Good afternoon, everyone, and welcome to SNAP, Inc.'s Third Quarter 2025 Earnings Conference Call. At this time, participants are in a listen-only mode. I will now turn the call over to David O'Meter, Head of Investor Relations. You may proceed.

Thank you, and good afternoon, everyone. Welcome to SNAP's Third Quarter 2025 Earnings Conference Call. With us today are Evan Spiegel, Chief Executive Officer and Co-Founder, and Derek Anderson, Chief Financial Officer. Please refer to our investor relations website at investor.snap.com to find today's press release, earning slides, and investor letter. 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-K or Form 10-Q, particularly in the section titled Risk Factors. Today's call will include both GAAP and non-GAAP measures. Reconciliation 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 certain other items.

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 welcome to our call in q3 we made meaningful progress on our long-term strategy to grow our global community deliver stronger performance for advertisers and invest in the future of augmented reality at the core of snapchat is a mission that has endured since our founding to reinvent the camera to strengthen human connection snapchat is built around real communication helping people share moments and build closer relationships every day. This clarity of purpose continues to drive durable growth. Our community reached 477 million daily active users, an increase of 34 million or 8 percent year-over-year, and 943 million monthly active users, an increase of 60 million or 7 percent year-over-year. With this momentum, we have made further progress toward our goal of reaching 1 billion monthly active users around the world. Revenue increased 10% year-over-year to $1.51 billion, driven by improved advertising demand and the rapid expansion of our direct revenue streams. On the advertising front, continued growth in our small and medium-sized business customers and improvements in direct response advertising performance drove an acceleration in direct response advertising revenue, which increased 8% year-over-year and 13% quarter-over-quarter. Other revenue, which includes Snapchat Plus subscription revenue, increased 54% year-over-year to $190 million in Q3, reaching an annualized run rate of more than $750 million. To build on this momentum, we expanded our premium offerings, introduced new storage plans for memories, and launched AI-powered experiences in LensPlus and Platinum bundles that we believe will deliver incremental value to our most engaged community members. We remain disciplined in aligning our investments with our core strategic priorities while driving operating leverage over time. In Q3, we delivered $182 million of adjusted EBITDA and generated $93 million of free cash flow, while reducing our net loss by more than 30% year-over-year to $104 million, underscoring our progress towards sustained profitability. With approximately $3 billion in cash and marketable securities on hand, we are well positioned to continue investing confidently in innovation and long-term growth. We also continue to scale differentiated ad formats and offerings such as sponsored snaps promoted places and the app power pack supported by advances in ai for ranking creative generation and personalization these investments are expected to compound performance over time unlocking greater advertiser roi and long-term revenue growth at the same time we are improving key components of our service to make snapchat more reliable and as fast to launch as the native camera an essential part of ensuring our service remains simple accessible and enduring snapping between friends and family remains the foundation of snapchat driving both daily engagement and long-term retention in q3 we shared that snapchatters created over 1 trillion selfie snaps in 2024 demonstrating how deeply our community uses our camera to communicate and feel closer together over the next year we are prioritizing sharing and conversations through new conversation starters such as status updates flashbacks and topics building new ways to play games with friends and making it effortless to share spotlight videos through stories and chat our goal is to spark conversations strengthen friendships and inspire creativity this quarter we rolled out several new features that make communication faster easier and more expressive infinite retention allows users to save chats indefinitely while home safe gives friends peace of mind with an automatic check-in after returning home we also launched the snapchat keyboard extending our sticker library to other apps and introduced Custom Moji, enabling users to generate personalized Bitmoji stickers from text prompts. These updates underscore our commitment to enhancing the Snapchat experience through richer visual communication while fostering deeper community connections. Global time spent watching content and the number of content viewers increased year-over-year in Q3, reflecting our multi-year investment in machine learning and the continued strength of Spotlight. Building on this momentum, we launched our largest content recommendation model to date, improving freshness and relevance across the platform. We also upgraded our infrastructure to get a step closer to delivering content in near real-time, reducing latency and cutting model training cycles from days to just two hours. As a result, the share of total spotlight views from content posted in the last 24 hours increased more than 300% year-over-year in the U.S., as our models now surfaced more topical and original content. In addition, we launched our first unified user model that combines signals from Spotlight, Discover, and the camera, while advancing work on a trend detection model that identifies emerging creative trends and amplifies their reach. Snapchat is a platform where any creator can express themselves authentically, grow an audience, and build a business. Over the past year, we onboarded thousands of SnapStars, reaching a record level of active creators. We're also seeing established creators and homegrown talent thrive, such as Kaylee Rosie, a nursing student and plant enthusiast who has increased her followers by more than 50 times in the last six months by posting stories and spotlight content nearly every day to help creators succeed we expanded monetization tools and new collaboration formats with brands such as sponsored first snaps this growing ecosystem has made snapchat more resilient and diverse driving a nearly 180 year-over-year increase in snap star spotlight posts in north america more creator activity enhances the relevance and quality of our content inventory strengthening the overall engagement flywheel for both users and advertisers. While we continue to innovate on our core product experience for our community, including efforts to address ongoing engagement headwinds, we are also navigating a number of evolving factors that we expect will influence community growth and engagement in the near term. The key focus of our current strategy is improving average revenue per user by more directly monetizing our core product. This includes the continued growth of Snapchat Plus, the introduction of sponsored snaps and promoted places, the launch of Lens Plus, and the testing of memory storage plans. These initiatives are designed to strengthen our top-line performance, but they do involve trade-offs with engagement, so we expect some adverse impact on engagement metrics as these experiences are rolled out globally. At the same time, we are recalibrating our investments in community growth and the cost to serve our community in order to improve financial efficiency. This includes testing changes to our infrastructure that will lower costs in regions with less long-term monetization potential, allowing us to better align our resources with the financial opportunity of each geography, but potentially coming at the cost of adverse trade-offs with engagement in these countries. We are also preparing for the upcoming rollout of platform-level age verification, which will use new signals provided by Apple and soon Google to help us better determine the age of our users and remove those we learn are under 13 or under 16 in certain geographies such as Australia. These actions are an important step in maintaining a safe and compliant platform that we expect they will also adversely affect engagement metrics as implementation progresses in addition to these internal initiatives we continue to experience the effects of regulation and government policy actions recent examples include australia's social media minimum age bill which takes effect in december and government restrictions on access to internet services in certain countries we anticipate that similar regulations and other jurisdictions may take effect or be passed in the near future these policy developments combined with potential platform level age verification are likely to negative impacts on user engagement metrics that we cannot currently predict. While we remain committed to our goal of serving 1 billion global monthly active users, we expect overall DAU may decline in Q4 given these internal and external factors, and as noted above, we expect particularly negative impacts in certain jurisdictions. We believe these are the right actions to strengthen our business for the long term by improving monetization efficiency, ensuring compliance with evolving regulations, and positioning SNAP for sustainable growth. Snap continues to be a global leader in augmented reality engagement and innovation. Every day, Snapchatters use AR lenses more than 8 billion times, and more than 350 million Snapchatters engage with AR experiences daily. Over 400,000 creators from nearly every country have built more than 4 million lenses using our AR tools, making Snapchat one of the most scaled AR platforms globally. In Q3, we introduced the Imagine Lens, our first open prompt image generation lens, allowing Snapchatters to create or reimagine snaps by simply typing a prompt. More than 500 million Snapchatters have engaged with Gen AI-powered lenses over 6 billion times, reflecting the growing appeal of AI-driven creativity on our platform. Snapchatters engage with our AI face swap lens over 1 billion times in Q3, illustrating how generative AI can turn self-expression into shared moments and open up new ways to spark conversations and connections our investment in generative ai is designed to make communication more expressive personal and human realistic style gen delivers lifelike fit texture lighting and perspective unlocking cinematic quality transformations and generating nearly 100 million lens views in q3 enhanced space gen enables higher fidelity face effects generating over 700 million lens views while selfie attachments use 3d asset generation to add realistic context-aware elements like hats and hairstyles generating over 145 million lens views coming soon ai clips will allow creators to generate short shareable videos from simple prompts turning ai video creation into a social and collaborative experience together these innovations demonstrate why our leadership and generative ai matters they transform how people express themselves create content and share moments that strengthen their connections on Snapchat every day. We continue to see strong momentum with games. Over 180 million people now play games on Snapchat every month, with sharing up more than 100% year-over-year. To make these experiences more social, we introduced the Games Chat Drawer, bringing games directly into chat so friends can play together seamlessly. Developers are using new tools in Lens Studio like the Character Controller, Camera Controller, Input System, and Bitmoji Suite, which make it easier than ever to build personalized, interactive experiences. New features like turn-based gameplay and enhanced leaderboards are driving innovation across popular titles such as two-player mini-golf and Bitmoji Tower Defense. To support creator monetization, we expanded the Lens Creator Rewards program with LensPlus payouts, enabling developers to earn based on engagement from LensPlus and Snapchat Platinum subscribers. Outside of Snapchat, CameraKit reached over 68 million monthly active users by the end of Q3 and no longer requires mandatory Snapchat branding, making it a flexible, free SDK for brands and developers to deliver immersive AR experiences across apps, the web, and AR mirrors. Together, these updates reinforce our commitment to building the most expressive, scalable, and monetizable AR ecosystem in the world. Our long-term vision for AR extends far beyond the smartphone. For For over a decade, we have been building towards the future where computing feels more natural, contextual, and integrated seamlessly into the world around us. After five generations of product development, SPECS will launch publicly next year, representing a major leap forward in human-centered computing. In Q3, we introduced SnapOS 2.0, our largest system update yet. It delivers faster performance and a redesigned browser optimized for streaming and productivity, adds full WebXR support, and includes a new UI kit and mobile kit to simplify interface space, and cross-device development. We also added features like travel mode, which keeps AR content stable while in transit, and iConnect, which enables instant shared experiences simply by looking at another person to co-locate content. Developers and brands are already building with spectacles, including Enklu and Artglass, who are redefining live events with location-based lenses. These projects highlight the vast potential for creativity and commerce on specs. To help developers monetize these experiences, we introduced Commerce Kit, enabling developers to accept payments directly within lenses, unlocking digital goods and premium features in real time. Specs are purpose-built for the age of AR and AI, designed to make computing more personal, intuitive, and contextually aware. Unlike traditional devices centered around apps and files, Specs understand the environment and adapt to user patterns over time. To support this next generation of computing, we introduced SnapCloud, powered by Supabase, a scalable backend platform that enables richer and more dynamic AR and AI experiences on SnapOS. SnapCloud is a key step in building the infrastructure that allows developers to create immersive real-time applications and reflects our long-term commitment to advancing the AR ecosystem through specs. We believe Snap is uniquely positioned to win the next wave of AR computing. With SnapOS 2.0, Lens Studio, SnapCloud, and our global developer ecosystem, We are at the forefront with an end-to-end AR stack spanning software, developer tools, and hardware. Together, these investments bring us closer to delivering the world's first fully stand-alone, human-centered AR glasses. We made significant progress across our advertising platform by focusing on three priorities, advancing our AI-driven ad performance, optimizing high-impact ad formats, and strengthening our go-to-market execution across SMBs and mid-market customers. Our investments in AI and machine learning are delivering measurable gains for advertisers. We advance dynamic product ads with large language models that better understand products, driving over four times higher conversion rates compared to baseline for certain campaigns. As a result of these and other improvements, purchase-related ad revenue grew 30% year-over-year, reflecting higher attribution accuracy and better campaign performance. For example, Comfort, a lifestyle and apparel e-commerce brand, leveraged target cost and max bid in their snap campaign to scale faster and reached an incremental audience that delivered an 85 percent lift in site visits, a 79 percent increase in new customers, and a more than three times ROAS improvement as measured by WorkMagic since the start of their 2025 campaign. Sponsored snaps allow brands to join real-time conversations on Snapchat in a way that feels authentic and relevant to users. Early results show strong performance with up to 22 percent higher conversions and up to 19 percent lower cost per action when including sponsored snaps in advertiser campaigns advertisers across industries are using sponsored snaps to reach audiences where they are most active and engaged for example to strengthen share voice and drive user preference asics partnered with xeno group to promote its latest running shoe collection through sponsored snaps reaching two million unique snapchatters in the chat inbox and driving a four-point lift in overall brand awareness and a 16-point lift among snapchatters age 35 and older along with stronger return on advertising spend compared to existing media in addition ebay's sponsored snaps campaign to drive brand awareness was highly effective achieving nearly two times incremental unique reach and positive lists in ad awareness and brand association sponsored snaps are also becoming increasingly direct response focused delivering more personalized and contextually relevant experiences according to a cantar study approximately 85 percent of us snapchatters say sponsored snaps feel relevant and fit naturally within their habits on the platform Promoted Places complements this offering by bridging digital engagement with real-world action. The format allows advertisers to highlight nearby store locations directly within the Snapchat map, unlocking new opportunities for performance-driven local marketing. Early testing shows double-digit lifts in visitation, demonstrating its ability to influence real-world outcomes. For example, the fast-casual chain Panda Express ran a Promoted Places campaign that resulted in a 15% incremental lift in visits as measured by our third-party measurement partner in market. In addition, they saw a 10-point increase in brand favorability and a six-point increase in action as measured by a brand lift study. Together, sponsored Snaps and Promoted Places demonstrate how Snaps ad platform can influence the full marketing funnel from discovery and engagement to measurable real-world results while creating new opportunities for revenue growth across our global advertiser base. For app-based advertisers, we introduced the AppPowerPack, a unified suite designed to improve performance across both scan and non-scan campaigns. Key features include target cost bidding, new app end cards that automatically incorporate App Store images, and playables for interactive game previews. Early results show that the AppPowerPack is driving over 25% lift in iOS app installs. Early adopters are seeing strong returns, reinforcing Snapchat's role as a scalable performance channel for mobile marketers. For example, mobile gaming app Yota chose Snapchat to reach Gen Z through culturally relevant, fast turnaround ads leveraging target cost bidding, delivering 35 times more iOS installs at 84% lower cost per install, 60 times more purchases at 90% lower cost per purchase, and six times more first-time purchases at 13% lower cost per ad to cart since implementing this new strategy. We continue to advance our automation capabilities through the SNAP Smart Campaign Solutions suite. Smart Targeting, which treats targeting inputs as suggestions and uses machine learning to identify incremental high-performing audiences, has launched, delivering an average 8.8% increase in conversions for adopted ad sets. Smart Budget, our automated budgeting solution that optimizes overall campaign performance, has also rolled out across select advertiser objectives and bid strategies early results are encouraging with a five percent improvement in median cost per action and a 17 increase in median spend and we plan to broaden availability early next year in addition we have begun testing smart ad which enables advertisers to upload raw creative assets and leverage snaps ml systems to automatically drive performance smbs remained our largest contributor to ad revenue growth in q3 driven by new advertiser onboarding, improved DR tools, streamlined go-to-market execution, and simplified workflows. We deepen partnerships with commerce platforms such as WooCommerce, making it easier for small and medium-sized businesses to advertise on Snap and reach incremental audiences efficiently. Looking ahead, we see significant potential in the medium customer segment, where penetration remains low despite strong product-market fit. We are realigning sales teams and agency partnerships to realize this opportunity, which we expect to become a meaningful growth lever through 2026. Direct revenue remains one of our fastest-growing opportunities. In Q3, we expanded premium tiers such as LensPlus and Platinum Bundles, introducing exclusive AR and AI experiences like the Imagine Lens. We are also planning to introduce live streaming and launch new tools to help creators build deeper relationships with their audience. In addition, we announced memory storage plans in Q3 and began rolling out this new offering to our community. With more than one trillion memories already saved, these changes are designed to both enhance the user experience and sustain the infrastructure that supports long-term growth. We took an important step toward building out our AI platform by partnering with Perplexity AI to integrate its conversational search directly into Snapchat. Starting in early 2026, Perplexity will appear in our chat interface for Snapchatters around the world. Through this integration, Perplexity's AI-powered answer engine will let Snapchatters ask questions and get clear, conversational answers drawn from verifiable sources, all within Snapchat. Under the agreement, Perplexity will pay SNAP $400 million over one year through a combination of cash and equity as we achieve global rollout. Revenue from the partnership is expected to begin contributing in 2026. This collaboration makes AI-powered discovery native to Snapchat, enhances personalization, and positions SNAP as a leading distribution channel for intelligent agents, laying the groundwork for a broader ecosystem of AI partners to reach our global community. Now I'd like to turn it over to Derek to share more about our financial progress.

Thank you, Evan. In Q3, total revenue was $1.51 billion, up 10% year-over-year. Advertising revenue reached $1.32 billion in Q3, up 5% year-over-year, driven primarily by growth in DR advertising revenue, which increased 8% year-over-year. The growth in DR advertising revenue was driven by strong demand for our pixel purchase and app purchase optimizations as well as continued strength from the smb client segment other revenue increased 54 year over year to 190 million in q3 with the largest driver being snapchat plus subscribers which increased 35 year over year to approach 17 million in q3 with the exception of our large customer business in North America, our advertising growth remains very strong. From a regional perspective, we saw significant acceleration in advertising revenue growth in both Europe and rest-of-world during Q3. In Europe, advertising revenue grew 12% year-over-year, an acceleration of 6 percentage points over the prior quarter. In rest-of-world, advertising revenue grew 13% year-over-year, an acceleration of 10 percentage points compared to the prior quarter. In contrast, North America growth continued to lag the global business, with advertising revenue growing 1% year-over-year in Q3. Within North America, our SMB advertising business grew at a rate of more than 25% in Q3, while our large client solutions business posted a modest decline in the quarter. The North America LCS business accounted for approximately 43 percent of total global revenue in q3 decreasing as a share of total revenue by roughly 10 percentage points over the past two years reflecting meaningful diversification of our revenue base as growth accelerates across other regions and customer segments while this makeshift demonstrates healthy progress toward a more balanced business the North America LCS segment remains the primary headwind to our overall revenue growth. Given the strong momentum we are seeing with our ad products and platform, and the rapid growth and demand from SMB clients globally, we are redoubling our focus on what we believe is working. At the same time, we are making targeted adjustments to our go-to-market operations in North America to improve performance and reignite growth in our LCS business in this region. Global impression volume grew approximately 22% year-over-year, driven in large part by expanded advertising delivery within sponsored snaps and Spotlight. Total eCPMs were down approximately 13% year-over-year due to the strong growth in impression delivery. While the increased inventory from sponsored snaps has initially put downward pressure on platform-wide eCPMs, we are encouraged to see our advertising partners experience and strong advertising performance, which is bringing increased demand to the platform. This improved performance has contributed in part to a three percentage point acceleration and the rate of year over year growth in DR advertising revenue in Q3. Adjusted cost of revenue was 671 million in Q3, up 5% year over year. Infrastructure costs are the largest component of adjusted cost of revenue, an increased 8% year over year in Q3, driven by investments in ML and AI compute as well as an 8% year-over-year increase in global DAU to reach $477 million in Q3. Infrastructure cost per DAU was $0.85 in Q3, up from $0.84 in both the prior quarter and prior year. The remaining components of adjusted cost of revenue were $266 million in Q3, or 18% of revenue, which is below the prior quarter and our full-year cost structure guidance range of 19% to 20%, due in part to the benefit of a shift in impression mix towards sponsored snaps and spotlight. With a combination of accelerating top-line growth and more efficient scaling of adjusted cost of revenue, adjusted gross margin reached 55% in Q3, up from 52% in Q2 and 54% in Q3 of the prior year. Adjusted operating expenses were $654 million in Q3, up 8% year-over-year. Personnel costs increased 12% year-over-year, driven by an 8% increase in headcount. Our hiring in Q3 was tightly focused on our core strategic priorities of improving advertising performance, enhancing our SMB go-to-market efforts, driving more personalized and fresh content, as well as expanding our leadership in AR. Higher legal costs, including litigation and regulatory compliance-related costs, were an additional driver of operating expense growth in Q3. The increases in personnel and legal costs were partially offset by lower marketing expenses compared to the prior year due to a combination of cost efficiency initiatives and timing factors on marketing expenses in Q3. Adjusted EBITDA was $182 million in Q3, an improvement of $50 million compared to the prior year. Adjusted EBITDA flow-through, or the percentage of year-over-year revenue growth that flowed through to adjusted EBITDA, with 37% in Q3, and contributed to adjusted EBITDA margins expanding 2 percentage points to reach 12% in Q3. Net loss was $104 million in Q3, compared to a net loss of $153 million in Q3 of the prior year. The $50 million year-over-year improvement largely reflects the flow-through of a $50 million increase in adjusted EBITDA, a $32 million increase in other income, due primarily lead to repurchasing convertible notes at below par prices, offset by a $29 million increase in interest expense, reflecting high-yield notes issued earlier this year. Stock-based compensation and related payroll expenses were $268 million in Q3, or approximately flat year-over-year, as progress towards a flatter and leader leadership structure largely offset the impact of growth and full-time headcount in Q3. Free cash flow was $93 million in Q3, while operating cash flow was $146 million. Over the trailing 12 months, free cash flow was $414 million and operating cash flow was $617 million, as we continue to balance investments with top-line growth to deliver sustained positive cash flow. Dilution, or the year-over-year growth in our share count, was 3.1% in Q3, as share repurchases completed earlier this year partially offset the impact of SBC on share count growth. We ended Q3 with $3 billion in cash and marketable securities and just $47 million in convertible nodes set to mature between now and the end of fiscal 2026. We believe that our robust free cash flow generation and the strength of our balance sheet ensure that our business has sufficient capital and financial flexibility to invest confidently to drive long-term growth. Our Q4 revenue guidance range is $1.68 billion to $1.71 billion, implying year-over-year revenue growth of 8 to 10%. From a cost perspective, we are tracking well against our full-year cost structure guidance. For infrastructure, our guidance was for quarterly costs of $0.82 to $0.87 per DAU, and we hit the midpoint of this range in Q3. In Q4, we anticipate that infrastructure costs will post a modest sequential rise to between $420 million and $435 million. For all other costs of revenue, our full-year guidance range was 19 to 21 percent of revenue. A mixed shift in delivery of impressions towards sponsored snaps and spotlight helped to reduce this to 18% in Q3, and we anticipate being in the 18% to 19% range in Q4. For adjusted operating expenses, we provided full year guidance of $2.7 to $2.75 billion, which we reduced to $2.65 billion to $2.7 billion earlier this year, and we currently estimate we will end the full year nearer the low end of this reduced range. For SBC and related expenses, we got it for a range of $1.13 billion to $1.2 billion for the full year. We reduced this to $1.1 to $1.13 billion earlier this year, and now estimate we will come within a further reduced range of $1.08 to $1.1 billion. Given the revenue range above and the progress we have made to optimize our cost structure. We estimate that adjusted EBITDA will be between $280 million and $310 million in Q4. Given the strength of our balance sheet, our progress towards sustained free cash flow generation, and our desire to opportunistically manage our share count for the benefit of our long-term shareholders, we have authorized a new share repurchase program in the amount of $500 million. As we look to close out 2025, we are excited by the opportunities ahead of us to accelerate top-line growth, further diversify our revenue sources, and make meaningful progress toward profitability in the year ahead. Thank you for joining our call today, and we will now take your questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, are then two. In the interest of time, we ask that you please limit yourself to one question. After your initial question is asked, your line will be muted. At this time, we will pause momentarily to assemble our roster. The first question comes from Rich Greensfield with LightShed Partners. You may proceed.

Hi, thanks for taking the questions. I've got a couple. On the perplexity partnership, which is really interesting that you're going to add it on to is Snap AI. Is the cash stock split already determined, Evan, or could it actually change based on factors that you can help us understand? And you talk about monetization for the partnership starting in 2026. Does Snap ad sales, like will your ad sales team be selling ad units that appear in perplexity or just help us understand what monetization could look like inside this perplexity bot that's going to live inside of Snap? And then just a question for Derek, on a two-year stack basis, it looks like cost of revenue really came down. You talked about a shift to spotlight and sponsored snaps. Should we presume that the reason why we're seeing that leverage in cost of revenue is because you're not paying out to content owners the way you do in Discover for those ad units? Just would love to understand those two main things. Thanks.

Hey, Rich. Thanks so much for the question. We're really excited about the perplexity partnership. And I think it sort of underscores Snapchat's role as a messaging service and how valuable that is in the age of AI, especially because Snapchat engagement is built around real relationships between friends and family, but also because conversational assistance is very quickly becoming the primary way that people are choosing to interact with information on the internet. So I think we have a really unique opportunity ahead to help distribute AI agents through our chat interface and launching with Perplexity next year to bring their answer engine to Snapchat, you know, really in the default placement in our chat inbox is going to be really valuable to our community and hopefully very valuable to Perplexity and to Snap as well. And I think Perplexity's focus on trusted and verifiable sources really aligns with our values and makes them a good fit for our community. I think, you know, to answer your question from a monetization perspective, we don't expect to recognize any of the 400 million until we begin to roll out the integration, likely towards the beginning of next year. And Perplexity will control the responses from their chatbot inside of Snapchat. So we won't be selling advertising against the Perplexity responses. But I do believe that the placement will help Perplexity drive additional subscribers, which I think is something that will be valuable to their business. I think just looking ahead, one of the things that's really exciting is the opportunity to expand to more partnerships, and advertisers are very focused on leveraging sponsored snaps to distribute conversational commerce experiences with their brands, so that's something we'll be experimenting with as we kick off next year. Thanks.

Hey, it's Derek speaking. I can take the cost element of that question. You know, as Evan noted in his letter earlier this fall, we see a lot of opportunity to expand our gross margins and we're working across a number of different fronts to achieve this, including by improving the top line growth as well as becoming more efficient on cost of sales. So on the revenue front, we're broadly taking steps to better monetize our core product value. So we see sponsored snaps and promoted places were first steps on that journey. The ongoing growth of Snapchat Plus, the introduction of Lens Plus, and now the recent announcement and testing of memory storage plans are all examples, with the latter being a great example of an area where we can flip a cost structure into a revenue-generating business line. The perplexity deal is yet another example of a new line of revenue generation that helps expand the margins also. So on the cost side, we see several dimensions to this, including work to optimize our content programs, recalibrating our investments in community growth, and the cost to serve our community to better match the long-term financial potential of each market. In Q3 specifically, we're seeing the benefit of a mix shift in where impressions are being delivered, in particular to sponsored snaps and to a certain extent to spotlight. And as you've noted, these surfaces have higher margins, and this contributed directly to the gross margin improvement of 55% in Q3, up from 52 in the prior quarter and 54 in the prior year. So lots of work to do there, but we're excited about the progress when we saw there in Q3.

Thanks for inspiring, Derek. Thanks.

Thank you. Next question comes from Mark Schmuck with Alliance Bernstein. You may proceed.

Yes, thanks for taking the questions. Evan, just to follow up on that last answer, kind of beyond perplexity, You know, how do you see SnapsRoll evolving here as kind of this distribution channel? Sounds like there may be something about kind of brand messaging integrations, but, you know, could we potentially see the ad stack open up as well? And then, Derek, kind of on the commentary around the Q4 engagement headwinds, you know, if we try to compartmentalize that, is the bulk of that kind of like one time in nature as we kind of think about some of these regulatory type headwinds and then we kind of rebuild the ramp from there? Is that the right way to think about it?

Hey, thanks so much. further question. I think, you know, as it pertains to opening up the platform further, what we're seeing is a lot of our advertising clients are investing a lot in these, you know, conversational experiences, whether they're, you know, educational or really designed to improve consideration or folks who are going, you know, and developing full-fledged commerce experiences inside their own chatbots. But despite all this investment in building out that customer experience, folks are struggling to find distribution channels for those experiences. And so while there's a lot of, you know, development of AI agents right now, I think, you know, we're very quickly seeing people, you know, shift their focus to trying to develop more distribution. So I think, you know, given Snap's primary, you know, engagement around messaging, there's a real opportunity to open up our chat inbox and chat interface to more of these agents and to really to distribute them through our sponsored Snap's products. So that's an area of investment for us. The work we're doing to support perplexity and the development of our APIs there will also support other partners over time. And it's certainly something we're excited about. I think it's also a really compelling customer experience, given what we're seeing and the way people are shifting their behavior patterns to engage with these chatbots. So definitely as a chat service, we're very excited about the evolution in the customer expectation there. You know, I think as it pertains to the overall DAU growth and our efforts, we've been doing a lot to overcome ongoing engagement headwinds to DAU, primarily by introducing new conversation starters. So if you think historically on Snapchat, a lot of conversations have been started by folks replying to friend stories. As we've seen engagement shift from things like friend stories to content posted on Spotlight, for example, we have to migrate that friend story reply behavior to things like sharing Spotlight videos or reposting Spotlight videos or playing games with friends. And we've got some forthcoming product initiatives as well that are oriented around new ways to start conversations and spark conversations with friends. I would say big picture, though, in terms of, you know, our growth in daily active users, you know, I outlined in my letter, I think that was released back in September, this crucible moment for Snap and, you know, really a pivot to more profitable growth during this period. And, you know, we tried to provide a few examples in the earnings release, but we're experimenting with things like changing the way we do prefetching and caching in certain geographies for our content business, you know, changing the candidate size, you know, number of candidates essentially in our ranking and retrieval systems in certain geographies, and really trying to line up our infrastructure and marketing investments against the geographies where we see the largest long-term monetization potential. So I do think there will be trade-offs there in terms of engagement, but ultimately, you know, as we focus on more profitable growth, I think those are trade-offs that we're going to want to accept. And then, you know, we're also, of course, investing in things like memory storage plans or LensPlus. You know, I think those are things that reflect the real in terms of, you know, large-scale cloud storage or new AI tools in LensPlus, but those also add some friction to the user experience. And then I think perhaps most importantly, we're going to be proactive. We're going to get on the front foot when it comes to rolling out age assurance. There are new age assurance signals that Apple is providing us this quarter. We're going to use those signals to detect underage users. I think Google is rolling out a solution as well, perhaps at the beginning of next year. And so as we roll out those age assurance signals, that may have an impact on daily active users as well.

But we think that's the right thing to do. it's important for maintaining trust with our community and of course as well uh with regulators but but that uh you know that could be a headwind to growth as well thank you as a quick reminder if you'd like to ask a question please press star then one on your touchstone keypad the next question comes from doug and with jp morgan you may proceed hi this is maggie on for doug thanks for taking the question um we can tell that mid-sized advertisers are clearly a focus for Snap. Can you just expand a bit more on your go-to-market efforts and product roadmap to unlock greater spend from this segment? Thanks.

Yeah, we're so excited about the growth we've been seeing with our small and medium-sized customers. We've obviously got very strong product market fit with our app product, lead gen, of course, our web direct response product as well. A lot of what we've been focused on from a product perspective, things like speeding up signals onboarding or simplifying account setup. We've also improved partner onboarding as well, which is helping us scale. And we've seen some improvements in the median login to spend time for that advertiser cohort. I also just want to recognize the business development team has been doing a great job onboarding more customers. So, we'll definitely be investing there as well as we work to further accelerate the growth we're seeing with small and medium customers.

Thank you. The next question comes from Michael Morris with the Guggenheim Securities. You may proceed.

Thanks for taking the question. Wanted to ask about direct response advertising. Can you share how much was the 8% growth in the quarter and acceleration from the core trend in the second quarter when we removed the impact of the execution error that you guys had? And then as you look forward, can you return to double-digit growth in direct response advertising? And if so, I know that you have a number of initiatives. I appreciate all the details, but would you maybe give us the top two or three contributors that can really impact that growth rate over the next year? And I've got to just slip one more in. Following the error that you did experience last quarter, could you just provide an update on your comfort and confidence with the stability of the bidding and optimization tools now to kind of ensure that you wouldn't have that happen again? Thank you.

Hey there, it's Derek speaking. Thanks for the question yeah direct response revenue uh was up eight percent uh year over year in the most recent quarter it was an acceleration of three percentage points over the prior quarter so we're pleased with the progress there uh what we saw is good strength in our pixel purchase demand as well as the app to optimizations and really broadly across the smb segment helping to drive that acceleration in the quarter you know when you're looking at ad revenue broadly the you know with direct response being the vast majority of it we saw really good strength across europe and rest of World. Europe in particular grew 12% year over year. That was an acceleration of six percentage points. West of World grew 13%, which is an acceleration of 10 percentage points in the quarter. So really strong results there, both across the LCS and in particular the SMC market there. As we look at North America, that business still lagged a little bit and so dragged on the rate of acceleration on the overall business as well as in DR specifically. Within North America, though, really pleased with what we're seeing on the SMB segment, up to more than 25% year over year in Q3. So given the strong momentum that we're seeing, you know, in Europe and rest of world and with the SMB business globally, we're pretty pleased with what we're seeing on both the ad platform and our ad units there in terms of driving improvement on revenue and the business generally. I think as it pertains to our large client segment in North America, we saw a small decline there. We've been really focused on, you know, doubling down on what's working in the business, but also making targeted adjustments or go-to-market operations there in order to drive growth. We don't have, you know, recovery in that North America large client segment really baked in, you know, in Q4, obviously with the guide, but we expect that the work that we're doing there will help us build momentum over time. And if we can bring the growth in that portion of the business back up to what we're seeing elsewhere, then that is a path to further improvement in overall growth in ads business going forward. So hopefully that gives you a sense of what's driving the growth and acceleration on DR. And of course, we're watching our ad platform extremely carefully and the roadmap there and working with our teams to execute well there. And I think it's showing up in the results that we're seeing on the ad platform across the business globally. Thanks very much.

Thank you. The following comes from Shwita Kajulia with Wolf Research. You may proceed.

Okay. Thank you for taking my question. I just had a quick one on infrastructure costs for next year. Yes, could you please talk to your conviction level on keeping infrastructure costs basically flat next year and what, in your view, could drive those costs higher and when would you think you would step in?

Sure, it's fair speaking here. You know, there's a number of different drivers here. Obviously, over the last several years, one of the really big drivers of our growth and infrastructure costs has been the rapid growth and investment of ML and AI infrastructure. And we do expect that we're going to be able to deploy capacity there, but we're getting a big focus on capacity utilization improvement. The other is we've scaled the business, obviously a lot with the growth in our community, and there's an opportunity for us to do work around the efficiency of that cost structure and our cost to serve. So So both in terms of the services we're utilizing from our cloud partners, the pricing of those services, but then also just how we're engineering our product and the cost to serve, which Evan talked about a little bit earlier in terms of our ability to calibrate that cost to serve relative to each market and its long-term financial potential. And so we think across each of these vectors that there's a lot of opportunity for us to make progress on the infrastructure costs and make progress towards that specific goal we had stated of working to make infrastructure flat into 2026. Hopefully that gives you a little more color.

Thank you. The final question comes from Ross Sandler with Barclays. You may proceed.

Great, Evan, just a question on spectacles. So there's been recent press reports about potential financial partners. And I think some of your peers have done partnerships with these manufacturing or distribution entities. So what's your latest thinking here? And your AR software stack is fairly advanced versus the field for smart classes. So how are you thinking about leveraging software versus the hardware side? Just any updated thinking there would be great.

Yeah, thanks so much for the question, Ross. We've got a really exciting year ahead here as we prepare for the public release specs. And we've been thinking a lot about ways to accelerate our technical leadership in the space. This is a form factor, obviously, we've been focused on now for more than a decade. And I think we've been able to really leverage our advantages in terms of LensCore, the huge ecosystem of lenses that have already been built, the amazing developer tools in LensStudio, and obviously now the Snap operating system that runs on the current developer version of specs. So, you know, one of the things that we have been doing to, you know, create more optionality in terms of our ability to accelerate is that in putting specs into their own standalone, 100 percent own subsidiary, that'll give us some options as we think about, you know, potential partners to work with to accelerate our leadership here in the space as we prepare for the public rollout. So definitely some great opportunities to partner. We really believe that the killer use case for specs is lenses, and we've seen some incredible lenses that have been created so far almost weekly. It seems like developers are rolling out new and unique experiences. So if you haven't gotten a chance to check out the latest, I'd highly recommend it.

This concludes our question and answer session, as well as Snap Inc.'s third quarter 2025 earnings conference call. Thank you for attending today's session. you may now disconnect.