Q1 2023 Snap Inc Earnings Call
Operator: Good afternoon everyone and welcome to Snap Inc.'s first quarter 2023 earnings conference call. At this time, participants are in a listen-only mode.
Pets are in a listen only mode.
I would now like to turn the call over to David Ometer, Head of Investor Relations.
David Ometer: Thank you and good afternoon everyone. Welcome to Snap's first quarter of 2023 earnings conference call. With us today are Evan Spiegel, Chief Executive Officer and co-founder, Gary Hunter, Chief Operating Officer, and Derek Andersen, Chief Financial Officer.
Welcome to snaps first quarter of 2023 earnings conference call with US today are Evan Spiegel, Chief Executive Officer, and co founder, Gary Hunter, Chief Operating Officer, and Derek Andersen Chief Financial Officer.
Please refer to our investor relations website at investor.snap.com to find today's press release, slides, investor letter, and investor presentation.
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.
Actual results may differ materially from those expressed in these forward looking statements.
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 10-K, particularly in the section titled risk factors.
Today's call will include both GAAP and non-GAAP measures. Reconciliations between the two can be found in today's press release. Please note that when we discuss all of our expense figures they will exclude stock based compensation and related payroll taxes, as well as depreciation and amortization and nonrecurring charges. Please refer to our filings with the SEC to understand how we calculate any of the metrics discussed on today's call.
Reconciliations between the two can be found in today's press release.
Please note that when we discuss all of our expense figures they will exclude stock based compensation and related payroll taxes, as well as depreciation and amortization and nonrecurring charges. Please refer to our filings with the SEC to understand how we calculate any of the metrics discussed on today's call.
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.
Evan T. Spiegel: Hi, everyone and thank you all for joining us. We began the year with an intense focus on growing our community, accelerating our revenue growth, and leading in augmented reality.
Our community continues to grow reaching 383 million daily active users in Q1, and we are working to deepen engagement with our content platform, while building innovative new features and services.
Our focus on visual communication between friends and family has distinguished our platform from other internet platforms.
And in Q1, we built on this core offering with the introduction of My AI, our new AI powered chatbot.
At our annual Snap Partner Summit, we made My AI available to snap chatters around the world and launched a range of new features including the ability to add My AI to a conversation with friends authored place recommendations from the snap map and suggest more relevant AR lenders.
We are excited about the opportunities we see for more innovation, especially as we look across our application and how AI can further enhance the snap chatter experience.
We are working to accelerate our revenue growth and we are using this opportunity to make significant improvements to our advertising platform to help drive increased return on investment for our advertising partners. We generated revenue of $989 million in Q1, a decrease of 7% year over year, which was within the forecast range we shared entering the quarter.
As expected, demand in Q1 was disrupted by the changes we made to our AD platform to drive more click through conversions. While these changes are disruptive in the short term, we are optimistic that our AD platform improvements are laying the foundation for future growth.
We believe that delivering stronger return on AD spend for advertising partners will enable us to increase our share of wallet over time in this highly competitive environment.
We made progress diversifying our revenues through Snapchat Plus, our subscription service that offers exclusive experimental and pre release features which now has more than 3 million subscribers.
We are excited about the launch of AR enterprise services with our first SaaS offering shopping suite, which helps retailers use our augmented reality platform to drive sales and reduce returns on their own applications and websites.
Diversifying our revenue growth is an important strategic initiative and we believe our leadership in AR technology provides a strong foundation to build enterprise services to deliver a more holistic solution for businesses who are already using our AR technology for advertising.
Despite the challenging operating environment this quarter, we continue to make progress on our path to sustainable profitability by achieving adjusted EBITDA of $1 million and generating $103 million of free cash flow in Q1.
As we enter Q2, we reflect on the progress we have made in transforming our business to succeed in an operating environment that has been shaped by platform policy changes, a more challenging macroeconomic environment in an intensely competitive landscape.
We began this transition with the reprioritization of our business last summer to focus on growing our community and deepening engagement, diversifying and accelerating our revenue growth and leading an augmented reality. As a part of the re prioritization, we took decisive actions to reduce our cost structure. We're pleased to share that we achieved the cost reduction targets we set in Q3 of last year.
First the buying and accelerating our revenue growth and leading an augmented reality as a part of the re prioritization, we took decisive actions to reduce our cost structure.
We used to share that we achieve the cost reduction targets, we set in Q3 of last year.
With our new COO structure, which unified our engineering sales and product teams, we have brought in three regional presidents across the Americas, EMEA, and APAC with Ronan Harris leading EMEA, [inaudible] Mohan leading APAC and our newest hire Rob Wilks leading the Americas.
We have also brought on several new engineering and product leaders to accelerate progress with our advertising platform. As this structure has improved coordination and prioritization across each of these teams, we have identified clear opportunities to further invest in our business.
As this structure has improved coordination and prioritization across each of these teams.
<unk> clear opportunities to further invest in our business.
For example, we've uncovered opportunities to make targeted investments in ML infrastructure to improve our recommendation systems for content and ads and we have identified areas for incremental go-to-market investments that we believe will help us to accelerate revenue growth.
Given the progress we've made with our AD platform, the experienced leadership team we have built, the work we've done to re prioritize our cost structure, and the strength of our balance sheet, we believe that we are now well positioned to responsibly invest in the acceleration of our topline revenue.
While there's still a lot of work to be done, we believe that our large and growing community, track record of innovation, and the changes we've made to drive focus will enable us to make the right investments for our business and realize the long term growth opportunity we see ahead.
Thank you, and with that, we will begin our Q&A session.
Operator: 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. If you are using a speakerphone, please pick up your handset before pressing the keys.
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.
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.
At this time, we will pause momentarily to assemble our roster.
The first question is from the line of Mark Shmulik with Bernstein. You may proceed.
You May proceed.
Unknown: Hi, this is Jenny on behalf of Mark Shmulik. Two questions if I may. The investment you've made to build out AR was always going to hurt revenue in the short run, how confident are you that the benefit is still there and when do you expect to see it and what markers should we be looking out for? And then secondly, we've heard from appear just how much short form video desk to time spent overall, any color that you could share on how spotlight [inaudible] contribute to the total time spent? Thank you.
Kristina investment you've made to build out Dr was always going to hurt revenue in the short run how confident are you that the benefit is still there and when do you expect to see it on what markers should we be looking out for and then secondly, we've heard from appear just how much short form video desk to time spent over or any color that you could share on how.
Spotlight on credit risk Dougherty contributing to total time spent thank you.
Evan T. Spiegel: Thanks for the question. Just taking a step back, we've done a lot of work over the last nine months to improve our advertising business here of course, starting with the organizational changes we made appointing Jerry as our Chief Operating Officer and hiring three new leaders across each of our regions. We have also hired a ton of strong leaders across monetization engineering and revenue product as well and so it's been really great to bring that experience into the organization. And obviously, bringing all these leaders together reporting to Jerry has really helped everyone get aligned on our strategy, so we've been making a lot of progress improving the platform. A lot of the early work was really focused on signal recovery using privacy safe integrations like [inaudible] for example, which we have discussed at length previously.
Yes.
Thanks for the question just taking a step back we've done a lot of work over the last nine months to improve our advertising business here of course, starting with the organizational changes we made appointing Jerry as our chief operating officer and hiring three new leaders across each of our regions. We have also hired a ton of strong leaders across monetization engineering and revenue.
Product as well and so it's been really great to bring that experience into the organization and obviously, bringing all these leaders together reporting to Jerry is really help everyone get aligned on our strategy. So we've been making a lot of progress improving the platform a lot of the early work was really focus on signal recovery using privacy safe integrations like copy for example, which we have. Discussed at length. Previously.
Discussed at length. Previously.
Previously.
We've also done a lot of work to improve the post click experience with ads, which has made it easier for [inaudible] to convert on platform and really help close the gap between the first party and third party metrics reporting which is really important for Advertiser Trust. And then in the quarter we also rolled out a new seven zero pixel purchase offering for advertisers who want to bid against that objective. The biggest change overall that we made in the quarter that was the most disruptive was really the transition to click based AD interactions across our different advertising format and then the retraining of our models against those click. So prior to these changes at interactions across the different content formats like spotlight in stories were different, which made a lot more confusing for our community to interact with ads on Snapchat. So for example, on stories people use a horizontal swipe to move to the next story and then a vertical swipe to open the AD, but on spotlight people use a vertical swipe to navigate to the next piece of content and then a tap to open the AD. And so now with these changes across stories and spotlight we have [inaudible] based interactions with ads, which has moved us a lot closer to unifying our overall content experience. And then of course, we have been retraining our models against these new AD interactions.
We also rolled out a new seven zero pixel purchase offering for advertisers who want to bid against that objective.
Biggest change overall that we made in the quarter that was the most disruptive was really the transition to click based AD interactions across our different advertising format and then the retraining of our models against those click so prior to these changes at interactions across the different content formats like spotlight in stories were different.
Which made a lot more confusing for our community to interact with ads on Snapchat. So for example on stories people use a horizontal swipe to move to the next story and then a vertical swipe to open the AD, but on spotlight people use a vertical swipe to navigate to the next piece of content and then a tap to open the AD and so now with these changes across stories and spotlight we have.
[inaudible] based interactions with ads, which has moved us a lot closer to unifying our overall content experience. And then of course, we have been retraining our models against these new AD interactions.
So there are some some early green shoots like the growing number of active advertisers, which leads to more advertiser diversity and higher retention of advertisers, which is an important input to long term growth. But I think maybe more importantly, all of these changes have laid the groundwork for us to invest more in running bigger models with more data and of course, accelerating the rate of experimentation on our AD platform, which is super important and why we're ramping up our investment in cloud infrastructure to improve our ranking system.
But I think maybe more importantly, all of these changes have laid the groundwork for us to invest more in running bigger models with more data and of course, you're accelerating the rate of experimentation on our AD platform, which is super important and why we're ramping up our investment in cloud infrastructure to improve our ranking system. So.
I think your second question was on spotlight time spent, we're super excited about the progress we're making with spotlight. We're now reaching 350 million monthly active users on spotlight, time spent is up 170% year over year, so that's a really exciting growth area for our business.
Operator: Our next question is from Rich Greenfield with LightShed Partners.
Richard Greenfield: Hi, thanks for taking the question, I got a couple. I guess, given the infrastructure and creator investments that feel pretty vital to reversing the pressure you've seen on engagement and advertising, I guess the question is sort of why aren't you scaling back your AR investments. You talked about offsite partnerships and I saw last week things like AR coke machines or vending machines-why not scale back AR investments until you're in a better financial position? Obviously, it feels like med has got the luxury of sort of walking and chewing gum when I look at like their metaverse investment, I'm not sure you have that luxury so how do you think about how do you balance sort of what you need to reaccelerate your core business or is this sort of investing in the future? And then two, I guess, just sort of a big picture question, obviously you've got now is going to be another quarter of revenue declines at least based on your internal forecast in Q2, what gives you confidence that you can return to robust growth because I think obviously the big challenge here is investor confidence in you and the team?
I guess, given the infrastructure and creator investments that feel pretty vital to reversing the pressure you've seen on engagement and advertising.
I guess the question is sort of why aren't you scaling back your investments you talked about Offsite partnerships and I saw last week things like a coke machines or vending machines. Why not scale back our investments until you're in a better financial position.
Why not scale back our investments until you're in a better financial position.
Obviously, it feels like med has got the luxury of sort of walking and chewing gum when I look at like their meta versus investment. I'm not sure you have that luxury so how do you think about how do you balance sort of what you need to Reaccelerate your core business. Or is this sort of investing in the future and then too. I guess, you just sort of high. Big Picture question Evan of just <unk>. You've got now is going to be another quarter of revenue declines at least based on your internal forecast in Q2. What gives you confidence that you can return to robust growth because I think obviously the big challenge here is investor confidence. And you and the team.
I'm not sure you have that luxury so how do you think about how do you balance sort of what you need to Reaccelerate your core business. Or is this sort of investing in the future and then too. I guess, you just sort of high. Big Picture question Evan of just <unk>. You've got now is going to be another quarter of revenue declines at least based on your internal forecast in Q2. What gives you confidence that you can return to robust growth because I think obviously the big challenge here is investor confidence. And you and the team.
Or is this sort of investing in the future and then too. I guess, you just sort of high. Big Picture question Evan of just <unk>. You've got now is going to be another quarter of revenue declines at least based on your internal forecast in Q2. What gives you confidence that you can return to robust growth because I think obviously the big challenge here is investor confidence. And you and the team.
I guess, you just sort of high. Big Picture question Evan of just <unk>. You've got now is going to be another quarter of revenue declines at least based on your internal forecast in Q2. What gives you confidence that you can return to robust growth because I think obviously the big challenge here is investor confidence. And you and the team.
Big Picture question Evan of just <unk>. You've got now is going to be another quarter of revenue declines at least based on your internal forecast in Q2. What gives you confidence that you can return to robust growth because I think obviously the big challenge here is investor confidence. And you and the team.
You've got now is going to be another quarter of revenue declines at least based on your internal forecast in Q2. What gives you confidence that you can return to robust growth because I think obviously the big challenge here is investor confidence. And you and the team.
What gives you confidence that you can return to robust growth because I think obviously the big challenge here is investor confidence. And you and the team.
And you and the team.
Derek Andersen: Hey, Rich, it's Derek speaking. I'm going to start here, and then I'm going to kick it to Evan at the end to expand a little bit. I think taking a step back on the cost structure, as we discussed at our recent Investor Day, we remain committed to balancing our investments and our growth over time and to the generation of adjusted EBITDA profitability and free cash flow over time as well. As part of that commitment, we took significant action in Q3 of last year and over the course of the last two quarters to re prioritize our cost structure significantly and we set a goal to remove $500 million from our cash cost structure in order to create a path to adjusted EBITDA profitability and positive free cash flow, even at reduced rates of growth. And as we noted in our letter, we actually exceeded the $500 million goal. In Q1 of this year, we realized $533 million in cash cost structure reductions, and that effort cleared the path for us to deliver adjusted EBITDA profitability and more than $100 million in free cash flow in Q1, despite the 7% decline in revenue year over year.
As we discussed at our recent Investor day, we remain committed to balancing our investments and our growth over time and to the generation of adjusted EBITDA profitability and free cash flow over time as well.
Part of that commitment we took a significant action in Q3 of last year and over the course of the last two quarters.
To re prioritize our cost structure significantly and we set a goal to remove $500 million from our cash cost structure in order to create a path to adjusted EBITDA profitability and positive free cash flow, even at reduced rates of growth and as we noted in our letter we actually exceeded the $500 million goal in Q1 of this year, we realized 500.
$33 million in cash cost structure reductions and that effort cleared the path for us to deliver adjusted EBITDA profitability and more than $100 million in free cash flow in Q1, despite the 7% decline in revenue year over year.
So while we're pleased to have achieved achieve those outcomes have made such a difficult quarter for our top line, we believe that the best path to delivering sustained profitability and free cash flow generation over time lies in accelerating our topline growth and better capturing our ARPU opportunity. So for example, the investments we're making in ML infrastructure to support our AD platform, the ML investments to deepen monetizable content engagement and the investments to develop My AI as the new input to understanding user interest and intent are all laser focused on helping accelerate the topline. Similarly, the investments, we're making and the creator stories program, which you noted while much smaller in scale, are deepening monetizable engagement and we've been pleased to see this drive really significant growth in impression inventory over the last two quarters.
The AML investments to deepen monetize content engagement and the investments to develop my AI as the new input to understanding user interest and intent are all laser focused on helping accelerate the topline. Similarly, the investments, we're making and the creator stories program, which you noted while much smaller in scale, our deepening monetize <unk>.
engagement and we've been pleased to see this drive really significant growth in impression inventory over the last two quarters.
So you're correct, these investments are collectively expected to put downward pressure on gross margins and adjusted EBITDA profitability in the near term, but we believe these investments will be substantially accretive over time and a critical input to sustain free cash flow generation and growth from there over time. In other words, our internal forecast for Q2 is not intended to mark a shift in our financial discipline and instead is part of what we see as the path to resuming growth in generation of sustaining free cash flow. And then in terms of prioritizing our investments to manage our cost structure, I think we really are fortunate that we made significant reductions already over the last six months and then the work that we've done over a longer period of time to build a strong balance sheet such that we can make these investments in the very near term to drive growth in a responsible way.
Our internal forecast for Q2 is not intended to mark a shift in our financial discipline and instead is part of what we see as the path to resuming growth in generation of sustaining free cash flow and then in terms of prioritizing our investments. To manage our cost structure I think we're really are fortunate that we made significant reductions already over the last six months and then the work that we've done over a longer period of time to build a strong balance sheet such that we can make these investments in the very near term to drive growth in a responsible way.
To manage our cost structure I think we're really are fortunate that we made significant reductions already over the last six months and then the work that we've done over a longer period of time to build a strong balance sheet such that we can make these investments in the very near term to drive growth in a responsible way.
Last thing before I turn it over to Evan it's just simply that we're going to measure the performance of these investments carefully and they're only going to persist in our cost structure to the extent that they are productive over any reasonable time frame.
Evan T. Spiegel: Thanks Rich for the question. I think as we look at our longer term opportunity, the thing that really energizes us is just the strength of our community and their engagement. We now reach over 750 million monthly active users and we continue to innovate at a really rapid pace. I think most recently with My AI, which is I think a really compelling extension to the messaging experience that people have on Snapchat. I think more tactically speaking, if you look at it the influx of really strong leaders that we now have on the AD side and the AD platform improvements that we're making that gives us a lot of confidence in our ability to accelerate revenue growth, and it's why we have the confidence to make the investments that Derek mentioned, which I think are going to be really important to moving quickly here. So I think just looking more broadly at the community and their engagement, we've never been more excited about our opportunity to really serve our community and of course realize the long term potential of our business.
Really compelling extension to the the messaging experience that people have on Snapchat I think more tactically speaking if you look at it the influx of really strong leaders.
that we now have on the AD side and the AD platform improvements that we're making that gives us a lot of confidence in our ability to accelerate revenue growth, and it's why we have the confidence to make the investments that Derek mentioned, which I think are going to be really important to moving quickly here. So I think just looking more broadly at the community and their engagement, we've never been more excited about our opportunity to really serve our community and of course realize the long term potential of our business.
The investments that Derek mentioned, which I think are going to be really important to moving quickly here. So I think just looking more broadly at the community and their engagement.
Never been more excited about our opportunity to.
It really serve our community and of course realize the long term potential of our business.
Operator: The next question is from Michael Morris with Guggenheim. Please proceed.
<unk> is from Michael Morris with Guggenheim. Please proceed.
Michael Morris: Thanks, I appreciate it. A couple of questions on AI, I guess first I'd be interested if you can share any early takes from My AI distribution. I realize it's only been a week or so since since it was more broadly, but would be curious what you've seen from your user base as it pertains to engagement with the product.
I guess first I'd be interested if you can share any early takes from distribution.
Distribution I realize it's only been a week or so since since it was.
More broadly, but would be curious what you've seen from your user base as it pertains to engagement with the product.
And then second just maybe to expand on what was asked previously but the broader question of the role of AI and the different functions of the company driving engagement, helping advertisers with creative, can you share more details on kind of the timeframe to having that kind of functionality available and maybe how you view competition with some of the larger players in the space that are clearly working very hard on this to keep engagement on their own platforms. Thank you.
Can you share more details on kind of the timeframe.
Having that.
That kind of functionality available in.
Maybe how you view competition with some of the larger players in the space that are clearly working very hard on this.
To keep engagement on their own platforms. Thank you.
Yeah of course, so maybe I'll just talk a little bit about the way that we use AI across. Several core pieces of our business. So I think the three sort of major areas are of course messaging augmented reality and then content slash. And so for a very long time, we've used AI in our ranking system for our content and add thats really been the. Core driver of engagement growth for us and we're going to continue to invest there, including with new and bigger models and of course I think we have a lot of the inputs we need to succeed there in terms of spotlight submissions for example, and of course the audience. And the growth we have in time spent and spotlight, which allows us to explore a lot more content for ranking so I think we're going to continue our momentum on the content of that side.
Several core pieces of our business. So I think the three sort of major areas are of course messaging augmented reality and then content slash.
And so for a very long time, we've used AI in our ranking system for our content and add thats really been the.
Core driver of engagement growth for us and we're going to continue to invest there, including with new and bigger models and of course I think we have a lot of the inputs we need to succeed there in terms of spotlight submissions for example, and of course the audience.
And the growth we have in time spent and spotlight, which allows us to explore a lot more content for ranking so I think we're going to continue our momentum on the content of that side.
We mentioned reality, we've seen AI play a really important role in new lens experiences for example, our ml driven lenders have driven a lot of engagement for snap and then as we look at the longer term future of augmented reality, we think that the intersection of NII is going to really provide a much more compelling user interface for things like. Spectacles and into the future. So that's a big research area for US and then on the messaging side, we're really excited about conversational AI because it really plays to our strengths as a messaging platform and we're finding that in addition to talking to friends and family All day long on SAP that people really enjoy communicating with my eyes. So don't have any. Specific stats to share with you just yet, but we've been managing the rollout really carefully. To make sure that the experience. As fast despite some of the capacity constraints, we're bumping up against but we're being thoughtful and deliberate with the rollout we're really excited to get it out to our entire community and we're really pleased with the engagement so far.
Spectacles and into the future. So that's a big research area for US and then on the messaging side, we're really excited about conversational AI because it really plays to our strengths as a messaging platform and we're finding that in addition to talking to friends and family All day long on SAP that people really enjoy communicating with my eyes. So don't have any. Specific stats to share with you just yet, but we've been managing the rollout really carefully. To make sure that the experience. As fast despite some of the capacity constraints, we're bumping up against but we're being thoughtful and deliberate with the rollout we're really excited to get it out to our entire community and we're really pleased with the engagement so far.
Specific stats to share with you just yet, but we've been managing the rollout really carefully. To make sure that the experience. As fast despite some of the capacity constraints, we're bumping up against but we're being thoughtful and deliberate with the rollout we're really excited to get it out to our entire community and we're really pleased with the engagement so far.
To make sure that the experience. As fast despite some of the capacity constraints, we're bumping up against but we're being thoughtful and deliberate with the rollout we're really excited to get it out to our entire community and we're really pleased with the engagement so far.
As fast despite some of the capacity constraints, we're bumping up against but we're being thoughtful and deliberate with the rollout we're really excited to get it out to our entire community and we're really pleased with the engagement so far.
Operator: The next question is from Lloyd Walmsley with UBS.
Lloyd Walmsley: Thanks, two if I can. First just like what inning are you guys in in kind of rolling out the DR shift to last click in terms of just educating advertisers, training the models, and kind of how do you rank the importance of getting that right to drive the faster growth?
First just like.
What inning are you guys in in kind of rolling out the Dr shift to last click in terms of just.
Educating advertisers training the models and kind of how do you rank the importance of getting that right.
Drive the faster growth and then <unk>.
And then the second one, I wanted to follow up on that last question on My AI. How much do you see this providing you guys with more signal for advertising versus simply driving more engagement, like is that a meaningful opportunity for you guys? Anything you can share on early data from that and how you can leverage that for monetization? Thank you.
You can share on early early data from that and how you can leverage that for monetization.
Jerry James Hunter: Hi, Lloyd, thanks for that question. This is Jerry, I'll take that first question and I'll hand it over to Evan for the second. For where we are in the DR changes, I mean, we went through a pretty major evolution of the platform and as I mentioned in the letter, we're making progress across the three areas, investing and observability and measurement, improving the engagement and the quality of the conversions and increasing that volume pipeline of engagements and conversions. We think that the big model and UI changes that we made are behind us, but we're still working through some impacts and making some steady progress.
<unk> pipeline of engagements and conversions, we think that the big model and UI changes that we made are behind us, but we're still working through some impacts and making some steady progress.
We're also always going to be shipping improvements to the platform, but we expect that these future changes they're going to be more incremental and less disruptive. On the importance of educating advertisers versus training models, it's really both but we've learned from these larger advertisers that we've worked with through this transition is that many are actually finding success now. We worked with them to get to where they were finding positive ROI. And then there's a few that we're still working with to get through the change to get them to positive ROI.
Were they were finding positive ROI.
And then there's a few that were still working with to get through the change to get them to positive ROI.
Evan T. Spiegel: In terms of My AI, our primary focus right now is really on the community experience and trying to drive a lot of value for folks who are using My AI. Of course, the intent signal we get can be used to improve relevance of content or AR experiences and that's definitely something we're working hard on. My AI can recommend places now and of course recommend lenses, we're really excited to see folks engagement there. We are doing some early experimentation around monetization, including things like sponsored links and I think the team will have more to share at our upcoming new fronts presentation.
Course recommend lenses, we're really excited to see folks engagement. There we are doing some early experimentation around monetization, including things.
<unk> sponsored links and I think the team will have more to share at our upcoming new fronts presentation.
Operator: The next question. Western is from Doug Anmuth with JP Morgan.
Western is from Doug Anmuth with J P. Morgan.
Unknown: Okay. Hey, this is [inaudible] on for Doug, thanks for taking the question. I just wanted to dive deeper into some of the monthly revenue pattern. I believe you called out that March was up 21% month over month, so I'm just curious if you're seeing real uptick in demand through the course of the quarter or is that more a function of easier comps with lapping potentially Russia, and Ukraine a year ago. And then just curious if you're seeing any of that improvement continue into April so far. Thanks.
Hey, this is <unk> on for Doug Thanks for taking the question.
Wanted to dive deeper into some of the monthly revenue pattern. I believe you called out that March was up 21% month over month. So I'm just curious if youre seeing real uptick in demand through the course of the quarter or is that more a function of easier comps with lapping potentially Russia, and Ukraine a year ago.
And then just curious if youre seeing any of that improvement continue into April so far thanks.
Derek Andersen: Hey there, it's Derek speaking I will take that one. I think maybe it makes sense to step back and just talk about the journey for Q1 and then what we're seeing into our internal forecast for Q2. On the macro side, while the macro environment appears to have stabilized, it stabilized at a much weaker level compared to where we were for example a year ago. We continue to be impacted by the platform policy changes and the tough competitive environment as well. In Q1 specifically, as we shared in our letter the changes we made to our AD platform we're disruptive and while some advertisers have already recovered to prior levels and while some new advertisers are finding success under these changes, there are a small number of our top advertisers that have not recovered and this continues to be a headwind to demand as we start making our way into Q2. So while we're pleased with the progress we're seeing from many of our advertisers, there are in many cases growing off a smaller base and it will take time for this more diverse base of smaller advertisers to drive the overall top line.
I think maybe it makes sense to step back and just talk about the journey for Q1, and then what we're seeing into our internal forecast for Q2.
On the macro side, while the macro environment appears to have stabilized it stabilized at a much weaker level compared to where we were for example, a year ago. We continue to be impacted by the platform policy changes and the tough competitive environment as well.
Q1, specifically as we shared in our letter the changes we made to our AD platform, we're disruptive and while some advertisers have already recovered to prior levels and while some new advertisers are finding success under these changes there are small number of our top advertisers that have not recovered and this continues to be a headwind to demand as we start making our way into Q2.
So while we're pleased with the progress we're seeing from many of our advertisers. There are in many cases growing off a smaller base and it will take time for this more diverse base of smaller advertisers to drive the overall top line.
In addition, we are concerned as we entered Q2 that there are some advertisers who rely on lift studies that provide measurement signals on a delayed basis and then this could cause disruption in their spending in Q2 as they experience the initial impact of the changes we made in Q1 on a more delayed basis. Our internal forecast for Q2 therefore reflects these challenges as well as the investments we're making to accelerate our progress towards improving our ad platform. Accordingly, we are seeing sequential progress in the business. As we noted in the letter, month over month growth in March for example was 21% and this was roughly in line with the seasonality month over month that we saw in 2021 and was well ahead of what we observed in 2022, although 2022 was impacted by the onset of the war in Ukraine.
Our internal forecast for Q2, therefore reflects these challenges as well as the investments, we're making to accelerate our progress towards improving our ad platform.
Accordingly, we are seeing sequential progress in the business as we noted in the letter month over month growth in March for example was 21% and this was roughly in line with the seasonality month over month that we saw in 2021 and was well ahead of what we observed in 2022, although 2022 was impacted by the onset of the war in Ukraine.
In addition, our internal forecast calls for the midpoint, 5% quarter over quarter growth, which is further demonstration of our expectation that we'll see more sequential progress for the business as we navigate the changes. So hopefully that gives you a little bit of an understanding of the topography of what we saw in Q1 and how we expect that to transition into the new quarter.
The midpoint, 5% quarter over quarter growth, which is further demonstration of our expectation that we'll see more sequential progress for the business as we navigate the changes. So hopefully that gives you a little bit of an understanding of the topography of what we saw in Q1, and how we expect that to transition into the new quarter.
Operator: The next question is from the line of Michael Nathanson with Moffett Nathanson.
The next question is from the line of Michael Nathanson with Moffett Nathanson.
Michael B. Nathanson: Thanks. Two for you Derek. One is you've done a really nice job driving gross margin in the past few years as you laid out in the letter a couple of factors [inaudible] this year, can you give me a sense of where you think gross margins bottom out in the near term just to dimension for us. And then you guys mentioned that last answer about some small number of advertisers who have not yet returned to prior spending levels, what's causing that issue and what alleviates that headwind to improve that situation? Thanks.
Thank you Derek.
What is you've done a really nice job driving gross margin in the past few years as you laid out in the letter a couple of factors.
This year can you give me a sense of where you think gross margins bottom out in the near term just to dimension for US and then you guys mentioned that last answer about some small number of advertisers who have not yet returned to prior spending levels, what's causing that issue and what alleviates that headwind.
To improve that situation.
Derek Andersen: Sure. So starting on the gross margins, I think one of the things that's challenging here, obviously is that especially over any long period of time gross margins are going to be impacted significantly by the topline revenue growth, and then particular topline revenue growth rate relative to our investments in infrastructure and so on. So I would say it starts with expectations around revenue on the top line. What we tried to do here, though is give you an understanding of where we are investing on the cost of revenue side and some magnitude to help you model out and sensitize where gross margins might hide. So specifically one really big component, the largest component of cost of revenue is infrastructure costs per DAU. We shared in the letter that we expected sequentially, that's likely to rise eight to 12 cents off of the 59 cent base that we saw in the current. And that's really reflective of the significant investments we're looking at for MLP infrastructure. The largest portion of that is designed specifically to drive optimization and performance of the AD platform. A smaller minority share of that, but still significant are the investments in ML to drive depth of engagement on the content platform and of course that drives directly into a monetizeable content and top line as well. And then a smaller minority portion is the investment in My AI, which again is directly attributable to contributing to the top line in the form of a better understanding of user interest and intent.
Especially over any long period of time gross margins, we're going to be impacted significantly by the <unk>.
Topline revenue growth rate, and then particular topline revenue growth rate relative to our investments in infrastructure and so on.
So I would say it starts with expectations around revenue on the top line. While we tried to do here, though is give you an understanding of where we are investing on the cost of revenue side and some magnitude to help you model out and sensitize, where gross margins might have so.
Specifically.
One really big component the largest component of cost of revenue as infrastructure costs per DAU, we shared in the letter there'll be expected sequentially, that's likely to rise eight to 12.
the 59 cent base that we saw in the current. And that's really reflective of the significant investments we're looking at for MLP infrastructure. The largest portion of that is designed specifically to drive optimization and performance of the AD platform. A smaller minority share of that, but still significant are the investments in ML to drive depth of engagement on the content platform and of course that drives directly into a monetizeable content and top line as well. And then a smaller minority portion is the investment in My AI, which again is directly attributable to contributing to the top line in the form of a better understanding of user interest and intent.
A smaller minority share of that but still significant investments in ml to drive depth of engagement on the content platform and of course that drives directly into a monetize content and top line as well and then a smaller minority portion is the investment in <unk>, which again is directly attributable to two <unk>.
Many of the top line in the form of a better understanding of user interest and intent so.
I think in terms of other aspects of what's happening in cost of revenue and gross margins. Over the last two quarters, we've taken an annualized $84 million out of fixed content costs, it's a little over $20 million a quarter and we saw that benefit come on over the course of Q4, and then into Q1, and so that's been offsetting the cost of the Creator Rev share program over the last couple of quarters. As we start to lap those fixed cost reduction in the back half of this year and hopefully continue to see great success with that Creator Story program that will put a little bit of new pressure on those margins in the back half of the year, assuming continued success there. But importantly that program is rupture based and therefore scales with monetization. So hopefully that gives you a little bit of a sense of what's happening with gross margins and the ability to sort of think about how that will move with revenue over time.
Over the last two quarters, we've taken an annualized $84 million out of fixed content costs, it's a little over $20 million a quarter and we saw that benefit come on over the course of Q4, and then into Q1 and so that's been offsetting the cost of the creator Rev share program over the last couple of quarters.
As we start to lap those fixed cost investments reduction sorry in the back half of this year.
Hopefully continue to see great success with that creator story program that will put a little bit of new pressure on those margins in the back half of the year, assuming continued success there, but importantly that program is rupture based and therefore scales with monetization. So hopefully that gives you a little bit of a sense of what's happening with gross margins in the.
<unk> to sort of think about how that will move with revenue over time.
And then I think in terms of what we're seeing on top advertisers over the quarter, we've got advertisers who performed exceptionally well under the prior paradigm. As Jerry laid out earlier, we made a number of changes to the AD platform and folks who are particularly sophisticated prior to those are going to take time to recover and become equally sophisticated under the new AD unit design and interaction design as well as tweaking their models to perform in a new environment. And that's not something that's going to happen quickly, but we're working hard with those partners to help them with signal and modeling in development and performance and all of the investments that we're pouring into our MLP infrastructure again are intended to contribute to the recovery. So hopefully that gives you a sense for how that's evolving.
Got advertisers who performed. Structurally well under the prior paradigm.
Structurally well under the prior paradigm.
As Jerry laid out earlier, we made a number of changes to the AD platform and folks who are particularly sophisticated prior to those are going to take time to recover and become equally sophisticated under the new AD unit design and interaction design as well as tweaking their models. Perform in a new environment. And that's not something that's going to happen quickly, but we're working hard with those partners. To help them with signal and modeling in development and performance and all of the investments that we're pouring into our MLP infrastructure again are intended to contribute to the recovery. So hopefully that gives you a sense for how thats evolving. Yeah.
Perform in a new environment. And that's not something that's going to happen quickly, but we're working hard with those partners. To help them with signal and modeling in development and performance and all of the investments that we're pouring into our MLP infrastructure again are intended to contribute to the recovery. So hopefully that gives you a sense for how thats evolving. Yeah.
And that's not something that's going to happen quickly, but we're working hard with those partners. To help them with signal and modeling in development and performance and all of the investments that we're pouring into our MLP infrastructure again are intended to contribute to the recovery. So hopefully that gives you a sense for how thats evolving. Yeah.
To help them with signal and modeling in development and performance and all of the investments that we're pouring into our MLP infrastructure again are intended to contribute to the recovery. So hopefully that gives you a sense for how thats evolving. Yeah.
Yeah.
Operator: Our last question comes from Tom Champion with Piper Sandler.
Tom Champion: Hi, good afternoon. Derek, I'm just curious if you could just talk about your advertising verticals and the pockets of strengths and where it's weaker and how you're working with clients to build relevant tools by by vertical. Thank you.
Derek I'm just curious if you could just talk about your advertising verticals in the pockets of strengths and where it's weaker and how youre working with clients to build.
Okay. Relevant tools by by vertical thank you.
Relevant tools by by vertical thank you.
Derek Andersen: Sure, I think actually I might ask Jerry to step in on that one. I mean, we've seen a continuation of strength in some of the same verticals we've been talking about for a few quarters, but you can probably talk a little bit more about some of the work that we're doing to support specific verticals under the new AD changes. I mean, yes, largely we're working with advertisers on [inaudible] and making sure that we're collecting information and signals. We're also orienting both the sales force as well as our product team that actually works with customers to work directly with these customers and build tooling that helps them find the performance that they're looking for and so we're doing these customer by customer and we've seen some very positive signals from some of these customers, where we've gotten them to get to a stronger ROE as post changes. We also have a bunch of other customers working with directly to improve their ROE.
Derek Andersen: Sure, I think actually I might ask Jerry to step in on that one. I mean, we've seen a continuation of strength in some of the same verticals we've been talking about for a few quarters, but you can probably talk a little bit more about some of the work that we're doing to support specific verticals under the new AD changes.
I mean, yes, largely we're working with advertisers on tap.
Kathy and making sure that we're collecting information and signals.
Jerry James Hunter: I mean, yes, largely we're working with advertisers on [inaudible] and making sure that we're collecting information and signals. We're also orienting both the sales force as well as our product team that actually works with customers to work directly with these customers and build tooling that helps them find the performance that they're looking for and so we're doing these customer by customer and we've seen some very positive signals from some of these customers, where we've gotten them to get to a stronger ROE as post changes. We also have a bunch of other customers working with directly to improve their ROE.
Also orienting both the sales force as well as our.
Our product team actually works with customers to work directly with these customers and build tooling that.
That helps them find that.
Performance that they're looking for and so we're doing these customer by customer and we've seen some positive some very positive signals from some of these customers, where we've gotten them to get to.
<unk> ROE as post changes, we also have a bunch of other customers working with directly. To improve that. <unk>.
To improve that. <unk>.
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Operator: This concludes our question and answer session as well as Snap Inc.'s first quarter 2023 earnings conference call. Thank you for attending today's session. You may now disconnect.
This concludes our question and answer session as well as Snap Inc. 's first quarter 2023 earnings conference call. Thank you for attending today's session. You may now disconnect.