Q2 2022 Snap Inc Earnings Call

So our filings with the SEC to understand how we calculate any of the metrics discussed on today's call.

With that I'd like to turn the call back over to the operator, who will begin our analyst Q&A session.

Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.

You are using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two in the interest of time, we ask that you. Please limit yourself to one question. After your initial question is asked your line will be muted at this time, we will pause momentarily to assemble our raw.

Stir.

The first question is from the line of Ross Sandler with Barclays. Please proceed.

Great maybe we can start with the macro environment are you stated in the letter of the three Jews roughly flattish, thus far and got the pretty material slowdown from where you guys were 90 days ago, which I guess isn't surprising given kind of what's going on with the macro so could you parse.

So for us which categories are slowing the most in your AD business and you called out in the letter some high growth sectors cutting back I assume you mean.

Venture backed startup type companies that buy ads on snap.

How big of a revenue bucket is that for you guys and how does the trajectory there compare to the larger kind of fortune 500 marketers on your platform. Thanks a lot.

Hey, Ross, it's Derek speaking thanks for the question.

I think it's probably a good opportunity to step back and discuss how the overall demand environment is materializing. As you noted we have seen as a pretty good deceleration over the last 90 days and as we noted in the shareholder letter, we've seen that across our DRM and brand business shifts as well as a number of sectors.

But over a longer trajectory here, we've absorbed a fairly steady deceleration in demand over the last year. The deceleration began with the platform policy changes implemented in Q3 of last year those policy changes up ended.

Decade of advertising industry standards and in turn the model of use to drive the direct response advertising business as well as the tools used to measure the returns from that direct response advertising.

And then beginning later in Q4 and that certainly through the first half of this year, we've seen macroeconomic challenges and bill while there've been lingering supply chain and labor supply issues impacting certain segments that began during the pandemic more recently, we've seen the impact of persistently high inflation, then rising interest rates and rising geopolitical.

Critical risks associated with the one Ukraine those macro headwinds have disrupted many of the industry segments that have been most critical to the growing demand for advertising solutions over prior years.

We're seeing these various headwinds put pressure on the earnings of a wide variety of companies on this is directly impacting the demand for advertising.

So here the advertising spending in particular auction driven direct response advertising is among the very few line items in our company's cost structure that they can reduce immediately in response to pressure on our topline order input costs as a result, as many industries and verticals have come under.

Topline our input cost pressure advertising spending has been amongst the first areas impacted earnings and to put a finer point on that we've we've over time work very hard to make it very easy for our clients to turn on advertising and to ramp our advertising and that's been particularly good for our business as budgets are growing over time.

But in a period, where we're seeing headwinds. It's also very easy to turn off and very quick to turn off.

So we see this dynamic within our business with advertisers have lowered their budgets and their bids per action to reflect our current willingness to pay. So for example in some industries, where topline growth may remain strong, but the businesses are experiencing input cost pressure due to inflation, we've observed reduced marketing spending and lower bids for action and then sort of another.

High growth sectors, our businesses are seeing.

Higher cost of capital that's further reflected in their campaign budgets and their level of bids fraction. So amended its various headwinds. We're also seeing increasing competition because the advertising dollars in aggregate are now growing more slowly than nine intensifies. The competition, we see so.

Because of the impacts from the Hopper and policy changes in the macro environment and the competition all compound on one another it can be difficult to just.

Sort of attribute the deceleration to any one factor.

But in order to keep growing and we've got to stay focused on the inputs that we control and that means investing to improve our direct response business, including our first and third party measurement solutions as well as improved ranking and optimization. So hopefully that gives you a little broader context of how we're seeing the demand environment evolved and how that's translating into our business more recently.

Yeah.

Thank you.

The next question is from the line of Brian Nowak with Morgan Stanley .

Please proceed thanks for taking my question.

Thanks. Thanks, Thanks for taking my questions I have two the first one.

I appreciate the color around where we are sort of to start out <unk> being flattish I know theres a lot of moving pieces around your Derek on the month and things just remind us how we should think about the monthly comps you know July versus August or September and some of the platform changes impacting the year on year comp structure throughout this quarter.

And then the second one.

<unk> added the last answer was pretty helpful. But just walk us through philosophically in this type of macro environment.

What do you have to execute on to really get the business back to growth do you have to add more advertisers. How do you get advertisers to expand AD budget like what are sort of your key strategies need to execute on to sort of get back to healthy growth for next six months for the platform.

Hey, there thanks for the question.

I'll take I'll take both of those.

First as we enter Q3.

A lot of the headwinds that I just talked about in the prior question.

Continue to be.

And significant as they've been at any point recently, and it's not clear how those headwinds or are going to evolve as we go through the quarter, whether they might abate or whether they may intensify in and one of the reasons for that is the point I mentioned near the end there which is in particular, how easy it is to ramp up spending on it.

Platform and how our flexible we've made for folks to ramp down their spending and so the reaction within our business and our top line to a shift in those trends can be fairly rapid and that makes it the visibility forward booking, particularly challenging so given that we believe the most prudent approach to giving folks.

Some indication of what to expect going forward is to focus on providing transparency on how our business is performing right now and our plans to better position our business for long term growth. So that sort of leads into your second question and essentially to return to a higher rate of long term revenue growth. We're focused on three priorities. The first is inverse.

Thing in our products and our platforms to sustain the growth of our community, which has been very healthy.

Second is investing heavily in our direct response advertising business and we've articulated three key priorities there, including around investing in our first and third party measurement solutions as well as continuing to make improvements in our optimization and ranking and product innovation and then lastly, as we shared a little bit in the latter we're focused on cultivating new sources of.

Revenue to help will help diversify our top line revenue.

Over time, so we believe that if we can stay committed and focused on these priorities and combine that with our unique reach and rapid product innovation that we've demonstrated over a long period of time here.

That provides us a path to regain momentum over time, so hopefully that gives you a little bit of helpful. Additional context in your questions. Thank you.

Thank you. Our next question is from the line of Rich Greenfield with <unk> partners. Please proceed.

Okay.

Hi, Thanks for taking the question I'm going to struggle to keep it to one but.

On page one you called out growing competition for AD dollars on top of the slowing AD market I am curious how much of that is sort of directly tied to tick tock, which has been a monster in terms of its growth.

This is.

Sort of the two juggernaut that exist today in terms of Google and Facebook or any color on sort of where that competition is coming from.

And then I guess.

Guess sort of related to this on.

Time spent.

Any of this people spending less time, it obviously relates to the competition, but is this people spending less time on Snapchat every day meeting less opportunities to monetize the <unk>.

User or is this just purely advertisers simply not spending as much as they were before I'd be curious on both of those points.

Hey, Richard Eric I'll take the question so on the competition.

Side in terms of monetization, we face a number of very large and very sophisticated competitor. So today, we're seeing the overall advertising pie grow at a slower rate than we had the macro headwinds I mentioned earlier, so add competition, whether it's with <unk> or any of the other very large sophisticated players in the space.

Has only intensified.

It's hard to disentangle the numerous factors here impacting what's what's.

Clearly a headwind driving deceleration of our business, but.

And definitely as you see that high grow at a slower rate than you got lots of folks competing very intensely ocreate youre going to see the competitive factor be a bigger part of the overall discussion and then in terms of what we're seeing on engagement and how thats translating to revenue. While you are correct that the community in aggregate.

<unk> to grow at a healthy rate and we've also seen time spent with content, where we generate the majority of our revenue today growing and thats reflected in the approximately 9% impression growth that we start from the latter.

Primary issue here is about how demand is materializing.

So we've talked a little extensively about this already but we've definitely seen the deceleration in demand as we first with the platform changes then all of the macro issues that have compounded on top of that which are really a significant barker at this point and then the competition play into it. So I think from a from a perspective of seeing.

The growth materialize this is really.

The demand side of things.

Well, we have to do is stay focused on the inputs that we control.

And that's around investing in our direct response business and making sure that we get improvements into our first and third party measurement solutions as well as continuing to invest in improving optimization and ranking in personalization.

And so certainly the continued growth of our community is going to help over the long term and is very important to the long term health of the business for the near term is about demand in us improving our direct response advertising tools to serve that demand from our mantra. So hopefully hopefully that provides a little helpful context for those question. Thank you.

Our next question is from the line of Eric Sheridan with Goldman Sachs. Please proceed.

And maybe maybe I'll ask if there's a two parter as you looked back over the last two years from when Apple first announced their policy changes and implemented a year ago, maybe talk a little bit about what your key learnings have been that you wish you had maybe done on a more accelerated timetable or how you might have positioned the company.

Differently looking backwards over the last two years and putting a finer point on the three elements of how to build and scale. The D. Var business from here can you put some sense around how far along you are on those initiatives and the amount of investment capacity that might be needed to achieve them <unk>, a timetable in which to achieve them.

Thanks.

Yes, Sir thanks for the question. This is Jeremy talking with you I think when you want to talk about the long term I want to go back to what Derrick was mentioning regarding our key priorities and where we're focused on growing the business. So in particular, focusing on our measurement strategies as well as integrating with third party.

And first party measurement solutions to get everything back on track when you think of our advertising more broadly there a litany of ways that they measure their advertising, including our own proprietary tools and then of course, our first party privacy centric tools, but then the third party tools that they prefer so continuing to optimize their and then continuing to drive demand in cattle.

<unk>, where we have headwinds I think are particularly important in that regard.

Thank you. Our next question is from the line of Blade Wormsley with UBS. Please proceed.

Thanks for taking the question if I can ask two I guess the first one would just be as we think about the divergence in tone between the major AD agency Holdco.

Continuing and relatively upbeat versus what you guys are seeing.

Think that Thats, just a function of them being a lagging indicator in that a different customer base is digital brand just easier to cut faster like what do you think are some of them.

The divergence is youre seeing there and are.

Are there customers still spending at healthy rates with you guys or maybe just moving budget.

And then the second one would just be.

As we think about moving through whatever form of downturn. This is coming out on the other side do you think that 50% top line growth ambition is still attainable in this kind of environment of increased competition and diluted AD performance.

ADT.

Is it is it just going to be a tougher road structurally or do you think 50% is still on the table on the other side of this.

This trough here thanks.

Hi, This is Jeremy again, I will take the first part and then hand it over to Derrick we felt a lot of enthusiasm at Cannes as well and a lot of really great reaction to our incredible augmented reality is the bit that we had there but in general kind of Harkening back to let Derek just said earlier on the call is that over the past few years.

And then a lot of time, removing friction from buying and selling on that platform you alluded to that in your question in terms of it making.

These year to turn on its definitely easier to turn Oculus companies are reevaluating their priorities and our cost structure. They are looking at things like digital AD spend it's easy to pause.

Reevaluate and and move forward there. So those same tools and services that make it easier to ramp up make it easy to ramp down and we know that our advertising partners are facing significant uncertainty and we talked about that a few times. So I'll focus on the others.

You mentioned that as well but.

There is a pretty heavy selection bias for the kinds of.

Team members and the times of types of clients that are 10 can we talk a lot about a balance between RDR business as well as our brand business large agencies as well as brands tend to be heavily represented at Cannes, whereas other companies like direct to consumer E. Commerce for instance.

All are less represented again I think part of the divergence that you are seeing is to your point about there being kind of just a different mix of people that left representative.

A lot of those brands that are bearing the brunt of these macro issues that we've talked about before they arent, particularly well represented at <unk>. So I think that that's what you're seeing there, but again I think that one of the things that was really exciting for us and me personally being narrowed.

Excitement around augmented reality advertising future, we have an exhibit with a lot of incredible brand there and we were able to showcase our capabilities and believe that that will have a long term halo effect on the air business, where we remain incredibly committed in addition to our resilient performance.

Okay.

And Mr. Eric I can take the second part of that was just with our long term growth prospects I think first it's important to step back and I think its probably clear profit in order to achieve really elevated growth rates were going to need in an operating environment that is more cooperative from the one that we're experiencing right now having stable.

Our platform policies that we can build and optimize against are really important, but having a macro environment, where clients are able to invest and grow their marketing budgets is really important to it's definitely easier to grow our top line in an environment, where there are incremental budgets being deployed and we can capture incremental share.

Simply happening to take share of the existing pie in order to grow the key here is being focused on the inputs that we control and the things that are critical to long term growth. We've articulated some of those in our letter so to be Super clear one of continuing the growth of our global community at a rapid pace we are.

Already reach very deep penetration in many of the world's most attractive advertising markets, but continuing to deepen our engagement and our penetration of those advertising markets in the overall global community has been put one.

The second is as we've discussed earlier here today is continuing to invest in our direct response business and improving that consistently over time.

One for improving our first and third party measurement solutions into through better ranking and optimization that delivers better optimization for our advertising partners and therefore return on AD spend overtime.

And then three.

It is really about continuing to cultivate new sources of revenue across our business and there is lots of opportunity for that obviously, we have a number of screens in our application that are currently under monetize that presents a lot of opportunity to grow over time, whether that spotlight or the camera thats very early in its ultimate amortization.

Or over the longer term the map and of course, the future of <unk> and many other formats and of course, we've got other endeavors that are earlier in their going that could provide growth including.

The recently launched Snapchat, plus so continuing to invest in diversifying our topline growth and to drive resiliency into our business and being well positioned for the long term is the key and if we stay focused on those priorities, we believe we'll be well positioned overtime.

Yes.

Thank you. Our next question is from the line of Justin Post with Bank of America. Please proceed.

Great you've talked a lot about measurement and both the letter and on the comments here I guess the first question is did measurement deteriorate in the quarter any changes from Apple or Google either in the quarter or looking forward to the second half and then second.

When you look at the measurement opportunity how would you say you do versus peers today and what is the timing for starting to see real improvement there. Thank you.

Yes.

Yeah.

Sure No problem Hi, this is Jeremy So we will talk about the measurement tools here and particularly as it pertains to appear. Thank you for the question. So there are a couple of things to keep in mind that measurement targeting optimization and engagement all together are important for driving.

Foreman and measure of bulk requirements in particular is what we have always been focused on and we still see a lot of headroom in improving our optimization and engagement and we talked about that and Derek just covered it is one of our core priorities, but I can give you an answer specifically the measurement in particular, which we have called out for a while and this is where we're focused on our two key <unk>.

It already so as we talked about kind of over the last year changes have happened driving adoption utilization and trucks and our first party privacy preserving measurement solutions such as estimated conversion. For example is a key part of this journey. So near term our focus is growing on a growing the adoption of those privacy performing.

Integration technologies, and those help feed both measurement and optimization such as the conversions API that we've had for quite some time and then from there we have to focus on building trust and those estimated conversion as I mentioned in one of my earlier example, and one of my earlier answer advertisers are playing around with new measurement.

Well Triangulating on first party third party and proprietary.

<unk> leads statistically modeled conversion when we're building trusted leads.

Excuse me statistically model and conversions can augment some of those third party tools and example of that would be scan and privacy preserving manner and giving advertisers more information to act quickly.

But in general we believe the estimated conversions are going to become an increasingly important part of the privacy centric advertising world, which feeds into the second measurement priority that we have which is ensuring that our advertising performance is well represented in advertisers preferred third party measurement solution. So that what I mean by that is that this is a core component.

Of building trust, so regardless of the impact of our advertising, our first party measurement well or not in alignment with advertisers prefer trusted third party tool, we're still fighting an uphill battle and those third party tools across both web and App have been impacted by policy changes they've just been particular.

Early acute for web based advertisers and has led to an increase in our relative emphasis on same session lap last quick based advertising, where we need to show that we our performance. We're still early in this journey.

From policy changes as you know are an ever evolving environment, but we do feel confident in our solutions and the opportunity ahead of us.

We're going to focus on this problem Holistically and we believe that we're going to improve performance in parallel with how we are represented within the third party tools than we get credit for the conversions that we do drive.

That will drive trust and our first party solutions, which will then enable us to focus on optimizing towards the privacy safe a favorable action and that will drive our advertising flywheel.

Thank you. Our next question is from Brent Thill with Jefferies. Please proceed.

Gary can you talk to the tradeoff to profitability and what are the steps you're taking.

As you highlight in the letter to emerge as a more focused company.

Hey, Bryan Thanks for the question first.

First I think it's clear our rate of revenue growth has slowed considerably and we.

You're acknowledging you must adapt our investment strategy. Accordingly, so first we intend to substantially slow our rate of hiring to effectively pause growth in our in our head count which is a significant portion of our Opex. In addition, we'll be.

Looking at the rate of operating expense growth that is non personnel related in order to stem the rate of growth in our overall operating expenses. The objective there being to get to a place where we can carve out a path to free cash flow breakeven or better even at reduced rates of top line growth.

As we implement these changes will be re prioritizing our investments and driving renewed focus on productivity in particular and in addition, we will focus our go forward investments around sustaining the investments. We believe are most critical to capitalizing on the future of <unk> and executing on the priorities we articulated in the letter and that are shared.

Year to date.

We may incur some transition costs, along the way as we execute on these changes, but we expect to emerge from all of that with more focused cost structure. As a result, so hopefully that gives you a sense of how we're thinking about it in terms of both a priority perspective, and how to bring the growth.

Our opex cost structure under control.

Thanks for the question I hope that provides some additional insight.

Thank you. Our next question comes from Mark Mahaney with Evercore. Please proceed.

Thanks, when you talk about diversifying your revenue streams I think Derek you mentioned, a couple of different areas maps spot.

Spotlight et cetera could you could you triage those a little bit of those different areas.

Which do you think he has got the greatest potential to the lease potential in terms of diversification and then I want to get back to one macro question in the in the.

In the script here you talk about macroeconomic challenges are disrupted many of the industries that have been most critical to your advertising solutions is there a is there a particular reason why the.

Macro pressures would have impacted your advertiser base more than what what would happen with other companies is there something about your advertiser base that may be more.

Mac economically sensitive than what would what would what we would see in the general economy. Thank you.

Hey markets.

Eric speaking.

Thanks for the questions and I'll jump in there on those I think in terms of.

Taken them in reverse order your second question there around.

Composition of advertising MRI might be more challenging for us I think first of all it's difficult to know what the composition of other folks' businesses are certainly we have a relatively lower exposure to small and medium sized brick and mortar businesses.

Part of that.

The substance there, but I think more than anything when you're thinking about.

Awesome decelerating from what was a very rapid rate of growth to nearly flat or approximately flat growth currently.

One of the challenges I think is pretty different clearly difficult is that it's much easier to gain share when budgets are growing and when <unk>.

Investment level with our growing and so it's easier to take share awards as we're seeing the overall advertising pie grow at a smaller rate than than that essentially intensifies the competition.

And then the last thing that I would share just here in terms of.

<unk>.

The composition of revenues that obviously, you've shared previously the significant majority of our revenue is direct response related and as I've mentioned earlier one of the things. We've tried very hard to do on behalf of our advertising partners. In recent years is to make it very easy to turn on and off direct response advertising at a scale that advertising very quickly.

And so.

As our partners were able to grow their marketing budgets and grow their rates of investment they were able to very easily and with very high return on investment scale their advertising with us, but that works in the opposite way when folks have to retrench their budgets and its very easy to trend down and so to the extent that we maybe skew in those two ways differently than other folks that might impact.

Oh, that's appropriate and then over the long term the question on where we see opportunity.

I think we've got a significant amount of green space on the application you talked about that over recent years.

One we're still obviously have room to go on our content business.

Today, we monetize today, but spotlight.

Relatively new product cross, we shared last quarter that we.

We have begun testing monetization there certainly were excited about that opportunity over the long term and expect that will expand the testing there into.

Into the back half of the year, especially later in the year when that sort of inventory it will be more helpful.

Obviously, the longest long term the most exciting opportunity is.

And we're investing heavily around the future of AOR to drive monetization and enterprise solutions for our partners and we're very excited about that opportunity to contribute to the business on a long term and of course, our medium to long term as the map and we're very excited about what we're seeing there on occasion with share some stats in the letter and some of the engagement that we're driving around maps and so.

Those are all exciting avenues to expand monetization across our business and then if you look further.

Other diversification opportunities that we've been discussing more recently, including the launch of Snapchat costs, obviously, a lot of opportunities here staying focused on our core priorities, it's going to be the key in order to execute on those numbers and long term growth. So hopefully that gives you a little bit of context to how we're thinking about it over the longer term.

Thank you. Our next question is from the line of Mark Shmulik with Bernstein. Please proceed.

Yes, Hi, Derek I know you mentioned a few times.

The ability to for snap to grow as AD budgets grow and I guess, what I'm wondering is in conversations with some of your core advertisers.

Much of the impact that they're seeing through their AD budgets would you say are transitory versus real permanent rebase and how they think about performance marketing and digital advertising spend.

Hi, Thanks for the question. This is Jeremy I can take this one.

Looking at macro pressures from a litany of different angles, and we're hearing of supply chain pressure inflationary cost of course that are impacting unit economics as it pertains to moving product, they're getting pressure from the cost of capital as we've talked about before capital being more.

<unk> as well as driving up in different areas.

And tomorrow as any of those are transitory I think that's yet to play out in the overall macro but what we're hearing from advertisers I think more specifically as it pertains to advertising budgets as what we said before.

Is that they are taking this time given all of those other macro pressures to reevaluate their priorities to ensure that they are making the right investments in the right places and when we talk about digital advertising. It is the easiest thing to turn off.

Said that a couple of different times, but I think it's important to reiterate here is that it is the most important thing to turn off but it is also one of the most performance tools in their tool chest.

As things start to rebound for some of these advertisers in the areas, where the macro pressures are a little bit more transitory. It's also the first thing to get turned back on so we're remain optimistic that as things hopefully start to improve in the macro that we can capture that opportunity by remained focus on the three key priorities that we've articulated in the call earlier.

Thank you. Our next question is from Doug Anmuth with Jpmorgan. Please proceed.

Thanks for taking the question.

When you think about the new sources of revenue you talked about some of the new surfaces, including spotlight in Cameroon, perhaps Matt further out how do you think about balancing opening up more inventory there.

Whats essentially more of a demand problem near term.

And then on a related question could you just talk about spotlight engagement and the expense, which you think it's the incremental versus a shift for users within the platform. Thanks.

And there it's Eric speaking.

I can take the first one there.

Just in terms of.

From a very short term perspective, I would say the primary issue as you've alluded to is about demand generation. So in the near term very focused on demand generation I think that opening up new sources of inventory.

New sources of supply over time are really critical for the long term growth in the long term health of the business, which is why we're focused on continuing to invest in the growth of the community and are continuing to invest in our content business is on the map and of course, our AI capabilities. So that we can generate more effective inventory over time and of course, if we're thinking of.

Ramping testing of the monetization of spotlight of course, we think about the course of the year and where demand generation peaks over the course of the year and so in the very near term I think you are right that predominantly this is about demand.

And to which incremental supply is going to be helpful is really over the medium and long term and so fortunately the healthy growth in the community and the healthy engagement, we're seeing across our platform.

It's really helpful to driving that long term opportunity.

And then in terms of spotlight versus.

Incremental versus within the platform when we look at content and games.

Very focused on continuing to see people engaging with stories from the friends and family. That's one of the things that bring them into discovery and helping them segue into additional entertainment compound from discover or spotlight we've.

We've been pleased to see the overall time spent watching content grew globally year over year and of course finally to sell also doing very well growing 59% year over year on time, and Mou growing 46% year over year to reach for the $270 million, So certainly being able to grow the overall content and engagement and then being able to grow slightly.

At accelerated rates.

Is encouraging for the overall engagement piece, but at the same time, we are still seeing discover do very well, including <unk>.

Generating very wide viewership growth.

Users over the age of 25, which is exciting for growing and aging up with our community. So overall.

When you step back and look at the service, we're particularly excited about the growth in our overall community. That's the key input to them driving people into each of our product, having <unk> up 18% year over year or $54 million is a great sign of health in the overall community and then working people into our products from there is the key so hopefully that gives a little bit more context and thank you.

Much for the question.

Okay.

This concludes our question and answer session as well as Snap Inc. Second quarter 2022 earnings Conference call. Thank you for attending today's session. You may now disconnect.

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