Q4 2020 Snap Inc Earnings Call
[music].
Good afternoon, everyone and welcome to Snap Inc. 's fourth quarter 2020 earnings conference call.
At this time participants are in a listen only mode.
After the prepared remarks, there will be a question and 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.
Thank you very much Betsy Frank Senior director of Investor Relations you may begin.
Thank you and good afternoon, everyone welcome to snap fourth quarter 2020 earnings conference call with US today are Evan Spiegel, Chief Executive Officer, and co founder, Jeremy Gorman, Chief Business Officer, and Derek Andersen Chief Financial Officer.
Earlier today, we made a slide presentation available that provides an overview of our user and financial metrics for the fourth quarter 2020, which can be found on our Investor Relations website at Investor day out SAP Dot com.
Now I will cover the Safe Harbor today's call is to provide you with information regarding our fourth quarter 2020 performance. In addition to our financial outlook.
This conference call includes forward looking statements any statement that refers to expectations projections guidance or other characterizations of future events, including financial projections future market condition or the impact of COVID-19 on our business and on the economy as a whole is a forward looking statement.
Based on assumptions 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 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 <unk>.
Quarter ended September 30th 2020.
Particularly in the section titled Risk factors.
This information can be found in our other filings with the SEC when available.
Our commentary today will also include non-GAAP financial measures and we believe that the use of these non-GAAP financial measures provides an additional tool for investors to use in evaluating ongoing operating results and trends.
These measures should not be considered in isolation from or as a substitute for financial information prepared in accordance with gas.
Reconciliations between GAAP and non-GAAP metrics for our reported results can be found in our press release issued today, a 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. We may 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 SEC to understand how we calculate our metrics with that I'd like to turn the call over to Evan.
Everyone and thank you for joining us on.
Our mission is to contribute to human progress by empowering people to express themselves live in the moment learn about the world and have fun together.
From start to finish 2020 reinforced the importance of that mission.
During one of the most challenging years in recent history for our global community and their loved ones. Our team worked hard to find ways to bring people closer together.
We've enabled relationships deepen and flourish, even as we're physically apart.
We added 16 million daily active users this quarter for a total of $265 million up.
Up 22% year over year.
This growth validates the broad appeal of our service on the role we play in the life of each member of the Snapchat community.
Quarterly revenue increased 62% year over year to 911 million showing the trust advertisers have placed in us and our communities Receptiveness to brands with shared values, we expect our relationships with community members and business partners to become even stronger as our platform continues to evolve.
We set an internal goal for full year adjusted EBITDA profitability in 2020, and I'm excited to share that we achieved this with positive adjusted EBITDA of $45 million.
As a result of the exceptional efforts from our team members around the world and their disciplined execution, our fourth quarter adjusted EBITDA was $166 million.
Achieving full year profitability in the midst of such a difficult on these stabilizing year proves the resilience of our business and represents an important milestone as we work towards being able to self fund our investments in the future.
Snapchat has embraced by a generation that is driving the future the.
The Snapchat generation, primarily Gen Z and millennials are 150% more likely to communicate with pictures and words and 82% of them believe they have a personal responsibility to change the world.
Our opportunities to serve an uplift this community in the coming decades, we will continue to grow and we are inspired by the world that the Snapchat generation is working to create.
At the core of this opportunity is the power of our camera it.
It is one of the world's most to use cameras with an average of over 5 billion snaps created every single day.
Cameras are no longer only a means to capture a moment in time or a memory.
Now enable a whole world of self expression and visual communication.
And we have worked to drive this fundamental transformation since our founding.
We've done this by putting the camera at the center of our application in the center of our strategy and by building businesses around it.
Empowering people to communicate visually drives high frequency engagement with our application with daily active users opening Snapchat 30 times per day on average.
This means that improving speed ease and quality of visual communication are important for growing engagement.
We finished rolling out new messaging infrastructure this quarter, making it easy to innovate and add new features within chat, while simultaneously improving performance and enabling regionalization of our chat infrastructure.
We also made significant improvements to the video quality for snaps, while still ensuring snapchat is the fastest way to communicate and share a moment.
The first platform, we built to extend the utility of the Snapchat camera beyond visual messaging with stories, which allows snap chatters publishers businesses, and Influencers to express themselves and creative and compelling ways without the pressures associated with traditional social media.
Stories are a femoral display content in chronological order and don't have public likes or comments.
We have evolved stories over time to embrace new formats like shows with total time spent watching shows increasing nearly 70% year over year in 2020.
Our commitment to both the quality and integrity of content on our service has driven a lot of this product evolution.
Initiatives like our 2018 redesigned to separate social content for media content.
Our content guidelines that we enforce equally across publishers and all community members.
And our early decision to create a hand curated platform with discover.
<unk> valuable as we have been able to provide trusted and reliable content to our community.
For example, during the week of the U S presidential election, nearly 30 million snap chatters watched election related coverage on discover from our trusted media partners.
We're also excited to see the success that both new and traditional media companies are finding on our content platform.
<unk> ranging from digital natives like wave TV barcroft team whistle on group nine.
To more established media companies like NBC, Universal ESPN and Viacom CBS have he.
Each reached over 25 million viewers across their discover channels in Q4.
We launched 10, new snap originals, including the second season of will Smith's will from home show, which has reached 43 million total viewers and it's two seasons.
Offering relevant content to our diverse and growing user base is an important part of our strategy and we launched a record 97, new international discover channels this quarter.
Furthermore, we continue to add shows and publisher content offerings that appeal to older audiences with a 25% year over year increase in viewership among our 35 plus audience.
The camera also drives engagement on our map.
Our goal is to build the world's most personalized map and we made investments years ago that are now paying dividends.
Each month over 250 million snap Chatters open our map, where they can find the people and places that mean, the most to them.
Our community can engage with shared stories from around the globe and explore new places by tapping on the map.
There are now more than 35 million businesses on the map for our community to discover and connecting local businesses with prospective customers represents a substantial future revenue opportunity for our business.
More recently, the power and frequency of use of our camera allowed us to launch spotlight.
We're really excited about the opportunity that this new platform creates for our community to reach a large audience with their most compelling snaps and to be rewarded for their creativity.
We've long watched as some of the best snaps go viral on other platforms and wish to provide a way for snaps to reach a large audience on snapchat, but we struggled to accomplish that in a way that aligns with our values.
Spotlight combines a simple submission flow that allows people to submit their best snaps in just one tap with a rigorous review and ranking process that allows us to filter out content that is inconsistent with our guidelines there.
The result is a fun and safe product experience that services the best of Snapchat all in one place.
Our primary goal in launching spotlight was to build critical mass both in terms of video submissions and audience and a select set of countries. So that we could begin to rapidly iterate on content ranking and the overall product experience.
We are seeing over 175000 video submissions per day on average in part due to our incentive program for creators, where we distribute over $1 million per day to the top performing videos.
Getting early momentum with creators is vital for attracting new viewers to the spotlight experience and these investments have helped spotlight grow to over 100 million monthly active users in January.
Our product and ranking teams have been able to quickly improve our ability to match spotlight viewers with the right content and we are now working on a broader rollout of spotlight to our entire community.
Our commitment to reinventing the camera is most evident through our advances in augmented reality.
Today more than 200 million people engage with our on Snapchat every day on average we have co developed our vision for augmented reality together with our growing community and have created cutting edge tools and capabilities that allow creators to build increasingly advanced lenses and distribute them to the entire Snapchat community.
We are inspired every day by the creativity of our creator community, who have made over $1 5 million lenses using lens studio across a growing variety of use cases.
For example, during a year when physical gatherings were difficult for many.
Ah remains integral to empowering snapchat herself expression creativity and connectivity with loved ones during the holidays.
For Diwali this year, many lenses leveraged new body tracking and segmentation capabilities. So people could try on festive stories and AAR.
Our community played with the volume theme lenses more than 500 million times more than eight times the engagement of our Diwali lenses last year.
We are particularly excited about the ways that <unk> is evolving beyond self expression communication and entertainment.
For example, our beauty partners have been accelerating their investments in virtual discovery on trial on experiences in response to the Covid pandemic.
Yesterday Lauder companies' brands too faced cosmetics launched and eye makeup tutorial lens through lens studio the lens overlays each step of makeup application and augmented reality and can be activated anytime by scanning the product packaging.
The brand's lens organically grew to become one of our top performing lenses with millions of people using it to learn about the product.
Other examples include mix professional makeup virtual store they created an lens studio.
Where people can walk around and explore their products.
In addition to promoting this experience on their Snapchat brand profile, they're also leveraging camera kit to distribute their lens to partners like trailer.
We are doubling down on our solutions for beauty with our partnership with perfect core which will enable hundreds of makeup brands to seamlessly create high quality makeup AAR experiences.
Beauty is just one of the many areas, where we see opportunities to provide valuable utility through augmented reality.
We are excited to continue investing in experiences like trying on clothes visualizing products in your home learning about the items in locations around you and so much more.
We're excited about the progress we're making in collaboration with our partners on games Minis and snap kit.
For example, Voodoo revamped one of its most popular games Aqua Park. So snapchat hours can play in real time with their friends on Snapchat complete with in game <unk> <unk>.
Turbo vote supported our Gen Z and millennial audience during the 2020 election with its voter registration, many which helped registered more than $1 2 million U S snap chatters.
We recently launched an integration with Twitter using creative kit, where Twitter users can share tweets directly through Snapchat stories on Snapchat Ben.
<unk> helps personalized user experiences through people's beloved avatars, whether on the Samsung default keyboard or when you're sending money on venmo.
We are now powering experiences on other apps through camera kit further expanding the opportunity of lens studio.
In just the past two years since our first partner summit, we have launched several new capabilities and thousands of successful partner integrations and we look forward to continuing this momentum as we expand our platform.
Looking forward, we are focused on continuing our disciplined execution on both our short and long term goals for growing our business.
We plan to make additional progress on profitability and free cash flow accelerate our full year revenue growth beyond the 46% year over year growth achieved in 2020 and grow our community around the world by improving and localizing the Snapchat product experience.
We're also reorganizing our product team around the five core platforms on Snapchat map communication camera stories, and spotlight, which we believe will drive increased focus and operational excellence as we transition each platform into a monetize able business.
We successfully made that transition with stories, which we monetize with full screen vertical video ads and with our camera where businesses can pay to promote their lenses.
All of our platforms share the same powerful monetization infrastructure, which drives strong ROI for our advertising partners.
In time, we look forward to creating new ways for businesses to reach customers on our map and.
Engage with their customers using minis in games, and Chad and extend the reach of their video campaigns on spotlight.
Lastly, we see a tremendous opportunity to innovate on E commerce, which to date has been largely driven by utilitarian benefits such as price selection and convenience.
As we have learned from our progress in providing new ways for people to try on and interact with products using augmented reality improves.
Improvements in the shopping experience to make it more entertaining and immersive can lead to powerful downstream results in terms of conversion.
We plan to experiment rapidly and plant many seats because we see this opportunity is very large and still very early in terms of maturity. Despite the massive step change in adoption due to the global pandemic.
This year has shown us that there is nothing more important than the people we share our lives with.
As the global Health crisis has addressed and the world begins to reopen we see opportunities to help strengthen the bonds of the Snapchat community all over the world and are committed to making sure snap continues to play a positive and constructive role in People's lives.
I look forward to speaking with many of you on a few weeks at our first ever Investor day, when you'll have the chance to meet more of our extraordinary team.
Until then take care and stay safe.
I'll now turn it over to Jeremy to share more about our business.
Thanks, Evan 'twenty 'twenty was an important year for us we.
We're in the early stages of an inflection point as we work towards becoming a cornerstone of advertisers' media plan on growing our always on budgets will cause. This is not for a long runway of growth not only have we invested for the future, but we also delivered strong results on the unforeseen challenges throughout the year and demonstrated the resilience of our team are.
Business and our ability to deliver a strong ROI for one of the most extra normal times on our industry's existence.
In 2020, our full year revenue was $10 5 billion growing 46% year over year, an acceleration of 1% from 2019 and.
In Q4, 2020, we generated revenue of $911 million, a significant acceleration of 18 percentage points.
2% year over year growth.
Results are a byproduct of the hard work being done across all teams at snap and validate the decisions we've made around our business structure. Our go to market strategy and the products, we have felt for our community and advertisers.
While brand advertisers encountering some disruption during the year direct response advertisers remains steady I think continues to demonstrate that we are an efficient platform for driving results across downs on on that track.
In Q1 on 'twenty and 'twenty, our business grew 58% year over year during January and February but slowed in March on throughout Q2, as the realities of COVID-19, and subsequent economic impacts to cost however.
However, in Q3 and Q4 with on many existing advertisers return to snap and so on many new ones leveraged our innovative AD formats and bidding capabilities to drive real business value on our platform. This drove active advertisers to an all time high.
In addition, our brand safe environment and privacy first approach has differentiated us from our peers.
He has emerged as an important things in 'twenty 'twenty. We don't believe they are going away and they have led to improved advertiser retention and increased demand.
The recent audits on digital platforms on advertising spend by many brands has given us an opportunity to educate the highest levels of our industry on our points of differentiation and safety by design principles.
We've been able to tell our story to an attempt to elevated audience. It is reevaluating marketing dollar allocation.
Well, there's still more to do we are excited to continue building on our recent results on investing to capitalize on our momentum.
We are fully focused on making progress against our revenue and our flow opportunities, which we believe will be driven by our three key priorities.
Investing in our sales and marketing functions by continuing to train hire and built for scale.
Driving ROI from measurement relevance and optimization and third building innovative AD experiences around video and augmented reality are unwavering commitment at these three priorities along with our unique reach and growing global audience allows us to drive performance at scale for businesses around the world.
The pandemic and stay at home orders accelerated in digital transformation, creating a new normal where brands are trying to determine the technology and trends that are here to stay.
For instance, with a more limited ability to get physical products in the hands on consumers' in store more brands are turning to augmented reality for virtual try on including combining and video tutorials for our best in class II on experience.
This trend is only accelerating with the Snapchat generation our ranks amongst 13 to 34 year olds in many of our established markets continues to grow which gives our business incredible insights on what these generations are looking for on our priority is helping brands connect with the Snapchat generation and new and unique ways.
Our sales model allows us to build deep domain expertise and to prioritize and pivot resources on certain verticals to accelerate or decelerate with macro trends.
This approach proved its value in 2020, and we were able to focus our investments on top performing vertical which included E Commerce CPG Tech telco gaming streaming financial services and restaurants.
Example, even milestones we're largely out of theaters, because we have highly performing AD product. We saw impressive growth in streaming and we're pleased to see our entertainment advertising partners increased spend as they pivoted to direct response.
In addition, we also saw kiosks are brands, such as Chipotle and leverage our location based technology to encourage customers to order and pick up meals from their restaurant that scale.
Our AD platform is maturing to a place where as advertisers moved their dollars basically strong ROI, giving us increased confidence that budgets will build over time.
We are also offering more down funnel bidding capabilities that allow advertisers to optimize for the objectives. They are trying to achieve and we continued to scale. These products in 2020.
For example revenue from our pixel verified sign up call based spitting products increased more than four times year over year in Q4, one of board on funnel optimization, that's all year over year revenue growth in excess of four times as we've continued to see strong advertiser adoption of our goal based bidding optimization.
We believe this is one of the clearest way is for us to scale revenue and close the ARPA GAAP relative to our peers.
The COVID-19 pandemic has brought rapid change in shopping patterns as people have moved their consumption on line.
Direct to consumer businesses are flourishing and consumers are looking for new ways to discover product at home. We are committed to finding new ways to support businesses see our AD products and tooling capabilities, while providing our community with new ways of experiencing the products and brands that they love.
Many advertisers, we're able to leverage our AD formats, but naturally support the E commerce opportunity for example.
A part of Deckers brands started testing dynamic ads in October of 2019. After initial testing proved to be extremely successful increased investment by over 10 times in Q4 of 2020 during one of the most competitive times of the year for shoppers.
The looser not only help them drive relevance during the holiday period, but they've shared this will be a key performance driver throughout the year.
They're also exploring new ways to drive social commerce in Q4, Ralph Lauren leverage multiple components of our platform to drive both awareness and business results.
First they invested in creating a collection of Venmo day outfits as an inspired effort to engage the younger audience, which proved to be extremely successful over 20 million users drop there, but no Dan Ralph Lauren and tried on the collection over 550 million times in the first five months of the partnership.
Next they utilize our scan camera technology to enable on a our shopping experience after snapchat or scanner ubiquitous pony logo and finally, they built a new brand profile, which offers a permanent home for their brands content and air experiences on Snapchat.
We continue to invest heavily to grow our video advertising business. The primary way, we monetize snapchat, we see more opportunity over time to grow video inventory, particularly via the growth in viewership of spotlight on stories, we're using multiple products shows incremental results.
And Marc Jacobs leveraged snap ads on commercials to drive sales of their new fragrance line. Their commercials campaign resulted in a 43 point lift in outerwear and are on a six point lift in purchase intent.
Beyond video as we are focused on using augmented reality to solve real business problems for brand, allowing advertisers to engage with our audience directly VR camera on.
Adoption of our <unk> lenses has benefited from virtual try on consumers are in need of new ways to experience products and brands need to reach consumers, where they are at home with both consumers and brands open to these new experiences our platform is perfect for this moment for.
For example, <unk> recently launched an hour trial lens, featuring six different products from their new B 27 sneaker launch.
Internationally, one plus India created lenses for volume as a means to bring people together safely during a pandemic their lenses garnered over 80 million impressions and reached over 14 million Snapchat or in India. Overall. The campaign was highly successful and drove a nine point lift in both AD awareness and a seven point lift in message away on.
Yeah.
We've also been investing in optimization algorithms that dynamically serve a our experiences a snapchat or who are most likely to meet our brands call.
<unk> seen shopper will lend campaigns drive a two four times higher intent less than the average across all snapchat campaigns measured in Q3.
Lastly, this is leveraging <unk> as one component of a larger multi product campaign on Snapchat tend to achieve stronger adult for example, Activision call of duty Black Ops ran one of the most successful campaigns, we have seen in console gaming.
They leveraged snap ads commercials on our reach and frequency lens and saw an 11 point lift in favorability on a five point lift in purchase intent.
Over that chatter is exposed to multiple AD products saw a 10 point lift in intent and the lens drove a 17 point lift in intent.
There is a lot more work to do on helping businesses achieve their goals are but we are thrilled with the results that our partners are saying and we're going to continue investing in this opportunity.
In conclusion, we started 2020 on a high note and we ended up with accelerating momentum, which we plan to carry forward into 'twenty and 'twenty, one continuing to drive ROI on performance of our advertising partners investing in innovative AD units and providing support for our sales and marketing functions I am confident in our long term trajectory and.
I look forward to sharing even more at our Investor day on a few weeks with that I'd like to turn the call over to Derek. Thanks.
Thanks, Jeremy.
Our Q4 financial results reflect our priorities of growing our community, making focused investments in the future of our business and scaling our operations efficiently in order to drive towards profitability and positive free cash flow.
As Evan mentioned earlier, our community grew to 265 million daily active users in Q4.
An increase of $47 million or 22% year over year, which represents an acceleration over the prior quarter growth rate of 18%.
The growth of our community continues to be broad based with year over year and sequential growth on both iOS and Android platforms, and then each of North America, Europe and rest of world.
In North America, <unk> grew by $5 million or 6% year over year to reach $92 million.
In Europe, <unk> grew by $7 million or 10% to reach $74 million in rest of world <unk> grew by $35 million or 55% to reach $99 million.
The acceleration of growth in rest of world reflects the benefit of improved application performance in local markets. The popularity of augmented reality lenses created by our community and investments to better serve our community, including local content local marketing partnerships and <unk>.
Broader language support.
Total revenue for Q4 was $911 million, an increase of 62% year over year, representing a 10 percentage point acceleration over the prior quarter, while global <unk> grew 33% over the same period, we continued to see strong adoption.
Of our advertising products in Q4.
Revenue from our commercials AD product more than doubled year over year in Q4, as we continue to see building demand from advertisers seeking to reach Gen Z and millennial audiences at scale and with a full screen video advertising product that has delivered adjacent to brand safe content in.
In addition revenue from our pixel verified purchase goal based bidding products more than tripled year over year on Q4, as we have continued to benefit from strong adoption of our pixel by our advertising partners over the past year.
Overall <unk> in Q4 increased 46% year over year, driven by a combination of mix shift towards the higher E CPM products such as commercials.
Mix shift towards higher ECP M regions with the relatively higher growth in North America as well as a rapid rise in overall demand sequentially.
Despite this growth in E. C. P. M. We believe our ECP and remained well below market rates for our audiences and add units the ongoing growth of our community combined with deep engagement within our app, including deep engagement across platforms, we have not yet begun to monetize gives us ample.
<unk> opportunity to expand inventory and our <unk> opportunity over time.
We continue to make improvements to our targeting and optimization capabilities that allow us to utilize our inventory more efficiently.
In addition, we more than doubled the number of active advertisers year over year in Q4.
Which further contributed to our ability to optimize our targeting by providing a greater diversity of advertising offers for our models to select from for example, while E C. Pms for inventory monetized by our pixel verified purchases rose by 41% sequentially in Q4.
The cost per purchase for our advertising partners declined by 11% over the same period.
<unk>, we believe that we will be able to deliver attractive returns on AD spend to our advertising partners as <unk> grows over the long term.
Gross margins were 59% in Q4 up three percentage points year over year, we continued to make significant progress against our goal of driving down our underlying infrastructure unit costs over time.
In Q4. These efforts resulted in infrastructure costs per day, you are 69.
Down from 72 cents in the prior year.
On the content side, we invested to support the launch of spotlight in Q4, and this contributed approximately $40 million to our cost of revenue in Q4, representing a five percentage point headwind to gross margin expansion in the quarter.
While it is still very early in the development of this new content platform. We are highly encouraged by the initial results and excited about the potential for spotlight to further expand our monetization opportunity in the future.
We are particularly pleased that we have been able to support the launch of spotlight, while continuing to expand our gross margins, which reflects our overall approach of scaling our operations efficiently, while making investments in the future of our business on.
Operating expenses were $369 million in Q4 up 36% year over year.
People and related costs grew 33% year over year on Q4, driven by a 24% increase in average full time head count and higher cash compensation cost per team member growth on our average full time head count was driven primarily by continued focused investments and our monetization and engineering teams to scale.
Our top line growth and accelerate the pace of our product innovation.
As we noted earlier this year, we have invested incrementally in our cash based compensation programs. In 2020. However, this investment is offset by a lower rate of dilution. In addition, we have continued to grow our investments in marketing in order to build on the momentum we have established with our advertising and snapchat or communities.
While it typically takes time for the benefit of these investments to become evident in our output metrics. We are encouraged with the progress we have observed thus far.
Q4 marked our second consecutive quarter of adjusted EBITDA profitability at $166 million for the quarter, an improvement of $123 million year over year.
We noted on our prior call that our cost structure would grow at a faster rate in Q4 than in any recent quarter and this was the case as we invested in content to support the launch of a spotlight in hiring to grow our talent base and in marketing as I noted earlier that said we were particularly pleased.
<unk> that we were able to make these investments while still delivering adjusted EBITDA leverage of 35% in Q4, as we continue to make progress towards profitability and sustained positive free cash flow.
Net income was negative $113 million in Q4, an improvement of $128 million over the prior year and $87 million over the prior quarter the year over year improvement in net income reflects the flow through of improved adjusted EBITDA and a favorable comparison against the onetime legal.
<unk> expense that was accrued in the prior year.
These factors were partially offset by the impact of interest expense related to the convertible notes issued over the past year and higher stock based compensation driven by higher head count and higher payroll taxes that vary with the stock price total fully diluted shares outstanding grew just 3% year over year on.
Q4 down from 5% in the same quarter of last year.
We consider careful management of our fully diluted shares outstanding to be a key input to building shareholder value over the long term and we are pleased to see our output metrics reflect the progress we have made in this area.
Free cash flow for Q4 was negative $69 million, an improvement of $7 million year over year, driven by the improvements in adjusted EBITDA that were largely offset by the timing of a $98 million on legal settlement payment made in Q4 and the net increase in working capital that resulted from accelerating revenue.
Growth, notably absent the onetime legal settlement payment in Q4, we would have generated approximately $29 million in free cash flow in Q4, which we view as a positive demonstration of our progress towards sustained free cash flow generation.
We ended the quarter with $2 5 billion in cash and marketable securities up from $2 $1 billion on the prior year as the proceeds of convertible notes issued in Q2 of 2020 more than offset the investments we have made to grow the business over the past year.
Before we discuss the quarter ahead I'd like to take a moment to reflect on the remarkable progress we have made as a business.
Growth in our community is accelerating and we have now on delivered five consecutive quarters of year over year <unk> growth in excess of 15%.
Full year revenue for 2020 was $2 5 billion, an increase of 46% year over year, and we exited 2020 with the highest year over year revenue growth rate. We have reported since 2017, our revenue has more than doubled since 2018, and while we have invested aggressively in the future.
One of our business, we have expanded our gross margins by 19 percentage points and delivered 47% of our incremental revenue to the adjusted EBITA line over the same two year period.
We set a goal to achieve full year adjusted EBITDA profitability at the outset of 2020.
And while the past year presented many unexpected challenges and opportunities. We are tremendously proud of the way our teams executed this year in order to reach this milestone by delivering $45 million and adjusted EBITDA profit in 2020.
We are closer than ever to achieving our goal of delivering sustained positive free cash flow and being able to self fund our investments in the future as a result.
We have also strengthened our balance sheet materially over the past two years and ended 2020 with more than $3 5 billion in available working capital inclusive of cash marketable securities and our existing credit facilities.
We closed out 2020 with strong momentum across our platforms and well positioned for the future.
We look forward to speaking with you more about the future of our business and our long term financial opportunity during our first ever Investor day on February 23rd.
Until then I would like to share a little bit about how we expect Q1 may unfold.
While we have benefited from an improving operating environment in the second half of 2020 and remain optimistic about the momentum we have established in our business. We are conscious that external factors may emerge that could impact our momentum.
For example, we experienced a period of interruption to advertising demand in the first two weeks of January as many brand advertisers paused campaigns. During this period amid events at the U S capital and thus we started the quarter slower than we would've otherwise expected.
We anticipate that the iOS platform policy changes to be implemented later this quarter will present, another risk of interruption to demand in the period immediately after they are implemented.
And it's not clear yet what the longer term impact of those changes may be for the top line momentum of our business and this may not be clear until several months or more after the changes are implemented.
As we look forward to Q1, we estimate the daily active users will grow year over year on Q1 at a rate of approximately 20% to reach $275 million.
On the revenue side.
If we are able to sustain the momentum we have observed in recent weeks, we believe that our revenue growth rate of approximately equal to what we reported in Q4 could be attainable on Q1.
That said our guidance range is for year over year revenue growth of 56% to 60% and this range reflects our best estimate of the potential impact of interruptions to demand associated with the iOS platform changes that we anticipate will be implemented in the final months of the quarter.
This would result in revenue of approximately $720 million to $740 million in Q1.
On the expense side, we intend to continue to invest in our long term growth of our business and we will continue to support the launch of spotlight with our $1 million per day creator fund in order to build on the momentum we are seeing with this exciting new platform.
As a result, we estimate that adjusted EBITDA will be approximately negative 70 to negative $50 million in Q1.
Thank you for joining our call today, and we will now take your questions.
We will now begin the question and answer session.
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At this time, we will pause momentarily to assemble the roster.
And the first question comes from Ross Sandler of Barclays. Please go ahead.
Hey, guys two questions maybe start off with the overall demand environment.
For Snapchat advertising.
In 2021 question, so Google and Facebook.
These behemoths in the industry are both talking about.
Accelerating growth in <unk>, and I know Theres, a lot of moving pieces with.
You have a tough comp in Gen Fab and then the easy comp in March and then decide Esa stuff. So I guess whats baked in.
The 60% growth Youre seeing what kind of what's happening right now how materials.
What impact do you see from the iOS changes any additional color there would be will be helpful. Just on the overall macro and then add on the second question is you guys have launched a lot of cool new products over the years.
You've invented a lot of things in this industry, how would you rank spotlight in terms of your new products that you launched in terms of potential to drive significant increase in either user growth or engagement compared to maybe maps or games or some of the cool lenses you've put on.
Thanks, a lot.
Yeah.
Hey, Ross, it's Derek speaking I will take the first part of your question and then I'll kick the second part about spotlight over to Evan.
I mean, just to give you a little more color on the forward look on the guide on revenue I guess, what I'd say is for starters, we're really encouraged by the momentum we've established with their advertising partners in general at a high level. We saw the average active advertisers double year over year on Q4, and we think that's a pretty pretty strong indicator that we're delivering value to our partners and we have good momentum.
With them. We're also pleased with the growth we've been able to put up in total on a revenue line that 40 or 62% in Q4, which is a 10 point acceleration over the prior quarter of 52. So the range. We're looking at in the quarter is between $56 60 percentage, where we gave on the guide.
Which would be amongst the highest year over year growth rates, we've reported as a public company, but potentially just below the prior quarter on.
And I can just share a little more context, there one as you noted at the beginning of the quarter. We did see some pauses from advertisers at the beginning of the quarter I made some of the events that we saw at the capital.
We have worked with our partners and reestablish the momentum <unk> got campaigns back going since then and we've resumed on momentum after this period.
I know, there's a little bit on prepared remarks that if we were able to sustain the momentum we're seeing right now in recent weeks through the remainder of the quarter. We actually think that we can achieve growth rates in Q1 that are approximately in line with what we observed in Q4.
That said, we do anticipate that there could be another interruption submit to demand later in the quarter as we see some of the iOS changes implemented and as we work with our advertising partners to navigate those changes as they are implemented so given that risk of interruption to demand that lies ahead, we wanted to make sure that.
We called that out and also to ensure that any guide we provided reflect our best estimate those risks to interruption on the back half of the queues. So as I said earlier it is unclear what the longer term impact will be to our top line momentum of that.
This may not be clear for some time after the changes are implemented so the risk we're calling out here is more specific to the interruptions. We expect during the period of implementation of those changes to the platform as we work through those with our partners. So again really pleased with the momentum that we saw on the second half of 2020 really pleased with the acceleration that will we saw on Q.
For top line to 62% and I'm pleased with the momentum that we're seeing on the business right now and working to keep our momentum going so hopefully that gives you a little bit more color I will turn it over to Evan to touch on spotlight.
Thanks, Ross for the question on spotlight were very pleasantly surprised with the momentum on spotlight, but admittedly I think we started with some great raw ingredients, meaning we have such a.
Widely used camera with over 5 billion snaps made every day and incredibly creative community and of course, a really large audience that loves watching mobile content. So maybe we should have expected it but so far it's really off to the races with over 175000 video submissions every day and an audience of over 100 million people in January so really excited with the URL.
Early momentum and we know that we have both sides of the marketplace, meaning the content submissions on the audience. We can do a lot of work to optimize our ranking and make sure. We're doing a good job with content understanding serving the right content to the right people based on their interests. So lots and lots of opportunity ahead and the team is making great progress really quickly growing engagement on that product.
So really excited about where we're at with that.
The next question comes from Michael Levine of pivotal Research group. Please go ahead.
Thanks for the question guys.
Look the as both Jeremy and Evan on the AR and VR front I guess I'm curious do you think that this could be the year that we really see an inflection with respect to advertisers willing to invest in and as from a content perspective.
What do you what do you feel like advertisers basically still need to need to see in place to go ahead and feel comfortable with that.
Hi, Michael Thanks for the question.
Yeah, I think it's been a really interesting period for us we've seen a lot of acceleration in demand for advertising in particular as more and more people at home and the living room becomes the news flow around and at the time, we really don't see going backwards in terms of becoming more mainstream on showing up more regularly on advertiser.
I think theres kind of three focuses there. The first is on on delivering ROI with IR and we started to develop a lot of those holes, which I'll talk about in a second here.
And then reducing the cost of creating <unk> as well importantly, largely by Commoditizing and day.
<unk> the ability to do it and then lastly, again adjusted net use of creation. So most importantly, we have reached we have the reach engagement with augmented reality and to build a large business and helps the business and therefore.
Therefore, using lenses so as Evan just mentioned over 5 billion videos and pictures taken every day and the camera, so really not a great place to build on that.
On Foundation and then we've been really focused on demonstrating the rois are investing in logos on I think that's really important on what needs to be this kind of takeover products for these big branding moments I'll now turn it into a highly performing AD format, where you can buy directly from the lenders themselves and do goal based bidding down funnel active.
He's on lenses for the creative can take a bit longer to develop and therefore, it's really important that our results speak for themselves the Hudson being worth my advertisers put us on.
Some of our recent efforts will try on definitely will add some meaningful improvements in purchase intent on conversion.
As I mentioned it does take a little bit of time to build so we're also heavily investing in improving tooling for London, and making them easier on a build in line with studio, including creating lens web builder.
Anyone easy for anyone to build their own a our experience online, but honestly going forward will just be a huge opportunity to innovate and augmented reality and we have been blown away by our community and how they leverage tools like not machine learning, which allows people to upload ml models and run them in real time with on lenses to power new experiences.
We believe that engagement with augmented reality is at a meaningful scale and to answer your question directly yes.
Definitely justifies advertisers.
And we've been able to validate those investments with clear on ROI. So we're going to continue to make lenses in here to create on more powerful which will help grow the opportunity for years to come.
The next question comes from Heath Terry of Goldman Sachs. Please go ahead.
Great. Thanks, I was wondering if you could update us a bit on the strategy for snap audience network, particularly.
Unity coming coming on board, what kind of impact do you expect that that's going to have to its contribution the audience networks contribution to growth and then.
Maybe from a higher level for partners that are at the scale that that something like unity is how do they make the decision to work with.
With snap versus what are the other networks that's available to them.
Hey, there it starts being I think the first thing I'd say is we're very early with the snap audience network. It's not currently a significant or material part of the business at this point in time and so it is not also factored in was a major factor on a go.
So we're very early in the process of growing and experimenting with our business and bringing on partners that can help the debt. So very early to be talking about the direction that that's going to drive in terms of revenue on top line growth and what have you.
I think what I would say at a very high level those are partners value our unique AD formats and Thats one of the things that makes our platform attractive and of course vertical video being a part of that augmented reality of <unk>.
Course, bringing the audience into that so.
Very early we will update you as that becomes more significant but I will just getting started on that area today.
The next question comes from Rich Greenfield of <unk> partners. Please go ahead.
Hi, Thanks for taking a couple of questions.
We see the word meta versus sort of used everywhere.
It seems these days, but the avatars are generally tied to each platform and Evan you bought Vik Mogae, a while ago, we're starting to obviously see it more and more places I'm wondering.
Does this have the potential will sort of be a global or universal avatars like how should we think about monetization opportunities for <unk> not just sit within gaming what beyond gaming. So just sort of any recent examples are just what are you thinking about the <unk> over the next couple of years.
And then too.
I think over the last couple of calls you've talked about sort of how map is going to start to see more and more businesses and I think in the prepared remarks, you made comments about personalized map are the most personalized map when do we start to see small and medium businesses really start to populate on the map.
Is that a 2021 event or do we have to wait longer. Thanks, so much.
Hey, Thanks, Rich, we're so excited about what's happening with Ben Mojang. The team has been doing such an incredible job driving towards their vision of being the world's avatar.
Got a couple of focus areas for <unk> one of them is just evolving the avatars themselves. The avatar style, we've been investing a lot in three D, which enables use and much more sophisticated games. So that's been a big focus of ours and of course, making a lot easier for people to express themselves with their avatar that means improving the bit moshi editor, adding new <unk>.
<unk> brands and partners like Ralph will run that Jeremy mentioned earlier.
And of course on trying to improve and strengthen the avatar bond the bond debt people have with their but mochi, which we do through partnerships. So for example, the integration of <unk> with the Samsung keyboard. So we're going to continue pushing forward on on those fronts, we certainly see opportunity for monetization on longer term, but frankly the opportunity is just still so large.
And so early that we're going to invest in improving the avatar themselves and really increasing our utility Interestingly. One example that we saw recently was game developer that integrated.
Emoji into their game saw radically reduce conversion costs on customer acquisition.
Which then allowed them to monetize their game at a higher rate and so that's a really cool example, where we're extending <unk> into partner on games and services, adding a lot of value for the partner and of course, adding value for our community because they feel so strongly about their relationship with her but the emojis are excited to play a game really as themselves. So that's definitely.
We have great opportunity for us looking forward and then when it comes to the map I think it is probably important just to maybe break out the SMB opportunity.
Into two sort of different.
Maybe categories, one are digital native smaller businesses, and they're really trying to grow with things like our dynamic product ads are our goal based bidding.
We have our pixel integration for but if we look at local businesses. There definitely is an opportunity longer term on the map. We started just by making sure that businesses can be easily discovered on the math today, and we're really focused on adding actions around those businesses. So right. Now you can place an order or find directions make a reservation on you can share with you.
Your friends and we're going to continue to build engagement around businesses on the math on overtime will be able I think to convert that into.
Another monetize it will surface for snap so.
All of our platforms, we really just try to create value for our community and build on engagement and then over time think about converting that into a business. Thanks for the question.
The next question comes from Justin Post of Bank of America. Please go ahead.
Thank you it's been really interesting to watch the evolution of the App over time and big change in November with considerably smoother, then and one of the prior changes just what are your learnings from that and are you really seeing.
An increase in engagement from that change has that happened and what what what can you tell us about that and then secondly on.
Obviously spotlight is off to a great start do you see that usage is incremental or is it taking maybe away a little bit from from other areas. Thank you.
That's a great question. Thanks, so much so I think first and foremost huge credit to our engineering and product teams.
Of course, all the folks working on our data platform and whatnot, who have gotten so good on that.
Really understanding what's happening on our platform being able to test and iterate on big changes that we're making and they've just done an outstanding job of allowing us to continue to move really quickly and try really big ideas without being disruptive to the platform overall, so really all the credit goes to the team.
On that one and what we're excited about is now that we built that muscle on we've demonstrated that we can move really quickly on these big changes that it frees us up to try new things and have that combined with these platform investments in iOS. For example, more recently, where we have improved the architecture on the client itself similar to how we approached some of the channel.
As we faced on Android those changes also allow us to move faster. So we got this combination out really deep understanding of what's happening on our platform the ability to test really really quickly on a new architecture that allows us to move faster both on the front end and the backend. So overall, just really can't I can't thank the team enough for all their hard work there on it.
It shows that we're going to be able to move a lot faster and innovate in the future.
And then separately.
When we look at spotlight, we're super excited so far it looks like a lot of that engagement is incremental and that really speaks to the new layout of the service around the action bar, which allows people to easily access different parts of the platform.
That doesn't totally surprised me because spotlight fills a really different need them stories. For example that allow you to catch up with their closest friends and really see the world from their perspective, so as we look at spotlight that content, that's really the best of Snapchat and people submitting this apps that are the funniest our most engaging our most interesting.
I definitely think that content deals those are really different need for our community and we're excited about the engagement we're seeing so far.
The next question comes from Lloyd Walmsley of Deutsche Bank. Please go ahead.
Hi, Thanks, two questions if I can.
First just the Forex growth in AD dollars around four down funnel metrics is.
Spectacular.
How do you guys get comfortable that the momentum in these AD units are sustainable through these upcoming iOS changes that are going to effectively blind AD platforms shut down funnel measurement as it is apple going to back down in some of these restrictions or do you think opt in rates are high or are your CPM is just so low and in services like <unk>.
Spotlight, just so meaningful that it doesn't matter, but I'm curious to get your take on that and then secondly.
You know of AD units to help advertisers across the funnel. So when you look at your customer base on what they're doing are they using all of these tools on snap.
How are you going to market to make them aware of all that you know how much of an opportunity is it to get them buying across all of these units.
And leveraging the full value of the platform. Thanks.
Thanks, Tim.
I appreciate the question I'll take that one first and the Forex growth as you're saying on iron down funnel metrics were also thrilled to see that on but I thought it would be kind of as it comes to the idea and the changes and whether or not that impact us.
The reality is we admire Apple and we believe that they are trying to do the right thing for their customers and their focus on protecting privacy in line with our values on the way that we've built our business from the very beginning.
Can you share that we're really focused on has less to do with Eylea for which Apple has long offered an opt out and instead on a much more broad policy change that requires snapchat or the opt ins attacking with other person identify areas such as their email address.
Get harder for us on the overall digital AD ecosystem matched advertising outcomes, but we've been working really closely with Apple to implement S. K AD network, which is their privacy protective solutions as well as building on our solutions that use aggregated data to protect privacy.
We've been communicating very well with advertisers educating them on talking about them deeply about these coming changes and encouraging them to implement our conversion API on measurement kits to mitigate any of that and then longer term. We are investing in using first party data from our platform and providing more opportunities for on on platform conversion, which will really.
Overall, we feel really well prepared for these changes, but senior citizen ecosystem on usually disruptive and outcome is uncertain.
Can you talk to your second question regarding the AD units and how it's helping advertisers across the funnel.
The advertisers who are most successful on snap are using broad our broad portfolio of targeting apo.
Optimization and our format places across our commercial snap ads story ads going on with each of them goal based bidding products and really optimizing our overall campaign will give me a significant opportunity to get more advertisers using all the features and functionality that we that we offer we do have multiple case studies.
So the value of utilizing multiple formats on the ones I just mentioned before but we don't make it as easy as we thought so it's very much still it's still day one here in terms of ensuring that all of our advertisers use as many of our products as possible to get the best outcomes for their dollar, but we are specifically focused on driving adoption and retention driving product and feature.
And we know that ROI is the best retention feature we could possibly have will we continue to focus on measurement optimization and delivering that ROI for our advertising partner.
The next question comes from Mark Shmulik of Bernstein. Please go ahead.
Yes, hi, thanks for taking my question.
You know I guess, if we think about advertisers are kind of growing to X. This year as we look ahead to kind of 'twenty 'twenty, one and sales objectives any color you could share on how you think about that strategically between continuing to grow the advertiser base versus you know I think what we just.
About around kind of growing share of wallet and cross selling more products and services within it and then my second question, while I'm generally not one to kind of compare across I think this quarter. You guys are the only one to grow domestic users sequentially. So any color you can share on on what you've been doing to drive that reacceleration and whether you expect.
Those trends to continue thank you.
Sure.
This is Jeremy as mentioned before regarding advertiser growth, we exit in 2020 with on the best momentum we've ever had on our advertising business more than doubling advertiser count year over year in Q4, and again, putting up highest number of advertisers of all time and be an important part about that is really the diversity of advertisers and the diversity of day.
And in our ecosystem and how that makes our entire marketplace stronger are we set up our team on three different in three different categories. The first of which focuses on our enterprise on a large scale clients that have complex complex buying structures and then theres a tier card called emerging which is focused on advertisers that really focus on on on.
Dr and ensuring that those app installed E com et cetera that there and then lastly, we have a scale function that goes out to get small medium businesses small E commerce advertisers people, who utilize shopify as they're back on for instance have a diversity of advertisers that an ecosystem. So that everybody can succeed. So we're really focused on growing not demand and will continue.
We need to do feel free.
On the day of your question, we're really excited about the momentum we're continuing to see in the United States I think a lot of this has to do with the large investments we've made on the underlying technology platform form over the last several years. On addition to a lot of the fantastic innovation around things like augmented reality.
And of course spotlight so.
We're going to continue to differentiate our products Dr. Ben.
First to really serve the needs of our community and I think we're still at the early stages of our growth given how powerful visual communication is young people on particular prefer to communicate visually and increasingly we're seeing people embrace visual communication.
Their preferred method, so while a lot of opportunity in front of us there and thankfully a lot of these investments we've made over the last few years are paying off.
The next question comes from Brian Nowak of Morgan Stanley. Please go ahead.
Thanks for taking my questions I have two just the first one on on spotlight monetization, but curious as to hear about what what sort of mechanics or technologies are already in place for you to start to test on spotlight monetization and what are some of the investments you still need to make to sort of eventually start to beta tests and rollouts, while I'm on.
So as we think about 2021 and then the second one on on content investment maybe Evan just talk about as you as you look at the explore tab. What do you think are sort of some of the key content investment areas that will be important for that tab to continue to evolve throughout 2021.
Yes, so I think as it pertains to a monetization timing on spotlight. It's still really early on we're going to focus on growing engagement, but Fortunately, we've got a lot of demand for our vertical video, which is the format. We will use to monetize spotlight on of course, all the underlying advertising infrastructure. So I think spotlight will be a great way for folks.
To extend their video campaigns, but again, we're focused on the product experience.
Day, and we will think about testing a little bit further down the road.
And then as it pertains to discover we've been doing a lot here, especially on content supply. So really trying to understand what sort of content is resonating with our community where the gaps are in terms of different demographics and interests, making sure that we can.
Meet that demand with the requisite supply and then taking a couple of big bets around compelling new shows for our community because we see that theres really a lack of investment.
On premium mobile video and Thats, an area, where we can we can really growth. So I think overall, we're just able to use a lot of our understanding of our audience to think about where to make content investments and improved supply either with original content or through syndication.
Of course with our partners.
Our last question will come from Doug Doug Anmuth of Jpmorgan. Please go ahead.
Thanks for taking my question.
Evan just wanted to ask the early <unk> disruption stands in contrast, I think to your positioning as a curated and more brand safe platform. So just curious if you could talk about your efforts here and just how much the differentiation is resonating with marketers and agencies.
Well, Jeremy might be better positioned to talk about how our positioning is resonating with advertisers and how she is having a lot of conversations with our partners, but I think just broadly speaking when it comes to some of the policy changes that Apple is making we really think of them as high integrity folks and we're happy to see them, making the right decision for our customers. So of course. This is in line with how we.
<unk> been thinking about building our business since the beginning.
It really innovative and I think we will continue to innovate. So this is really an opportunity to work together with our partners worked together with Apple and really move forward in a way that benefits everyone in particular consumers who deserve to be protected.
Nathan I think will you have some net regarding what advertisers and agencies on a thing to us I think when we look at the overall industry and then growth.
The growing focus on brand safety and privacy across the entire industry actually places us on a really unique and beneficial position given what Evan to sandwiches from the beginning of our business. We made the same decisions that helped us in Hawaii. Many of the issues seen on other platforms. So a lot of the conversations we're having with advertisers and agencies are around things like the fact.
We don't have any comments for instance, the fact that it is that our groups can only be 64 people is another good example of that but friendships need to be vibrant bidirectional and when you get into that with advertisers and agencies. They truly understand how our design was different from the beginning in addition, we have very clear policy.
He is and we adhere to those policies consistently.
It really is the very foundation on both our consumer products and our advertising business has been built around the commitment to brand safety and privacy. So deposits that we mentioned earlier in the year arent related to snap specifically just on my.
On a disruption as it pertains to the overall market as things worse.
We're shifting and changing but we believe that building trust with trust with our community and providing a safe environment on Snapchat is actually the most critical things for our long term success, because our customers come here and have fun and they feel safe NSA will private and they enjoy their experience on snapchat, which means that they will continue to stay with us for years to come on those growth.
On the audiences are what advertisers want to see.
We really take this all very seriously, including wet spotlight were all content is manually reviewed by our team to force surface to a large number of that snapchat or I mean, it can't go viral without a manual review and we will continue to adhere to those practices and it is core to our foundation.
Frankly from my point of view it has been.
Stream tailwind as advertisers look to align their values with other businesses.
Those same dialed in on a safety by design and privacy by design principles and commitment to our community really really a line up with what they are looking to spend that money.
This concludes our question and answer session as well as Snap Inc. 's fourth quarter 2020 earnings Conference call. Thank you for attending today's session. You may now disconnect.
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