Good afternoon. My name is Dave and I will be your conference operator today. At this time, I would like to welcome everyone to the Meta Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. This call will be recorded. Thank you very much. Ken Dorell, Meta's Director of Investor Relations, you may begin.

Thank you. Good afternoon and welcome to Meta Platforms’ third quarter 2023 earnings conference call. Joining me today to discuss our results are Mark Zuckerberg, CEO, and Susan Li, 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 quarterly report on Form 10-Q filed with the SEC. Any forward-looking statements that we make on this call are based on assumptions as of today and we undertake no obligation to update these statements as a result of new information or future events. During this call, we will present both GAAP and certain 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.

All right. Thanks, Ken. Thanks, everyone, for joining today. This was a good quarter for our community and our business. We estimate that there are now more than 3.9 billion people who use at least one of our apps every month. The big product news this quarter is that we just held our annual Connect conference and we discussed Quest 3, which is the first mainstream mixed reality device, and the next generation of Ray-Ban Meta smart glasses, which are the first smart glasses with our Meta AI built in. There continues to be a ton of innovation in AI. And we used Connect to describe and start launching a lot of the new consumer AI experiences that we expect to become meaningful parts of all of our apps and our business over the coming years. We started rolling out Meta AI, our new assistant that you can access across all our messaging experiences and smart glasses to answer questions, get access to real-time information, and generate photorealistic images. We started launching our AI Studio platform that enables people to create and interact with lots of different AIs for help getting things done and just having fun. We rolled out Emu, our image creation model that produces high-quality images and stickers fast. We launched an early alpha of business AIs so that eventually every business can have an AI to interface with customers to do sales and support. And we let out the plan to launch creator AIs next year, so every creator can have an AI their fans can engage with to help them build out their community. And that's just a snapshot of some of the AI work that we're doing. The experiences that we start rolling out at Connect are going to transform the way that people use all our services, feeds, messaging, hardware, advertising, business messaging, interacting with creators and more. But it's going to take time to tune all these experiences before hundreds of millions or billions of people are going to use them. And I expect that dialing in these products and the vision that we articulated at Connect is going to be our theme for much of the next year. And I think that it's going to be a very exciting 2024. As we are looking ahead and planning for next year, I want to share a few thoughts on what I'm expecting. I've been happy with our results this year so far, and we are planning to continue focusing on operating efficiently going forward, both because it creates a more disciplined and lean culture and also because it provides stability to see our long-term initiatives through in a very volatile world. Now, in terms of investment priorities, AI will be our biggest investment area in 2024, both in engineering and compute resources. But I want to avoid allocating a lot of new headcount. So we're going to continue deprioritizing a number of non-AI projects across the company to shift people towards working with AI instead. On the recruiting front, one dynamic that I want to flag is that we have a sizable hiring backlog right now since part of our layoffs earlier this year included teams swapping out certain skill sets for being able to hire others. And we're still going to be hiring those roles into 2024. So that means that even though we're planning to grow headcount at a much slower rate going forward, the actual rate next year may temporarily be faster as we work through this hiring backlog. All right. Now, let's get into our product updates. Let's start with Reels, which continues to do very well. We estimate that with all the ranking and product improvements that we've made, Reels has now driven more than 40% increase in time spent on Instagram since launch. We also reached a monetization milestone earlier than expected. And we estimate that Reels is now net neutral to overall company ad revenue. In many ways, Reels has now graduated from being an early initiative to now being a core part of our apps. So going forward, and we're going to continue focusing on Reels, but we'll also look at growing it as part of our overall portfolio of video services, which make up more than half of the time that is spent on Facebook and Instagram. And there's a lot more to do across all of these. All right, AI. AI advances are driving a lot of our product and business performance. Generative AI will increasingly be important going forward. I outlined our product roadmap earlier. And on top of that, we're also building foundation models like Llama 2, which we believe is now the leading open-source model with more than 30 million Llama downloads last month. Beyond that, there was also a different set of sophisticated recommendation AI systems that powers our feeds, Reels, ads, and integrity systems. And this technology has less hype right now than generative AI, but it is also very important in improving very quickly. AI-driven feed recommendations continue to grow their impact on incremental engagement. This year alone, we've seen a 7% increase in time spent on Facebook and a 6% increase on Instagram as a result of recommendation improvements. Our AI tools for advertisers are also driving results with Advantage+ shopping campaigns, reaching a $10 billion run rate and more than half of our advertisers using our Advantage+ creative tools to optimize images and text in their ads creative. Business messaging also continues to grow across our services, and I believe will be the next major pillar of our business. There are more than 600 million conversations between people and businesses every day on our platforms. To give you a sense of what this could look like when it's scaled globally, every week now, more than 60% of people on WhatsApp in India message a business app account. A revenue from click to message ads in India has doubled year-over-year. Now I think that this is going to be a really big opportunity for new business AIs that I talked about earlier that we hope will enable any business to easily set up an AI that people can message to help with commerce and support. Today, most commerce and messaging is in countries where the cost of labor is low enough that it makes sense for businesses to have people corresponding with customers over text. And in those countries like Thailand or Vietnam, there's a huge amount of commerce that happens in this way. But in lots of parts of the world, the cost of labor is too expensive for this to be viable. But with business AIs, we have the opportunity to bring down that cost and expand commerce and messaging into larger economies across the world. So making business AIs work for more businesses is going to be an important focus for us into 2024. I want to give a quick update on Threads. We're three months in now, and I'm very happy with the trajectory. There are just under 100 million monthly actives at this point. And we're now getting to the point where we're going to be focusing on growing the community further. From what we can tell, people love it so far. I've thought for a long time that there should be a billion-person public conversations app that is a bit more positive. And I think that if we keep at this for a few more years, then I think we have a good chance of achieving our vision there. Now finally, in addition to AI, our other major long-term focus is the metaverse. And we just launched Quest 3, our most powerful headset yet, at a very competitive price. We packed a lot of improvements in there, including a next generation chipset with 2x the graphics performance, our best display as yet, and a form factor that's 40% thinner than Quest 2. But the most important breakthrough for Quest 3 is that it's the first mainstream mixed reality device. And that means that when you put on the device, you see your physical room around you, and you can bring digital objects and games into your physical space, whether that's a ping pong table, your workstation, a big screen TV to play Xbox games on, or your friends as holograms. The early reviews have been great, and it's been fun to see how people respond to this. We also launched the next generation of Ray-Ban Meta smart glasses. They're upgraded from the first generation in basically every way. Better camera, clearer audio, they're lighter, they have more styles, and you can now even live stream video from them. But most importantly, these are the first smart glasses shipping with Meta AI built in. So you can ask your glasses questions throughout the day. It'll answer them right in your ear. And in many ways, glasses are the ideal form factor for an AI device because they enable your AI assistant to see what you see and hear what you hear. Again, it's good to see the early reviews, they're so positive, and I'm looking forward to this space evolving quickly over the coming years. We are also making progress on software for the metaverse too. Horizon is now growing faster. There's more new worlds like Super Rumble and Citadel come online. We also started testing Horizon for phones, tablets, and PCs, which is going to be an important part of how we build out the metaverse across devices. And we've had a couple of important milestones with avatars as well, both for our expressive avatars and the latest codec avatars that I showed off recently. Now, as I said at Connect, I think one of the most interesting questions for our industry over the coming decades is going to be how we bring together our physical and digital worlds into a coherent and good experience. I think we're starting to see some of the building blocks come together between mixed reality for bringing digital objects into the physical world, our AI studio work for enabling interactions with all kinds of different AIs, and eventually smart glasses to bring all this together into a stylish form factor. So I am very excited about the roadmap ahead. All right. That is my update for today. This was a good quarter. I'm pleased with our progress on efficiency this year. We're a leaner organization, shipping faster and advancing the state-of-the-art in all of our long-term initiatives. And while investing heavily for the future, we also just recorded our highest operating margin in two years. So I'm looking forward to carrying this product momentum and operating discipline forward. As always, thank you to everyone on our team and all of you who are on this journey with us. And now, here's Susan.

Thanks, Mark, and good afternoon, everyone. Let’s start with our consolidated results. All comparisons are year-over-year unless stated otherwise. Q3 total revenue was $34.1 billion, an increase of 23% or 21% on a constant currency basis. Total expenses for Q3 were $20.4 billion, down 7% from last year. Looking at specific line items, the cost of revenue rose 9%, as increased infrastructure-related costs were partially mitigated by reduced content costs. Research and development increased by 1%, with higher headcount-related expenses in the Family of Apps and Reality Labs offset by lower non-headcount operating expenses in Reality Labs. Marketing and sales expenses decreased by 24%, primarily due to lower marketing spend and headcount costs. General and administrative expenses dropped 39%, mainly attributable to decreased legal expenses. We concluded the quarter with over 66,100 employees, down 7% from the second quarter, as the third quarter headcount did not include most employees affected by previous layoffs. Our operating income for the third quarter was $13.7 billion, yielding a 40% operating margin. The tax rate for the quarter was 17%, resulting in a net income of $11.6 billion or $4.39 per share. Capital expenditures, including principal payments on finance leases, amounted to $6.8 billion, driven mainly by investments in servers, data centers, and network infrastructure. These expenditures were lower than the previous year, primarily due to reduced spending on server and data center construction as we prepared to transition to our new data center design and due to payment timing. Free cash flow was $13.6 billion, benefiting from a deferral of income taxes, which will be settled in the fourth quarter. We repurchased $3.7 billion of our Class A common stock during the third quarter and ended the period with $61.1 billion in cash and marketable securities alongside $18.4 billion in debt. Now, turning to our segment results, beginning with our Family of Apps segment. Our community within the Family of Apps continues to expand. We estimate that about 3.14 billion people utilized at least one of our Family of Apps daily in September, and approximately 3.96 billion used at least one on a monthly basis. Facebook is still experiencing growth globally, with engagement remaining robust. Daily active users on Facebook reached 2.09 billion, a 5% increase or 101 million from last year, representing about 68% of the 3.05 billion monthly active users in September. Monthly active users increased by 91 million or 3% year-over-year. Q3 total revenue from the Family of Apps was $33.9 billion, reflecting a 24% year-over-year increase. Family of Apps ad revenue reached $33.6 billion in Q3, up 24% or 21% on a constant currency basis. Among ad revenue, the online commerce sector was the largest contributor to year-over-year growth, followed by consumer packaged goods and gaming. Online commerce and gaming experienced strong advertising spending, particularly from China reaching customers in other markets. By user geography, ad revenue grew the most in the Rest of World and Europe at 36% and 35% respectively, followed by Asia Pacific at 19% and North America at 17%. Foreign currency positively impacted advertising revenue growth in all international regions. In Q3, the total number of ad impressions served across our services increased by 31%, while the average price per ad decreased by 6%. The growth in impressions was primarily driven by Asia-Pacific and the Rest of World. The decline in pricing year-over-year was attributed to strong impression growth, especially from lower monetizing surfaces and regions. While overall pricing remains under pressure from these factors, we believe continuous improvements in ad targeting and measurement are enhancing results for advertisers. The other revenue from the Family of Apps was $293 million in Q3, a 53% increase driven by strong growth in business messaging revenue from our WhatsApp Business Platform. We are continuing to focus our investments on the development and operation of our Family of Apps. In Q3, expenses for the Family of Apps reached $16.4 billion, representing roughly 81% of our total expenses, down 9% as the rise in infrastructure-related costs was more than offset by decreased legal, marketing, and headcount-related expenses. The operating income from the Family of Apps was $17.5 billion, equating to a 52% operating margin. In the Reality Labs segment, Q3 revenue was $210 million, a reduction of 26% primarily due to lower sales of Quest 2. Reality Labs expenses totaled $4.0 billion, unchanged year-over-year, as higher headcount-related expenses were counterbalanced by lower non-headcount operating expenses. Reality Labs reported an operating loss of $3.7 billion. Now moving to the business outlook. Our revenue performance is driven by two main factors: our ability to deliver engaging experiences for our community and our effectiveness in monetizing that engagement over time. Engagement across Facebook and Instagram remains strong. Reels and video content continues to grow, fostering additional engagement. AI-recommended content from unconnected accounts in Feed is increasingly significant to engagement, especially in the US and Canada. These advancements are attributed to improvements in our recommendation systems, and we foresee further opportunities to enhance these systems as we implement more advanced models. We are also working on completely new experiences for our community. Our investments in AI capacity over the past years have allowed us to support pioneering research in Generative AI, and we are accelerating the integration of this research into our products. Last month, we launched our first consumer Gen AI experiences based on our foundational models and are eager to learn from user interactions to enhance their value over time. Besides Generative AI, Threads presents a compelling long-term opportunity, and we’re enthusiastic about the strong product momentum as we head into next year. Regarding the second driver, enhancing monetization, we aim to continue improving marketing performance for businesses through business messaging. Our initiatives focus on four key areas: improving the monetization of Reels, creating engaging on-platform ad experiences, facilitating easier connections for advertisers to their marketing data, and increasingly leveraging AI across our ad systems and products. On the Reels front, we have been enhancing monetization, currently reaching a level where Reels is neutral to overall revenue. We have made significant strides over the past year in building and scaling Reels as a consumer product, which has now become an integral part of the core experience on Instagram and Facebook. Therefore, we do not plan to quantify the net revenue contribution from Reels moving forward. Nevertheless, we will continue to enhance Reels ad performance through ranking improvements and interactive ad formats while increasing supply to provide businesses more opportunities for visibility. We anticipate that these ongoing efforts will contribute modestly to revenue in 2024, as we strive to achieve a balance between engagement and revenue growth. Our focus will be on increasing revenue and engagement in overall video and across our product lines within Instagram and Facebook. Next, in terms of onsite experiences, we are observing sustained growth with Click-to-Message ads, particularly Click-to-WhatsApp ad revenue, which is expanding rapidly and has already reached a multi-billion dollar annual rate. We are making progress on efforts to enable deeper conversions down the funnel, and we see substantial potential in utilizing AI to facilitate business messaging with customers more efficiently at scale. We’ve recently started trials of AI capabilities with select partners, ensuring we take our time to refine the experience, as we believe this could unlock significant advancements for business messaging in the future. Additionally, we see promise in paid messaging, which complements Click-to-Messaging ads by assisting businesses in developing ongoing customer relationships within messaging threads. Beyond business messaging, we are witnessing encouraging early traction with Shops ads. In the third quarter, we rolled out expanded commerce integrations with third-party services to streamline the process for businesses to set up a Facebook or Instagram Shop and run Shops ads. The third aspect of our work is easing the connection of marketing data for advertisers. We are investing in making it simpler for advertisers to adopt our Conversions API, understand its impact, and utilize it across a wider range of objectives. In addition to our existing AWS support, we announced support for Google Cloud for the Conversions API Gateway in September. We’ve also introduced enhanced reporting and rolled out Conversions API for Business Messaging, enabling Click-to-Message advertisers to better gauge the value of WhatsApp and Messenger and improve their performance. Lastly, we are utilizing AI in our ad systems and product suite, which is resulting in better performance for advertisers. We are increasingly implementing larger, more sophisticated ad models and leveraging AI to enhance ad products that provide increased automation to advertisers. We are seeing strong uptake of our Advantage+ Shopping solution, particularly among online commerce and CPG advertisers aiming to drive sales online. Furthermore, we continue to invest in various other products within the Meta Advantage+ suite to aid advertisers in optimizing and automating more campaign elements. Before discussing our revenue outlook, I’d like to update you on our hiring plans for 2024. It’s important to note that we are currently operating with a significant headcount shortfall compared to our 2023 budget. Throughout much of late 2022 and early 2023, we enforced a broad-based hiring freeze while undertaking restructuring initiatives. Additionally, as part of those efforts, many teams opted for deeper headcount reductions to recruit the necessary skill sets. We have since resumed hiring but expect that a substantial portion of our originally planned and budgeted hiring for 2023 will take place in 2024. For our 2024 budget, we plan to selectively allocate additional headcount towards four key priorities: AI, infrastructure, Reality Labs, and monetization, as well as our regulatory and compliance needs. Among these areas, we foresee AI being the largest focus for increased investment as we further support Generative AI across our core products, internal tools, and research endeavors. We plan to offset some of this growth by maintaining our efficiency initiatives and limiting planned hiring in other areas throughout 2024. The cumulative effect of addressing our 2023 hiring shortfall and our efficiency-targeted budgeting process for 2024 leads us to expect a significantly higher reported headcount by next year, but with a slower growth rate thereafter. Additionally, we anticipate a rise in infrastructure-related expenses next year as we recognize increased depreciation and operating costs from managing an expanded infrastructure. Moreover, we are closely monitoring the active regulatory environment, particularly the escalating legal and regulatory challenges in the EU and US that could markedly affect our business and financial outcomes. Notably, the FTC is seeking significant modifications to our existing consent order and intends to impose further restrictions on our operational capabilities. We are contesting this situation, but if we fail, it could negatively impact our business. Now, regarding our revenue outlook, we expect total revenue for the fourth quarter of 2023 to fall between $36.5 billion and $40 billion. This guidance incorporates a foreign currency tailwind of about 2% for year-over-year total revenue growth in the fourth quarter, based on existing exchange rates. Turning to the expense outlook, we forecast our total expenses for the full year of 2023 to range from $87 billion to $89 billion, a reduction from our previous estimate of $88 billion to $91 billion. This outlook comprises approximately $3.5 billion in restructuring costs associated with facility consolidations, severance, and other personnel expenses. We also anticipate an increase in Reality Labs operating losses year-over-year for 2023. Additionally, we are providing an initial outlook for our 2024 expenses, capital expenditures, and tax rate. We expect full-year 2024 total expenses to range from $94 billion to $99 billion, with several factors expected to drive total expense growth. First, we foresee higher infrastructure-related costs next year, as increased capital investments have led us to anticipate a larger rise in depreciation expenses in 2024 than in 2023. We also expect higher operating costs from managing a more substantial infrastructure. Second, growth in payroll expenses is anticipated as we address our current hiring shortfall and add new talent to support priority areas in 2024, which is expected to shift our workforce towards higher-cost technical roles. Lastly, we expect significant increases in Reality Labs operating losses year-over-year due to ongoing product development in AR/VR and our investments aimed at scaling our ecosystem. Regarding our capital expenditures outlook, we predict that 2023 capital expenditures will be in the range of $27 billion to $29 billion, adjusted from our earlier estimate of $27 billion to $30 billion. We anticipate capital expenditures for 2024 to range from $30 billion to $35 billion, primarily driven by investments in servers, including both AI and non-AI hardware, as well as in data centers as we begin to ramp up construction for sites featuring the new data center architecture we introduced late last year. Concerning taxes, barring any amendments to US tax legislation, we expect our tax rates for the fourth quarter of 2023 and for the full year of 2024 to remain comparable to those of the third quarter of 2023. Please note that our estimates for 2024 expenses, capital expenditures, and tax rates are preliminary. We aim to provide our initial forecasts for forward years, along with expense, capital expenditure, and tax rate projections, during the fourth-quarter call. In conclusion, this was a positive quarter for our business, as our efficiency initiatives are translating into improved financial outcomes, and we are witnessing momentum across our company priorities. We are excited to build upon this progress in 2024 as we invest in areas poised to transform how individuals engage with our services and each other in the future. With that, Dave, let’s open the call for questions.

Your first question comes from the line of Brian Nowak with Morgan Stanley.

Great. Thanks for taking our questions. I have two. The first one, Mark, just wanted to ask you about the open-source model strategy. You've been a leader in developing a lot of unique open-source AI models. You've got some high-profile distribution partners now. How do you think about the strategic opportunity for Meta from the growing open-source model adoption? And then the second one, Susan, just on the operating losses at Reality Labs. I understand there are product development and efforts to scale the ecosystem. Can you help us understand or give us examples of expenditure going on within Reality Labs that could also be ported and used over at Family of Apps perhaps over time?

Sure, okay. I can start with the AI models. We have a pretty long history of open sourcing parts of our infrastructure that are not kind of the direct product code. And a lot of the reasons why we do this is because it increases adoption and creates a standard around the industry, which often drives forward innovation faster so we benefit, our products benefit, as well as there's more scrutiny on kind of security and safety-related things so we think that there's a benefit there. And sometimes, more companies running models or infrastructure can make it run more efficiently, which helps reduce our costs as well, which is something that we've seen with open compute. So I think there's a good chance that, that happens here over time. And obviously, our CapEx expenses are a big driver of our costs, so any aid in innovating on efficiency is sort of a big thing there. The other piece is just that over time with our AI efforts, we've tried to distinguish ourselves as being a place that does work that will be shared with the industry and that attracts a lot of the best people to come work here. So a lot of people want to go to the place to work where their work is going to touch most people. One way to do that is by building products that billions of people use. But if you're really a focused engineer or researcher in this area, you also want to build the thing that's going to be the standard for the industry. So I know that's pretty exciting and it helps us do leading work. While at the same time, a lot of the secret sauce that goes into our product has specific product logic on top of the model, and we're also able to further train the models with data that we have internally. So I think it's a good balance of improving the quality of what we do and improving the economics around it and improving recruiting while still enabling us to build a leading product.

And Brian, I'll go ahead and take your second question, which is on the operating losses at Reality Labs and whether there's any benefit to Family of Apps from some of that work. So first, I should clarify, the majority of our Reality Labs costs are direct costs in headcount, operating expenses and product costs for the Reality Labs work. The remainder of the Reality Labs total costs are indirect costs such as facilities that get allocated based on our estimate of their benefit to Reality Labs. Now, as you alluded to, Reality Labs is working to build the future of online interactions. And we do expect you'll see some interesting ways that translate into work with the Family of Apps in the near term. For example, with avatars, you've already seen 1 billion avatars created so far. We expect that this will become increasingly important across the Family of Apps. And we're also starting to see how our hardware can help create unique content for Facebook and Instagram today with our Ray-Ban Meta smart glasses making it easier to capture and share to Family of Apps, including live streaming, and we think that will obviously create more engaging content for the content ecosystem. Longer term, obviously, we think there's a lot of value from operating our Family of Apps experiences on top of a new computing platform that we helped develop, for example, having glasses on that enable you to have our Meta AI assistant with you at all times. And as glasses scale, they'll make it increasingly easy to capture compelling content from a first-person point of view while you're staying in the moment or the activity that you're doing and sharing that content should enrich our content ecosystems even further. But again, the operating losses that are occurring within the Reality Labs segment are really driven by the Reality Labs work directly. And we think that over the sort of arc of the years ahead, there will be increasing shared benefits to our Family of Apps experiences.

Your next question comes from the line of Eric Sheridan with Goldman Sachs.

Thanks for taking the questions. Maybe on the business, I have two. One, when you see maybe a wider divergence than we thought in terms of some of the regional performance of the advertising businesses, anything to call out region by region in terms of either macroeconomic conditions or levels of product initiatives having been rolled out in different parts of the world that might led to a wider divergence in operating performance in the ad business across the globe would be number one? And then two, Susan, you introduced this concept a couple of quarters ago about data center architecture, and you said it's now being deployed in the way you're allocating capital into the business. Is there any update on how we should be thinking about that on a multiyear view in terms of achieving additional capital efficiencies and being able to deploy less CapEx but maybe with a higher throughput or output on those dollars spent? Thank you.

Thanks, Eric. So your first question, I think, was about regional trends or regional themes in our ad revenue, which as you saw this quarter accelerated across all regions. To give you a little bit of color, in North America, we saw accelerate by 7 points due primarily to strong demand from China advertisers. Note that North America didn't experience the same currency tailwinds that drove acceleration in year-over-year growth for the other regions. In the EU or in our EU region, we saw that accelerate 21 points. There was a broad-based acceleration in the region, including demand from China advertisers and some benefit from currency tailwinds after facing currency headwinds in Q2. Asia Pacific accelerated 9 points. We benefited from stronger demand in Southeast Asian countries, and again, the flip to currency tailwinds versus headwinds in Q2. Rest of World accelerated 20 points. We saw both stronger pricing and the same currency dynamic there. Brazil was a strong contributor to the region's acceleration due in part to increased advertisers' demand from China advertisers targeting users in Brazil. Your second question was around the impact of the new data center architecture on our CapEx investments in the years to come. We are still relatively early on this. We had to pause some of our existing data center construction work to switch over to the new data center architecture that played through in some of our 2023 CapEx dynamics. And going forward, as I think we said when we introduced the concept of this architecture, we expect it to be more cost-efficient for us. We expect it will give us greater fungibility in the way that we plan for CPU and GPU capacity. So we expect that we'll be realizing the cost benefits and efficiencies and the planning flexibility that the architecture gives us in the years to come.

And your next question comes from the line of Mark Shmulik with Bernstein.

Yes. Hi, thanks for taking the questions. The first is, this month, you started to roll out some of those first kind of gen AI tools for ad creative. I'd love to hear a little bit about kind of how that's going. Are advertisers using this? And really, is it creating better ads on their behalf? And then secondly, as we kind of look ahead here to the fourth quarter, there's certainly been a lot of unfortunate geopolitical kind of activity around the globe. Would love to just understand some color on how that affects kind of Meta's ad business. Thank you.

Hi, thanks, Mark. I can take both of those. So your first question was around gen AI tools, especially for advertisers and you'll see that we have been increasingly testing these in our AI sandbox. And then as they become more mature, we incorporate them into our ads manager directly. We've incorporated them into some of our Advantage+ solutions. A few that I would highlight that we're rolling out this quarter are text variations, so generating multiple versions of ad text based on an advertiser's original copy that helps highlight the selling points of their products and services, giving them multiple text options to better reach their audience. Another one is image expansion, which helps adjust creative assets to fit different aspect ratios across multiple services like Feed or Reels. That allows advertisers to spend less time themselves trying to repurpose their creative assets in these different formats. Another one is background generation, creating multiple backgrounds to complement the advertisers' product images, allowing advertisers to tailor their creative assets for different audiences. And we're making this available actually through Advantage+ catalog ads. And so we really feel like we've introduced quite a lot of new ads products and features. You asked about the gen AI one specifically. So those are the ones I highlighted. We've actually introduced a number of others that are related to other dimensions of the ad creation experience that we expect will help improve our advertising performance, will help advertisers drive sales, especially over the holidays and especially in the Advantage+ shopping suite. So we're very excited about all of those upcoming launches, and we think that the early advertiser feedback has been very positive. Your second question was on looking ahead in Q4 and the impact of some of the geopolitical activity that we've seen around the world and how that might be affecting our business. So first, I think I should start by saying that our thoughts are with everyone who has been impacted by the horrific violence in the Middle East, and we know that our services can be a vital tool for information and connection and expression at a moment like this. And we're continuing to monitor the situation and are doing everything we can to keep people safe and to keep our services secure. Now in terms of how this translates into impact on the Q4 business, first of all, I should say that coming into Q4, we've been seeing continued strong advertiser demand in key segments, including online commerce and gaming. But having said that, we are also seeing more volatility at the start of the quarter. That's in part why we widened our guidance range to capture that uncertainty. And so for instance, while we don't have material direct revenue exposure to Israel and the Middle East, we have observed softer ad spend in the beginning of the fourth quarter, correlating with the start of the conflict, which is captured in our Q4 revenue outlook. It's hard for us to attribute demand softness directly to any specific geopolitical event. Historically, we have seen broader demand softness follow other regional conflicts in the past such as in the Ukraine war. So this is something that we're continuing to monitor. We've reflected the latest trends and advertiser reaction that we've seen into our Q4 outlook, which again, we think reflects the greater uncertainty and volatility in the landscape ahead. I want to add here, too, that we are pleased with the fundamentals of the business and with our execution. We've seen promising engagement trends. We're continuing to drive ad performance improvements. We're executing well on our company priorities. So we'll continue to stay focused in those areas, and we'll also remain disciplined with our investment approach as we navigate a volatile environment.

Your next question comes from the line of Doug Anmuth with JPMorgan.

Thanks for taking the questions. One for Mark and one for Susan. Mark, I was hoping you could talk more about the gen AI-driven vertical chatbots and Meta AI assistant rolled out of Connect a few weeks ago. How do you think about the potential for these products to improve both engagement and monetization over time? And then Susan, I know it's early but I was hoping you could talk a little bit qualitatively about some of the puts and takes to 2024 revenue growth. And then in particular, whether you'd expect revenue to grow faster than expenses off a normalized revenue base backing out restructuring. Thanks.

Sure. I can share some insights about our recent AI launches. We introduced Meta AI, an AI assistant that answers questions and provides real-time information, along with the capability to generate images. Additionally, we launched the first version of AI Studio featuring several AI characters for interaction. Our vision is that having a basic assistant is crucial, but we anticipate a wide variety of AIs that people will engage with. We believe creators will want AI tools to foster community growth, while businesses will seek AIs to enhance customer support and drive commerce. In terms of engagement, we foresee that, at scale, this will shape how people use our messaging apps, allowing for interactions with both individuals and AIs. The balance of these interactions is likely to evolve over time, and it's difficult to predict precisely how this will unfold. However, this new use case is designed to complement human interaction rather than replace it. Our goal is to encourage and facilitate more interactions among people by integrating AIs into group chats, enhancing engagement along the way. The AIs will also have profiles on Instagram and Facebook and will be capable of generating content. In the future, they may also interact with one another, creating an interesting dynamic and a new form of medium and art. This development should enhance engagement and entertainment as well. Increased engagement in our apps will present more opportunities for monetization. Another significant monetization opportunity lies in business messaging. A key factor in making the global business messaging model work is enabling businesses in higher labor cost countries to use an AI to handle customer messages, which can reduce cost barriers. If we can successfully roll out these business AIs, we believe it could significantly expand our messaging business, though there's still much work ahead to achieve this. That's an overview of how I see these developments influencing engagement and business.

I'm happy to take the second question. Thanks, Doug. We have not yet provided a revenue outlook for 2024. You inquired about some of the significant factors influencing this, and I would refer back to my earlier comments on the Q4 outlook to emphasize the volatile macro environment we are experiencing. This will undoubtedly affect the advertising market next year, and we will monitor it closely. However, we are significantly influenced by the fluctuations in the broader economy. Our advertising performance is an area where we've invested heavily, and we are seeing increased value for marketers. We are improving conversions and offering a better return on ad spend, which we believe will be an important consideration. We're also rolling out numerous new features, both in generative AI and other areas of our ad tools, and refining the ranking and delivery models that support our advertising framework. Additionally, we will be comparing ourselves to stronger periods, particularly in light of this quarter’s results. All of these factors will contribute to our 2024 revenue outlook. You also asked about our expense philosophy for next year and whether expense growth will correlate with revenue growth. Given the uncertainty in the revenue outlook, we discussed elements factored into our preliminary expense guidance for 2024. Key components include infrastructure expenses. We anticipate depreciation expenses in 2024 will rise significantly due to increased capital investments made in recent years, along with higher operational costs stemming from a larger infrastructure footprint. The second major factor is payroll, as we expect payroll growth to be influenced by hiring that was originally planned for 2023 spilling into 2024. We foresee that the Family of Apps will contribute more to payroll expense growth than Reality Labs next year. Additionally, hiring will generally focus on technical roles, which will shift our workforce towards a higher cost structure. Finally, we expect Reality Labs operating losses to grow in 2024, driven by increased payroll costs and higher non-headcount expenses to support the development of our next-generation VR and AR products. How expenses and revenue align will depend on the revenue outlook for the upcoming year. We have previously introduced a framework acknowledging our ambitious investments, particularly regarding Reality Labs and new initiatives in the generative AI roadmap. We understand that we must generate consolidated operating income growth over time to sustain these investments, which remains a core focus for us.

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

Great. Thank you. I guess I'll ask about the DSA and DMA and also press reports that there could be a subscription offering in Europe. Maybe, Mark, how do you think about subscription usage for Facebook? Maybe an update on how Meta Verified is going and how you're thinking about the evolution of the model in Europe. Maybe we'll start with that. And then for Susan, I know you've talked a lot about Chinese advertisers. How do you think that could affect the growth as you comp that next year? Thanks a lot.

Hi, Justin. Thank you for your question. I will do my best to address all parts, so please let me know if I miss anything. First, your question about operating in Europe focused on the legal basis for advertisements. As we stated in August, we plan to shift our legal basis for processing personal data for ads to a consent model in the EU, the EEA, and Switzerland due to recent regulatory changes in those areas. We do not have further details on the exact implementation at this moment. We are in discussions with the DPC and other regulatory bodies regarding our proposed consent model and are committed to transitioning as soon as possible, providing updates when available. The second part of your question was regarding Meta Verified. We are still in the early stages, but we have rolled out Meta Verified for creators in most global markets. We continue to receive positive feedback from creators, which has helped them establish a stronger presence on Facebook and Instagram. Recently, we also began testing Meta Verified for businesses on Facebook and Instagram in certain countries, and we plan to extend that to businesses on WhatsApp in the future. This initiative will help businesses stand out on our platforms and build trust with their customers by confirming they are communicating with the correct business. We are encouraged by the early signs but recognize it is still quite early, and there isn’t much more information to share right now. The third part of your question concerned Chinese advertisers. In the third quarter, spending from Chinese advertisers increased. We have seen strong investments from some of our larger clients and generally positive performance from other Chinese advertisers. Factors like lower shipping costs and relaxed gaming industry regulations have contributed positively. Overall, there has been improved growth across all advertiser regions in Q3, and even without Chinese advertisers, revenue growth has significantly accelerated. You mentioned the sustainability of advertising revenue from China. Although we’ve experienced strong growth this year, there has been a long-term trend of growth in this segment extending back over the years, despite periods of volatility, such as in the last two years which were impacted by high shipping costs and lockdowns affecting demand. We recognize there is potential for future volatility, especially considering the unpredictable macro factors at play.

Dave, we have time for one last question.

Certainly. Thank you. That will come from the line of Youssef Squali with Truist.

Thank you very much. Two quick questions for me. First, can you share any early read into demand for Quest 3? It's been out for 10 days but I think you've been taking orders from these last three weeks? And is it priced to be at least gross profit breakeven or not necessarily? And then second, Susan, for 2024 as we think about growth, can you speak maybe about political spend contribution that you've had back in 2020 and how that may inform how we should think about its contribution for 2024? Thank you.

Sure. So the first part of your question was early sort of signals with Quest 3. We are not sharing any explicit expectations for Quest 3, either Q4 Reality Labs revenue, unit sales, etc. But we are very excited to have Quest 3 in market, in particular, during the holiday shopping period. We think early reviews have been great. And we're very excited to have a product out there that is going to introduce a lot of people to mixed reality experiences for the first time. So it's very early. I think we don't have very many more specifics. But again, we're quite excited to have it in the market and to have it in particular during the holiday marketing season. Your second question was about political spend. And so this is a place where I would say we saw acceleration of positive year-over-year growth in all verticals this quarter really except politics, which is lapping the lead-up to the 2022 US midterms last year. So I will say though that this is also just a very small vertical for us so there's not too much more to add there.

Dave, we have time for one last question.

Great. Hey, Mark, just going back to the AI agent theme. I know it's early but how would you rank the overall strategy here around these AI agents and AI Studio compared to other big initiatives that Meta has made in FoA over the years? Is this bigger than or as big as the Stories transition or the Reels transition? And any thoughts just kind of high level on that? And then the cost of serving up responses, especially stickers and images is a little bit more expensive than your core business of aggregating the News Feed. So how much more expensive, I guess, is the question? And are there things you can do to bring that cost down? Thanks a lot.

It's difficult to predict the scale of what we're building since no one has created anything quite like it before. While there might be some similarities to what OpenAI is doing with ChatGPT, our approach is distinct. There may be overlaps with Meta AI, but our focus on AI characters includes consumer, business, and creator aspects that I believe no one else is tackling in the same way. In previous projects like Stories and Reels, there were existing market examples, but in this case, we're exploring new technology that is incredibly exciting. Leading in this area means there's uncertainty about the potential scale, but I firmly believe that Generative AI technology will significantly change how people interact with the various apps we create. Over time, I expect more content consumed in Feed apps will be AI-generated or edited, allowing creators to produce content more easily and enjoyably. Eventually, we might even generate personalized content for users based on their interests, which could be very appealing. On the messaging front, our focus on AI will streamline interactions, allowing users to chat with Meta AI or various AIs for entertainment, information, or commerce. This will enhance messaging behavior and transform advertising, simplifying ad creation for businesses that previously had to generate their own creatives. They will be able to test various creative versions, which is exciting, especially when combined with recommendation AI. Regarding our smart glasses, we initially viewed them as a stepping stone towards augmented reality displays and holograms, which I still believe will be realized soon. The integration of AI into smart glasses could offer a compelling use case even before we fully explore augmented reality applications. This technology is broad and exciting, making the tech industry thrilling to work in as it presents opportunities for transformative innovations that improve creativity and service. Predicting specific metrics, such as interactions between AIs and users or the mix of AI and human-generated content, is challenging, but I am confident that this will become a significant area for investment. As for efficiency and costs, our immediate focus is on achieving product-market fit. We value efficiency greatly, as our capital expenditures are significant and impact our economic model. Enhancing efficiency will enable us to train larger models and support more users, addressing current infrastructure bottlenecks. In the short term, the gains in efficiency will primarily help us deliver better products to a larger audience, and we’ve already made strides in optimizing our hardware and computing resources. As we refine our understanding of these products, we can build a sustainable economic model, but we're still in the early stages of that journey.

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

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