Q3 2022 Snap Inc Earnings Call
Our revenue growth and investing in augmented reality, we believe that we can be successful in this new operating environment, but we must rigorously prioritize our investments and continue to delight, our community with our products, while driving success for our advertising partners.
Growing our community engagement is one of our most important inputs the long term success because it increases our overall revenue opportunity and strengthens our network effects. Our team remains focused on expanding our product offering and deepening engagement with our global community, which increased 19% year over year to reach 363 million daily active users.
Our revenue grew 6% year over year to $1 3 billion and we generated adjusted EBITDA of $73 million in free cash flow of $18 million. We are focused on increasing our share of wallet is growth in the overall digital advertising segment flows are working to increase the return on advertising spend delivered by our direct response advertising platform. As we believe these are the most advanced.
Full advertising budgets in a challenged economic environment.
To achieve this we are investing in driving scalable lower funnel performance for our advertising partners and making improvements to our on platform and auction dynamics. So that we can continue to deliver strong returns on advertising spend for.
For camera has evolved into a leading platform for augmented reality or AR products and services are already driving a major impact at scale today, a snapshot or use our services to shop play learn explore and entertain themselves. This quarter, we announced several new valuable partnerships innovative experiences and new features and capabilities and lens studio.
Over 250 million people engage with augmented reality on Snapchat every day accelerating our lead in augmented reality helps us build a durable competitive advantage that comes from investing over the long term building sophisticated technical tools and capabilities and growing our platform that is increasingly differentiated and difficult to replicate.
This momentum in the creative energy of the Snapchat community. It makes us incredibly excited about the future of augmented reality.
As part of our re prioritization efforts, we have reorganized our teams and better meet the challenges of the current environment and to make as much progress as possible as quickly as possible in the areas of our business that we are able to control in particular, there is a significant opportunity to improve coordination and prioritization across our engineering sales and product teams in an effort to re.
Realize this opportunity we promoted Jerry Hunter to Chief operating Officer, Jerry leaves, our monetization efforts across our three operating regions, EMEA, APAC and Americas as well as our engineering growth partnerships and content <unk> enterprise and SMB teams.
Jerry has repeatedly demonstrated operational rigorous scale, leading our business through several challenging transitions, including the build out of our advertising platform. The rebuild of our Android products are infrastructure optimizations, and most recently significant investments in our platform integrity team with.
That I'm excited to introduce Jerry.
Thanks, Kevin and thank you everybody for joining our call I see significant opportunities for our business in the years ahead.
As the business our primary focus is on driving lower funnel performance and improving yield of our inventory for advertising partners, we're working to improve optimization against lower funnel objectives to drive more conversions and innovating on our advertising formats in order to make them more native and engaging.
Improving our product and technical performance of our advertising platform requires tight collaboration and teamwork across sales product and engineering are.
Our renewed focus will be on creating alignment across our teams to ensure that feedback from clients helps inform our product roadmap and that each of our teams is more directly accountable for advertisers' success.
After years of rapid growth in the size of our team we're focused on driving productivity in our sales organization and improving our go to market with more clarity about the role that Snapchat plays in the lives of our community and how we can help businesses grow.
We will listen to our clients clearly understand their challenges and opportunities and demonstrate how snapchat can play a meaningful role in driving their success.
We're also working hard to deliver new revenue generating opportunities, including spotlight augmented reality advertising and our Snapchat plus subscription service.
We're expanding our advertising test within spotlight in Q4, especially as we see many opportunities to introduce advertising formats that align well with this new content viewing experience.
With hundreds of millions of people are using every day, we have a huge opportunity to help businesses reach their customers with immersive and engaging augmented reality experiences.
<unk> chat plus represents an exciting opportunity to diversify our revenue streams outside of advertising and.
And we have a direct ability to increase subscribers with new product features and by driving awareness of our subscription offerings.
I couldnt be more excited to be here at snap and I look forward to sharing more about our plans for 2022 and beyond thank you and with that we can begin our Q&A.
Thank you.
Now begin the question and answer session to ask a question you May Press Star then one on your attach Samsung if 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 actually.
Our initial question is that your line will be muted at this time, we will pause momentarily to assemble our roster.
The first question comes from the line of Eric Sheridan with Goldman Sachs.
Thanks, so much for taking the question maybe I'll do a two parter if I can I think first Evan would people still.
Here is sort of looking back over the last four or five quarters as apples, Dave the policy change as they did in the industry has been in the sort of transformative mode over the last 12 plus months would have been some of the key learnings of where you found the infrastructure and the AD product, maybe a less less well positioned.
In terms of what's happened from an industry shift standpoint, and turning to the forward timetable, you've obviously laid out an investment plan to sort of reposition the product for the long term can we get a better sense of like where you are in the process of repositioning the AD platform for the medium to long term and how should we be thinking about what the path.
He is in terms of headwinds versus tailwind from a monetization standpoint. Thanks.
Thanks, Eric Yes, so at a high level, we're focused on building our business for the long term and that means that we really put our community at the center of everything that we do and we innovate to offer products that add value to people's lives by empowering them to express themselves live in the moment learn about the world and have fun together and that long term and <unk>.
Active is really what informs our strategy as we think about navigating this difficult macro environment that has impacted our advertising business over the past few quarters.
So we made the decision to re prioritize and focus our investments on our three strategic priorities growing our community and their engagement re accelerating and diversifying our revenue and investing in augmented reality and these changes should allow us to drive continued growth in our community, while delivering free cash flow, even with low levels of revenue growth and that gives us a lot more flexibility to focus on the long term.
An environment, where the cost of capital has increased quite dramatically.
There's a lot of opportunity to generate incremental revenue across our platform, whether that's our AR platform spotlight or the map. We've also been growing our snapshot plus subscription service, which is another way that we deliver value to our community and allows us to monetize the high levels of engagement that we have across our service operationally our advertising business has become a lot more technically.
Complex over the past few years as advertisers are working to better measure and optimize their campaigns that means that we need to drive increased coordination across our sales engineering and product teams, which is one of the reasons I'm. So excited to have Jerry leading these teams as our COO I've already observed a significant change in the way that our teams are working together and I'm really pleased to see the folks.
<unk> on our advertising customers driving everything that they do I mean, tactically really that means working to make conversions on our platform more observable and easier to measure whether that's more on platform or click through conversions.
Movements are first party tooling third party tooling and partnerships AD format improvements ml and optimization improvements and of course continuing to grow our inventory we saw about an 8% increase in impressions year over year in the quarter, which is really a function of daily active users and engagement.
And then.
We're looking to the future, we really tried to make sure that all of our investments are lined up against those three strategic priorities.
I mentioned community growth revenue growth.
And that's really how we're going to be working through this challenging environment.
Okay.
The next question comes from the line of Brian Nowak Morgan Stanley .
Great. Thanks for taking my questions I have two maybe Jerry let me ask you a couple so just could you give us some examples of one or two of the most important steps that you see yourself focusing on to really improve the the performance driven business and how quickly that business can ramp within the overall mix.
Blocking and tackling and then the second one with with U S time spent down 5% and really the core snap stores seem to be what are in decline.
Do you think about sort of differentiating the pitch to advertisers and even users is your engagement increasingly driven by by short form video and long form video. Thanks.
Thanks for the question Brian .
I am excited about the opportunities we have for our business advertising has become more technical as signals and measurement continue to evolve I actually have three things I want to tell you about first is building out the connective tissue between sales engineering and product that includes feedback mechanisms into product from sales and customers and better go to market planning that ensures customer success on our platform.
<unk> two is continuing to strengthen our <unk> business, which we know is more defensible both in good and challenging times, we'll do this by continuing to drive our first party measurement and we're seeing strong adoption by our top advertisers, making our systems work better with third party measurement systems, like Google analytics, and continuing to improve personalization optimization.
And the third thing is bringing top talent to our three president roles for the Americas, APAC and EMEA, one of whom run inherits is going to join US next week. This will ensure that we're improving our focus on customers in every region and getting closer to the customers needs. I think these priorities will set snap up to be successful in this current environment.
Thanks, Yes, I can speak a little bit to that.
Content trends.
That we're seeing in the U S and more broadly so at a very high level both in the U S and globally viewership is up and so that means that our overall opportunity is expanding if we can continue to increase our folks depth of engagement and thats really important of course for advertisers, who really value the reach that we provide.
Looking more specifically at stories, what we're finding is that while people continue to engage at really high levels with stories from their close friends or private stories.
Especially from people that are really important to them that depth of store engagement as you get you get to your 200 brand or something like that at some point you know content on spotlight discover maybe more engaging or more interesting and so what we're trying to do is help people transition from that front story content that really drives that healthy top of funnel and viewership.
<unk> content in spotlight and discover and both of those are growing nicely spotlight of course is growing very very rapidly year over year and we're excited about that I think as it pertains to advertisers as I mentioned they are really looking for reach but they're also looking for performance, especially in this period of time, which is why we focus so heavily on evolving our direct.
Response business.
And making sure that we're really delivering return on AD spend for our partners I think they're going to be some unique opportunities with things like spotlight for example, where smaller advertisers can experiment with content submitting content to spotlight seeing how it performs and then if they get some traction there and get feedback from our community.
They want to turn into a direct response advertising unit and manage that through our AD platform. So I do think some of the content investments, we're making provide new and unique opportunities for advertisers, but really especially in this environment. The focus is going to be on reach and performance.
Okay.
The next question is from the line of Rich Greenfield with <unk> partners.
Hi, Thanks for taking the question I want this one specifically for Evan.
I guess.
Pretty obvious that you're sticking utility for photo based messaging.
Especially among sort of your core demos, but you are clearly losing engagement time spent to tick tock and maybe even other camera apps that have come onto the scene like be real impacting sort of overall time spent per user per day, and then in turn monetization.
Curious on the I guess, the most important question for you, especially on the product side.
Like how do you get people to spend more time on on Snapchat, and especially more monetize them. All time spent on Snapchat and like what is the plan for that in 'twenty three.
That's what investors are going to really be anchored on as they think about your stock over the next year.
Thanks Rich.
High level as you pointed out snapshot provides an extremely valuable utility in terms of visual messaging, but also across our service with things like the math of our AR platform and of course content. As you also mentioned and so we've really worked hard to diversify engagement across our products and our application opens to the camera. So we've got a real strength in visual communication and augment.
In reality the remains under monetize which is why we really focus on accelerating our revenue growth in augmented reality. So that's more commensurate with the engagement that we're seeing there and we believe that the differentiated nature of our service is what's contributing to the daily active user growth, which grew 19% year over year to 363 million daily active users.
In terms of the content.
Specifically I think Theres a lot of headroom of course to continue to grow content engagement as I mentioned viewership has expanded and we're continuing to see a lot of demand for content and spotlight, which is growing nicely and our discover platform. I think we can do a better job, helping people transition from print stories, where private stories into those types.
Content and relative to other services, where people are spending a lot of time watching content. We believe we have a lot of headroom to increase content engagement, so working to improve content diversity and personalization to realize that opportunity overall of course impressions grew 8% year.
Year over year. So we are seeing some progress there.
Your next question is from the line of Mark Shmulik with.
France team. Please proceed.
Yes, hi, thanks for taking the questions a couple if I may 1st for Evan I know, what the leaked memo there was kind of the numbers out there.
General expectations for 2023.
Color you can share just how that's changed given this is a fast evolving macro market and a lot of changes with kind of new executives like Gary on board and kind of the plans in place there.
And then secondly, Jerry I'm trying to think about kind of new levers of monetization and I know, we're talking about are kind of spotlight coming onboard here in the fourth quarter.
Any color you can share and just kind of the roadmap of what else is there to kind of really reaccelerate revenue growth I kind of look at that like Samsung So $2 5 billion snaps and so just how do we think about like camera kit and <unk> monetize as well.
Yes.
Hey, Thanks, Mark Yeah. So that was an internal memo that we weren't intending to share publicly and as such had a number of aspirational goal is really designed to rally the team, especially at a time when we are restructuring and refocusing our business. It's really important for our team to see the enormous opportunity that we have in front of us.
Re accelerating our revenue growth by improving our direct response business that are monetizing the enormous amount of engagement that we see obviously in our camera and continuing to grow and build on Snapchat plus so we certainly see a lot of opportunity there and the goal is really as we look to 2023 and inspiring our team I.
Some really challenging times in the past when expectations were really really low and internally, we tried to really inspire our team and that's what helped us deliver a 50% year over year revenue growth on average the last five years or so so I think especially in really challenging times when we've taken the necessary steps to make sure our business can be successful over the long term.
Inspiring the team is critically important but those goals, our internal and aspirational.
I'll take the second part of that question.
In addition to the work on AAR and accelerating the <unk> business that I haven't touched on I just want to give you a sense of how we're refocusing and realigning sales engineering and product teams around the customer. So let me give you. An example of a program. We started a couple months months back called that reference customer program. The idea is to find customers that we want to ensure getting the most from our platform.
We brought several Swat teams together a Swat team that included folks from the account team the engineering team and product teams to review.
Every aspect of how the advertiser was using the platform and we found that through this we were able to help improve their implementation better utilized features that are already in the platform in a couple of cases did a little bit of feature integration work and all of those cases, the customers had higher rois than expected and they were happy with our results now.
Now we are in the process of rolling these successes that the other customers who might have similar opportunities and I think that that's just a product of this of bringing the teams together. So I think theres a lot of opportunity for us to just bring teams together and take advantage of what we've already got out there and have it implemented in a better way.
Next question comes from Ross Sandler with Barclays.
Okay.
Hey, guys just wanted to throw the macro question out.
So it sounds like it's mostly brand advertising that was weak in <unk> and it seems like that's the area that's <unk>.
Forecasted to really drop off as we kind of go forward here in <unk>. So could you just maybe elaborate a little bit on what you are seeing whats.
We can obviously see what's going on with the macro broadly, but specifically to the rest of this quarter commitments youre looking at that would cause those growth rates to kind of dip into the negative.
And then related to one of the prior questions Youre growing your <unk>, almost 20% and impressions, 8%. So it seems like we've just got a demand problem here not a supply problem can you just talk to that a little bit. Thank you.
Hey, there it's Derek speaking thanks for the question.
Yes in Q3, the deceleration in revenue growth was really observed across both our direct response and brand advertising business with the direct response advertising growing modestly faster than the overall business, while the brand oriented advertising business declined slightly over year over year in the quarter and then in Q4 as we look forward, we expect the brand business.
To play a bigger role in the diesel that we anticipate to occur as we move through the quarter.
And that being due to the fact that number one the growth rates were very high in the prior year, but also it has a bigger portion of the business in Q4.
Stepping back we've seen revenue growth move around over the last several months, but within a relatively tight range. So there'll be grew about 13% in Q2, but we saw that decelerate as we move through the quarter and this led us to sharing we reported last quarter. The growth was approximately flat in the early portion of that quarter by the end of August when we.
Sure the AK about the restructuring the quarter to date revenue had improved to about 8% so that imply things accelerated a bit with.
With a full quarter number at six this quarter, obviously things slowed down to about the low single digits in September So and then we've seen things move up a bit in Q in the beginning of this quarter with the early weeks being at about 9% and so if you sort of take that together.
And what we're seeing is the growth rate has moved around month to month and accelerated or decelerated a couple of times, where we've largely been range bound here between Florida and the low teens as we continue to navigate this really difficult operating environment I think the thing I'd share here. That's really important is something we've talked about several times in recent quarters, which is that it's.
<unk> fast and easy for advertisers to turn digital performance advertising on and off as they seek to calibrate their investments in their own growth in their business and that's part of what we're seeing here with the start stop on the growth rates in the <unk> that we've experienced so as we're navigating this it's incredibly important that we stay focused on the inputs that we control.
Heard a lot about that from Evans, Jerry earlier around the investments that we're making to grow the community the investments to improve the Dr business and of course things like Snapchat, plus which are helping to diversify the top line growth and of course, the future of <unk>.
And then.
To your other question <unk>.
In terms of.
Supply versus demand, we continue to believe we have significant room to grow our advertising business.
And so I do believe that as you've seen the macro challenges compounds on some of the platform changes. We saw last year certainly we've been demand challenged and we continue to see a lot of opportunity to grow grow our business with ECP with impressions as you seen in the most recent quarter with those compression is growing but also through <unk> as we can continue to get better.
At our direct response business, including optimization personalization ranking which Jerry talked about a lot earlier. So I agree with you on that point and hopefully all of that provides a little bit of context for your question.
The next question is from the line of Lloyd Walmsley with UBS.
Thanks <unk>.
First one is just you talked about expanding spotlight tests. This quarter, you just talked about being kind of just demand constrained. So curious how you guys think it plays out if we think about adding inventory from a spotlight, reducing ECP EM, how responsive as the AG community.
Moving budget over.
That AD load Ram since Cpm's come down how easy is it for advertisers to shift that creative and ROI in the spotlight format.
And then second one if I can.
You talked about taking $450 million out of the cost base I think it was kind of an exit <unk> annualized.
Number can you just talk about what kind of growth, we should expect on that new cost base.
In terms of either head count inflation or other cost growth.
This new base heading into 'twenty three.
Hey, it's Derek speaking thanks for the question. So in terms of the first one around monetizing spotlight as we look into Q4, we will expand our advertizing tests within spotlight, but in addition businesses already have several mechanisms to test and learn directly within spotlight. So businesses are able to submit content that spotlight see Howard.
Performs within our community received direct feedback from from our user base and then use those learnings to inform their campaigns. We believe that this is a good example of how spotlight offers an exciting new way for brands to experiment with their video creative and learn how to make content and inspires. The community. We're also working on new tools that will enable businesses to easily promote their mo.
Engaging spotlight content drive conversations and then measure their success without managers. So at a high level, we're really excited about the potential for spotlight.
But we also have a lot of room as I, just mentioned to grow our advertising business, regardless of how and when we ramp spotlight I bought it.
<unk>, sorry, so we're ramping our testing judiciously there to make sure that we maximize long term value.
The next question is from the line of Mark Mahaney with Evercore.
Okay. Thanks, two questions. Please.
First is.
As you tried to thoughts on <unk>.
<unk> when that comes out sometime this quarter do you think your thoughts on whether that will help you or not and at the same time I think <unk> been trying to recover signal you've been doing a series of things to try to improve.
At attribution and targeting just where are you on that and then you talked about ROI in the shareholder letter. So can you just quantify like for people running campaigns consistently running campaigns, how impaired is the ROI versus where it was kind of a year ago and the path to getting that back to levels that you had at that time.
Thanks, a lot.
Hi, This is Jerry let me talk about that first one on <unk>.
To take step back here, we think it's critical measurement is critical and it's why we've invested so heavily in first person third party measurement and scan fernando's important accounting changes are definitely need improvements to help advertisers achieve their business goals and better campaign attribution and more granular reporting should give us even more headroom for.
For improvement.
For the ROI part of the question we are constantly evolving the best way, we serve our advertisers, we're continuing to update and improve our first party measurement solutions, which youre seeing continued adoption of our top advertisers and theyre seeing success on our platform as a result.
We're also continuing to prove the way that third party measurement systems like Google analytics are reflecting conversions in our systems and we're seeing positive results there too.
We're also driving.
Our direct response ads to better convert right on our platform that improvements happening through more experimentation with ml and integrating data from our privacy protecting first party measurement solutions, so that our ranking and personalization are more effective.
I wanted to come back to the fact that this AD space is more technical and it is just as important as the rest of these to talk about that integration between sales engineering and product teams and the processes that ensure that our advertising partners are achieving success by a cross functional process tighter lines of communication and faster responsiveness to their opportunities and challenges.
Our last question comes from the line of Brent Thill with Jefferies.
Thanks, just on the on the brand side I think many are curious kind of why brand will suffer so hard going into a seasonally strong period.
Is this more macro related is it is it given some of the restructuring is that having some impact and I guess I mean, if you can also follow up on that I know.
There's been a lot of change when do you expect that to kind of stabilize in that to flow through the system and you feel like you're on your on the right Foundation from from this restructuring activity.
Hey, it's Derek speaking I'll take the first part of that and then hand it off to Evan.
I think first just stepping back for context on Q4.
Even flattish year over year revenue growth of about a 15% step up on a quarter over quarter basis. So we are expecting revenue to grow seasonally at a pretty good clip.
So the issue that we're seeing here is that if you look back to a year ago, we grew at over 40% year over year in the prior year and many of the really significant macro impacts that we've seen over the course of this year werent impacting the business nearly as much as they were a year ago. So for example, the persistent inflation we've seen this year, but the ramp.
The fed rate cycle as well as the onset of the war in Ukraine that really had an impact on growth rates as we moved into Q2, and so while we're still expecting really pretty robust, 15% approximately year over quarter over quarter growth in Q4.
Comp to the prior year.
And the fact that the macro impacts of buildup in compounding on each other over the course of this year is really making the back half of this quarter and number one in a little bit more difficult from a visibility point of view and certainly with the performance that we saw from the brand portion of the advertising business in Q3, given the sort of informs our expectation of the diesel as you move through the rest.
For the quarter. So hopefully that gives you a little more context on that side of things I'll turn it turn it over to Evan for the second portion there.
Hey, Thanks, Brian for the question, Yes, I mean, these sorts of changes and restructurings are always challenging and I'm really just grateful to the team and really proud of how quickly they've worked to adapt and really make sure we're focused on our.
Key priorities.
It's going to take a little bit of time, we certainly have regained some momentum in focus but the process is still concluding in certain countries where regulations require.
Those processes take a little bit longer so I wouldn't say that we're.
Complete there I think one thing I'm watching specifically is on the sales side. We've got these president roles Rone is Ronan Harris who's joining of it later this month.
President of EMEA, but will also have an APAC president and in Americas, President and will be putting folks.
And so those roles as soon as we can and in addition to that we're also thinking about how to better organize our sales teams to go to market in a way that best serves our customers and we're sort of thinking about Q1 is that the timeline for that so we're certainly not done with this process, because we see more opportunity to streamline and improve the way we serve our.
Advertising partners I know Thats, something Jerry is thinking a lot about but overall if you just look at how the team has managed this period of time I'm really proud of the work Theyre doing and the progress we're making.
Yeah.
This concludes our question and answer session as well as Snap Inc. Third quarter 2022 earnings Conference call. Thank you for attending today's session. You may now disconnect.