Everything Sheryl Sandberg Said on Advertising During Facebook’s 4Q Earnings Call

Facebook held its fourth-quarter and full-year-2014 earnings call after market close Wednesday, and advertising was a major focus, with the social network reporting a record $3.59 billion in ad revenue for the quarter, 69 percent of which came from mobile

SherylSandberg650Facebook held its fourth-quarter and full-year-2014 earnings call after market close Wednesday, and advertising was obviously a major focus, with the social network reporting a record $3.59 billion in ad revenue for the quarter, 69 percent of which came from mobile.

Chief operating officer Sheryl Sandberg did most of the talking about advertising during the call, and here’s what she had to say:

Sandberg presented an overview during her opening remarks Wednesday:

The fourth quarter was strong across the board, tapping a great year. This is our first quarter with over $3 billion in ad revenue and over $2 billion in mobile ad revenue. Our fourth-quarter ad revenue grew 53 percent year-over-year. Our mobile ad revenue was 69 percent of the total ad revenue and double that of the past year. Our growth is strong across all verticals in marketer segments. We also saw healthy growth around the world, although growth rates outside the U.S. were affected by exchange rates.

We also made progress growing the number of marketers using our ad products. Custom audiences, our suite of proprietary targeting products, has become an essential tool to segment current and potential customers. Conversion tracking away from marketers to measure the impact of their campaigns online is also seeing wider adoption. We’ve made it easier for businesses of all sizes to plan and manage their ad campaigns and for small businesses to use our targeting tools.

Travel company Thomas Cook recently used Facebook in Belgium to reach a broad audience and used custom audiences to send targeted messages to existing customers based on the places they’d expressed interest in. It reached 30 percent of the Belgian population in just one day and achieved a 3.85 times return on investment. Results like these are attracting more marketers of all kinds to our platform.

Finally, we made great progress improving ad relevance and measurements. To do this, we made significant investments in both our core measurement and targeting tools, as well as ad tech.

Earlier in 2014, we introduced ad-buying capabilities based on reach and frequency metrics, which is similar to how brand marketers buy TV ads and, therefore, enables better cross comparison. We improved our Ads Manager product to give better insights into ad campaigns and analyze their impact. In the fall, we relaunched Atlas to help marketers reach real people and measure results across multiple devices. Omnicom is our first global client, and this month we announced a partnership with Havas to further expand globally. We also invested in Audience Network, which helps marketers extend their campaign off of Facebook, and LiveRail, which provides publishers with the video tools to monetize their inventory more efficiently.

Heading into 2015, we’re excited to build on the progress we’ve made with our core ad products, as well as with newer areas like video, Instagram and ad tech. It is still early days in all of these efforts. There is a lot of hard work to do, and we plan to invest aggressively. Our ultimate goal is to be a critical business partner to our clients, providing people-based marketing of scale to build their brands and move their products off shelves.

Over the past few weeks, I have had a chance to meet with many of our largest global clients and agency partners and talked about how we can drive real business results for them, making sure every impression and every dollar they spend improves their bottom line. Our clients are excited by the opportunity to use video on Instagram and ads on and off Facebook to reach the right people with the right message. In turn, as their ads become more relevant, we provide a better experience for the people who use Facebook.

In response to a question from Goldman Sachs analyst Heather Bellini about the conversations with advertisers mentioned by Sandberg during her opening remarks, she elaborated:

It’s a great time for the brand question because over the past few weeks, I’ve spent a lot of time kicking off 2015 with our largest agency partners and largest clients. And I would say that people remain really excited about Facebook, but people are bigger believers because we’ve had an opportunity to do more measurement over the past year. I think there are few things about the Facebook platform that are really exciting for brand marketers. The first is the creativity and storytelling, and certainly, as you mentioned, video is a big part of that because video is a format that marketers have used for a long time to building those connection to brands.

And the second is measurement. And what clients want and what they should want is an ability to look at their ad spend and see how effective it is not just in the brand metrics, even though those are important, but in moving products off shelves. And over the past year-and-a-half, the investments we’ve made in building out that measurement have paid off. So when I sit down with clients at the beginning of this year compared to last year, we have more actual case studies of marketing we’ve done with them. We’ve been able to ad test, Facebook ads versus no Facebook ads, and what the effectiveness is on their sales. And I think across the board, we’re showing very healthy, very competitive ROI. The opportunity and the challenge now is that even for our largest clients globally, we still represent a really small part of what they do. And so it’s on us to prove to them that the results we’re showing them in these smaller tests can happen in more bands and more countries with a larger part of their business.

Merrill Lynch analyst Justin Post asked:

It looks like you did about $9 of revenue in the U.S. per monthly active users, which implies an over $30 run rate, which is impressive. Sheryl, maybe the first question is for you: How do you grow that from here? Is it usage? Is it higher ad loads? Is it the mix of ads, or is it targeting — maybe some thoughts on how you grow from there. And then Mark, if you look at other your three platforms — WhatsApp, Instagram and Messenger — and other things you probably have in mind, can you monetize anywhere as well as Facebook if you look at your five-year plan?

Sandberg replied:

When you think about what’s happening, certainly, the growth has been good, but it’s still true that marketing dollars have not followed consumer time and the same percentages. So in the U.S., mobile gets 25 percent of consumer media time, but only 10 percent of the ad budgets. And to take one comparable example, that means that for every consumer hour spent on print, marketers spend $1, and they spend $0.07 per hour on mobile, which means that we have an opportunity to grow. One of the most important ways we grow is not just bringing more marketers into Facebook, having them use more of our ad products, but, as you mentioned, better targeting.

A more relevant ad is a better ad experience for consumers, but it also drives much higher returns for marketers, and as our ads get more relevant and we provide higher ROI, we should be able to continue to grow. I think we’ve done a good job over the past year making our ads more relevant. I think most people on this call would say that you see more relevant ads than you used to a year ago, but I still think, you know, some of the Facebook ads still have rooms for improvement in terms of relevance. And so, we see a lot of room for improvements there, both in the ROI we deliver and in the experience we can provide to consumers.

Co-founder and CEO Mark Zuckerberg chimed in:

Yes, so I will add something to that just on the side of how we think about value through Facebook and I will talk about the other applications. In terms of the product developments that we do here, we have four major groups inside of the company. This is kind of how our company is organized. We have one that is focused on growing the community, one that is focused on kind of increasing content consumption and people’s engagement and another that is focused on kind of efficiency and helping people to get the most value out of each moment that they’re spending in Facebook. And then the fourth group is our core business, which is focused on helping people to see the best ads and basically make the most money per moment that people are spending at the lowest cost and most efficiency in terms of serving people.

And there is, I think, big upside in each of those four categories. I mean, our community is growing. I mentioned in our comments upfront that time spent across our services grew by 10 percent year-over-year per person, which is pretty meaningful. Utility and efficiency are increasing and, of course, the ad business per person and the efficiency of our services are both increasing, as well. So I am pretty excited about that, and think we’re organized in a way where we can continue that.

The other opportunities — Instagram, Messenger and WhatsApp — I am really excited about, and I do think that they’re going to reach the level where they contribute to our business in a pretty big way, but it’s really important to get this right and not rush. And you know what I would say around messaging, as we’re pretty early in that cycle, we are about where Facebook was in around 2006 or 2007, where at that point Facebook was really just a consumer product.

There were no businesses in the ecosystem. And a lot of people were telling us, “OK, don’t put better ads in.” And that’s not wrong. I didn’t think that that was going to be the right way to build the products or build the business. So instead what we did was built pages, which was a way for businesses to interact for free in the system and start creating organic interactions between people and business. And we built more tools for pages and businesses to engage.

And our recent success with advertising is really just built on some of those organic interactions between people and businesses. And what you see in Messenger and WhatsApp now is that we’re still in the early end of that curve where the interaction is still primarily people-to-people, and businesses are starting to figure out in the case of WhatsApp much less than Messenger so far what the organic interaction is. But we’re going to have to go through a whole cycle of figuring out how that works before it really make sense to start monetizing them in a big way.

But yes, I mean, I am a big fundamental believer that these are going to be very big contributors to our businesses over time, but we just have to do it right.

On Atlas, she said:

In terms of Atlas, we just relaunched this fall, and we’re just seeing deals get done in broad adoption. So I think it’s too soon for us to report that Atlas drives an increase in digital spend or an increase in any particular kind of spend, but you should believe really deeply that Atlas is going to revitalize marketing by making the measurement more accurate. If you look at how digital ads are being measured, they are being measured based on a cookie-based world that assumes that people have one device, largely a PC. And that is not real: Consumers have phones, they have tablets, they have PCs, as well, and the ability to understand that one person and to serve an ad and measure all the way through correctly – we think it’s going to massively improve the efficiency in the system.

In response to a question from Wells Fargo analyst Peter Stabler about monetizing off-platform inventory, Sandberg elaborated on Facebook Audience Network:

Our Audience Network efforts are still pretty new. We have a goal of serving more relevant ads to people off Facebook, which will provide greater reach for Facebook marketers and also a better opportunity to monetize for publishers. We are seeing some nice results, as Shazam reported that using Audience Network increase its revenue from ad networks by 37 percent. We believe that working with publishers, if we can increase the value of their inventory by providing more relevant and targeted ads, they are going to be really happy with that opportunity, and we are in the early stages of finding those partners.

On Instagram, she said:

2014 was also the year we began scaling Instagram ads. In the fourth quarter, we rolled out Instagram ads in Australia and Canada. Marketers are excited to have access to the 300 million people viewing Instagram and the creativity it inspires. We’re seeing beautiful creative and great results from brand marketers across verticals from insurance and tax to retail and entertainment. For example, as one of our first Instagram video advertisers, Banana Republic developed a series of videos to promote its BR clothing lines. The video showed fashion sketches from the new collection and drove a 23-point lift in ad recall. While, it’s still early and we’re being deliberate in our rollout, we believe that Instagram will become core to advertisers and mobile brand building efforts.

In addition, speaking with Julia Boorstin on CNBC’s Closing Bell Wednesday, Sandberg said on Instagram:

We are excited about Instagram. We still don’t break out revenue by product, but excitement and engagement around Instagram is really growing. Instagram is a really special community with very visually compelling images that get people really engaged.

We had a really interesting case study recently with McDonald’s in Australia this summer. It did an Instagram ad campaign it called “Signs of Summer,” and what is interesting about it is that they were just pictures, and they had little to no branding or product, but they just included the kind of iconic McDonald’s red and yellow colors, and that showed a 46 percent lift in ad recall and a four-point lift in brand favorability.

And that is pretty interesting because it shows how these new formats like Instagram give us new and creative ways to build brands in ways that haven’t been done before. But even that really subtle branding can really work, and I think people are excited to take advantage of that opportunity.

RBC Capital Markets analyst Mark Mahaney asked:

Sheryl, the size of the ad revenue that Facebook is generating, in the growth — these are large budgets that are shifting over to Facebook. Any commentary on where you think those budgets are coming from? What are the sources of funds?

She answered:

I don’t think there is any single source of where the dollars are coming from. Certainly, as consumer time and attention is shifting to mobile, so is marketers’ time and attention. We pay a lot of attention to the marketer segments we work with. We’re seeing strong growth from brands from direct response like ecommerce, and from SMBs (small and midsized businesses) and developers. And we stay pretty focused not really on the source of where the money is coming from, but what are the objectives people are spending against on Facebook, so that we can meet all the different objectives. We understand that in order to continue to grow, we’re going to have serve multiple objectives on the Facebook platform, and that’s what we’re focused on.

david.cohen@adweek.com David Cohen is editor of Adweek's Social Pro Daily.