Q3 2021 Snap Inc Earnings Call
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 most recent Form 10-Q.
<unk> in the section titled Risk factors.
Today's call will include both GAAP and non.
Non-GAAP measures reconciliations between the two can be found in today's press release.
Please note that when we discuss all of our expense figures they will exclude stock based compensation and related payroll taxes, as well as depreciation and amortization and nonrecurring charges.
Please refer to.
Billings with the SEC to understand how we calculate any of the metrics discussed on today's call.
With that I'd like to turn the call over to Evan.
Thank you all for joining us.
This quarter, we celebrated snaps 10 year anniversary and.
And as we reflect on the progress we've made over the past decade.
Sure if I have never been more excited about our future.
Robbie and I grew up with social media and we wanted to build something different.
Way for people to have fun and express themselves without the permanence and pressure of public likes and comments.
We built a camera to make it easier for people to communicate with close friends and family.
And express themselves visually.
And today, we reach more than 500 million people, including more than 75% of 13 to 34 year olds in the United States, Canada, France, The U K, Australia and the Netherlands.
We have innovated on top of our camera and bill to augment.
Mentioned reality content and mapping platforms that each reach hundreds of millions of people.
We are now operating our advertising business at scale, providing us with the resources, we need to invest in our long term vision of computing overlaid on the world through our camera and we are just getting started.
This quarter, we grew daily active users to 306 million, marking our fourth consecutive quarter of more than 20% year over year growth.
We grew sequentially in North America, and Europe, which represent our largest monetization opportunities in the near and medium term and we continue to build on our momentum in the rest of world geographies.
Where we see massive long term potential are you and rest of world represents just 5% of the overall rest of world smartphone population, which is currently more than 2 billion people and growing.
Many of the mixed engagement trends, we observed during the pandemic and that we discussed on our last earnings.
Call have continued through the third quarter on one hand, while total content viewership and time spent has grown year over year.
User generated stories continue to see year over year declines in overall time spent.
On the other hand, we are seeing quarter over quarter improvements in engagement with the snap map story, posting new friend connection.
Graffiti bidirectional communication and we are cautiously optimistic about the ongoing reductions in pandemic related restrictions worldwide.
We grew our revenue 57% year over year to reach $1.067 billion.
Delivering adjusted EBITDA of $174 million and 50.
<unk> $52 million of free cash flow, while we are excited about the continuing growth of our business and improvement in our cost structure, we miss the lower end of our guidance by $3 million due to a few key factors, including changes to advertising tracking on iOS and macroeconomic factors that have impacted our advertising partners.
Our advertising business was disrupted by changes to iOS and tracking that we're broadly rolled out by Apple in June and July.
While we anticipated some degree of business disruption the new Apple provided measurement solution did not scale as we had expected making it more difficult for our advertising partners to measure and manage their ad.
<unk> for iOS.
We have remained very focused on driving ROI for our advertising partners and we continue to see strong consistent performance on our AD platform based on first party data and conversion lift studies and are working on building flexible first party tooling and measurement solutions to serve the diverse needs.
Campaigner advertising partners. This impact was compounded by the ongoing macroeconomic effects of the global pandemic with our advertising partners facing a variety of supply chain interruptions and labor shortages.
This in turn reduces their short term appetite to generate additional customer demand through advertising at a time when their businesses.
All of US are already supply constrained the ongoing magnitude and duration of these global supply and labor disruptions are inherently unpredictable and in the meantime, we are focused on supporting our partners in this uncertain environment.
While it is difficult to predict the trajectory of these challenges the growth of our audience the adoption of our new products.
<unk> platforms by our community and the underlying efficacy of our advertising products for performance advertisers gives us confidence in the future of our business and our ability to navigate this environment as we continue to invest in our long term vision.
Augmented reality is one of our most exciting long term opportunities because it is simultaneously.
Alex and very early in its technological development and already used by hundreds of millions of people.
More than 200 million people engage with every day on snapchat across a variety of use cases, including entertainment fashion education and the arts.
This quarter, we partnered with <unk> to.
So the very AAR lenses teaching snap chatters houses Fingerspell in American sign language.
We featured a number of community try on lenses to celebrate fashion week, and we partnered with Sotheby's two allows snap chatters to experienced christo and Joan clubs artistic rendition of the arc to trio from anywhere in the world.
<unk> three are also doubling down on the early successes, we have seen helping people trialing clothing beauty products and accessories with augmented reality and are working closely with partners like Ralph Lauren Mac cosmetics, and as any optical to expand our AAR shopping experiences on today's smartphones.
And the longer term we are.
And new ways people can interact with the physical world around them, including using our <unk> enabled spectacles, we were thrilled to see the unique experiences our creator community has developed for this new form factor as we iterate on our long term hardware product roadmap.
Our content partners continue to find success on our platform with 15.
Investing in different partners, each reaching over 50 million snap chatters this quarter.
Two of our new snap original has launched this quarter my mom and honestly Laurent and.
And each reached over 10 million viewers.
We are also introducing more locally relevant content is our community grows worldwide.
15, France, we partnered with MTS, our first major French broadcast partner for entertainment content to bring 400 episodes of their television shows to snapshot.
In Mena, we partnered with ICP media group to bring more than 200 show up besides from some of the region's biggest and most influential creators.
And we're very excited about the long term potential of spotlight our newest platform designed to shine a light on the best snaps created by our community in recent months, we have focused on building the tools and infrastructure to help creators of all kinds thrive on spotlight.
We have reengineered the spotlight incentive program to reach more creators who are publishing a greater diversity.
The content and more markets.
We are committed to making spotlight a platform on which professional creators can grow an audience and build a business and both gifting and the creator marketplace for spotlight are now live.
We are extremely pleased to see daily spotlight submissions more than double when compared to last quarter and.
<unk> by ongoing quarter over quarter growth in both daily active users of spotlight and daily time spent per user.
We will continue to build spotlight into a unique entertainment destination for our community and a rewarding creative outlet for people expressing themselves through our camera.
We are also continues.
And are incurring to innovate and improve our products for both our community and our partners.
We launched the places tray, which allows the 250 million snap chatters that use the snap map each month to save their favorite locations and explore what places are popular among their friends. We expanded our minis offerings to include our first cooperating experience.
With HBO, Max as well as the new birthday mini to provide reminders for friends birthdays.
Our new run for office mini, which helps young people run for local office encourage more than 2 million snap chatters to explore local election opportunities and more than 45000 people have nominated a friend to run for.
For office.
Profiles now support next generation <unk> letting people express themselves through a variety of options for backgrounds poses and facial expressions.
As we reflect on the past decade, we are fortunate to have grown our business and a favorable economic regulatory and geopolitical environment.
Prioritize growing our business responsibly and sustainably rather than scaling as fast as possible and our commitment to privacy and empowering self expression through our camera led us to build our products in a way that we believe enables our future success over the long term.
As we look to the future these fundamental decision.
We along with the scale, we have already achieved in our business and operations gives us confidence that we have the resilience to maintain our momentum through a changing macro environment now.
Now I'll turn the call over to Jeremy to share more about our business.
Thanks, Kevin in Q3, we generated total revenue of one point.
<unk> $7 billion, an increase of 57% year over year, as we grappled with industry changes to the way advertising targeted optimized and measured on iOS that created a more significant impact on our business than we had expected.
Despite these challenges we crossed $1 billion in quarterly revenue for the first time.
Oh seem focused on our long term opportunity our community and advertising partners, which we believe will be driven by three key priority.
First driving online through measurement ranking and optimization.
Second investing in our sales and marketing functions by continuing to train hire and built for scale.
And we remain building innovative AD experiences around video and augmented reality with a focus on commerce.
Additionally, we reach a valuable and hard to find audience, which continues to grow around the world.
Together, we believe that over the long term. These factors will allow us to drive performance at scale for businesses around the world.
We are continuing.
To work through the ongoing changes to digital advertising driven by Apple's App tracking transparency framework, which was introduced as part of iOS $14 five we.
We saw meaningful adoption in June and July when Apple pushed all of its users to update to the new version of iOS.
Broadly speaking these changes have offended many of the industry norms and advertiser.
Third is that were built on the idea.
Apples unique device identifier for advertising over the past decade, which now require a demo often by users in order to access directly.
As part of these changes Apple rolled out as cat and our our scan as a proprietary solution to allow app based advertisers to continue.
Their behavior and their advertising on iOS.
The initial results we observed using scan were generally aligned with prior industry standard solutions and we were among the first platform to lean into the solution and push for widespread industry adoption. However over time, we saw scan measurement results diverge meaningfully from the results we observed on other first and third.
Can you imagine measurement solutions thinking scan unreliable or a standalone measurement pushing.
Furthermore, as our advertising partners have explored and tested scan solutions is serviced a variety of concerned about its limitations every advertiser has their own unique fine tune perspective on the optimal parameters to measure ROI for their business.
Third party scan requires them to use Apple's fixed definitions of advertisers' success. For example, advertisers are no longer able to understand the impact of their unique campaigns based on things like time between viewing an AD and taking an action or the time spent viewing an AD. Additionally, real time campaign and creative management has hindered by extended reporting.
Malaise and advertisers are unable to target advertising based on whether or not people have already installed their app.
As a result, we have accelerated our focus on developing additional first party privacy safe solutions to help our advertising partners measure their campaigns effectively.
Our primary solution as advanced conversion, which mark.
Porting, let's see with our mobile measurement partners and uses aggregated privacy safe methodologies to help advertisers understand the impact of Snapchat and their media mix.
This solution is now launched for all eligible advertisers and we're encouraged by the early adoption, we're seeing from apps.
Even with the basic features that we have approximately 50%.
<unk> seen advertisers opting in Vietnam media measurement partner or a direct integration.
We are excited to invest in both third party and first party solutions to provide a richer set of privacy safe towards our partners to help them measure and optimize their advertising.
We otherwise continue to see strong sustained performance in our App advertising platform.
As measured by both first party engagement data and incremental lift studies and believe the long term shift towards privacy safe solutions will be a net benefit to our community and our business.
We are working closely with our advertising partners to help them grow their businesses with our large engaged audience.
This work will not only address the near term disruptions.
And by ATT and it will also help our partners adapt to the long term privacy oriented future.
Over the last couple of years, our direct response business has grown at a faster rate than our brand business. This is something of which we are incredibly proud and continue to feel is the right strategy for the long term.
Proving performance and delivering.
In general why are our top priority and we've made significant progress over the past several years.
As we've mentioned for the past few quarters, Dr has grown to comprise over 50% of our business well.
Well this has been a historic strength given the recent ATT changes coupled with Snapchat existence as a mobile only platform are strengthened.
Levering our has become a more significant headwind in the current environment.
We still believe that in time every advertiser will be performing advertiser and despite the recent shakeup in the ecosystem driving Dr. Performance is the right strategy over the long term separate from these iOS related issues, we've heard from advertising partners across our library.
And the idea of industries and geographies that they are facing headwinds in their business related to disruptions in global supply chain as well as labor shortages and increasing costs.
In turn we expect this to impact advertising demand in Q4 in particular as in many cases their businesses do not have the inventory our operational capacity to support incremental.
<unk>.
We expect that some of these clients may opt to slow their marketing spend given the diminished need to drive incremental demand at a time when their supply chains are not able to operate at peak capacity, we continue to invest in our sales teams and marketing initiatives in order to support our advertising partners and achieve our long term revenue and our Google.
For example, this quarter our marketing team launched the open your Snapchat campaign, which invites those customers and advertisers to fully dive into augmented reality unlocking hundreds of customer experience is local and several different markets across the globe.
The campaign highlights many of our E Commerce Advertiser and <unk> relationships.
Rentals of this week, we rolled out a new AD experience lining the walkway of the Westfield Bridge in London, which feature lenses with brands, including American Eagle, Ralph Lauren and the Jordan brand well.
While still in early days, we have already seen positive signs of the campaign success, including listen consideration and trust among our 25% to 34 year old Audi.
The team also launched Snapchat trends in the corner, a self service tool, which allows our advertising partners to discover and explore trends across snapchat. So they can find what topics performed well on snapchat and better engage with our community.
We continue to invest heavily in professional content and video advertising to support our community.
Advertising partner.
For example, we partnered with Hollister to seamlessly integrate custom ads within our new snap original Lago Vista.
Each episode included three commercials, featuring one of the series cast members Sporting Hollister gear and a third commercial introduced a new custom Hollister branded augmented reality lens.
And that included pumps that snap chatters could tap to visit the Hollister website entire AD experience focused on creating cohesive brand name with our snap original content, which led to strong view rates and Sherry.
We believe the camera and augmented reality represents our most exciting long term revenue opportunity, particularly as brands start to.
Bill the only as an AAR strategies for their business.
I've mentioned reality advertising as a fully immersive experience that is delivering a return on investment for advertisers that is measurable and repeatable, which is encouraging more and more businesses to invest in a arm for.
For example, Ulta beauty leveraged our DDB pixel purchase optimization.
But they are to bring unique makeup try on experiences to snap chatters, which drove over a four five times higher return on AD spend compared to its campaign optimize per impression.
The success of the trial and ultimately encouraged Ulta beauty to include air lenses within its long term business strategy we.
We have continued to roll out.
For of tools and capabilities to help empower our commerce on Snapchat.
Not only can our trial in technology drive higher return on AD spend for businesses, but it can also deliver a huge uplift for brands because snap chatters can visualize what they look like when different products.
For example, Samsung launched three adopted our a R try them.
A number of U K to drive product awareness for its latest wearable technology.
Campaign delivered impressive brand lift measurement results, including a 23 point lift in product awareness driven by those exposed to the lens.
Now businesses of all sizes are beginning to invest in their own public profile, which gives them a free permanent home on Snapchat.
And where they can showcase compelling and our experiences and share shuffled products directly within that the department of culture and tourism Abu Dhabi launched its first official public profile in Q3, which aims to give potential visitors a chance to discover what the uae's capital has to offer.
The new profile has already driven incremental engagement.
Chat chatters the stories format highlights the destinations many offerings and the a our experiences are an immersive way to explore all the derby virtually.
One of our top priorities for a R is reducing the barrier to creation and helping brands understand the importance of they are and the value it can drive.
One of the ways in which we're improving this is.
Through our recent acquisition of vertebrae.
What form that enables brands and retailers to develop three D. A R asset.
Everybody's team and technology will further our AAR apparel and three D asset roadmap by providing the back end platform to create manage and deploy our assets.
We are offering three D asset creation as a service.
Atlas businesses create a content at scale and drive business results.
Platform will also make it even easier for brands to activate our shopping experiences on Snapchat.
Additionally, we announced a new partnership that will give W. P P and its clients more access to snap to our technology and resources, including classes on how do you say.
How creative production and campaign measurement.
We also just announced the launch of our new global creative studio for brand new they are called Arcadia.
By the team of World class experts that pioneered mobile air advertising Arcadia will develop new technology and deliver the most innovative impactful and effective air experiences.
Our brand and agency partner.
Acadia will be platform agnostic and develop experiences that can live across different platforms, including the web and App based air environments.
Lastly, when brands use a portfolio approach of combining sponsored airlines is a snap ads. They result in higher ROI and lower cost per outcome.
For example, Lionsgate spiral campaign utilized snap ads story ads and lens to generate double digit lift in brand awareness and AD awareness and nine point lift in Washington.
When snap Chatters, we're exposed to multiple products brand awareness and Washington increased by two times and three times, respectively. Ultimately reinforce.
The value of leveraging our different AD formats, together to drive performance and ROI.
In summary, we are working very closely with our advertising partners to build and adapt for the future.
While there will be near term monetization challenges related to our direct response business and the macroeconomic environment. We ultimately believe that the best way to retain.
Thing and build relationships with advertisers is to continuously deliver measurable ROI if.
We will continue to invest for the long term and making product and marketplace improvements to help advertisers scale, they'll focused relationships with brands and agencies across verticals and improve our direct response products and measurement solutions for performance centric businesses.
Based on the size of our audience their levels of engagement across our service and our overall opportunity in the growing digital advertising market. We are well positioned to play an important role in driving results for businesses across the world and with that I'd like to turn the call over to Derek.
Thanks, Jeremy our Q3 financial results reflect our priorities.
<unk> are 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 306 million daily active users in Q3, an increase of $57 million.
23% year over year.
Q3 marks our fourth consecutive quarter of year over year growth in excess of 20% and it's timed with the prior quarter for the highest rate of growth for our community and more than four years.
In North America <unk> grew.
<unk> grew by $6 million or 7% year over.
Orchard to reach $96 million in.
In Europe, <unk> grew by $8 million or 11% year over year to reach $80 million and rest of world grew by $43 million or 49% year over year to reach $130 million as we continue to execute against the international growth playbook, we laid out.
For your Investor Day earlier this year include.
Including investments in local language support local content local marketing partnerships and support for local creator communities.
Total revenue for Q3 was $1.067 billion, an increase of 57% year over year.
At our and this was $3 million below our guidance range entering the quarter, which primarily reflects headwinds associated with the iOS platform policy changes.
Direct response advertising as comprise the majority of our business for some time now and has also been growing at relatively higher rates in recent quarter.
Due to the impact of changes in the iOS ecosystem that affect optimization and measurement of direct response advertising objectives. The revenue from this portion of our business was approximately flat quarter over quarter.
Our brand focused advertising business was the primary driver of sequential growth in Q3.
Others remained healthiest in North America during the quarter.
In North America, our revenue grew 60% year over year in Q3, while <unk> grew 49% year over year as we continue to benefit from the significant investments we made in our sales teams and sales support in the prior year and Europe revenue grew.
90% year over year in Q3, while <unk> grew 34% year over year.
And rest of World revenue grew 53% year over year in Q3, while <unk> grew 3% year over year.
As we've indicated in the past we are continuing to accelerate our investments in sales and sales support beyond north.
<unk> 40 in order to capture our global aircrew opportunity faster in the years ahead.
Given the rapid growth of our community and rest of world and the relatively early stage of our investments in sales and sales support in this region.
Rest of World ARPA is best considered as an output metric at this stage.
America averages CPM increased 62% year over year in Q3, rising CPM relative to the prior year reflects the year over year rise in overall demand a mix shift towards relatively higher ECM products as well as a mix shift towards relatively higher ECP in regions, such as North America.
In addition, we have observed sequential and year over year increases in the cost per action for our goal based bidding products, which we attribute to the loss of signals that our advertising partners and have previously relied on to measure the impact of their campaigns.
Adoption of our new measurement solutions.
<unk> such as advanced conversions is ongoing but it will take time to be fully adopted in.
In addition, the ecosystem for measuring advertising returns is continuing to shift with more changes anticipated as part of <unk> that are expected to further reduce the availability of certain signals that are key.
It is broadly as tools for optimization and measurement.
Continuing to evolve and adapt our measurement solutions I mean, the rapidly shifting operating environment as a top priority as we seek to deliver attractive returns on advertising spend for advertising partners over the long term.
The ongoing.
Currently our community and strong engagement in areas of our application that we have not yet begun to monetize provide confidence in the value of our inventory and platform over the long term as we continue to navigate these changes.
Gross margins were 60% in Q3, an increase of approximately two percentage points year.
<unk> and four percentage points sequentially, which brings us to the 60% medium term goal, we noted at our Investor day much sooner than anticipated.
Gross margins may occasionally be volatile as we make investments in our long term growth of our business as demonstrated by our investment can spotlight.
But we continue to deliver against our goal of driving down our underlying infrastructure unit costs overtime to achieve long term margin expansion.
Infrastructure costs per <unk> was <unk> 66 cents in Q3 down from 70% in the prior year, but up from a record low as a public.
You are reading a 62 cents in the prior quarter. The sequential rise in this metric reflects investments in machine learning to support our direct response advertising business and spotlight content optimization as well as investments in support of our overall community growth.
On the content side.
The company continued to invest in spotlight and this contributed to year over year growth in cost of revenue, but the level of investment declined sequentially, reflecting a full quarter of the new structure for this program to promote more content diversity across categories and regions.
We continue to be highly encouraged by.
The early returns from our investments in spotlight with daily spotlight submissions more than doubling compared to the prior quarter and ongoing quarter over quarter growth in both daily active users of spotlight and daily time spent per user.
It is still very early for this new platform.
We are excited about the potential for spotlight to further expand our monetization opportunity in the future.
We are particularly pleased that we've been able to continue to invest in spotlight and discover while expanding our gross margins year over year, which reflects our overall approach of scaling our operations efficiently.
We're making investments in the future of our business.
Operating expenses were $464 million in Q3 up 37% year over year.
As expected our rate of hiring stepped up in Q3.
Total employee related costs were up 31% year over year driven by a four.
40% increase in full time headcount.
This reflects ongoing investments in our team as well as the integration of acquisitions made over the past year, which contributed approximately 10 percentage points of the year over year growth in full time head count.
In addition, we increased our investments in marketing both.
And year over year with the launch of the open your Snapchat campaign in Q3, lastly, certain costs that were significantly diminished due to the pandemic related restrictions in the prior year, including travel and event related cost are gradually returning to our cost structure and contributed in part.
Hurt to the year over year growth rate of operating expenses.
Adjusted EBITDA was $174 million in Q3, an improvement of $118 million year over year as we continued to grow our top line rapidly while scaling our cost structure efficiently we.
We delivered adjusted EBITDA leverage.
Leverage of 30% in Q3, as we continue to invest in the future of our business, while making progress towards sustained profitability and positive free cash flow.
Net income was negative $72 million in Q3, an improvement of $128 million over the prior year, which reflects the flow.
Through the $118 million improvement in adjusted EBITDA, as well as 122 million higher gains on investments in the quarter.
This was partially offset by $120 million higher stock based compensation.
While head count growth is the largest driver of this expense accounting for more than.
60% of the year over year increase the impact of long term retention associated with several acquisitions completed in the last year and the impact of higher payroll related taxes due to a higher stock price were also significant drivers of the year over year increase.
While we have continued to grow our team and.
Leverage stock based compensation strategically to foster an ownership culture and drive long term retention.
We have remained focused on managing these programs responsibly.
Total fully diluted shares outstanding grew four 6% year over year in Q3.
Significant portion of this year over.
It was driven by $1 1 billion of early conversions of our outstanding convertible notes that were completed in Q2 and Q3 of 2021 excluding.
Excluding dilution related to convertible notes the rate of growth in fully diluted shares outstanding was just one 3% year over year.
Year go down from one 7% in the prior quarter and well below the 3% estimate we shared during our recent Investor day. There was noted to be exclusive of any dilution related to convertible notes.
Free cash flow for Q3 was positive $52 million or $121 million improvement.
Versus the prior year, driven primarily by the improvement in adjusted EBITDA noted earlier.
We ended the quarter with $3 5 billion in cash and marketable securities up from $2 7 billion in the prior year as the proceeds of the convertible notes issued over the past year more than offset the investments we have made.
Grow the business over the same period.
As a result of the early conversion of our convertible notes mentioned earlier, we have been able to build our cash position to fund long term investments, while maintaining a responsible level of overall debt of $2 3 billion in Q3, which is approximately flat year over year on an apples to apples.
Basis after adjusting for the impact of adopting the new accounting standard for convertible notes.
This reflects our approach to managing our balance sheet conservatively and responsibly to support the long term growth of our business.
Q3 marks our second quarter of positive free cash flow and we are also free cash flow positive.
<unk> on a year to date basis, which marks an important milestone for our company as we transition towards self funding our investments in the future of our business. The progress we have made in expanding our gross margins and balancing our investments and operating costs as we scale our business have enabled us to drive 34% of.
Incremental revenue to the adjusted EBITDA line over the trailing 12 months, which demonstrates the potential for our business to deliver substantial free cash flow generation as we scale our top line over time.
As we look forward to Q4, we face a variety of challenges in the operating environment, including the iOS platform.
Form changes as well as macro uncertainty driven by supply chain disruption and labor shortages.
The fact that these challenges are largely exogenously makes the provision of guidance, particularly challenging and complex.
We expect that the measurement and optimization foundations of the digital advertising.
The economy will continue to experience significant changes in the months ahead, including additional disruptions, we expect related to the adoption of IRS 15.
We are focused on helping our partners navigate these changes, but we still expect these headwinds to continue to impact our business throughout Q4 as.
As the adoption of new measurement solutions will take time.
It is still not clear what the longer term impact of the iOS platform changes may be and this may not be clear until at least several months or more after the ecosystem stabilizes and advertisers are able to fully implement the new solutions we are developing.
In addition.
<unk>, we are hearing from advertising partners across a wide variety of industries that they are facing disruptions in their supply chains as well as labor shortages. Unfortunately. These changes are occurring during the season when our advertising partners would normally expect our supply chain to be operating at peak capacity.
And at a time, when we would otherwise expect peak advertising demand to drive peak contestation, and therefore peak pricing in our auction.
While it is difficult to predict the duration and magnitude of these macroeconomic factors on the businesses of our partners.
We have assumed that.
These headwinds will persist throughout Q4.
When combined with the measurement related headwinds we are seeing in our direct response business, we expect a compounding impact on the level of contestation and pricing in our auction based ecosystem relative to what we would otherwise expect during the second half of Q4.
In particular.
We currently estimate that <unk> will be $316 million to $318 million in Q4, implying year over year growth of 19% to 20%.
On the monetization side. We currently estimate Q4 revenue will be between $1 billion $165 million.
And $1.205 billion, implying year over year growth of between 28 and 32% in Q4.
On the expense side in Q4, we intend to continue to invest in our teams and products to support the long term growth of our business in order to build on the momentum we have established with our community.
And our partners.
Our estimates for Q4, adjusted EBITDA reflect our revenue guidance and our expected level of investment, resulting in a range of 135 million to 175 million for Q4.
Thank you for joining our call today, and we will now take your questions.
That concludes the prepared remarks for today's earnings call and we will now begin the question and answer session.
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At this time, we will pause momentarily to assemble a roster.
Yeah.
The first question comes from Rich Greenfield with light shed partners. Please go ahead.
Hi, Thanks for taking the question I guess Evan.
Kevin as you think about it you.
Assume that you'd be growing at sort of 60% plus in Q4 revenues if not for I guess apple in the supply chain issues.
Obviously.
You can't really comment on or solve the supply chain issues, but I guess as we think about sort of the issues going on with Apple.
Getting back to a normal or getting back to sort of normal is it a quarter away quarters away years, and then I think back in March just sort of related to this I think in March it at an investor.
Mr Conference you saw.
Sort of talk about your confidence in growing 50% in terms of multi year revenue growth rate.
How confident are you you get back to that again, whether it's quarter quarters or years.
Hey, rich. Thanks, so much for the question and you know share your disappointment. This has definitely been a frustrating.
Not bad for us, but I think over the long term. These privacy changes in protecting privacy for users of ILS and of course, the other sidetrack community is really important to the long term health of the ecosystem and something that we fully support I think when we saw these changes coming are our primary focus was the performing.
Some of our advertising platform in the face of the signal loss. So could we still really drive advertising performance optimize campaigns to make sure. Our ads were in front of the right people and we spent the vast majority of our engineering time and effort and energy, making sure. Our ads were still really effective and we did all sorts of revenue back testing to make sure that we could.
Form a neutral and we were really confident in our ability to drive results with our advertising platform. Despite the signal loss, but what I think we really underestimated where the tooling changes and so what I mean by that specifically is that advertisers have essentially for a long time now use a set of really sophisticated tools to measure and optimize their campaign. So that allows.
Them to test out a bunch of different creative and see what's performing.
No more effectively.
So on and so forth and there.
The big change there was that with these new Apple changes those those tools were essentially rendered blind and in their place Apple released a new product.
Called S. K AD network that allows advertisers to measure across different advertising platforms, but without a lot of the flexibility that they're used to so for example, you can only really measure your advertising results using the success parameters that Apple has already defined the reporting is delayed for a significant period of time.
And on the available if you don't hit a certain threshold of conversion, it's very hard to see performance on our creative level, but of course. It does have the benefit of being able to look across different advertising platforms. So what we've done is built our own solution called advanced conversions that allows people to do much more sophisticated things and really.
Really get the benefits of a lot of flexibility using the advanced conversions products. So they can understand performance at the creative level optimized for down funnel conversions and things like that and we've been working really hard to make that solution more effective and help advertisers onboard but the obvious challenge with advanced conversions is that it only has snapped.
Now Chad first party data it doesn't have the benefit of looking across all of the other advertising platform. So what advertisers essentially have to do is use both of those tools <unk> network and advanced conversions and the way that theyre able to understand the performance of both is by running increments holiday testing for example to show you how performance.
Advertising is on different platforms and that process adopting essakane network adopting advanced conversion's running instrumentality testing and really building trust and these new solutions. After the tooling you have been using for a decade has essentially gone away that just takes time and its really challenging so we underestimated.
That impacts where advertising partners, we're working through it we've certainly seen some early signs.
A success, but it's going to take a little while I think the good thing is that we remain very confident in the underlying performance of our advertising products and when we look at Incrementals <unk> testing when we look at first party data like on platform swipes.
And so things like that.
We see that those conversions are still happening at similar rates that they did in the past. So I think we can work through the tooling issues. It will take time, because they are new but.
The underlying performance of the advertising platform is still very strong.
Hey, rich, it's Derek speaking.
<unk> the second half of your question as it pertains to the long term growth opportunity of the business. The first thing I'd share here is that we believe the fundamentals of our business are intact and we remain confident in our long term growth potential of the business. We believe we've made significant progress on demonstrating the capacity of our business to drive elevated growth rates of returns.
So for example, we've now exceeded 50% year over year growth for five consecutive quarters, and we've delivered a two year cumulative average growth rate of 55%.
We are seeing significant headwinds heading into Q4 that are driving our near term deceleration in our top line, including the iOS at AD changes that Evan just spoke about as well as the supply.
I'll take disruptions labor market headwinds.
While the challenges we face in the near term are significant we believe they are transitory. We believe that the fundamentals of our business remains strong our community is growing at the fastest rates we've reported in more than four years. We continue to have deep penetration of hard to reach audiences in the most attractive advertising markets.
In the world and measurement issues aside our ads continue to drive impact and we continue to have significant opportunities to expand our monetization to more screens within our apps in order to grow our crew overtime.
So we continue to be focused on investing in our teams and our products in order to overcome the near term challenges and to support the long term growth of our busy.
So anyway. Thanks for the question and I Hope that provides some helpful additional context.
Our next question comes from Eric Sheridan with Goldman Sachs. Please go ahead.
Thanks for taking the question and maybe I'll follow up on Rich's broader point and further.
Down a little bit as we look out over the next 12 months can you give us a little bit of sense of how much of investments need to be made in some of these solutions to transition the advertising industry in your advertiser base to where you want them to go and maybe drill down a little bit deeper in terms of duration of what it would take to prove out on some of the additional.
<unk> narrowed our solutions for folks to get more comfort.
Measurement and attribution over the medium to long term. Thanks, so much.
Sure. Thanks, Scott for the question this is Jeremy.
Definitely focused on exiting our advertisers in terms of navigating this environment. It's the most important thing that we can do.
Kevin mentioned, it's definitely a change.
They are used to over the last decade or longer and we want to make sure that we're with them every single step of the way to ensure that they have this pushes that they need in place to measure the efficacy of their advertising or print.
Print and priority.
So here's what we're doing there kind of in three primary areas, where we see the opportunities to help.
<unk>.
First as many advertisers can choose to utilize and network, we're sharing best practices to best ensure that advertisers can remain.
As they test and learn with it with less information than there used to as Evan mentioned secondly on boarding advertisers into our first party privacy based solutions, such as advanced immersion where.
It works seamlessly with our mobile measurement partners in music aggregated privacy safe methodologies to help advertisers understand the impact of Snapchat and their media mix and that's also news. So that's important to know advanced conversions and people are also going to have to take time to test and learn to better understand how it works in partnership with Afghan network, and so on and so forth.
Them or English.
Product engineering as well as sales account management and the whole team holding hands with our customers to ensure that they get the best experiences.
Third we are investing in growing our set of needed native experiences and that'll allow advertisers to drive ROI with deeper experiences, but all within Snapchat and so one.
The other thing that's really important about that is that they will be able to get signals from within our app itself, which include our augmented reality experiences minis, which we've talked about business profiles, which are growing and we're excited about as well as the native commerce products that we're building with shopify.
And they're advertising first for instance, we think this approach is reflected.
Or what's driving continued growth in active advertisers.
And.
Again grew in Q3, both year over year and quarter over quarter to their highest level ever and so that gives us some good confidence there and in terms of deploying the additional solutions. This is going to be an iterative process at $14 five was one thing iOS.
<unk>.
<unk> will be a different thing I'm. So we're continuing to work very closely with product and engineering to ensure that we have the right solutions in front of the right advertisers when they need them.
Already in terms of product of course, but we're going to keep improving the quality of that over time.
For example, we talked about advanced conversions, we've launched that already for both.
And advertisers and we have about 50% of our advertisers offering and the other media measurement partner or with direct integration and we also have a let.
Other direct integrations with some of our largest advertisers.
It's been really helpful as well working with solutions engineers and other team members.
Recently enabled advertisers.
Others.
These women and so are the most leaned in to advertise across both in and out users using privacy safe delivery and measurement to deliver efficient ads.
And then alright. This long answer here, but it's really important that they just kind of share what we're doing with the advertisers, but additionally, we started the rollout of estimated conversion.
And which is new but allows advertisers to see accurate estimations of their results more quickly, but at privacy safe level. The resolution that may not have done otherwise available that product is rolling out over the course of Q4 and as new but that's been a current state of the product one of the most important things you can do.
As more education, we need to help advertisers adopt it by giving high touch support I'm sales from marketing from engineering from product marketing et cetera, and proving it works and building that trust with our advertising partners. The data that we're seeing does give us confidence that that adoption and the adoption of advanced conversions is.
It's a good place to be we are confident in that solution. We believe it is the right solution, but education. It takes time, there's going to be a lot of testing and learning.
Our next question comes from Ross Sandler with Barclays. Please go ahead.
Great Jeremy just one follow up on that last answer and then and then maybe one for Derek So if we look at the average E Commerce campaign on Snapchat.
How much of the Rollouts on iOS eroded versus what you were seeing back in.
Prior to June and do.
Or you think there's tooling solutions are going to bring us back to previous levels or do you view.
All of this privacy stuff is kind of permanently impairing the rollout the ecommerce companies can achieve on snap.
And then Derek you've talked in the past couple of years ago about how the fourth quarter.
Quarter, usually has a.
Bigger mix of brand advertising relative to other quarters and how direct response mix is down a little bit and so I guess, how much of this 30 ish percent growth that we're guiding to in <unk>.
Based on that mix dynamic and maybe a little color on what.
Those two channels are assumed to grow or is it are they both growing about the same in the fourth quarter that would be helpful. Thanks a lot.
Sure thing I can take the first part of your question and we can't be specific on return on AD spend but web is less affected because of the privacy safe snap pixel and conversion API.
So that really better understand and drive performance for E Commerce.
In addition to that we have advanced conversions for the web advertisers, what we talked about in the last answer, but that's actually been available since the spring. So we're continuing to learn test iterate with our advertising partners. There and then in terms of just ROE as in.
We're in all our first party measurement tools and studies continue to show that our ads are affected and they are approximately as effective as they were prior to these changes. So it's really that the loss of signal required significant changes to our overall technology and we believe it's actually mostly a measurement challenge not a question of the efficacy of our advertising.
And as we talked about before it's going to take time for advertisers to sort through what they're seeing in their new measurement solutions and relative to what they have available to them, including an Afghan network and lift conversion studies, we are optimistic that our first party solutions, including advanced conversions and estimated conversions are going to help close that measurement got for advertising.
Rising partners and we look forward to seeing those be fully adopted him and in the meantime, we're gonna be validating with our partners third party first party or things like conversion lift studies as well as a minimum studies et cetera to calibrate our crosswalk.
Nextera and sense of humor.
Hey, Ross.
I think thanks for the question I'll take the part about the mix in the business heading into Q4. So the first thing insurers just in both the brand and the dealer portions of our business are impacted by the headwinds we're seeing in Q4, our Dr business, which is the majority of our revenue is facing the headwinds directly from a wireless platform changes that we've described.
The supply chain and labor shortage related headwinds that we're seeing in Q4 impact a wide variety of advertising partners across a wide variety of industries, including both brand and Dr oriented advertising partners. So we would normally expect a bit of a mix shift towards brand oriented spending in the second.
Earlier for Q4, and this is typically its helpful to driving the overall demand and therefore pricing any auction. During this period you know heading into this quarter I think it's challenging to predict the exact mix of precise mix, but our guide reflects both of these headwinds persisting throughout Q4, so hopefully that gives you a little bit more context.
Secondhand yourself with your question.
Our next question comes from Doug Anmuth with J P. Morgan. Please go ahead.
Thanks for taking our questions just wanted to follow up on Ross's question.
Eric I was wondering if you can be any more specific.
That's like in terms of the AD categories and verticals that you're seeing most impacted by both the iOS changes and then also the supply chain and labor disruptions.
And then a separate topic I'm just curious on spotlight, how you're thinking about kind of the product there and when it will.
So trying to kind of move beyond some of them very early AD testing and monetize the product in a bigger way. Thanks.
Yeah.
Hey, it's Derek speaking I can take the second half of your question first and I'll turn it over to Jeremy to talk about the advertising partners and how they're being impacted in terms of.
Spotlight is very early for this platform. We're excited about the early results that we're seeing from.
From an engagement perspective, we're also in terms of them having seen.
The D are you on that platform continuing to grow quarter over quarter and time spent per day. We're also pleased to see that after the changes we've made to.
Our creator fund that we've seen the submission is double quarter over quarter. So we're pleased but it remains early for this platform. We're excited about the potential for the platform to add to our <unk> opportunity over the long term, but were focused still on making sure that the customer experience is great and continuing to invest in optimization and our creator community.
I'll turn it over to Jeremy to talk about the specific impacts from different customer categories.
Sure Yeah definitely thanks, Derrick so just to talk about some of the verticals. We're seeing most impacted on iOS changes and then also by the supply and inventory constraints, we've been meeting with a lot of advertisers.
Lot of meetings here and we're hearing from partners.
Across a wide variety of industries and geographies that they are facing headwinds in their business related to the disruption in global supply chain as well as labor shortages and later labor competition. So when they're talking about you know the product we are putting marketing into the product when it was already low margin for them and can erode margin and Furthermore, they don't necessary.
So certainly we want to accelerate the sale of the products that they are going to have a hard time getting into the hands of customers and that is somewhat broad broad sweeping in terms of the supply chain issues, which I'm sure. We ran about more broadly than just on this call here, but one of the things I think that's great is that there are still categories, where there is an opportunity for us those who are less reliance.
Supply chain things like streaming things like entertainment, we're seeing travel come back, which is really exciting and its been tax et cetera. Those types of resources are not as impacted by supply chain and you know we've done this successfully in the past when Covid hit last year, we suddenly disrupted a number of our key.
On calls in the way that supply chain is doing so right now and we were able to redeploy our resources across sales and product and marketing to focus on the categories with momentum and those who can win despite an externality or macroeconomic condition that may be impacting their businesses and we did that successfully before by supporting our partners who are facing.
Political Andres doubling down on those less reliant on those macro conditions. We expect this to impact advertiser demand in the short term in particular in many cases with the backup of the ships in Los Angeles and everything else, we've been reading about them and we also expect that completed with the iOS platform is that what we're seeing is.
Chinese clients are just going to take this additional time to test and learn as they navigate the changes to the iOS platform and the diminished need to drive incremental demand at the same time, because their supply chains aren't able to operate at peak capacity, but we have plenty of these categories that aren't reliant and we're having great meetings.
Some of them and outside early tests show that the performance still looks good in those categories and so we'll navigate that says we've done some of the extra nowadays in the past.
The underlying fundamentals of the business haven't changed and we're just remaining laser focused on working with our advertising partners to get through these challenges.
Our next question comes from Brent Thill with Jefferies. Please go ahead.
Thanks, Derek is there an easy way to frame idea say versus supply chain as it is.
How do you think any 90% of the headwind 10, 10 to 20 on supply chain and is there some easy framework, how youre thinking about.
You know that the balance of those two.
There was just a follow up question as it relates to you know what you're impacting from the Max version of Microsoft, Iowa, 15, and that headwind you baked and can be changed.
Give us a sense of what that is.
Hey, there thanks for the question.
You know I think you know what I would say is when you look at Q3 and the impacts that we saw in Q3 relative to our expectations entering the quarter the majority.
Primary driver of the impact there, it's really about the impact from headwinds associated with the platform changes on iOS.
Those changes accelerated as we move.
Quarter. So what you are seeing when we go into Q4 is a full quarter impact of those issues.
On Q4, and the reason that we're mentioning.
Oh expert team is then that's going to continue to disrupt the advertising ecosystem, which is critical getting a stable.
Most of the some of the advertising ecosystem. So that advertisers have some stability to then be able to adapt tools test tools and understand their impact is really important so that that is contributing to the IRS headwinds persisting throughout Q4.
In terms of giving you a specific breakdown of the mix of the impact between.
The supply chain and labor shortage headwinds in the Irish headwinds I think that's very difficult.
Or because the two of them compound on one another in terms of their impact on the contract station and therefore, the level of pricing that we would expect to see any auction, especially in the second half of the quarter, which makes delineating between material impacts.
Unfortunately challenging so hopefully that gives you a little bit of context for your question.
Yes, it does thanks Derek.
Our next question comes from Tom Champion with Piper Sandler. Please go ahead.
Hi, good afternoon, everyone, maybe for Derek relative to our estimates it looks like Europe and rest of World revenue was a little more impacted by headwinds in <unk> and just curious if that's the case or.
If there's anything to call out here and then.
Relative to content submission.
<unk> on spotlight doubling quarter over quarter can you just update us on how you're investing directly behind this maybe how do you create or features play into this momentum and just any more.
Comments on how usage trended.
Quarter over quarter as well thank you.
Sure. Thanks for the question. So I think when we're looking at the performance by region, we're continuing to make progress on hiring and investing in our team globally across sales marketing partnerships and sales support as we believe this will position us well to grow our business over the longer term in Q3 our business.
<unk> was healthiest in North America, because we continue to benefit from the significant investments we have made in sales and sales support in the prior year. We're in the early stages of <unk>.
Ramping the investments in our team internationally, but we are making progress and this is a driver of our rapid head count and Opex growth that you can see in the recent quarters that being said.
It takes time for those resources to become productive. So we don't expect an immediate impact to the topline in the near term, but that should give you a little bit of context about.
North America performed relatively better than the period I'm going to turn it over to Evan to share a little bit more about how we're thinking about the product and our investments around engagement on spotlight.
It sounds thanks for the question. We're certainly excited about what we're seeing on spotlight I'd say the primary focus and the biggest investments we're making in spotlight are really in the underlying infrastructure of the content understanding content recommendation and ranking so that we can make sure that as people submit new content. The spotlight, we understand what's most compelling.
Who that will appeal to the most in terms of their own unique interests and then make sure that content is really distributed to them and that's how we can ensure creator success not just for the most famous greater because they get a huge number of use across a really big audience upper creators, but also want to reach a niche audience with their own unique interests and so being able to really understand the content.
Allows us to help creators who are just getting started who maybe don't appeal to as big of an audience that's still.
Find that find that success on our platform. So I think the infrastructure piece is critical and that's where a lot of our focus is right.
Right now and as we evolve the creator program and the way that we're rewarding folks who are submitting content.
They've also found new ways to incentivize the diversity of content submission, which again has been making it easier for our systems to understand a wider variety of content and make sure. It gets to the right people. So I'd say that's the primary focus right now that'll also help of course drive overall time spent viewing content.
Content.
This creates this positive flywheel, where more creators we're getting more visibility.
And finding more success and then of course, we're also investing in new ways for creators to monetize.
With snap the latest of course being our gifting a program, which is off to a pretty fun start where folks who find creators they really like they can they can send them.
And messages to build a relationship and say thanks for the great content that they're making and.
We also have a creator marketplace as well to make it easier for brands to partner with creators and create sponsored content. So yes. There is a lot going on there, but I think the fundamental thing we're really focused on at least over the next year or two is really the content recommendation.
With an understanding and that's where our key infrastructure.
This concludes our question and answer session as well as Snap Inc. 's third quarter 2021 earnings Conference call. Thank you for attending today's session. You may now disconnect.