Q2 2020 Snap Inc Earnings Call
[music].
Good afternoon, everyone and welcome to snap Inc.'s second quarter 2020, <unk> earnings Conference call.
At this time participants are in listen only mode.
After the prepared remarks, there will be a question answer session.
If you would like to ask a question during that time. Please press Star then the number one on your telephone keypad.
This call will be recorded thank you very much mr. David meter of Investor Relations you may begin.
Thank you and good afternoon, everyone welcome to snap second quarter 2020 earnings conference call with US today are Evan Spiegel, Chief Executive Officer, and co founder, Jeremy Gorman, Chief Business Officer, and Derek Anderson, Chief Financial Officer.
Earlier today, we made a slide presentation available that provides an overview of our user on financial metrics for the second quarter 2020, which can be found on our Investor Relations website at Investor thoughts now Dot com.
Now I'll cover the Safe Harbor today's call to provide you with information regarding our second quarter 2020 performance. In addition to our financial outlook.
This conference call includes forward looking statements.
Any statement that refers to expectations projections guidance for other characterizations of future events, including financial projection future market conditions or the impact of Koby 19 on our business and on the economy as a whole. It's a forward looking statement based on assumptions today.
Actual results may differ materially from those expressed in these forward looking statement and we make no obligation to update our disclosures.
For more information about factors that may cause actual results could differ materially from forward looking statements. Please refer to the press release, we issued today as well as risks described in our quarterly report on form 10-Q for the year ended March 31, 2020, particularly in a section titled risk factors.
This information can be found in our other filings with the FCC when available.
Our commentary today will also include non-GAAP financial measures and we believed that the use of these non-GAAP financial measures provides an additional tool for investors to use and evaluating ongoing operating results in trends.
These measures should not be considered in isolation from or as a substitute for financial information prepared in accordance with GAAP.
Reconciliations between GAAP and non-GAAP metrics for our reported results can be found in our press release issued today.
Copy of which can be found on our Investor Relations website.
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 nonrecurring charges.
At times in our prepared remarks or in response to questions. When they offer additional metrics to provide greater insight into our business or our quarterly and annual results.
This additional detail maybe onetime in nature, and we may or may not provide an update in the future on these metrics.
Please refer to our filings with the FCC to understand how we calculate our metrics.
With that I'd like to trying to call over to Evan.
Thanks, everyone for joining our call.
This has been an extremely challenging time and our team has done an outstanding job continuing to support the growth of our community, which increased 17% year over year to 238 million daily active users.
As well as building our business with revenue growing 17% year over year to 454 billion.
Well our revenue growth rate continues to be impacted by ongoing market disruptions. The fundamentals of our business are strong and the high levels of engagement on our service are backed by years of investment in our self serve advertising platform, which is helping our partners achieved success and grow their businesses in this uncertain and invite.
Firemen.
Hi, I'm most proud of our team for the work they did to create our snap partner summit this quarter, which was delivered virtually in an augmented world.
We announced several new products like many voice scan camera kit places on the snap map didn't know G. for third party games as well as several new partnerships and a fresh slate of content.
We also made snapshot easier to navigate with our new action bar, which provides top level navigation to more easily accessed the snap map chat camera and discover resulting in more surface area and accessibility for each of these platforms.
We're working hard to overlay new computing experiences on the world through augmented reality.
The snap partner summit showcase some of our latest a our products, including local lenses that allow people to share augmented reality experiences together overlaid on their neighborhood cityscape and snap and mill, which empowers members of our community to bring their machine learning models directly into lenses on snapshot. This enable.
Gucci to leverage Wanna buys what tracking technology to help people try on their latest sneakers and snapshot and even buy them directly within the last these sorts of augment it reality experiences are especially powerful in the post cobot retail environment, where brands are investing more in virtual trial. In addition to our new.
It should reality products. We also released committees to enable developers to build interactive and social experiences for our community.
For example, when movie theaters reopened friends, we'll be able to browse and purchase tickets together in the upcoming Adam tickets many.
We're excited to help our partners understand how they will benefit from our long term vision for SAP and in many ways that they can use our products and platform to connect with our community and build their businesses.
Our community grew by 17% year over year with 238 million people using snapshot every day on average in the quarter.
This continues our recent momentum and daily active user growth with the last three quarters seeing our highest year over year growth rates since 2017.
We now reached more than 100 million people in the U.S. alone and are also seeing strong growth in our core market in North America, Europe and Australia.
We're also continuing to invest an outperformance in localization to make our service more accessible to people all over the world.
With snapshot now available to over 2 billion people in their native language.
These efforts have helped us grow even faster and emerging markets like India, where we've seen over 100% growth in daily active users over the past year.
As the changing public health landscape accelerates the adoption of digital products. We believe there is a large opportunity for us to further empowered new behaviors with a our entertainment and commerce for.
For example, we continue to see increasing engagement with our camera.
The number of snaps created every day grew at double the pace of our daily active user growth over the past year, making snapshot one of the world's most used cameras.
We're especially excited to see that the adoption of our a our platform is also accelerating but the number of people playing with lenses everyday growing by 37% year over year.
This growth has been driven in part by the community of talented lens creators and partners that are creating and distributing lenses on snapshot.
Creators are quickly adopting new lens studio capabilities to create lenses that put a lightsaber in your hand turn the entire world into Spaghetti and let you try on clothes and makeup.
Today snap Cheddars play with lenses created by our community six times as often as they did just last year and these lenses now driving more than a quarter of all lens engagement on Snapchat.
We're excited to see that our product innovation in a or its empowering the creativity of our lends creator community, which in turn has driven growth in user engagement.
So much happening around the world today, our discover platform is more important than ever and helping our communities stay educated and informed about current events.
Snapshot has become a go to destination for credible an accurate news content during the pandemic with more than half of the entire U.S. Gen depopulation washing kobin related news created by our partners.
Additionally, following the murders of George Floyd Mott, our Aubrey Briana Taylor, we published curated community stories, featuring powerful snaps from our community, which range from breaking news about peaceful protests to a dialogue about what it means to be living wealth Black in America.
We're also rolling out happening now dedicated section of discover that provides breaking news for media partners, such as NBC news and SDN summarized in a single snap in.
In addition to news discover has also provided a premium mobile entertainment experience for our community as their sheltering in their homes.
For example will from home, which culminated in a fresh prensa Bellaire cast reunion was wash by more than 35 million people.
Snap originals continue to attract audiences that rival those of top TV series and have reached more than 75% of the U.S. gensix population. So far this year.
In addition, many of our media partners are finding success adapting their television properties for our platform in order to reach an incremental audience that is not watching TV.
According to E marketer the average U.S. adult Spence 29, more minutes with mobile content compared to TV, which is up from six fewer minutes on mobile and 2018.
We believe this trend is driven primarily by the younger generation, whose time spend watching TV is a fraction of their older counterparts.
This creates an opportunity for our media partners several of whom spend significant resources to create high quality content for TV.
To expand their total audience to include these younger viewers. Several shows that are finding success on discover were originally shot for linear TV knee shows of recent audience of over 100 million people and snapshot so far this year.
We added more than 180, new discover channels this quarter and recently announced newly expanded partnerships with Disney, Yes, Pn and B C. Viacom CBS, the India and the NFL as we continue to expand or curated content business.
The strong engagement with our platform and products is driving results and our advertising business. Despite the many macro headwinds currently experienced by our partners.
Our advertising business grew 17% year over year to $454 million in revenue.
We're pleased to see that continuing growth in our revenue, especially in the face of extreme dislocations in the market.
As heavily impacted companies like travel and in theater Entertainment pullback spend give transition to helping them plan for future recovery led in part by our audience.
We've also seen that certain industries like CPG gaming streaming services and E. Commerce have benefited from some of the kobin related changes in consumer behavior and have been leaning in as advertisers on our platform.
Our significant investments over the past few years and our team and our AD platform helped us provide substantial value to both direct response and brand advertisers as they navigate these rapid an unprecedented shifts in the market.
Our direct response business continues to drive meaningful return on investment at scale, especially during the current environment, where performance oriented apps and ecommerce advertisers look to reach customers, who are increasingly engaging and transacting on the internet rather than in person.
This has been accelerated by the major improvements we continued to make to our AD products and backend optimization, which have helped us increase the scale at which were able to deliver results for direct response advertisers.
For example, we're rolling out dynamic ads globally, so that retailers like flora and I'd to can run ecommerce campaigns on snapshot that automatically optimized across their entire catalog. These product improvements also drive a virtuous cycle for our direct response business.
As we onboard more advertisers increased quality and diversity of our advertising demand means that we have more relevant ads to choose from when deciding which add to show a particular person at a particular time.
This in turn drives more value for advertisers with fewer wasted impressions, while simultaneously, reducing the perceived AD load for our community.
Well these uncertain times have impacted many businesses in different ways, one consistent theme across all brands has been the focus on reaching customers and thoughtful and genuine ways.
Brands have collaborated on many of the new products, we are building, including by investing heavily in our new a our capabilities to engage in audience that is not able to visit their stores or see their products in person.
We recently launched brand profiles, an important first step towards building a native home for all of the organic experiences that brands are building.
Now Chatters can now visit the profiles of brands like to your target and Tim Hortons to watch their stories play with their a our experiences and even by their products through our native commerce integrations.
We're excited to evolve our relationships with brands of all sizes as we continue to build tools for brands organically engage with our audience.
Finally, the growing focus on brand safety and privacy across the entire industry places us in a unique position of strength as we have invested in these areas from the beginning of our business.
Very foundation of both our consumer products and our advertising business has been built around our commitment to protecting the privacy of our community and to delivering a safe environment for brands.
We believe that building trust with our community and providing a safe environment on snapshot is critical to our long term success and helps us live up to the high expectations of both our community and our advertising partners.
This reflects our broader commitment to making a positive impacts with our company and our products. Our strategy is simple we try to do the right thing even when it's hard and we work to acknowledge and fix our mistakes quickly.
Looking forward, we expect that the current operating environment will become more complex. This year alone we have seen sweeping changes to our global economy, the privacy and regulatory landscape public health and social behaviors and the direct confrontation of a legacy of injustice, an extreme inequality in America.
This means that our strategy of trying to do the right thing isn't just a moral imperative we.
We believe that it is the only way to achieve the long term vision for our business, we have a lots to learn as we grow our global audience and expand our advertising and content partnerships and it gives me great hope to see our team community and partners actively engaged in building a better future.
Thank you again for joining us today I'll now turn the call over to Jeremy to share more about our business.
Thank you Evan we're pleased with our results for this quarter I missed a challenging and evolving global environment.
Can you just see significant.
Any aren't as we report our community and advertising partner in Q2, we generated total revenue for.
$4 million and increased 17% year over year, we are confident.
No long term evidenced by the resiliency of England direct response appetite. There is as follows our continued success pumping brands valuable messages and effectively reach our community.
[laughter] about how our team our product and our business can be forces for pocketing change and well in the U.S. Our platform reaches 90% 13, you 24 here or any [laughter] 18 to 34 year. All its audience is critical for advertisers that's a snapshot generation develop Blake.
But also because young people are focused on driving change in the world and building a better future, we take our responsibility to educate and farm and support this incredible generation very seriously and we did see using our.
Forthright that.
Given the relationship we have dealt with the stopped talking indeed worldwide, you've been able to help brands delivered finally messages that resonate with 13 get everybody else, we see the well defined and their parents generation. This is particularly important against the backdrop.
As advertisers love to appropriately align their messages with what our community positivity goodwill and most importantly authenticity. We've partnered with many brands phones that are well positioned in the current environment.
Hi, good gaming streaming and he calmer well also helping our partners like recovery roadmap for industry.
From an outsized impact from Coca 19.
We have the opportunity to work closely with monster energy to adapting campaign.
In response to it.
[laughter] arm in campaign across.
Commercial sorry.
Yes.
Monster and product exposure ultimately generated at some point.
Uh huh.
In message Association.
Large audience creative format, and advanced measurement tools, providing a significant opportunity or brands such as monster energy drinks that patterns during the bubble.
Our team has also been working hard to provide useful product and resource.
And they managed to current economic landscape, we added multi country targeting capabilities, allowing advertisers to optimize bascome farming customer regardless of location catering to location agnostic products and services like calmer intact and gain.
In addition, we lost spaces on our [laughter], which highlights businesses. They are popular with our community and operate information like ours, we need and delivery options. The third party partners.
Well, we are just getting starting with this opportunity and parts of the world begin to reopen safely we will be there to help the snapshot generation support their favorite local businesses and discover new ones.
We remain focused on making progress against our opportunity right Creed key priority for investing in our AD platform in order to driving Bruce relevance and deliver measurable ROI second efficiently scaling our sales and marketing actions to depart advertising partner locally and they're building innovate in addict.
As you video and augmented reality at deliver real.
Our three priorities along with our unique breach and growing global audience allows us to drive performance at scale since completing the transition to our self serve AD platform, we've been able to reliably translate improvements in relevant optimization and measurement into revenue growth by delivering increased ROI during.
It's kind of disruption marketers thats been difficult decision any flexibility creativity and strong relationships, but most importantly, they need for apartment media.
Hi, guys are becoming more performance oriented and economic conditions only accelerate it that trend this quarter.
Our flexible and advanced sensor platform Armstrong Cedar performance at product and our relentless focus on measurement and our ally continue to help our advertising partners deliver positive results.
The global I'm kind of fits and also celebrated shifts to more digital economy, our advertising partner you start buying more ways to offer services digitally including.
Uh-huh online education program retail stores, and restaurants, offering online ordering and delivery services and mobile first thinking integrating.
Hi, this is encouraging.
Actually adopt digital marketing methods to engage with their customers globally, and we are well positioned to take advantage of this checked our early investments in building the fundamentals of our global business that paid off and it resulted in our highest number of active appetite next day quarter. We've built a whole suite of products designed to meet advertisers needs in this new anywhere else.
Particularly for E commerce, such a slight to call pixel there okay.
Reengagement and dynamic ads.
We recently launched dynamic ads globally, and we are finding the advertisers were already seeing early success with this new ad format.
Rob you senior director of media activation and how do you guys said well in the wake up the Colgate 19 epidemic I need assets further accelerate its digital business with E. Commerce, a key focus from in 2020 M. beyond we were excited to beta test snapshot dynamic ads in the UK, Germany, France, and then island.
We've been weeks, we saw 52% growth and return on advertising spend and we subsequently kroner investment and.
More and more ecommerce businesses are adopting our EXL to optimize for down purchase objected demonstrating the increased demand here thing businesses measuring campaigns. The first party attribution.
For example, in Q2 2020 to pull and launched a new free delivery campaign on chat to drive purchases, both on just totally dot com and within there huh.
Campaign drove over three times, the number of attributed purchases as compared to their Q1 in 2020 campaign and a 171% increase in return on <unk> and compared to prior quarter.
We remain focused on helping businesses, such as AAA translate measurement and optimization into meaningful comparisons and strong airline.
Our second priority is to grow demand through better service of our advertising partner and we continue to higher talented sales professionals to build out and improve our verticalized pepperidge. It serves many amortized and across the globe.
Well, you're not able to host interesting meetings with our advertising partners I can see timid efforts to virtual industry education. Our team has left thought leadership Webinars and R&D and partnered with many industry leader like Shopify and partly to further educate advertisers that are robust and tools and capabilities.
We're also supporting appetite there by building out more on demand learning tool, it's just not okay.
Explained courses, but watching everything advertisers need to know that create their first ad campaign.
Third priority is to lead the way live entertainment advertising over the past five years, we've been building a powerful video, but all of connecting Brandon advertisers to the fact that generation.
Example, cover dropping price came to snap chat to get in front of the hard to reach density and millennial audience.
You can't in leaned heavily into premium video featuring light commercial it's not that unfiltered.
The total audience reach 62% when do you need to staff.
Campaign drove a nine point lift in Atlanta, and lifting purchase intent that was 4.5 times the snap the last CPG norm. This is just one example of many signaled the broader set and how can the millennials in content, it's getting harder and harder to reach this audience on linear TV or commercial supported string.
Not just the younger generation average daily December content, you were set by people over 35 has increased by over 40% year over year.
Based on this gross and in response to the evolving needs of our advertising partner, we introduced first commercial giving amortizes away to reserve in the first commercial and antitrust Easter and that's first show they watch, allowing brands can take that all important first impression.
Our commercial their design for both social video and online video buyers within Bullivant tracking incremental online video and TV budgets into our hand curated brand things content environment. In fact, the content on our discover platform is brand safe by design in order to provide advertisers with fixed price reserved inventory now I'm.
And we introduced snap the line, where I'm only appear in our hands curated selection it shows and content and media brands like STN NDC and people in.
In Q2, we expanded our select curated AD placement options five topic sports entertainment beauty lifestyle and news, enabling advertisers to reach viewers with any trouble.
We believe that future customer interactions immersed as the most engaging in creating an add on our platform are powered by our augmented reality landed brand from every vertical have worked with us to provide snapshots, it's fun and that they say that and share with friend ultimately we want to enable advertisers at the tools to build the digital air around their product.
For example, we recently launched our augmented reality line is turning on campaign with luxury brand Gigi, which allows snap tires to virtually try on purchase duties most iconic she a snapshot.
The last was playing with buyer community for 22, [laughter] rights and in some markets generated five times return on.
Sectors are actively looking for more and more ways to engage with brands on our platform and we're excited to help partners like BG connect during this time.
We believe the air Tran is going to be incredibly important to the future Palmer and we're excited to work with more partner to build out in Idaho experiences for our community longer term, we see a significant opportunities for brands to provide utility assets, while generating real business value across our 39, yeah I think content for.
And they're starting to invest in snapshot beyond advertising by building and engaging and useful experiences.
The launch of brands profile this month, which have been highlighted earlier in the key tilera future today. Our focus is on giving ran the home for all of the entertaining a our experiences that they create alongside their story in the future. We believe that snapshot are slowing engage nationally with businesses are all ideas across our service.
For brand my target just can you make visit the targets are on the map to check local store hours using many to find the back office in Fran trying the latest look see any islands anymore.
In the five years since we launched ads on snap chat we've created the industry's first ever vertical video Farha brought branded air experiences to the mainstream and pioneering privacy same mobilefirst advertising in order to help advertisers everywhere reach our community. We will continue doing back for the long term by demonstrating measurable ROI forever.
I think partner empowering our keen to speak strategically to the value of our app and leading the way with innovative advertising products and services to help advertisers.
We've built a robust advertising platform to reach the snapshot generation or digitally native and uniquely positioned to help jumpstart recovery, given our young and influential community adaptive engaged in our platform and our overall opportunity to take share if the growing digital advertising market. We believe we are well positioned strike business results for advertise.
There's over the long term with that I'll turn the call over to Eric.
Thanks, Jeremy.
Our Q2 financial results reflect our priorities a growing our community, making focused investments in the future of our business and scaling our operations, especially in order to drive towards profitability and positive free cash flow.
As as I mentioned earlier, our community grew to 238 million daily active users in Q2, reflecting year over year growth of 17% or 35 million.
Growth in our community was robust however, the final results fell below our earlier estimate of 239 million.
At the onset of widespread shelter in place orders as people start to stay connected and entertain from home.
We observed an increase in daily active users that informed our initial estimate this initial lift dissipated faster than we anticipated as shelter in place conditions persisted.
Despite the or unusual circumstances influencing user growth in the quarter. We were pleased with the overall level of growth and the growth continued month over month from April to me and May to June.
The growth in our community continued to be broad based in Q2 in North America da you grew by 9% year over year to reach 90 million.
In Europe GA, you grew by 12% to reach 71 million.
In rest of World you grew by 37% to reach 77, Doug.
The outsized growth in rest of world follows the rebuild of our Android application in 29 team and our subsequent efforts to further localized product.
Good example of this momentum can be seen in India, where daily active users more than doubled year over year in Q2.
We see a significant opportunity to continue to grow our community as we further investing localization of her product through language support local content and marketing partnerships across a variety of geographies.
Q2 revenue was 454 million, an increase of 17% year over year.
While our growth rate for the full quarter exceeded the early quarter to date result, we shared at our prior call. The path to this outcome was not a straight line.
The operating environment has remained challenging as cobot banking continues to impact macroeconomic conditions and the businesses over advertising clients.
Many of our advertisers as seen interruptions in their businesses, especially those that rely on in person interaction with their customers such as restaurants entertainment venues transportation services, physical retailers and hospitality providers among others.
In addition, many advertisers toro spending for periods of time during the quarter in order to swap out there and creative for messaging that was more appropriate for the given moment.
These challenging circumstances interrupted otherwise robust momentum and ourselves or platform.
We continue to see strong adoption of our goal base bidding products driven by demand for Darryl funnel bidding objectives, including pixel verified purchases pixel verified subscriptions.
Purchases and other objectives that are tied to directly measurable returns on that on spending for example revenue from pixel verified purchases increased more than four x. year over year in Q2, and it's now among our most important goal based bidding products.
From a regional perspective, our North America revenue grew 18% year over here in Q2 or roughly in line with the business overall.
In Europe revenue grew 30% year over year as the end up stay at home orders in Europe has contributed to an improving operating environment in this region.
In addition, Europe was relatively less impacted by advertisers pausing spend to swap out creative messaging in Q2.
In rest of World revenue grew 2% year over year in Q2, with a relatively lower growth rate, reflecting cobot 19 related operating headwinds that were more pronounced for our advertising partners in this region, including limitations on cash transactions in some countries where cash transactions remain.
An important to direct response advertisers and supply chain issues that impacted certain ecommerce categories more significantly in this region among other factors.
ARPU was stable in Q2 as year over year growth and daily active users was approximately equal to year over year growth in revenue.
Tire so through impressions and strong growth in content engagement has contributed to total served impressions nearly doubling year over year in Q2.
As a result, he CPM declined 24% year over year in Q2, which is roughly in line with the decline observed in the prior quarter.
Well, we aspire to achieve a market level ecpm for our audiences and AD units over time.
Relatively lower east Cpms in the near term position us well to attract and retain new advertisers by hoping to deliver attractive return on to outspend.
Gross margins were 47% in Q2 up one percentage point versus the prior year.
Infrastructure cost forget you were 69 cents in Q2, which is the lowest cost per Ghq. We have reported since Q1 of 2017 and comes on the heels of our annual infrastructure cost Kip, where our engineers dedicate time to infrastructure efficiency projects that go above and beyond our.
Ongoing cost management programs.
On the content side, we have been doubling down on or investments in premium content and we are seeing productive returns on these investments with the daily average number of snap shutters watching shows growing more than 45% year over year in Q2.
In addition, we continue to see our overall discover audience mature with the daily average number of snap charters in the 35 and over age group engaging with discover contract growing at a rate of more than 40% in Q2.
We're particularly pleased that we have been able to grow our community at a robust spray and make investments in premium content, while continuing to expand our gross margins.
Operating expenses were 307 million in Q2 up 19% year over year. This increase reflects continued investment in our channel a base driven primarily by growth in our engineering and monetization teams.
We have observed a steady and significant improvement in employee retention over the past year.
And this has helped ensure that the investments in our tell a base are highly productive which is evidenced by the product innovation showcased during our recent partner summit.
We also made investments in marketing to grow our advertiser base and stuff Cheddar community, which have contributed in part to robust growth in these areas.
These investments have been partially offset by savings related to lower travel and event related spending while our teams largely continue to work from home.
Adjusted EBITDA was negative 96 million in Q2 or 17 million on favorable versus the prior year.
While we have carefully prioritized our investments given the on certain operating environment.
We have remained focused on investing in the long term growth of our business in order to build on the momentum we have established with our community and our advertising partners.
Well this is put downward pressure on adjusted EBITDA in the near term.
We believe it is the right decision for the long term health of our business given the strength of our balance sheet.
Operating income in Q2 was negative 311 million or 6 million unfavorable versus the prior year as lower stock based compensation, partially offset the year over year decline in adjusted EBITDA. While we have continued to grow our team we have seen stock base.
In decline year over year by approximately 5% in total.
This decline columns as our team continues to migrate towards sustainable and competitive compensation structures that we have put in place in the years following our IPO.
We view careful management of our stock based compensation programs as a key input to efficiently managing our fully diluted shares outstanding as we seek to build shareholder value over the long term.
Net income in Q2 was negative 326, boes or 71 million unfavorable versus the prior year, which reflects the flow through from operating income noted a ball higher interest expense related to the convertible notes issued over the course of the past year.
And the impact of onetime gains in the prior year related to disposal of certain assets.
Free cash flow was negative 82 million in Q2 and improvement of 21 million year over year as lower adjusted EBITDA higher interest payments and higher capital spending were more than offset by improvements in net working capital as we continue to scale our business officially.
We ended Q2 with 2.8 billion in cash and marketable securities up from 2.1 billion at the end of Q1, which reflects the proceeds of the convertible notes issued in Q2.
When combined with our Undrawn credit facility. We currently have access to approximately 4 billion in total capital, which ensures we have the working capital necessary to stay focused on the long term regardless of the operating environment.
Similar to last quarter, we do not intend to provide financial guidance for Q3.
But we do want to provide a sense the where we are today and how we plan to invest in our business.
Thus far in Q3, we estimate year over year revenue growth to be 32% through July 19th.
While we are cautiously optimistic that these trends could sustain over time. We're also conscious that operating conditions may remain volatile and that economic conditions could further deterioration.
For example ever touching demand in Q3 has historically been bolstered by factors that appear unlikely to materialize in the same way they have in prior years, including the back to school season film release schedules and the operations of various sports leagues.
At this point in time it is difficult to predict how these factors may impact advertising demand in the remainder of Q3.
Our best estimate at this point is that our full quarter revenue growth rates is likely to be below our quarter to date estimated actual growth rate.
And as a result, we haven't built our internal investment player based on revenue growth of approximately 20%, we intend to continue to invest in our business in Q3, and our estimates for our cost structure assume that daily active users will be between 242 million and 240.
4 million in Q3.
This implies year over year growth of approximately 15% to 16% or 32 to 34 million daily active users.
On the expense side, we currently expect that our combined cost of revenue and operating costs, which are included in the calculation of adjusted EBITDA will grow year over year in Q3, I percentage rates in the low to mid Twentys as we continue to invest in the long term growth of our business.
Given that a small minority of our cost structure various directly with revenue in the short term we do not currently expect substantial variance in the cost growth estimate.
Regardless of the revenue outcome in Q3.
While there is continued uncertainty about the near term revenue growth rates given the challenging operating environment. We're pleased with the strength of the underlying momentum in our snapshot or an advertiser communities and we remain highly optimistic about the long term prospects for our business.
Thank you for joining our call today, and we will now take your questions.
That concludes the prepared remarks for todays earnings call and we will now begin the question and answer session.
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And our first question comes from Ross Sandler of Barclays. Please go ahead.
Hey, guys just I.
I think what everybody on the call wants to know is is our things improving or not really so can can you talk about what might have caused the growth rates to pick up from.
Mid teens into Q2, the low Thirtys in July and then maybe.
On the reasons provided a minute ago why do you expect that to drop off in the future or is that just conservatism baked in to the to the plan and then any color just over the last couple of months since the last update.
On growth rates for brand advertising revenue.
Versus direct response advertising revenue any color there would be helpful. Thanks a lot.
Sure. Thanks to the question, Ron I'll get that little bit more color here is that we're really proud of them work that our team did deliver results for our business more working from home and their challenging operating environment after quarter and continues to do today.
We mentioned on our I recall that we experienced the growth rate at 15% to the first few weeks acute acute so our final result, a 17 with just about that but the result wasn't in a straight line. There were a period of time, where advertisers have to upon to reset the creative these kinds of things and was not straight line. They see the talent visit.
Our business due to covert 19, and other interruption and we also saw a number of advertisers on spending at time at times just good job does that or is the moment, but be Pacific. Our direct response business is present, just Brazilian and we've continued to benefit from the growth in adoption of our oldest bidding product and that is.
Driving that continued growth in the top line overall, you're seeing now as far as some of that other parts. The brand side of the business has begun to recover as revenue growth in the rest of world has recovered and this is contributing in part to the improved results. We've seen that partner I'm. In addition, we see continued strength in categories like CBD.
He streaming content fitness and and of course, the decline in things like terrorism dining restaurants, while they continue to be town in this environment.
Oh, that's a trend that we there recently will present, but we're also contest that the operating environment remains challenging and many other factors that have.
Certainly contributed to the growth in Q3 are unlikely to materialize in the same way this year that they have in prior years examples of that would be that starts the NFL season, well movies being moved out of summer. Maybe you then well et cetera. All of these things will happen, but just in ways that were a little bit less familiar second some color.
Oh play on the on the cautious there.
Our next question comes from Rich Greenfield of late said partners. Please go ahead.
Hi, a couple of questions I mean, I guess first off you know Evan you've talked a lot about the investments you've made in in content, obviously discover looks dramatically different you, putting a lot of effort into minis and other things the basically a lot of.
Spend to make the product better curious then why are we seeing sort of a deceleration in user growth.
It seems like snap is so much better than it was six and 12 months ago and I'm, maybe even specifically calling out Europe like.
Why is European growth I'm kind of post the Android why are we not continued.
You'd acceleration is content flows in over there as well.
And then just on.
The kind of the elephant in the room, there has been a boycott as I'm sure you and everyone are aware of some of your peers that most notably Facebook.
When you think about the commentary that Jeremy and Derek We're just talking about for Q3 and even Q4.
What is the.
What is factored in for shift of spans from other platforms. How are you taking advantage of major advertisers literally stopping their spend on Facebook and even some of the other platforms.
Hey, rich, it's Derek speaking I'll take the first part of your question there around the growth I think the first thing that I'd shares we've been pleased with the growth trajectory of our community over the past year. The 35 million da you that we added in Q2.
Was among our highest quarters of absolute year over year growth that we've seen since 2017.
Following the rebuild of our Android application in early 2019, and our subsequent efforts to localize our product we've seen elevated growth rates in the rest of World region and I noted specifically some of the gains we've made in India. In my prepared remarks, we've also seen fairly healthy growth rates in our more established markets.
In regions of North America, and Europe, our estimates for Dia you in Q3 are for 15% to 16% year over year growth, which as you noted is 1% to 2% below the year over year growth rate, we observed in Q2 and I can share. Some further context on that first I would note. The Q3 of the prior year reflects the full quarter by.
Benefit of a all products, we launched in the middle of Q2 in 2019. So this contributes to a tougher year over year comp. This coming quarter. In addition, the sequential growth in Q3 is typically seasonally lower than Q2, and our estimates for the sequential growth in Q3 takes into account. So after taking these factors and the consider.
They should we believe our estimates for Q3 reflect the continuation of the healthy underlying growth trends, we that we've observed in the business over the past year. So we continue to see a lot of oh opportunities to grow our community over the long term and we're focused on investing in our product to realize this opportunity as a result. This is why we've shared a plans to continue to invest.
More talent base, our premium content and marketing in addition to our efforts to further localize our product returns. So thanks again for the question I Hope you find the traditional context helpful.
I'll turn it over to Germany to handle the second part there great. Thank you rents for the question on one end beat that typically about that Facebook quite hard to your question. It is difficult to ascertain exactly what the impact of the Facebook My comments on revenue at this time some of that they like cockpit also b. Riley related to overall has been marketing Buddy.
Just given the environment and what we do know is that it's only positive to engage at the highest levels of an organization and this conversation has opened the door crafted do that extremely frequently at the CEO and CMO level and in particular, we've been designed in a brand safe integrity curated way since the beginning there is no account.
Our ability or an unlimited use during the first our whole community and as advertisers evaluate our farms that are aligned with their value. These deliberate decision made years ago are paramount important with that being said the majority of our revenue in the Arlington segment, not broadly participating in the black Hawk and with the advent that dynamic ad.
Just on a worldwide targeting then we're continuing to deliver results for those advertisers, which put us in a strong position to gain and retain those advertisers overtime independent of the bike.
Our next question comes from Heath Terry of Goldman Sachs. Please go ahead.
Keith Your line is open on listened.
Great. Thank you yeah, when we think about things from just maybe a little bit of a a have a higher level perspective.
I was wondering if if you could give us a.
The sense of sort of the evolution of the advertising base over the course of the crisis just in terms of the the vertical the goals that you're seeing them in.
Seek out in sort of the tech and sales channel that they're using to engage with you with your particularly to the extent that you're seeing advertisers new to the platform any any sense, where their spend is coming from and I guess at the same level. You know that question about about your users how Howard the.
Users that are new to the platform sort of different in their their behavior, maybe getting to quantify it in terms of time spent on the platform and the way that that's evolving.
Sure I think the question he I'm our early investments to build the fundamentals of our global business have really paid off and they resulted in our highest number of active advertisers in quarter to date. This quarter I'm as I mentioned earlier, we do continue to feed strengthened category like TBD streaming.
Fitness and pack and we talked about terrorism and dining restaurant earlier whats do continue to be talent on the sale does continue to support advertisers and all I currently on whether they are economically challenged or not so that we can focus on the long term as the business, but have if it did arby's aren't as part of the advertisers that are.
You mean and the direct response based on our community that strong demand from direct response advertisers looking for lower funneled bid optimization and delivering ROI I mean generally the way to look at it and stuff and global health crisis has accelerated the shift to a more digital economy. So anything in that category is there are areas.
Where we're seeing new advertisers routine advertisers and growing advertiser those again would be kind of the at home fitness online education retail stores as a pivot the omni channel as well as restaurant operating on ordering and delivery services mobile banking.
Because the line, let the call short there just wanted to add kind of give that over overall at Ti left and then I can turn it over the second part of your question.
Hey, Thanks for the question on engagement really excited about what we're seeing you know I've found the content platform as we mentioned where content consumption is growing more than 40% year over year and also in terms of growth.
In unique same thing that we're seeing in the camera huge increase in snap creation, which has outpaced the growth and we're really excited about as new action bar, we rolled out in STS, which actually elevates all these different platforms and creates more surface area for people to engage with all of our products across snapshot and so we actually.
Thats going to be a great way for people to get to know snapshot when they first sign up is your as you.
I mentioned when people sign up they do evolve their behavior over time as they get to know the service and so by removing friction from that process and helping people transition across all of our different platforms that can really unlock more value from snapshot. So we're really excited about what we're seeing across the platform lots of great momentum and engagement, which is driving the business overall.
Our next question comes from Michael Levin of pivotal Research group. Please go ahead.
Thanks for the question guys.
Both Evan and Jeremy you guys had referenced dynamic product ads I'd love to hear little bit more about that specifically I mean do you have a sense of what percentage of adoption. You think you could see out of other commerce advertisers and I guess just around adoption in general like our advertisers ready for this at this point in time.
What do they need to do to get there they're ducks in a row to to be able to go ahead and start getting you guys would probably catalog. Thank you so much.
Sure. Thank you for the question Michael Yeah. We are really excited about how dynamic ads are going on we're seeing strong growth globally and we're excited to build on access and learnings of our initial U.S. rollout and we now have solid early success stories and lean on Europe, and in Canada, and it's an area in which we will continue.
You too in that we are really really excited about the progress ahead of the holidays and seeing the adoption across a number of vertical advertisers are absolutely ready for that its design similar to other product in the market and dynamic ads is now processing over 100 million I heard per day from catalog, which provide a list.
Rich set of items that not patterns are interested in engaging with and are the most relevant to them.
A huge milestone in our pursuit of always on budget as it pertains ecommerce in particular, but can also utilize more broadly as we continue to grow and has been named the guy and dynamically update based on the catalogs and he will always be relevant as advertisers continue to adopt this technology.
Our next question comes from Lloyd Walmsley of Deutsche Bank. Please go ahead.
Thanks, a couple if I can be first last quarter uses the upfront commission commitments double this year wondering if most of that spend is kind of.
Planned for the second half or if it's already been flowing through first half results. If you feel like.
It's it's a reliable commitment given everything going on this year and then I guess, just secondly, going back to the D.A. you growth you said it did improve each quarter, but was a little below your expectations.
Anything in particular, you point to as to what.
Well came in below expectations like with any of it related to kind of maybe this this new navigation bar.
You know is that performing in line with expectations or you could share would be would be helpful. Thanks.
Sure I can take the part about the upfront we're really happy with the progress that we've seen about went up from bookings and we're excited that brands and agencies have confidence in our platform and advertisers are committed to working with us and an always on way given a return on AD spend that there.
Experiencing in this particular time marketers are extremely focused on ROI and even though they always are right. Now is even more critical every dollar spent to the dollar that matters and we continue to deliver that our upfront commitments are a tangible sign up for many advertisers, we gradually and I'm the experiments on budget into a port.
Another strategy and then doubling of commitments in 20 years. When he gets further evidence that were becoming increasingly important prior art gun as it pertains to what we're seeing a far we are working with our partners to be flat booming upfront and Keith they need to ship spending from one quarter to another so standpoint that that would be something that I used earlier about at temple.
Deeper and moved from Q2, the Q3, we're being very flexible about the timing the spend but we haven't seen a significant inbound requests to.
Metairie I'll take that.
And there is Derek speaking I can take the second part of your question. There just in terms of the texture of the view you growth in the quarter I think early in the quarter. We were really pleased with what we saw in terms of a lift of engagement as widespread shelter in place orders.
Were in place and sustained we saw an initial lift in the frequency of engagement there that contributed to a lift and yet you and were pleased that it did as I mentioned in her prepared remarks diminish faster than we had anticipated in our estimate which is why we came in approximately 1 million below our estimate that we've given on the prior.
Our call, but I also shared there that we saw sequential growth in Dia you'd from April to May and then again from May to June. So continued growth. There in terms of your question about the new now or not if not a big factor in the quarter, but I would note. We're pleased with their early results there as well.
All new products that we launch we have gone through rigorous testing to make sure that it would be additive to the community and we're pleased with what we're seeing in terms of early results. There. So thanks for the question hopefully that additional context, it's helpful.
Our next question comes from Mark Mahaney of RBC. Please go ahead.
Thanks.
Is there anything that you're doing actively to try to resuscitate growth in a Aro W. You did call it out as an area of weakness, but is there anything that are those mostly macro factors. Just anything you can do to two to accelerate growth and then secondly, we have a lot of political ads coming out of online.
I don't know 3 billion EUR 4 billion, but it's a big chunky number and I know you are making it a point to show was much transparency around the ads as possible, but what are you doing to tap into those AD dollars I would think that part of that demo you have will be key to both parties I would think in these elections coming up and I would say could be a good.
Placed the message to them, but are you trying to trying to tap into those those dollars the political AD spend thanks a lot.
Hey, Mark Thanks for the question. This is Derek speaking.
I'll take the first part of your question would just with respect to the growth rate that we saw in rest of world in recent quarters as you've likely noted rest of world has often been our fastest growing region for revenue. So we were definitely disappointed with the 2% year over year go through Q2. Unfortunately, the rest of World region for revenue was more.
Significantly impacted by several coated related factors than our other regions, including some of the items I mentioned in our prepared remarks, such as restrictions on cash transactions in interruptions to supply chains impacted both physical and ecommerce retail.
What I would add though is that Fortunately we've seen since then the revenue growth rates in the rest of world region begin to rebound them. This is contributing in parts of the better results that were seeing thus far in Q3. So.
Happy with the trends that we're seeing their narrow although the interruptions and disruptions that we experienced in Q2 are disappointing.
Things are looking much better now I'll turn it over to Jeremy to handle the second part of your question.
Sure so as it pertains to political AD, yes, it's a it's a segment that we are actively going after we serve 90% of 13 to 24 arrows in the U.S. and 75% 13 to 34 arrows in the U.S., so educating them, allowing them to learn more about the issues any.
No actually manner, it's super critical and we are not as a segment that England, but we're working to ensure transparency in political advertising on snapshot all political issue and advocacy add their publicly available along with relevant information on him and Ben and paying entities and are not political and atrophy add library.
We have very specific guidelines for political advertising that apply to adds related to elections and advocacy issued.
Most broadly we do believe that snapped back to play an important role in getting first time voters engage with our democracy and we look forward to providing a responsible path for our community to engage with their elected official candidates and can you.
Our next question comes from Brent Thill of Jefferies. Please go ahead.
Thanks for taking my question. This is James on for brand at your partner Summit, you announced the update to the snap map with places could you go a little deeper into your strategy for building out. This particular product and then curious what are you can comment on how you plan to eventually monetize nap and what that timeframe might look like thanks a lot.
Hey, Thanks for question really excited about what we're seeing with the map and we think it represents a huge opportunity because we are personalizing the math to reflect your view of the world today, most people used to map mass for way finding and directions.
Rather than understanding the world around them in a personalized way and so as we think about adding your friends to the map and also adding places that are important to you we feel that the snap not better reflects your view of the world around you until overtime, we believe that will create a monetization opportunity because people are using the massive browse to see with their friends are up to this.
What's happening at different locations and that sort of mass consumption is different than the aided the way finding that typically happens on maps today. So we've taken some intermediate steps in terms of monetization.
Well, helping local businesses.
Ben following the co bid lockdown, providing free on credit and letting them easily create snapped back, but we'll continue to work on those products, especially as we build products around categorizing places and less helping recommend places to different trends, we see that as a really big opportunity overtime.
Our next question comes from Doug Anmuth of JP Morgan. Please go ahead.
Thanks for taking the questions.
One for having one for Derek Evan just wanted to ask about some of you some of the key initiatives to grow the international user base, especially the rest of world I'm clearly the Android app rebuild a while back was significant but what are you. Most focused on now as you look to.
To make snap a more global product it has both local and cultural relevancy.
And then Derek you are on obviously, a good path in terms of EBITDA profitability and hitting that last for Q.
Can you talk about kind of how that could resumed here going forward and then also how do you get SBC bigger under control you commented on that.
Yeah in your prepared remarks as well thanks.
Thanks for your question, we're definitely excited about the momentum were seeing in rest of world. The investments. We made an Android are definitely paying off there's still work to do you know improving performance of the service minimizing data consumption working on partnerships to help make that data more affordable around the world of course, we're continuing to localize the product and onboard.
Local content local creators and building local a our experiences which we've seen that increase engagement. So definitely lots investment there, but really excited that the fundamentals are in place and they're showing up in the growth.
Hey, Doug as Derek will take your next two questions. There in terms of the path to profitability. We've not historically provided full year guidance. However, we did share near the beginning of this year that he had set a goal to achieve adjusted EBITDA profitability for the full year in 2020.
Obviously modest changed in the out in the operating environment since we set that internal goal and our revenue growth rates are currently below our expectations entering the year much of our cost structure doesn't very directly with revenue. So lower revenue growth rates have a fairly direct impact on this path to profitability in the near term we've carefully price.
We're trying to our investment though given these changes in the operating environment, but we remain focused on investing in the long term growth of our business in order emerge in order to emerge stronger and better position to deliver sustained profitability over the longer term, we've given fairly clear guidance on our intended level of investment heading into Q3 and that level investor.
Then won't very much with revenue in the quarter. So.
Absent significant improvement in the operating environment, and the resulting sustained improvement in revenue growth rates, we don't expect to achieve that internal goal for fiscal 2020, we will continue to prioritize building towards sustained profitability and positive free cash flow over the long term, though so that we can emerge stronger and then to further expand on your question about.
About FCC and managing the.
We think stock based compensation is amongst our largest expense buckets and has also been contributor obviously to the growth and fully diluted shares over time. So we view careful management of our stock based compensation programs is a really key inputs to efficiently managing our fully diluted shares over time, so while we have continued.
To grow our team.
We've seen stock based compensation decline year over year by approximately 5% in total and the most recent quarter and by just over 20% on a per capita beta. This decline comes our team continues to migrate towards sustainable and competitive compensation structures that we put in place in the years following our IPO, including additional investments in cash conference.
Station programs and we will continue to optimize these programs over time to ensure programs are both sustainable and competitive.
Yes, due impart to this careful management of these programs, we've begun to see the rate of growth and fully diluted shares diminish. In addition to the stock based compensation coming down. So we've actually seen the rate of growth and fully diluted shares decline to between three and 4% in the last couple of quarters versus 5% to 6% in the prior year, So weve paying very close attention to that.
As we understand what the key input to building shareholder value over the long term and we're carefully focused on managing it.
We also believe that if we can continue to scale the topline and manage our investment carefully that we'll be able to make additional investment and progress towards positive free cash flow overtime and of course this and this will also.
Open up additional avenues in the long term demand launch these factors over time, so hopefully that gives you a little bit more context on both the path to profitability as well as how we're managing our really key portion of our cost base.
Our next question will come from Justin Post of Bank of America. Please go ahead.
Great a couple of questions. Obviously, a lot of interest in the acceleration in July just wondering you know we know first half of June was refer the industry.
Did you see a big improvement from the second half of June and into July I Wonder if you could help us at all with that and then secondly.
I just wondering about how you see the discover content and gaming content pipeline in the second half.
Adam interesting stuff going on there just do you expect more shows and more content in the second half than than what you were able to put out in the first half. Thanks a lot.
And there is very interesting after speaking I can take the first part just in terms of.
What we saw on revenue growth rate, obviously, we saw the full year the full quarter growth rate at 17% was above where we started but as we mentioned there were some interruptions within the quarter.
As we saw some positives to Swapo creative in selling so we we've obviously seen some improvement and more recently and as we noted the quarter to date result.
He is obviously much better early in July here. So it's been on even in terms of the trajectory to get to this point, but obviously things have improved more recently for all of the reasons that we've noted earlier and I'll turn it over to take the second part of your question there.
Thanks for the question, Yes, we're super excited about the content in gaming pipeline also our new Minis product, which is just released more widely we're really excited about all the experiences that developers are creating to bring friends together to do stuff and snapshot. So that is super exciting and we'll make for a fun back half of the year.
Our last question will come from Eric Sheridan Oh, Yes. Please go ahead.
Thanks, So much particularly question, maybe two quick ones, but Ken Evan just some talk out of the U.S. government about exploring the role of current could lead US more could you go from commented on some of the social media landscape at some of the regulatory landscape I wouldn't it have you had to take on net neutral action by the U.S. government white, what it might need globally.
For the landscape during and we just through the use but globally. What do you think over the next couple of years that'd be question number one question number two maybe as you look into Q3 in Q4, the recovery takes it maybe a firmer footing is there a dynamic healthier that there should be this white a divergence in performance in the business or not.
Region by region basis, or it's tough comps do you guys see reason why the business you should much more become a one read over time in terms of we'll drill growth rate just wanted to get the bigger picture question. There. Thanks, so much.
Sure. Thanks for the question, Yes, I think you some really interesting to watch the United States government grapple.
With the huge success of a consumer technology company that is headquartered in China, I think that really brings us to more of like a free markets question. As these businesses are able to leverage the massive billion plus consumer base and obviously in a second largest economy in the world in China and Levered our success there to enter the United States.
Market, which is a is smaller market in terms of people. So it's been really fascinating to see the government grapple with its you know obviously the national security concerns notwithstanding so I'm not totally sure what the path looks like from here, but you're right to note that the I think the ecosystem has shifted a little bit with the success of can.
Tumor technology from China, I think the really fascinating question that a lot of people are asking about you know people really assume that the next big consumer Tech hit would be a startup.
And in this case actually the next consumer ticket here in the United States seems to be a very large Chinese conglomerate that offers many services around the world. So I think that has maybe reformulated people's conceptions of the tech landscape here in the United States and we're definitely.
Interested in seeing how this all develops.
Yeah.
Hi, Eric It's Derek speaking I can take the second part of that question. There I think in terms of forward looking on growth rate by region.
What I would say there is obviously the the conditions that were operating here in terms. The operating environment are really uncertain I think for the at least the coming quarter and that's why we've not chosen to provide formal guidance. This quarter. So I don't think we're really in a position until we better understand how the operating environments going to recover to really give specific commentary on what we can.
Backed on a growth rate basis by quarter, obviously, we're.
Hopeful that we'll see the can the trends that we've seen more recently persist and therefore see demand build but we also understand that.
The operating environment has been particularly on certain recently and Theres always the possibility that the macro environment could deteriorate. So we wanted to be prepared for a shifting environment. As we go forward and obviously hopeful that things would or wouldn't continue to improve.
But it will depend on the operating environment in large part so hopefully that gives you a little better sense of how we're thinking about at least in the coming quarter.
This concludes our question and answer session as well as snap Inc. second quarter 2020 earnings Conference call. Thank you for attending today's session and you may now disconnect.
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