Q4 2022 Snap Inc Earnings Call

Speaker 1: Good afternoon everyone and welcome to SAP EATSport Quarter 2022 earnings conference call.

Speaker 2: At this time, participants are in a listen only mode. I would now like to turn the call over to David Omitr, head of investor relations. Thank you and good afternoon, everyone. Welcome to SNAP's fourth quarter, 2022 earnings conference call. With us today, our Evan Spiegel, Chief Executive Officer and co-founder, Jerry Hunter, Chief Operating Officer, and Derek Anderson, Chief Financial Officer.

Speaker 3: This conference call includes forward-looking statements which are based on our assumptions as of today. Actual results may differ materially from those expressed in these forward-looking statements and we make no obligation to update our disclosures. For more information about factors that may cause actual results to differ materially from forward-looking statements, please refer to the press release we issued today, as well as risks described in our most recent Form 10Q, particularly in the section titled Risk Factors. Today's call will include both GAP and non- GAAP measures .

Speaker 4: Reconciliation 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 in non-recurring charges.

Speaker 5: Please refer to 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 over to Evan.

Speaker 6: Hi everyone and thank you all for joining us. 2022 is a challenging year for our business, as we continue to be impacted by macroeconomic headwinds, platform policy changes and increased competition. We've taken action to refocus our investments to support our three strategic priorities of growing our community and deepening their engagement with our products.

Speaker 7: continue to drive strong growth in our community, ending the year at 375 million daily active users in Q4, an increase of 17% year over year. Our team continues to innovate rapidly in ways that support the growth of our community.

Speaker 8: For example, in Q4, we released communities to expand our content offering, onboarded several new media partners, doubled down on our progress with Spotlight, and launched new Snapchat Plus features, each of which helped drive engagement across our service.

Speaker 9: For the full year, we generated $4.6 billion of revenue, up 12% year over year, and generated $1.3 billion in the quarter, or flat year over year, reflecting the rapid deceleration in digital advertising growth.

Speaker 10: Direct response advertising is a critical way that many companies grow their businesses.

Speaker 11: as it is one of the most performant and measurable forms of advertising.

Speaker 12: We have made progress updating and improving our ad platform over the past year across three key areas, investing in observability and measurement, improving engagement and conversion quality, and increasing the volume of high quality engagements and conversions.

Speaker 13: In the very near term, it will take time for these improvements to translate into improved top-line growth. Over the long term, we believe that delivering higher return on advertising spend and utilizing our inventory more efficiently, our critical inputs to gaining share of wallet, accelerating revenue growth, and realizing the full output potential of our business. In the very near term, we believe that delivering higher return on advertising spend and utilizing our inventory more efficiently.

Speaker 14: We believe that the camera represents our greatest opportunity to improve the way people live and communicate. Over the last decade, we have made significant advances to our AR software and hardware that have enabled the growth of the sophisticated AR platform that we have today. Over 250 million snap-shutters engage with augmented reality every day on average.

Speaker 15: And we are investing rapidly and thoughtfully in the future of AR to further expand our leadership position.

Speaker 16: We continued our path to sustainable profitability by generating $378 million of adjusted EBITDA in 2022, achieving our third consecutive year of positive adjusted EBITDA. We also generated $55 million of free cash flow in 2022, achieving our second consecutive year of positive free cash flow.

Speaker 17: 2022 brought significant challenges for our business, and we have emerged with a highly engaged and growing community, a more focused team and cost structure, a clear path to delivering sustained and just able to profitability and positive free cash flow, and a strong balance sheet with $3.9 billion in cash and marketable securities. We begin 2023 focused on executing, again, start three strategic projects.

Speaker 18: With that, we will begin our Q&A session.

Speaker 19: Thank you. We will now begin the question and answer session to ask a question. You may press star then one on your touch tone phone. If you are using a speaker phone, please pick up your handset before pressing the keys.

Speaker 20: To withdraw your question, please press start then to.

Speaker 21: 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 roster.

Speaker 22: question comes from Justin Post with Bank of America.

Speaker 23: Great, thank you for taking my question. Clearly, it's a tough environment for the digital economy overall. Can you talk about one of some of the bigger first quarter revenue headwinds from SNAP from a macro perspective? And then can you go into the monetization changes that you are making in the quarter that could have a positive longer impact on the model? Thank you.

Speaker 24: Thanks, Justin Hayatt, Kevin. From our recent conversations with our partners, it seems like advertising demand hasn't really improved, but it hasn't gotten significantly worse. Either the brand spend is significantly reduced like we saw in the quarter, but our direct response business. Thats it.

Speaker 25: continue to grow in Q4. In general, it seems like our partners are just managing their spend very cautiously so that they can react quickly to any changes in the environment. I think as we look at Q1, the most significant impact thus far have really been the changes we're making to our ad platform. Maybe just like taking a step back here. We've really been on a journey re-architecting our ad platform. We shared a lot over the last year.

Speaker 26: The majority of our revenues now measured using signals from conversions API, pixel integration scan, or MMPs. And so a lot of what we've been doing is taking this improved measureability and using it to improve the value of those conversions. And so some of the things we've shipped recently in Q1 at the beginning of the quarter are big changes to our in-app UI.

Speaker 27: which we believe will help improve consideration because it aligns the the ad UI with the more organic content experience. We've done a lot of work to improve our in-app web view performance which we believe can help contribute to improved conversions on the platform. We've updated our user ID graph which helps improve attribution as well and you know some of the early results.

Speaker 28: So overall, obviously the results are early, but we're excited about these changes we're making. And then what we're doing is we're taking our machine learning models and we're training them on these higher value conversions, which will hopefully help us scale the overall number of those conversions over time. But the net net, the impact in the short term is really...

Speaker 29: that advertisers are experiencing these higher value conversions, but there are fewer of them as our models retrain. You know, and hopefully as we progress to the quarter, we can improve and increase that volume overall. And obviously, you know, in addition to larger advertisers, these changes really benefit smaller advertisers who are much more reliant on last click conversions for measurement, you know, maybe because they...

Speaker 30: have implemented our conversions API or don't have a data clean room for example. So this I think of course is a near-term headwind to the business but we're very excited for the long-term potential of these changes and we're working really hard on it.

Speaker 31: Thank you. The next question comes to remarks, Felix, with Alliance for Enstein.

Speaker 32: Yes, I think for taking the question. So it looks like time spent on content globally was off.

My apologies, Mark has dropped.

The next question comes from Ross Tamler with Barclays. Please proceed.

Hey, Evan, I've got a high level technology question. You guys have been stating forever that you're a camera company and we've seen an explosion in these new generative AI tools. How do you see those impacting your business? We have examples of mid-journey inside of Discord driving up.

engagement for them. Do you see the same kind of opportunity inside of SNAP? Or do you view this as possibly a risk if people are going to the camera less? How do you see this impact in SNAP over the next five years? Thanks a lot.

Thanks, West. Yeah, we're so excited about the opportunity around generative AI. It's a huge opportunity for us. And we're already investing a ton. You know, a lot of our most sophisticated AR lenses use generative AI technology. And we also see a lot of opportunities just to make our camera more powerful with generative AI. I mean, you know, I'm in.

Some simple examples are like improving the resolution and clarity of a snap after you capture it or you know even much more extreme transformations or editing images or snaps based on a text input. But you know if we think longer term you know five years as you mentioned it's going to be critical to the growth of augmented reality so.

you know today if you look at AR there's just a real limitation on what you can build an AR because there's a limited number of 3D models that have been created by artists and we can use generative AI to help build more of these 3D models very quickly which can really unlock the full potential of AR and help people you know make their imagination real in the world you can imagine playing around with your kids

studio and it's really enabled creators to build some incredible things. We now have 300,000 creators who built more than 3 million lenses in one studio. So the democratization of these tools, I think will also be very powerful.

Thank you. The next question is from Richard Greenfield with LightShud Partners.

Hi, thanks for taking the questions. One, I guess I wanted to just follow back on.

Hi, thanks for taking the questions. One, I guess I wanted to just follow back on the initial topic of this.

DR was up 4% in Q4, which is actually a pretty encouraging number. But it sounds like you're talking about in Q1, basal, you're gotten. If the changes you're making, you're going to drive that DR to go from up forward to down something. Can you just help us better understand?

You know as a DR flywheel and your investment start to kick in. Why is it not driving sort of accelerated spend? Why is it actually hurting? I know you wrote a little bit about it in the letter, but I think there's a lot of confusion of sort of why that Inflestion to the negative in dr as you're sort of investing to improve it

And then just on engagement, you made a comment that global time spent was up on content. Was that true in the US or was that more of a global comment? And then on friend stories, you said it was down in Q4, is that TikTok, Reels, shorts, just any color on what's driving sort of the pressure on friend stories in Q4 would be great.

Thanks, Rich. There's a lot in there. Let me see if I can get to all of it. I think at a high level on the DR business, as I mentioned, the key here is that we're really improving the overall value of those conversions. But as a result, the volume of those conversions has decreased.

up and their third-party measurement tools, for example, and then go in and increase their bids to reflect that increased value. And so overall, that sort of disruption. And again, when you layer in, of course, the changes to the app UI and even things like our sales reorg channel redesign this quarter, it's a lot all at once. But frankly, we'd rather rip the bandaid. And so...

at once. So they're disruptive, but I think the really exciting thing is that it is having the intended impact in terms of value to advertisers and frankly the expected impact in terms of the disruption to our business. So we're going to continue to work through it, but again, the improvements we're seeing in terms of third party match rates as well time.

non-bounce rates. That's all really exciting. I think an overall input to improving return on advertising spend for our advertising partners. And then, you know, I think about content time spent. So I'd say overall, you know, content viewers continue to grow content products, including spotlight friend stories, crater stories, partner.

with content. The most important thing is really increasing spotlight, viewership, and engagement. We think we've got a lot of headroom here. We're excited about the 100% year-over-year growth on time spent in 30% year-over-year growth in spotlight, MAU. We're also continuing to invest in new creator tools and growing our creator ecosystem.

to increase, you know, creator content supply and diversity. That was definitely a bright spot in the US where, you know, time spent watching creator stories grew 10 percent, you're over year in Q4. And then we're making a lot of product improvement and innovations around, you know, friend stories, including things like community stories, which we think are really valuable.

to our community and then, you know, lastly, obviously, onboarding new media partners who are driving significantly in viewership and time spent as we shared, you know, in the letter. I do think, you know, short video competition is gonna continue to be very intense. You know, our community loves watching, entertaining short videos.

So what we're really trying to do here is just play to our strengths around our camera and messaging. We benefit from the enormous amount of video creation happening on our platform, over five billion snapscreen every day, and this network of close friends who really enjoy sharing videos across our platform. So I think we'll continue to play to our strengths there. It's part of what's contributing to the great growth we're seeing in Spotlight.

Thank you. The next question is from Brian Noak with Morgan Stanley .

Thanks for taking my questions. Just to kind of go back to the ad disruption in the near term, I kind of laid out on page 9. I guess one of the questions I have, maybe I'm just trying to not really understanding it, is the way to think about this, the value of the advertiser is going up because in the near term you're sort of increasing the effective ad load. So we should think about going to develop the value of me.

platform-wide pricing going down in the near term. Is that right or am I sort of off there is the first one. Then the second thing, one of the important aspects of driving a direct response business is sort of data capture and being able to build cohorts of users. Could you just talk to us about some of the data capture that you already have and how you think about the potential to sort of cohort these users?

product in particular that's been very popular both for posting and from an engagement perspective and you've seen that contribute. I'm sound thoroughly and ad-load is driven by you know positive engagement with that product and then in terms of you know what we're seeing in sort of the overall ecosystem of the auction what we're doing here is using our inventory significantly more efficiently.

And so that has the effect of actually returning impressions back into the oxygen which have to be absorbed across other GVBs and you know sort of puts downward pressure all else being ill-cool on the contestation and the oxygen. And so you know obviously that increases the opportunity for Rhoaz in return for advertisers and...

All of being equal, what you're seeing that do is translate into lower ECPMs in the short term. But the improvements that we're making to the DR platform, you know, in translating into longer dwell times, lower bounce rates and some of the metrics that have been shared with you short earlier, really are improving the value of the actions we're driving. And so that is more performative for the overtoucher.

demand environment. I'll turn it over to Jerry for the second part of your question. Yeah, thanks, Derek. Brian , thanks for the question. Let me just give you a little, a little...

about how we think about this data. So we have a bunch of ways that we're collecting data. So conversion API, pixel, data clean rooms, it's like Evan talked about earlier, multi-party computation, MMP, and all of these signals feed into our system and give us a better view of what's happening with customers and conversions.

Add to that the changes that we made to the WebView and to the ad format. So we get better signal about how our customers are interacting with our product. These all come together to train our ML. And that gives us better targeting over time. So the way we think about this is sort of a circle where there's constantly information that's coming in.

the board and better our row as for our customers.

Thank you. The next question comes from Mark Mahini with Everquire.

Okay, thanks. I think I just asked one question on the monetization of spotlight. It's something that's gone back and forth on for a while now. Let's see. I don't want to see what's to hold up in monetizing spotlight, but I do kind of want to ask that. What are the factors that you're looking for that allow you to be a little bit more aggressive in monetizing what's clearly a really strong growth asset for you? I know you don't want to undermine it.

the user experience, but when do you make that on off decision or that full on decision?

Hey, Mark, it's Derek speaking. I'll to contact that question for you. I think for context, just to start, and I hinted out this a little earlier in the prior question, we definitely believe that we are demand constrained and not supply constrained at the moment. And to sort of put a finer point on that.

We saw 8% impression growth in the most recent quarter and that translated into a 9% decline in ECPM. So clearly, you know, demand is the sort of lacking portion of things there. And obviously that's why so much focus is on improvement in the DR business that we can utilize our inventory and monetize it, take share. You know, I think we're pleased with what we're seeing also in the growth and support.

We did share last quarter that we would be expanding the testing of Spotlight monetization and we did do that in Q4 and we're pleased with what we saw. It remains really early in that testing, but in the testing we've seen thus far the yield we're getting on ad served in Spotlight is equal to and in some cases higher than the yield we're realizing currently.

in the month ahead and continue to optimize the ad experience for both our community and advertising partners. But as I said earlier, you know, given where demand constraints, the urgency to ramp up monetization there is limited and focusing on the advertiser and the customer experience is the most important thing in the very near term.

Thank you. The next question is from Eric Sheridan, Goldman Sachs.

Thanks so much for taking the question. I mean, maybe if I could pivot to the cost side of the equation and just try to tie a few loose ends together. So it sounds like Evan earlier said there's obviously some key areas to invest in that will act as a headwind to margins. Even as you exit 22 and go into 23, you've obviously done a close-up.

in the business when you think about your investment cadence versus sort of implementation of the cost-cutting initiative and then an improved revenue profile was removed through 23. Thanks so much. I can take that one. I think to start off, when we approach the reprioritization that we announced near the end of Q3.

where we shared that we were going to be removing $500 million from the cash cost structure. I think it's important to just understand that we were very thoughtful in our approach about that because we really wanted to achieve two goals.

One is we wanted to make sure that we were clearly building a path to adjust the EBITDA profitability and positive free cash flow even at lower growth rates. But we also wanted to make sure that each of our three strategic priorities were fully funded.

So that we were fully funding the efforts to continue to grow our community and deepen engagement, the work that we're doing to improve our DR platform in order to accelerate revenue growth, as well as the efforts around diversifying our revenue growth that you see with Snapchat Plus. And then also, of course, being able to continue to invest in the long-term AR business.

What you can see is we've been able to make sure that we have a cost structure that fully funds those three priorities. And we're still on track to deliver all of the $500 million in cost reduction. So the first 50 million there is coming out of fixed content reductions and you should see that fully reflected in the fixed component of the content cost in q1.

Similarly, on the cash operating cost structure, the objective there was to remove $450 million. We were continuing to wind down various operations through the course of Q4. You'll see the full benefit of that cost reduction again in Q1, just as we anticipated.

For example, our actual head count numbers are at the end of the current quarter are down 20% from the peak in Q2. So it gives you a sense of the progress we've made in managing down the cost structure and getting ourselves to the prioritized cost structure. So then going forward.

you know first um you know i'd say like we remain long term oriented when we're thinking about the investments in the business so there are going to be things that are incredibly compelling for us to invest in in the business and you know for example we just made the investment in crater stories

Obviously, a very compelling investment immediately resulting in an 8% increase in inventory. So, you know, they're going to be investments like that along the way that are incredibly compelling. What we have to do is remain one very disciplined on the aggregate cost structure and very focused on prioritizing our investments to make sure that we maintain.

that path to adjust the availability and consistent pre-cash flow generation. It's now our third consecutive year of adjust the availability, second consecutive year of positive pre-cash flow. And that's important to controlling our financial destiny and going forward, making sure that we can fund the investment in the future of our business.

and also making sure that we have the cash and cash flow to manage any dilution of the experience in the business which you see we've been active in doing so. Hopefully that gives you a sense of where we are on the reprioritization of the cost structure and funding our priorities but also how we're thinking about balancing that discipline going forward.

Thank you. Our next question is from Lloyd Wandsley with UBS.

Thanks. Two, if I can first, you've talked a lot about the headwinds to time spent in friend stories, but can you just talk about what you're seeing in the core chat experiences? Are you seeing growth in whether it's time for user visits per day per user?

in that core kind of anchor engagement that feeds the whole business. And then the second one was just in the letter you mentioned, Discover Content, moving into more places. Curious if you expect this to be more of a driver of engagement or monetization or both. You know, if you started doing anything that you can kind of share early learnings with us here.

Thanks. Thanks for the question. Yeah, we're incredibly excited about the moment. I'm seeing around our messaging service, visual messaging is really core to the Snapchat experience and what helps people connect with their friends and family.

and of course enhances their relationships. So we're really excited about that momentum there. And of course, the work that we're doing in our camera around augmented reality and helping our community express themselves with AR lenses and try and get new utility out of augmented reality with things like trial as well. So those core experiences around the camera and messaging are obviously really exciting driving a lot of growth.

We have come in around that as well.

Thank you. Our last question comes from Doug and Moose with JP Morgan.

Thanks for taking the questions. I have two, just a circle back on friends, stories, and the strategy there. It sounds like part of the goal here is to get people to shift and to use spotlight more. Is the idea to shift them into that tab in particular or to put spotlight videos?

within friends' stories. And then can you also just talk about how revenue sharing with creators will work on Spotlight? Thanks.

Yeah, sure. So at a high level what we're seeing with friend stories that people still really want to watch stories from their close friends and their family, it's more the longer tail of their friends where they'd prefer to watch a really entertaining video. Then maybe a story about somebody's day-to-day life.

And so that's really where we're trying to understand where that sort of break point is for for different members of our community and help them discover spotlight content sort of at that moment as they start to become less engaged with friend stories. So some of that, for example, is creating entry points even in discover, right? So that people can tap directly into spotlight content from that port tab content experience.

And in addition, we're also helping drive folks to the spotlight tab itself, especially for example, if one of the creators they're following has posted a new spotlight video, how we can let folks know and bring them into spotlight that way. So that's I think kind of how we're thinking about driving more top of funnel to spotlight, at least in the near term.

You know, as it pertains to revenue share with creators, we do do a small amount of, you know, sort of content seeding, for example, with sort of contests and things like that around spotlight. But we have not yet rolled out sort of a large scale revenue share. In fact, what we're seeing a lot of creators do is use spotlight to get distribution for their stories, so to become discovered in spotlight.

that more hit-driven. So if they've got a great hit video, they can use that to drive people to their story and then monetize that more durably over time and build that relationship with their audience.

Thank you. This concludes our question and answer session as well as Snap Inc. 4th quarter 2022 earnings conference call. Thank you for attending today's session. You may now disconnect.