Snap Inc Q3 FY2023 Earnings Call

Thank you, and good afternoon, everyone. Welcome to Snap's third quarter 2023 earnings conference call. With us today are Evan Spiegel, Chief Executive Officer and Co-Founder; 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. Our revenue returned to positive growth in Q3, increasing 5% year-over-year and flowing through to positive adjusted EBITDA as our reprioritized cost structure demonstrated the leverage in our business model. We are focused on improving our advertising platform to drive higher return on investment for our advertising partners, and we have evolved our go-to-market efforts to better serve our partners and drive customer success. We also made progress toward diversifying our revenue with Snapchat+ reaching more than 5 million subscribers in the quarter, resulting in Snapchat+ revenue growing more than 250% 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. Our community grew to 406 million daily active users in Q3, and we are working to further deepen content engagement by focusing on three key areas: investing in our ML models to improve content ranking and personalization across all of our content surfaces; growing our creator community and diversity of content by supporting and rewarding creators; and using content to start conversations and build relationships across our service. We continue to leverage AI technology to deliver new products and features to our community. Since launching My AI, more than 200 million people have sent more than 20 billion messages, which we believe makes My AI one of the most used AI chatbots available today. More than 250 million Snapchatters engage with AR experiences on our platform every day on average. On November 9, we will be live streaming our sixth annual Lens Fest. We're thrilled to have the opportunity to bring together the vibrant Snap AR community of developers and creators that are collaborating with us to push boundaries, redefine what's possible with augmented reality, and build businesses along the way. Given the progress we have made with our ad platform, the leadership team we have built, the work we have done to reprioritize our cost structure and the strength of our balance sheet, we believe we are well positioned to continue making progress on our top strategic priorities. As we move forward into Q4 and 2024, we remain focused on investing in our platform to sustain community growth, investing heavily in our direct-response business to deliver measurable return on ad spend, and cultivating new sources of revenue to diversify our top-line growth to build a more resilient business. I want to thank Jerry Hunter, our Chief Operating Officer, for seven years of service at Snap. Jerry has notified us of his intent to retire and will be transitioning his responsibilities by the end of the month. I am deeply grateful to Jerry for the meaningful contributions he has made over his many years at Snap. His work to improve our advertising platform, serve our community, and build a strong team has helped to lay the foundation for our future growth. 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 comes from Doug Anmuth with JPMorgan.

Thanks for taking the questions. Your Q4 revenue guide mostly implies the deceleration versus Q3, and I think that's coming on much easier comps. I was just hoping you could provide some color on October performance, especially given the war in the Middle East. And we know that Q4 is back-end weighted, and I think the brand comps in particular get easier through the quarter. Just hoping you could talk about what's embedded there. Thank you.

Hi, there. Doug, it's Derek speaking. I'll take that one for you. First and foremost, you're right, we had a quarter in Q3 that we're pretty pleased with on the progress we made on top-line. There's a lot that went into that. We had a number of drivers to that outcome, including the progress we've made on our direct-response ad platform. We continue to make significant investments in ad ranking and optimization, incorporating a much broader range of signals into the ad platform and driving much larger models. We've also instituted a much faster pace of experimentation. All of that is leading to more precise conversion predictions and improved ROI for advertisers. As we noted in the letter, 7/0 has been a bright spot in the quarter in terms of driving Pixel Purchase behavior and the year-over-year and quarter-over-quarter growth that we saw in lower funnel. I also note that part of the strength in Q3 was around brand advertising where we saw good uptake on our Total Takeover products, including First Story that launched in the period. So, really pleased with the momentum that we saw there. As we look into Q4, I think we talked about a little bit in the letter, but to share some high-level color, we believe we're on the right path for the DR platform. We're pleased with the continuous progress we're making there, working with our partners on making their privacy-safe integrations with the platform, higher quality and more performance for them, and driving results. We're also pleased with what we're seeing on our scaled solutions for small and medium-sized businesses, which drove a quarter-over-quarter growth in Q3 of 11% in aggregate and the DR business returning to year-over-year growth. So, we're really pleased with fundamentally what we're seeing there and what we're executing against into the new quarter. On the brand side, in particular, coming off the progress we saw in Q3 with those new brand products seeing good uptake, historically, Q4 has seen a larger share of the revenue coming from brand products, and it's a little more back-end weighted than other quarters historically. These factors can impact our visibility, and we have seen some campaigns pause spending due to the onset of the war in the Middle East. However, we've seen many of those campaigns resume spending, and our daily run rate's impact has reduced significantly. We do want to be transparent about what we've seen quarter-to-date on that side. In the past, we experienced similar impacts due to geopolitical events, and we've learned that wars are fundamentally unpredictable. Therefore, it would be imprudent to provide a formal guide in this environment. We did provide our internal forecast, which assumes an acceleration at the top end while incorporating everything we know about the impact of those pauses. This flows through to our adjusted EBITDA range as well, as we have a high rate of flow-through on those. Ultimately, we're pleased with the progress we're making on the DR business and the uptake we saw from those new brand products in Q3. We simply want to make sure everyone is aware of the headwind we've seen to begin the quarter. Hopefully, that gives you a little color on how we frame that. Thank you.

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

Great. Hey, guys. So, Evan, you recently changed the leadership team in North America ad sales. And that seems like the area that's not yet caught up with the rest of the business, which is performing quite well. So, how do you feel about that change? How confident are we that North America larger accounts are going to step up and commit to more budget with Snap in 2024? And when do you expect that growth rate to converge with the international business?

Hey, Ross, thanks so much for the question. Yes, we are making progress in North America, which is the fastest growing region quarter-over-quarter, but obviously, there’s a long way to go. In general, North America has a number of large customers that are simply more complex to work with. While we've made a lot of progress with some of the simpler integrations for smaller advertisers, it’s just taken more focus and more detailed work to drive customer success with larger advertisers. So, I'm pleased with the progress we're making. We're fixing things every day and getting advertisers closer to hitting their KPIs, or in many cases, exceeding their KPIs, which should translate into improved spending. So we're making progress there, but we are definitely working with more complex customers. We’re excited about Patrick's leadership of the team. He has a wealth of experience to bring.

Thank you. Our next question is from Rich Greenfield with LightShed.

Hi, thank you for taking my question. I have one inquiry and then a quick follow-up. In the employee memo that was leaked a couple of weeks ago, it mentioned a goal of 80% of your daily active users interacting with content. I'm trying to understand how ambitious this goal is for 2024, as content engagement seems to be a significant factor in your advertising revenue potential, especially considering how ads are integrated. I'm not clear on your current percentage of daily active users that engage with content and what might drive growth to reach that 80% target. Any insights you could provide would be helpful. Additionally, the memo also mentioned a 20% revenue growth goal for 2024. Is that a challenging target to achieve? What is your level of confidence in attaining 20% growth next year? Thank you.

Thanks, Rich. Yeah, that's an internal memo really designed to motivate and inspire the team around what's possible. When it comes to content penetration, that's really going to be driven by emerging countries where, in some cases, our growth is earlier in its cycle, and users are ramping up with our communications products and have yet to really transition to the content-focused products. So, when we talk about 80% of DAU, in aggregate, what we're really trying to accomplish is breadth of content engagement in some of the emerging countries and depth of engagement in the more developed countries where we do have a very high rate of DAUs engaging with content already. That's really our strategic approach toward content engagement. Regarding the 20% revenue growth goal, that's about making more progress in customer success, especially with the lower funnel. We are excited about the progress we are seeing. So, we're hoping to keep our heads down and keep making more progress.

Thank you. Our next question is from Mark Shmulik with Bernstein. You may proceed.

Yes, thanks for taking the question. Evan, I'd love to hear just a little bit more color on My AI, like around usage. Are folks using this daily? What are they really asking their AI companions? And then, is there any real commercial intent that you're seeing there? And kind of like a sub follow-up, any color you could share on how that Microsoft partnership is going?

Yeah. We're excited about the progress we're seeing with My AI. I don't think it's really a daily use case yet. We hope that it becomes a weekly use case for now because there are some gaps. It doesn't yet have access to real-time information and those sorts of things. Our primary focus right now is just improving response quality. As you can imagine, it's difficult to measure because the responses can be unpredictable. We think we’ve built a solid way to understand if the responses people are getting are satisfactory, and we're seeing some of the work we’re doing to improve those responses leads to higher retention with the product overall. I would say it's just very early with this product and we will keep the majority of our focus on response quality, which can drive more engagement and long-term retention. There’s certainly commercial intent. We are taking steps to integrate that, for example, into our models to help folks see more relevant content and advertising. So, we are making some progress there as well.

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

Maybe I'll ask two. Lots of third-party data out here on engagement and time spent, just wondering how you'd characterize engagement on the platform and the drivers from here. And then, I think you gave some DAU guidance, some modest slowdown. What are you seeing as far as DAUs in North America and the rest of the world in Q4? Thank you.

I'll let Derek speak to the guidance question, but overall, healthy engagement trends. We certainly see an opportunity in more developed regions like North America, where we reach a very large percentage of the smartphone population to drive more daily usage with monthly active users. There are plenty of folks who are monthly active but may not be daily active—those who have unread messages from friends or available stories. Therefore, we see an opportunity to drive more frequency of use with monthly active users in North America. Of course, there’s plenty more headroom in the rest of the world region in terms of incremental new users. We are excited about what we’re seeing on the content side as well. We saw a year-over-year acceleration in time spent growth globally and some positive trends in the U.S. as well with U.S. content time spent growing quarter-over-quarter. Overall, we view our engagement metrics positively with opportunities to continue growing it.

To pick up the second part of that on the DAU forecast we shared for Q4, which is 410 million to 412 million, first for context, year-over-year growth right there is about 35 million to 37 million DAUs year-over-year. We are still seeing significant year-over-year growth. You must look at this slightly market by market. In North America, for example, we have really high penetration rates for 13- to 34-year-olds in over 25 countries, including North America and many Western European countries. We're already at a very high penetration in North America; for example, over 100 million DAUs. The latest number we shared was 150 million. The reach is very deep. Our recent growth in total DAUs has been primarily driven by the rest of the world region. We had a strong quarter last year as a comp, which impacts the year-over-year rate. Nonetheless, we're continuing to see substantial year-over-year growth; that internal forecast range again indicates 35 million to 37 million additional DAUs on a year-over-year basis. Hopefully, that provides a little color.

Thank you. The next question is from Brian Nowak with Morgan Stanley.

Thanks for taking my questions. I have two. The first one, a little housekeeping. Derek, can you help us out just a little bit, sort of, with the amount of subscription revenue in Q3? And then, what are you assuming on subscription revenue contribution in your fourth-quarter guide at the midpoint? The second one, it sounds like you're starting to make some progress on the performance strategy. Can you give us a few more tangible examples of categories or verticals where you've made the most progress? And how you think about the next category to really sort of improve the performance for advertisers? Thanks.

Sure. Hey, I'll take the first part of that. In terms of how we're doing on Snapchat+, first, we're really excited about the momentum there. This product is not very old since we launched it. We've reached more than 5 million subscribers in the period. If you go back to the Investor Day at the beginning of the year, we shared that we were running close to a $100 million annualized run rate then. You've since seen the subscription number grow about 60%, which gives you a ballpark of where we're trending in the most recent quarter. This product is becoming a much more meaningful contributor; in the letter, we shared that it grew at a rate of more than 250% in this quarter. We're very pleased with what we see in terms of uptake and its contribution to the business, both from a top-line and margin perspective. We don’t break down our forward look for Q4 by different revenue types, but we expect to continue momentum on the subscription side in Q4, just as we would for the advertising business as well. In terms of strength with advertisers, we’ve focused heavily on aligning our going-to-market efforts. We’ve seen success across a variety of sectors, like CPG, restaurants, travelers, and e-commerce businesses. This aligns well with the strong progress we've seen on 7/0 Pixel Purchase optimizations and the success we've attained with new brand takeover products. Overall, this should provide insight into our outlook for both the subscription side and traction across different advertising verticals.

I could briefly speak to the progress we're making on the tech side. We're making significant progress with our ML platform, which allows us to run larger models that incorporate more features. I feel good about our progress there, though there’s still more to do. The atomic unit of our performance business right now is 7/0 purchase optimization, and that's working well for many advertisers. We're trying to build upon that to meet more sophisticated advertiser needs. For example, with our app business, we’re beta testing event optimization for app advertisers. Instead of just optimizing around an install, we’re optimizing around completing an in-game level. These optimizations are crucial for specific performance advertisers. We’re also focusing on reducing the time and spend required for smaller advertisers to ramp up and find conversions quickly. Overall, I feel good about where our various tech initiatives are right now, and taking a customer success approach across all teams—from product to measurement, PMM, and engineering—has driven a lot of positive momentum.

Thank you. Our next question is from Lloyd Walmsley with UBS.

Thanks, a couple of parts to my question here. On the ads within My AI search, can you talk about how those are performing for you all, for advertisers? Are those all powered by Bing or some of them your own ads? Have you integrated that signal in the targeting across the platform? And I guess, just broadly, how do you think about turning to partners like Microsoft Bing or others in general to enhance monetization across the platform, similar to what we've seen at Pinterest? Is that something you guys think about doing beyond the Bing integration?

It's still early in the partnership. The click-through rates are very healthy when the ads are relevant. Our big focus has been on improving relevance for sponsored links in My AI. So far in terms of signal integration, right now, we're using it to inform interest categories. There’s a lot more we can do, but we've taken that initial step with a test-and-learn perspective. We consider this more of a longer-term investment, particularly because the immediate work we're doing on that platform is yielding meaningful results. Therefore, our focus will be on the product experience and experimenting with the partnership, though we have more pressing priorities regarding the ad platform right now.

Thank you. Our last question comes from Mark Mahaney with Evercore.

Okay. And I just want to get into a nuts and bolts issue on ARPU or a question on ARPU. You had two interesting trends here. European ARPU jumped significantly, and I know this is an output indicator, but could you just explain why that happened with kind of a 15% year-over-year growth? And then sequentially, North American ARPU also jumped significantly; it was the biggest sequential growth we've seen in a while. Any color behind those two metrics would be appreciated.

Hey, Mark, it's Derek. Thanks for the question. Part of what you're seeing there is the fundamental improvements we're making to the ad platform and the ad products in our go-to-market strategy. Regarding the year-over-year growth in the European region, we're seeing that the fundamental improvements we've made to the direct-response ad platform. Some aspects contributing to these results include significant investments we've made in infrastructure for ad ranking and optimization, incorporating a broader range of signals and features into our models, which have become larger, and a faster pace of experimentation on the DR ad platform. All of this is leading to much more precise conversion predictions and improved ROI for advertisers. You can see this improvement reflected in our year-over-year growth in lower funnel performance. Additionally, the new brand products launched earlier this year saw nice traction in Q3, including First Story and the Total Takeover products, along with our go-to-market improvements. While these changes affect the European region specifically, they also have global applicability, including the improvements for small and medium-sized businesses. The factors impacting North America are coming into play a little later, explaining why North America saw significant sequential growth at 14%. This is a combination of the fundamental improvements impacting the North American market and improved go-to-market strategy. Overall, these improvements are positively showing in our ARPU metrics, which is great news for the business.

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