Why DDOG & NET Are Special, META Earnings Review, and... A Workout?!

Engagement trends on Facebook have generally been stronger than we anticipated, and strong real growth is continuing to drive engagement across Facebook and Instagram. That said, we seem to have entered an economic downturn that will have a broad impact on the digital advertising business

We're focused on making the long-term investments that will position us to be stronger coming out of this downturn, including our work on our discovery engine and Reels, our new ads infrastructure and the metaverse. And we're also focused on being rigorous about measuring returns and sizing these investments correctly.

Our plan is to steadily reduce headcount growth over the next year. Many teams are going to shrink so we can shift energy to other areas inside the company.

To understand where we're going, it's important to keep in mind that there are 2 major technological waves that we're riding in our business. The first wave of driving our business today is AI. And then the second longer-term wave is the emergence of the metaverse.

One of the main transformations in our business right now is that social feeds are going from being driven primarily by the people and accounts you follow to increasingly also being driven by AI-recommending content that you'll find interesting from across Facebook or Instagram, even if you don't follow those creators.

Right now, about 15% of content in a person's Facebook feed and a little more than that of their Instagram feed is recommended by our AI, from people, groups or accounts that you don't follow. And we expect these numbers to more than double by the end of next year. As our AI finds additional content that people will find interesting, that increases engagement and the quality of our feeds. And since we're already efficient in monetizing most of these formats, this should increase our business opportunity over that period as well.

Reels engagement is also growing quickly. I shared last quarter that Reels already made up 20% of the time that people spend on Instagram. This quarter, we saw a more than 30% increase in the time that people spent engaging with Reels across Facebook and Instagram. AI advances are driving a lot of these improvements.

Reels doesn't yet monetize at the same rate as feed or stories. So in the near term, the faster that Reels grows, the more revenue that actually displaces from higher monetizing surfaces. Now in theory, we could mitigate the short-term headwind by pushing less hard on growing Reels, but that would be worse for our products and business longer term since we're confident that Reels will grow engagement overall and quality and will eventually monetize closer to Feed.

I'm confident that if we invest in building the new infrastructure that we need, then we're going to come out of this downturn with even more superior ad products and a meaningful technology advantage over other industry players.

In the last recession, we invested in our Ads business through the downturn and came out stronger on the other side, and I'm focused on making sure that we do the same today.

the Metaverse is a massive opportunity for a number of reasons. Most importantly, it enables deeper social experiences, where you feel a realistic sense of presence with other people, no matter where they are. Whether you're playing games or working for hours at a time or if you're just jumping in for just a minute at a time to say hi to a friend or collaborate on a project quickly.

By helping to develop these platforms, we're going to have the freedom to build these experiences the way that we and the overall industry believe will be best rather than being limited by the constraints that competitors place on us and on our community and on small businesses. And given some of the product and business constraints that we face now, I feel even more strongly now that developing these platforms will unlock hundreds of billions of dollars, if not trillions, over time. This is obviously a very expensive undertaking over the next several years. But as the metaverse becomes more important in every part of how we live from our social platforms and entertainment to work and education and commerce, I'm confident that we're going to be glad that we played an important role in building this.

The next milestones to look out for here are the continued expansion of Horizon, our social metaverse platform, and the continued improvement of our Avatars platform, how you express yourself and interact in the metaverse as well as the commerce around that. These are some of the areas that we're most focused on. And we're going to be launching a web version of Horizon that will be accessible on all platforms later this year, which should dramatically increase the number of people who can use Horizon. And we also just launched our Avatars store with digital clothes from leading fashion houses. And we're going to continue expanding that selection and the fidelity of our Avatar system overall.

On the hardware front, later this year, we'll release Project Cambria, and the experience here is getting pretty awesome. It will be a high-end device focused on professional users and work with high-resolution color mixed reality. I'm really looking forward to getting this one out. This is just one milestone in the long-term path, but I think people are going to be pretty blown away by this.

The mood, especially in Europe, right now is that the world is at war both literally, but also figuratively. And I think that we are in for a difficult next few years. In our last earnings call, we said Q1 of 2022 was by far the hardest quarter we've seen since Q1 of 2020, which was the COVID quarter. And I think one of the things that is unique about us is because our sales cycles are so fast, measured in less than a quarter typically. That let us see some of the kind of early warning signs late in 2021 and early in 2022. And that's allowed us to adjust and adapt.

But I think companies that may have looked like they were doing very well in Q1 that have longer sales cycles, you're going to start to see them having pipeline problems in Q2, Q3, Q4. And so I think what has always been a real strength of Cloudflare has been that because we see things early and our feedback cycles are so fast, we can adapt to that. But anyone who tells you -- sits up here and tells you that they're not having to adapt how they're marketing, how they're going to market, how they're closing deals, how they're getting new logos, how they're getting new customers, doesn't have their business instrumented as we do.