creates a near-term headwind for revenue, but that's not a big concern for us at this point. It makes some of the stuff not as clear in the near term, but long-term, we're pretty optimistic about that. The dynamic that I think is actually a little bit different with Reels compared to what we've seen with Stories and Mobile Feed in the past is that the teams are executing quite well, and the product is growing very quickly. The thing that is somewhat unique here is that TikTok is a significant competitor already and also continues to grow at a faster rate off of a large base. To the question that was asked before regarding if there’s anything that could mean it takes us longer to get to where we want, the fact is that even though we're compounding extremely quickly, we also have a competitor that is compounding at a quick rate too. Overall, back to your question, Reels is extremely engaging. I think overall engagement will grow as a part of this, and that’s why we’re optimistic about the future, despite the work ahead.

Then, Sheryl, were you going to take the second part of the question on the mitigation front?

Yes. When we talked about mitigation, we've said there are two key challenges from the iOS changes: targeting and measuring performance. On targeting, it's a multiyear development journey to rebuild our ad optimization systems to drive performance while we're using less data. As part of this effort, we're investing in automation to enable advertisers to leverage machine learning to find the right audience with less effort and reduce reliance on targeting. That's going to be a longer-term effort. On measurement, there were two key areas impacted as a result of Apple's iOS changes. I discussed this on the call last quarter as you referenced. The first is the underreporting gap. Advertisers worry they aren't getting the ROI they're actually getting. We believe we've made real progress on that underreporting gap since last quarter, and we think we'll continue to make more progress in the years ahead. I do want to caution that it's easier to address this with large campaigns and harder with small campaigns—which means that part will take longer, and it also means that Apple's changes continue to hurt small businesses more. The second area underneath the measurement challenge is really data delays. As part of the iOS changes, we and many other ad platforms, receive less granular conversion data on a delayed basis. Advertisers shared with us that this makes real-time decision-making particularly difficult—especially important during the holiday period, where people are often spending a lot and continually monitoring their ads and adjusting spend not just on a daily basis but often on an hourly basis. That was one of the challenges we faced during this holiday quarter.

Our next question is from Justin Post with Bank of America.

A couple. Mark, just on a big picture basis, you're adding a lot of short-form video, and maybe the content is shifting from friends' content to general content. What does that mean for Facebook? I'm sure you've thought about a lot of it. But how do you think about the evolution of Facebook as a platform? Then for Dave, as you think about the measurement and targeting challenges, when we get out to September and October, should we be effectively lapping the issues? Or is there reason to think it could actually get worse in the second half, just thinking about revenue growth kind of reaccelerating?

I can take the first one. For Facebook, I think content from your friends is always going to be an important part of the experience. We'll be discussing stuff that you find with friends, whether it's in a group or a community, or public content or Reels or news or different content like that. Overall, you're right that the balance of content that people see in Feeds is shifting a little bit more toward stuff that isn't coming from their friends, which you may discuss with your friends, but it is kind of shifting towards more public content. At the same time, we're seeing a trend where if you can do your day-to-day behavior on a lot of this stuff, this pattern may resonate with you. A lot of people are now taking much of the content that they may have previously shared in a Feed and sending it to friends over Chats, whether it's one-on-one or through group chats. This is one of the reasons I called out community messaging as one of our major priorities. If you look at the overall constellation of services, a lot of personal sharing is shifting toward messaging. What we're seeing in Feeds is generally highly engaging content that forms the basis for conversations, whether it's in Chat or in common trends in those Feed apps. That type of creative work is a lot more of what we're seeing across the Feed apps, namely Facebook or Instagram.

Justin, it's Dave. On the second part of your question, it's really about what's the landscape of headwinds look like regarding targeting and measurement. There, I think what we're seeing is two things going on; we've got incremental headwinds coming from things like iOS 15, which provides additional targeting and measurement headwinds, but those are far less significant than the changes made with iOS 14.5, which seriously impacted the business in the second half of last year. I think that lapping effect will be very pronounced in the first half of the year where we're lapping periods that didn't have that impact. That's where we will see the biggest impact from the lapping. We are continuing to fix more headwinds related to iOS 15 and further regulatory headwinds that restrict data usage for targeting in regions like Europe. We're continuing to see headwinds. While we're working to mitigate those, the biggest lapping effect will be in the first half of the year where we didn't experience the large iOS 14 headwinds in the same period last year.

Our next question is from Doug Anmuth with JPMorgan.

Mark, you discussed last quarter about how Reels would become better integrated into both Facebook and Instagram. Can you just talk about where you are in that process? We've seen some, just curious if there's more in the product pipeline and could that deeper integration potentially have even greater drag on revenue going forward? Then, Dave, just curious if you're willing to comment on a Reality Lab spend or a loss number in '22?

I didn't talk about the first piece. I think we're probably a little further along than just the beginning, but I'd say we're closer to the beginning than the end of the trend on Reels. There’s a significant flywheel here where more creators share more content. We will only show Reels or recommend them if we feel there's high-quality content to showcase, and as there's more high-quality content, we show more of it. We believe it's going to grow a lot going forward, and we think engagement across both platforms will increase. As we forecast, the relative monetization rate of Reels for the next few quarters will likely be lower than Feeds, as we're transitioning some of that revenue. But we believe there's potential for massive engagement growth, so we see it as the right strategy to push on Reels quickly.

No, I think that's exactly right. That's what's factored into the guidance we’re providing specifically for Q1. Doug, on the expense outlook, we're not breaking out expenses by segment. However, I can give some color here. We're expecting accelerated headcount growth in 2022 to be the biggest contributor to expense growth, primarily in tech and product roles to support the seven product priorities Mark laid out: Reels, community messaging, commerce, ads, probably AI, and the metaverse. A number of those investment priorities map to our Family of Apps segment, and we expect that segment to drive most of the expense growth in 2022. Although we do expect Reality Labs' operating loss to increase meaningfully in '22, and that's incorporated into our outlook.

Our next question is from Mark Mahaney with Evercore ISI.

I want to ask two questions, please. First, on ESG. Could you just—there's been a series of steps that have been taken, reducing the ability to do political targeting, the introduction of the Take a Break feature within Instagram, and maybe a few other things that arguably have been put out to address some of the ESG concerns. Where do you think you are in terms of addressing some of those that we've heard in the investment community? And then, Dave, I think you mentioned this $10 billion headwind, and I think that was related to some of these policy changes to Apple. Could you just give a little color as to how you came up with that number?

Yes, Mark, on the headwind, we're just estimating what we think is the overall impact of the cumulative iOS changes to our revenue forecast for 2022. If you aggregate the changes we’re seeing across iOS, that's the order of magnitude. We can't be precise on this. It's an estimate. We have ranges on the impact to our business, so we think it's a substantial headwind to work our way through. Of course, we're working hard to mitigate those impacts and continue to make ads relevant and effective for users.

Our next question is from Youssef Squali with Truist Securities.

Mark, you stated your goal of refocusing on the growth of younger audiences on the last earnings call, and I think you even signaled back then that could mean maybe focusing on other constituencies. I know it may be early, but any color maybe to share on growth, on users and engagement by age groups? And then probably another question for you. I'm curious about when you think we can start seeing the kind of mesh in apps like Instagram with AR and VR and the interoperability of these apps. Is that something where you think we're going to see gradually evolve? Or is it something that gets opened only once the metaverse is sufficiently built up, whenever that is?

Let me take the first one; I can take the first one on user growth. What we said about overall user growth is we're seeing an impact from strong competition, particularly with younger audiences. That's true, and we're seeing that globally. If you look at the overall user growth landscape for the fourth quarter, we're seeing MAU and DAU in the U.S. and Canada sort of bounce around at expected levels given our high penetration. For the Rest of World, we've seen some headwinds there. This quarter has unique elements in areas like India, where we saw data plan pricing increase that led to slower growth. So that's another unique factor for the quarter.

Sure. In terms of when some aspects of the metaverse will show up, I talked about avatars in my remarks at the beginning and how we're making them increasingly both expressive and eventually, we've shown demos around photorealistic avatars capturing you that you can use across different apps, whether Facebook, Instagram, Messenger, or Quest. We will continue expanding that further. I also commented on our goal for 2022 to make Horizon work not just in immersive VR but also on two-dimensional screens, so that you could jump into those kinds of worlds from Facebook, Instagram, or other apps. You've already seen some of that in progress. Some of it is already there; some will come over the course of this year. The ability to message across apps is something we've been working on for a while. You can already do that across Messenger and Instagram and there’s more that we’ll roll out over time as well. You will see this stuff work seamlessly across the family.

Our next question is from John Blackledge with Cowen.

Two questions. Maybe first one for Mark. How has Reels differentiated versus TikTok, YouTube Shorts, and other short-form video services? One for Sheryl, any further color on how SMBs are changing ad spend budgets since the iOS changes? And is it slowing adoption of new SMB advertisers on Facebook?

Sure. I can start with Reels. One of the things that we've seen is that there are fundamental formats in social media like Feeds and Stories, now I think this Reels short-form video, that within the context of a different network or community, the same format will take on different characteristics. For example, the discussions you might have in a feed on Twitter or on Pinterest are different from what you would do in Facebook or Instagram, even with relatively similar formats. To some degree, even if a creator chooses to reshare their content across the number, you'll have different discussions with your friends across the different services based on who's there. There’s also a social dynamic where friends and different communities create this content too. What we're seeing is that this is all growing incredibly quickly. It's hard to determine exactly where this will settle ultimately, but we believe people's appetite for content has shifted. There's been a long-term trend that I have commented on several times, where the method of sharing and consuming content online has progressed from primarily text-based in the early 2000s through photos to now video as the primary form—thanks to mobile networks improving significantly, which supports video formats. This is also part of why we believe that an immersive format, such as VR and AR, is the next step beyond video and is a major area we are investing in. We're seeing significant engagement, which is reflected in the success that other apps like TikTok have had. There's a lot more to expand here. We’re aware that we will have competitors across the industry, but as we've seen with some of these other formats, it will feel different depending on the context in which it's implemented and the content shared by your friends.

Sorry, I…

I think we had a follow-up on SMB.

SMBs. It's a good question because as we've said, the iOS changes definitely impacted advertisers across the board, but they are much harder for SMBs. The progress made on the measurement gap, which I've discussed earlier, has certainly been more pronounced with larger clients than with SMBs. Personalised ads are more critical for SMBs. They really need to target a very small audience to achieve results, while larger businesses can afford to personalize ads less. We're observing that this has a greater impact for SMBs. Regardless, we believe strongly in the long-term benefits of our ad system for SMBs. We will continue working on addressing measurement gaps to ensure SMBs can effectively use it. Additionally, we are focusing on enhancing SMB adoption of our commerce tools and other solutions like business messaging and have been seeing some success in those areas. Nonetheless, this remains a challenge.

Thank you. Thanks to everybody for joining us today. We appreciate your time, and we look forward to speaking with you again. And this concludes today's conference call. Thank you for joining us. You may now disconnect your lines.