Thank you and good afternoon everyone. Welcome to Snap's second quarter 2023 earnings conference call. With us today are Evan Spiegel, Chief Executive Officer and Co-Founder; Jerry Hunter, Chief Operating Officer; and Derek Andersen, Chief Financial Officer. Please refer to our Investor Relations website at investor.snap.com to find today's press release, slides, investor letter, and investor presentation. This conference call includes forward-looking statements which are based on our assumptions as of today. Actual results may differ materially from those expressed in these forward-looking statements and we make no obligation to update our disclosures. For more information about factors that may cause actual results to differ materially from these forward-looking statements, please refer to the press release we issued today, as well as risks described in our most recent Form 10-Q, particularly in the section titled Risk Factors. Today's call will include both GAAP and non-GAAP measures. Reconciliations between the two can be found in today's press release. Please note that when we discuss all of our expense figures, they will exclude stock-based compensation and related payroll taxes, as well as depreciation and amortization and non-recurring charges. Please refer to our filings with the SEC to understand how we calculate any of the metrics discussed on today's call. With that, I'd like to turn the call over to Evan.

Hi everyone and thank you all for joining us. We began the second quarter of 2023 with a strong focus on growing our community, accelerating our revenue growth, and leading in augmented reality. Our community grew to 397 million daily active users in Q2, and we are working to deepen engagement with our content platform, with the number of content viewers and total time spent watching content increasing globally year-over-year. Our focus on visual communication between friends and family is a strategic advantage that has enabled us to build engaging and retentive products and services across our platform. To achieve a higher rate of revenue growth, we are focused on three key priorities. First, investing in our products to sustain community growth and deepen engagement. Second, investing heavily in our direct response business to deliver measurable return on spend for our advertising partners. Third, cultivating new sources of revenue to diversify our topline growth to build a more resilient business. We generated revenue of $1,068 million in Q2, a decrease of 4% year-over-year and an increase of 8% quarter-over-quarter. In Q1 of this year, we made changes to our ad platform to unify the ad experience across our service and retrained our models to drive more in-session click-through conversions. In Q2, we made progress toward improving results for advertisers through machine learning model updates and infrastructure improvements, new ways of measuring and optimizing advertising spend, and new leadership for our go-to-market efforts. We are encouraged to see that this progress is beginning to translate into improved results with record active advertisers in Q2, up more than 20% year-over-year, and through improved advertiser retention compared to the same time period last year. We made progress diversifying our revenue through Snapchat+, our subscription service that offers exclusive, experimental, and pre-release features, which now has more than 4 million subscribers. We are excited about the early progress we are making with AR Enterprise Services, our first SaaS offering, which helps retailers use our augmented reality platform to drive sales and reduce returns on their own applications and websites. We also rolled out My AI globally, and we recently began early testing of sponsored links in conversations with My AI. Diversifying our revenue growth is an important strategic initiative and we believe our leadership in messaging and AR technology provides a strong foundation to help connect businesses to our large and engaged community. We are calibrating our investment levels to build a path to free cash flow break-even or better, even with reduced rates of revenue growth. We will continue to invest with a long-term perspective, especially in areas that are critical to realizing the long-term opportunity of augmented reality. While our strategic investments in cloud-based ML infrastructure have put downward pressure on margins in the short-term, there are early signs that the improvements to ranking and personalization of our content and ad platforms are leading to deeper engagement with content by our community and stronger returns on investment for our advertising partners. We have further scrutinized our operating costs in order to invest incrementally only where it is necessary to achieve our strategic priorities and in particular to drive top line revenue acceleration. Last year we reorganized our team, reprioritized our business initiatives, and laid out our strategy to reaccelerate revenue growth by investing in community growth and engagement, improving our direct response advertising business, and diversifying the sources of our revenue. While we are still far from achieving the revenue growth to which we aspire, we believe that the momentum we have established in community growth and content engagement, the significant improvements we are seeing in return on investment for direct response advertisers, and the early growth of Snapchat+ to more than 4 million subscribers demonstrate progress and further validate our strategic focus. Thank you, and with that we will begin our Q&A session.

Thank you. We will now begin the question-and-answer session. Our first question is from Mark Shmulik with Bernstein. You may proceed.

Yes, thanks for taking the questions. So Derek, on the guide, this is the first time you've guided in a while, but I guess I imagine investors were hoping for a bit more sequential improvement. Can you share just what's giving you the confidence to guide more formally now? And just how to think about some of these puts and takes that get into that guide? And then I guess as a follow-up, a bit more longer-term focused for Jerry, in the investor letter, you talked a lot about adding a lot of ad impressions, active advertisers up a lot, still rebuilding the ad server, launching new ad products. It sounds like many of your historic major advisers are still not back to kind of where they were. What's the easiest way to think about getting back to double-digit growth, if you were to stack rank? Is it getting these new ad buyers to increase your wallet or really focusing on your kind of major accounts and getting them back? Thanks.

Hey, it's Derek speaking. Thanks for the question. And you're right. I'd note that we've not provided formal guidance since the very beginning of 2022. So it is a big shift for us to begin providing formal guidance again. And I think that does reflect an increased confidence in the trajectory of our business. We've historically, I think when we've approached thinking about guidance, one of the things that we've tried to do is make sure that we're reasonably including at the top end, the attainable upside that we see in the business. And then on the downside, making sure that we're including the reasonably visible and quantifiable downside on that side. So, as we enter Q3, the business is in a period of rapid transition as we invest to drive improved performance on our ad platform. You'll note that we've ramped investment in infrastructure really rapidly to support monetization as well as the depth of content engagement and my AI, each of which is or will be a key input to monetization over time. And given the progress we're seeing there, we're pretty excited and encouraged. We've seen active advertisers up 20% year-over-year, higher active advertiser retention year-over-year and a more than 30% lift in purchase-related conversions. So, we're increasingly confident that these investments are a key input to sustain revenue growth over time. That said, how the continued ramp in these investments will impact the ad platform performance, advertiser demand and topline growth in the immediate weeks and months ahead is more difficult to predict with precision. In addition, forward visibility of advertising demand remains somewhat limited. We've seen continued strength with verticals such as CPG and restaurants and travel. Well, we've got some other sectors that continue to face challenges that are unique to their sector or the macro environment and therefore, make forward visibility on advertising demand, a little bit more difficult or challenging to calibrate, especially in a quarter is typically somewhat back-end weighted. So, for Q3, the guidance range calls for a range of between negative 5% and flat on a year-over-year growth basis. And we think this reasonably includes the attainable upside and all of these risks we see that could possibly drive us towards the low end. So, I hope that is a good set of context for how we think about guidance generally, given we haven't done it for a while and how we arrived at it specifically for this quarter. Thanks for the question. I'll turn it over for the other one.

Hey Mark, this is Jerry. Thanks for your question. Let me provide some background on what’s happening. We had a small number of customers who were negatively affected by the changes we made, primarily in North America. This is why the impact is most noticeable there. However, it's important to mention that over half of the affected advertisers have returned their spending to previous levels. We’ve made significant progress and are learning how to support these advertisers effectively, and we're working to help the others reach those levels as well. I feel confident about our direction. As Derek noted, we're seeing an increase in active advertisers, with a 20% year-over-year rise, and we’re also observing a significant increase in year-over-year spending in lower funnel optimization, which has been our focus. To boost our market share and demand, we restructured the team last year and brought in an experienced leadership team for better operational focus. I’m excited about the ongoing efforts. Ronan Harris, who joined first, has driven positive progress in EMEA. Shortly after, Ajit Mohan came on board, and we're seeing developments in APAC. We’ve made some recent hires, including Rob Wilk in the Americas and Patrick Harris overseeing global partnerships, and they are beginning to take action within their teams. Looking ahead to the second half, our primary goal is to accelerate revenue. We’ve enhanced our processes for acquiring new clients, and our ad platform updates are creating excellent opportunities for both new clients and our existing top clients. We’ve introduced several go-to-market improvements that are yielding positive results, increasing our share of wallet among current customers and driving growth in the market sectors we operate in. Additionally, we are systematically enhancing the implementation of our ad products, focusing on understanding advertiser goals, ensuring proper setup for their campaigns, and collaborating closely with them to iterate and improve. We have seen success with existing customers who have returned to their previous spending levels. We're also automating these processes to simplify the experience for advertisers in the future. These are just a few strategies we are employing to enhance efficiency and effectiveness in our go-to-market efforts, which I believe will attract more customers and generate increased demand. Thanks for your question.

Thank you. Our next question is from Rich Greenfield with Lightshed Partners. You may proceed.

Hi, thanks for the question. Evan, it seems there's a disconnect regarding the company's overall employee count. In the release, you mentioned reprioritizing the employee base. The key question is how many employees are focused on near-term or medium-term revenue versus long-term projects. We've seen leaders like Elon and Bob Iger make tough decisions on reprioritizing initiatives and cutting headcount, yet you still have 5,300 employees. Are many of them working on projects that won't generate revenue for five or more years? Can you clarify how many people are in areas like AR, spectacles, and advertising? You mentioned significant recent hires in content; how does that fit into the balance? Have you altered this balance, and what does it look like now? Are you finished optimizing, or do you still face difficult decisions regarding headcount going forward? With 5,300 employees and declining revenues, this situation seems concerning for a lot of investors, especially given how your stock is reacting after hours.

Hey Rich, thanks so much for the question. We've always been clear that we're building Snap for the long-term. And that means that we really have to strike the right balance between growing and optimizing the business we have today and also planting seeds for future growth. And that's really core to how we've evolved from being a simple messenger to a diversified platform with engagement across our map, augmented reality and, of course, content and stories and spotlight. As you know, engagement is a fundamental input to monetization on Snapchat, which is why we're focused on innovation. It's really the only way we've been able to compete with companies that are far bigger than we are, the way we've been able to grow to more than 750 million people using our service around the world. And sometimes these new products are monetizable immediately, but oftentimes, as we grow engagement, they become monetizable in the future. And this was definitely the case for our content business and, of course, for our AR platform as well. So when we confronted the rapidly changing economic environment a year ago, we made the difficult decision to sunset some products that hadn't yet reached scale and we reduced the size of our team by approximately 20%. And as I mentioned, we support a community of more than 750 million people as well as our advertising partners and content partners, and we do that with a team of about 5,000 people. So on a revenue per headcount basis, I think you could make the case that we should actually invest more, especially given the size of our long-term opportunity, but we wanted to really thoughtfully manage our cash flow and dilution because financing costs have increased and our share price has trended lower. So things like spectacles or AR enterprise services, for example, build on core investments that we're making today in our AR platform. That's driving revenue and engagement on Snapchat right now. And that really represents a focused way to build on our core strengths by investing in longer-term initiatives that are technically complex and more difficult to replicate. So by building on those core strengths in AR, we're able to make long-term focused investments more efficiently because these efforts represent an extension of our core platform rather than totally new bets. So of course, from a headcount perspective, while I wish we could invest more in some of our more long-term initiatives. I think we have the right balance for where we're at today. And we really need to accelerate near-term revenue growth while simultaneously setting up the business to sustain that revenue growth over the longer term. So fortunately, we've got a balance sheet to navigate this challenging period. So we don't have to sacrifice our longer-term opportunity as we tackle some of the shorter-term headwinds.

Thank you. Our next question is from Doug Anmuth with JPMorgan. You may proceed.

Hi. This is Katie on for Doug. Thanks for taking the question. First, I just wanted to dive deeper into the infrastructure cost. It feels like you're stepping up again materially get into the third quarter. So just curious if you could walk us through again what these are calling towards. I mean it feels like it's even higher now than how you were thinking about things a couple of months ago? So is there a change there in terms of that level of investments? And how can we measure that these investments are paying off? Thanks.

Hi, it's Derek. Thank you for your question. First, I'd like to highlight that our near-term investments in infrastructure are significant. We are allocating funds across several key areas, which I'll explain in more detail. Firstly, we're enhancing our ad platform to improve its performance. Secondly, we are investing in machine learning for content to increase engagement with our platform. A smaller portion of our investment is going into products like My AI, which supports our main offerings and fosters innovation on the platform. The majority of our investment is directed toward initiatives related to media monetization, such as the ad platform and content engagement. We have significantly increased our investments this past quarter, and we previously stated that we would need to see results from these investments to continue them. I mentioned earlier that we are very encouraged by the positive early results we are experiencing. This includes a 20% increase in active advertisers, improved retention rates, and a 30% rise in purchase-related conversions in Q2. These indicators suggest that our investments in the direct response ad platform are beginning to yield positive outcomes, which we find very promising. Regarding content, we began increasing our investments in machine learning to support deeper engagement earlier, and we've seen progress. For instance, the time users spent on our platform more than tripled year-over-year in the latest quarter. We are pleased with how these investments are performing. While it's still early for My AI and it constitutes a smaller investment, we have shared some metrics that show we are witnessing a high volume of conversations with My AI, indicating clear interest from our community regarding products and services. This will have beneficial implications for our ad platform and monetization over time. Based on the results we are seeing now, we anticipate increasing our investments in Q3 to further accelerate our progress, particularly in areas closely tied to monetization. For Q2, the increase in investment per daily active user was around $0.11 to $0.70, and our guidance for Q3 is between $0.79 and $0.84, suggesting a similar increase ahead. Moving forward, we will carefully calibrate these investments to ensure they are both effective and manageable financially over the long term. It's important not to assume that the increases in infrastructure spending per daily active user observed in Q2 and guided for Q3 will lead to the same results in Q4 or beyond. We will diligently assess the returns on these investments, and whether we maintain, reduce, or grow this spending will depend on the outcomes we see from it, especially concerning our revenue growth. Lastly, I want to note that we are committed to pursuing adjusted EBITDA profitability and positive free cash flow, even with slower growth rates, as well as achieving the medium and long-term margin targets we discussed at our Investor Day. Despite a time of significant change in our ad platform, we have managed to balance these investments effectively. We have achieved a positive free cash flow of $81 million and an operating cash flow of approximately $250 million over the past 12 months. We will continue to carefully maintain this balance going forward.

Thank you. Our next question is from Tom Champion with Piper Sandler. You may proceed.

Hi, good afternoon. Can you talk a little bit about the progress with DR tools? Where are you today relative to your plan and what you hope to implement? And I'm wondering if you could just speak briefly on Scan 4.0 adoption and whether that might be helping you recapture some lost cohorts over the last year, I'm thinking of verticals like gaming or app downloads? Any comments there would be helpful. Thank you.

Hey Tom, thanks so much for the question. We're really excited about the progress we're making on our DR tools. Obviously, over the last year, a huge priority for us has been signal restoration. So, creating solutions like conversions, API that advertisers can integrate to pass back signals in a privacy safe way. I'd tell you, our focus right now is really more on the go-to-market side because what we're finding is when advertisers have integrated our solutions and configure them correctly, they're really able to drive strong results. And this is especially the case with e-commerce and pixel purchase where we're seeing some strong momentum. So, what we've been trying to do is scale out with our go-to-market efforts. So, for example, we released a new dashboard for our team to be able to make sure that advertisers are sharing signals correctly in a privacy safe way. That's helping us find these configuration errors that if we can correct can lead to much stronger results for advertising partners, and we're definitely taking a more consultative approach with clients as well. So, I think for e-commerce advertisers and purchase-related conversions, we're seeing a lot of progress there. On the app side, there's still some work to do, and that will be a big focus for us in the back half of the year. Scan will be a piece of that, but there are tools like value optimization, for example, where app advertisers want to be able to optimize against users, they think will spend a lot of money in their app, for example. And we don't offer that level of fine grain optimization today. So app will be a priority for us. But I think the good news is we're seeing some real momentum on the e-commerce side and the work we've done to update our models and focus on click-through conversions is really delivering strong results for advertisers. So think of it as go-to-market is key for our e-commerce focused advertisers. And then on the app side, there's a little more work to do, but we've got a clear path to getting there by the end of the year.

Thank you. Our next question is from Justin Post with Bank of America. You may proceed.

Great. Thank you. And I apologize if these have already been asked. A couple of questions. First on the gross margin pressure, is there a level of cost per user or a gross margin level where you think that can level off? How should we think about gross margins kind of a year or two years from now? And then really interesting usage stats on Spotlight. I'm wondering if that is more than offsetting the stories pressure at this point, or if you're seeing overall trends flipping positive as far as usage per user related to Spotlight. How much of that moving the needle for the entire ecosystem? Thank you.

Hey there, it's Derek speaking. Regarding the gross margin pressure, I would say that in the medium and long-term, we've outlined what we expect margins to look like on the gross margin side during our recent Investor Day. Even though we've made a significant increase in infrastructure investment in Q2 and plan to continue this in Q3, I don't see this changing our expectations for medium and long-term gross margins. The key aspect of Snap's gross margin story will be about reaccelerating top line growth and how our business scales in a growth scenario. Currently, we see a great opportunity and necessity to invest in infrastructure to support our direct response advertising business and to deepen engagement, which will enhance our advertising potential over time, as well as innovative products like my AI that help us understand intent and interest, directly contributing to top line engagement. What we're experiencing now is a substantial increase in investment at this time to facilitate the transition in our business and top line for reacceleration. I still anticipate that our business will demonstrate excellent unit economics as we manage to reaccelerate the top line. I won’t repeat what I’ve previously discussed about the early progress from these infrastructure investments, but I believe our increased infrastructure investment in Q3 signifies our strong confidence in how these investments are aiding the reacceleration of the top line and fostering sustainable long-term growth. Hopefully, this clarifies our position on margins. I understand the near-term may be uncertain, but we believe this is essential to reaccelerating the top line. I will now turn it over to Evan to address the second question you had regarding Spotlight.

Thanks so much for the question about Spotlight and our content business. We're really excited about the trends that we're seeing. Obviously, globally, content viewers and content time spent continue to grow meaningfully, and Spotlight has been a big driver of that, reaching 400 million monthly active users in the quarter with time spent up 3x year-over-year. So we're definitely excited by that momentum. In the US specifically, the trends we've seen are essentially friend stories, viewership is trending better than we had forecast. So the rate at which the viewership decline is happening has slowed. And at the same time, we're seeing some real momentum with Spotlight. So I'm not sure in aggregate, if we flip positive yet, I think we're getting closer which is really exciting and the trends are moving in the right direction. So globally, a lot of momentum in content in the US as well, a combination of friend stories performing better than we had expected and then Spotlight and creator stories driving a lot of momentum for us.

Thank you. Our next question is from Ross Sandler with Barclays. You may proceed.

Hey, guys. I just had two questions. The first is a follow-up on the hot topic of infrastructure cost per user. So there's a lot going on here with like the rebuilding of the ad model, the content ranking model, some of the generative AI products that you're building for lens creation, et cetera. And then there's my AI, which just took off like crazy for the last 10 weeks or so. So is the uptick based on the first bucket, which is all these kind of discrete projects that are going on or the second bucket, meaning inference costs for my AI is going up, and so that's just a reflection of like future usage? And then how do you expect those two buckets to play out as we think about that hosting cost per user. And then the second question is you guys have three new regional heads of sales, I think they've been to see for now a little over a quarter. Just how do you feel about that team? And is the success in bringing back some of those large advertisers who have cut back a function of just time and getting more confidence around the attribution or do you expect these new sales organizations to really start to move the needle on revenue? Any thoughts on that?

Hey, it's Derek speaking. I'll take the first bit on infrastructure. And speaking specifically about the drivers we've tried to speak to the sort of an order of magnitude. But definitely, the focus here is in both Q2 and as we look forward to Q3 in the incremental investments that we're making to drive the advertising platform, specifically in depth of content engagement. Certainly, there are other investments that we're making in infrastructure to drive other products. And you mentioned my AI, which is specifically one of them. The investment there is much smaller. And then there's other investments we're making in things like lenses and so on that you mentioned again. The big focus here of the investment is on the investments necessary to drive the improvement in the ad platform as well as the investment opportunity to drive depth of engagement, which contributes directly to the ability to drive up inventory and grow revenue over the longer term. In terms of how my AI scales over time, I think it's been manageable so far, as I mentioned, a smaller component of the overall ramp in the spend. And we're continuing to watch it carefully, but we've been pleased with unit economics so far and the relationship between how we think that can contribute to intent and personalization and monetization relative to the unit cost. So we'll monitor that carefully over time. But so far, we're comfortable with what we're seeing there. And it's not the focus of the ramp that we're experiencing in general. Hopefully, that context is helpful there and understanding what's going on. I'll turn it over for the second part of the question.

I can share some insights about our regional presidents. Jerry doesn't have to choose a favorite as Ronan has been in the role the longest, overseeing EMEA for about nine months. He has made significant progress and discovered better strategies for us to enter the market there. We are applying these insights globally. Jeet is leading our business in APAC and has been with us for a shorter period than Ronan. Rob just started in the Americas in the second quarter, and there is still some work needed in that region. He is implementing changes to quickly develop vertical plans to identify opportunities and is spending time with several advertisers who have not yet returned to previous spending levels. The reasons for this vary, and some advertisers are seeing competitors increasing their spending significantly, leading to better performance than ever before. We are trying to address these issues individually to ensure advertisers are using our solutions effectively. Looking ahead, it will be crucial for us to establish a more diverse base of advertisers as we concentrate on achieving lower funnel goals. Rob is particularly focused on expanding our advertiser base since our targeted strategy in the Americas has yielded success, but diversification is essential. Overall, it has been exciting to see regional focus positively impacting our business in terms of revenue, user growth, partnerships, and content initiatives. Witnessing these efforts translate into results has been very rewarding in EMEA and APAC, and we look forward to hopefully seeing growth return in North America soon.

Thank you. Our last question is from Eric Sheridan with Goldman Sachs. You may proceed.

Thanks for taking the question. I'll just squeeze one in. A lot's already been asked. But maybe just broadly, your view of the competitive landscape for user growth, engagement, sort of rising utility in your app vis-à-vis other potential competitive companies. How are you thinking about the mixture of what you see as the competitive landscape, where do your strengths fit today to invest behind and lean into? And we've talked a little bit about it on the call, but elements of continuing to capture rising utility on the consumer side that can produce sort of signal and measurement and advertising or monetization opportunities as you look out over the medium to long term? Thanks so much.

Yes. Thanks so much for the question. We're really excited about this unique role we play in the market, connecting friends and family with visual communication. And we use our strength in that very frequent visual communication to build other businesses around it. So you can think about all of our different platforms like our content platform or AR platform, has different ways to, of course, increase engagement, but also monetize this core communications use case that we provide. And we actually think providing this place for friends and family to communicate, it's only become more important as more and more platforms focus on public social media style features where people feel like they have to compete for popularity, compete for likes and comments. It's never been more important to actually build deeper relationships with your friends and family. And that's really the key utility that Snapchat provides. So anywhere that we can play to that strength, we can really build momentum. So, for example, with Spotlight, one of the ways we've been able to drive more viewership and time spent is through enabling better sharing of content between friends. People love to share videos with their friends and laugh about them or share a video that makes them think of somebody that they care about. And we've been able to use that to drive more spotlight engagement over time. I think similarly with MyAI, we saw a real opportunity to play to our strength in communication to provide more utility with an AI chatbot, but also improve business performance by using those intent signals, which historically we'd have to infer, we'd have to guess what people were interested in based on the content they are watching or ads they were engaging with. And with MyAI, we can use very clear intent signals to better rank and optimize content across our platform, AR experiences and, of course, advertising as well. So I think we continue to occupy a really special place for supporting relationships between friends and family, and we've really built our business around that over time.

Thank you. This concludes our question-and-answer session as well as Snap Inc.'s second quarter 2023 earnings conference call. Thank you for attending today's session. You may now disconnect.