Q4 2023 Snap Inc Earnings Call

February 6, 2024

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David Ometer: Good afternoon, everyone, and welcome to Snap Incorporated's fourth quarter 2023 earnings conference call. At this time, participants are in a listen-only mode. I would now like to turn the call over to David Ometer, Head of Investor Relations. Thank you, and good afternoon, everyone. Welcome to SNAP's fourth quarter 2023 earnings conference call. With us today are Evan Spiegel, Chief Executive Officer and Co-Founder, 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 assume no obligation to update our disclosures.

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Good afternoon, everyone.

Speaker Change: And welcome to snap Incorporated's fourth quarter 2023 earnings conference call.

Speaker Change: At this time participants are in a listen only mode.

Speaker Change: I would now like to turn the call over to David Ohmmeter head of Investor Relations.

David Ohmmeter: Thank you and good afternoon, everyone welcome to snap fourth quarter 2023 earnings conference call.

David Ohmmeter: With us today are Evan Spiegel, Chief Executive Officer, and co founder and Derek Anderson Chief Financial Officer.

David Ohmmeter: Please refer to our Investor relations website at Investor Snap Dotcom to find todays press release slides investor letter and Investor presentation.

David Ohmmeter: This conference call includes forward looking statements, which are based on our assumptions as of today.

David Ometer: For more information about factors that may cause actual results to differ materially from these forward-looking statements, please refer to the press release we issued today, as well as the risks described in our most recent Form 10Q, particularly in the section titled Risk Factors. Today's call will include both GAAP and non-GAAP measures. 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 and certain other items.

David Ohmmeter: Actual results may differ materially from those expressed in these forward looking statements and we make no obligation to update our disclosures.

David Ohmmeter: For more information about factors that may cause actual results to differ materially from these forward looking statements. Please refer to the press release, we issued today as well as risks described in our most recent Form 10-Q, particularly in the section titled risk factors.

David Ohmmeter: Today's call will include both GAAP and non-GAAP measures.

David Ohmmeter: 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 certain other items.

Evan Thomas Spiegel: 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. Hi everyone, and thank you all for joining us. In Q4, we continued to make progress on our core priorities of growing our community and improving depth of engagement, driving top-line growth and diversifying our revenue sources, and carving a path to adjusted EBITDA profitability and positive free cash flow. Monthly active users increased more than 8% year over year and surpassed the 800 million milestone in Q4, demonstrating progress towards our goal of 1 billion monthly active users. Daily active users reached 414 million in Q4, an increase of 10% year over year, and we continue to deepen engagement with our content platform with the number of viewers and total time spent watching content growing year over year.

David Ohmmeter: Please refer to our filings with the SEC to understand how we calculate any of the metrics discussed on today's call.

David Ohmmeter: With that I'd like to turn the call over to Evan.

Hi, everyone and thank you all for joining us in Q4, we continued to make progress on our core priorities of growing our community and improving depth of engagement driving topline growth and diversifying our revenue sources and carving a path to adjusted EBITDA profitability and positive free cash flow.

David Ohmmeter: Monthly active users increased more than 8% year over year and surpassed the 800 million milestone in Q4, demonstrating progress towards our goal of 1 billion monthly active users.

David Ohmmeter: Daily active users reached $414 million in Q4, an increase of 10% year over year, and we continue to deepen engagement with our content platform with a number of viewers and total time spent watching content growing year over year.

Evan Thomas Spiegel: Revenue grew 5% year over year in Q4 to reach $1,361,000,000, as we remain focused on investing in our direct response business to deliver increased return on ad spend for our advertising partners. Adjusted gross margins expanded one percentage point quarter over quarter; adjusted operating expenses declined by two percent year over year, and we delivered adjusted EBITDA of one hundred fifty nine million and free cash flow of one hundred and eleven million in Q4.

David Ohmmeter: Revenue grew 5% year over year in Q4 to reach $1 billion $361 million as we remain focused on investing in our direct response business to deliver increased return on AD spend for our advertising partners.

David Ohmmeter: Adjusted gross margins expanded one percentage point quarter over quarter, adjusted operating expenses declined by 2% year over year, and we delivered adjusted EBITDA of $159 million and free cash flow of $111 million in Q4.

Evan Thomas Spiegel: 2023 was a pivotal year for Snap as we focused relentlessly on adding value to our community while evolving our business for long-term growth. Last year, we made transformative changes to our business by shifting to a more customer-centric approach, investing heavily in our ML platform to drive improved performance for our advertising partners, and better leveraging privacy safe signals for ranking and optimization. We have also transformed our go-to-market efforts with new regional leadership and a renewed focus on customer-oriented advertising solutions.

David Ohmmeter: 2023 was a pivotal year for snap as we focus relentlessly on adding value to our community while evolving our business for long term growth.

David Ohmmeter: Last year, we made transformative changes to our business by shifting to a more customer centric approach investing heavily in our ml platform to drive improved performance for our advertising partners and better leveraging privacy say signals for ranking and optimization.

David Ohmmeter: We also transformed our go to market efforts with new regional leadership, and a renewed focus on customer oriented advertising solutions.

Evan Thomas Spiegel: We begin 2024 with a focus on three initiatives that we believe are essential for Snapchat's long-term success. First, we are continuing to evolve our machine learning models to drive more ad interactions across our platform. Second, we are working to unify the content experience across Spotlight and Stories to improve the user experience and deepen engagement.

David Ohmmeter: We begin 2024 with a focus on three initiatives that we believe are central for Snapchat for long term success.

David Ohmmeter: First we are continuing to evolve our machine learning models to drive more AD interactions across our platform.

David Ohmmeter: Second we are working to unify the content experience across spotlight and stories to improve the user experience and deepen engagement.

Evan Thomas Spiegel: Lastly, we are shifting more of our focus towards user growth and deepening engagement in our most highly monetizable geographies, including North America and Europe. We believe that focusing on these initiatives will help us to increase daily active usage of Snapchat, deepen content engagement, improve performance for advertisers, and ultimately accelerate revenue growth and drive increased free cash flow. In order to best position our business to execute on these priorities and to ensure we have the capacity to invest incrementally to support our growth over time, we have made the difficult decision to restructure our team while continuing our investments in our highest priorities, including improved top-line growth. We will reduce layers of management and concentrate our team members in major hub locations to support in-person collaboration, resulting in a reduction in our full-time workforce of approximately 10% in Q1 of 20

David Ohmmeter: Lastly, we are shifting more of our focus towards user growth and deepening engagement in our most highly monetize all geographies, including North America and Europe.

We believe that focusing on these initiatives will help us to increase daily active usage of Snapchat, even content engagement improved performance for advertisers and ultimately accelerate revenue growth and drive increased free cash flow.

David Ohmmeter: In order to best position, our business to execute on these priorities and to ensure we have the capacity to invest incrementally to support our growth over time, we've made the difficult decision to restructure our team while continuing our investments in our highest priorities, including improved topline growth.

David Ohmmeter: We will reduce layers of management and concentrate our team members and major hub locations to support in person collaboration.

David Ohmmeter: <unk> and a reduction in our full time workforce of approximately 10% in Q1 of 2024.

Evan Thomas Spiegel: The team members impacted by these changes are kind, smart, and creative colleagues who have been important contributors to our business during this challenging time, and we are committed to supporting them in their transition. Thank you. And with that, we will begin our Q&A session. Thank you. We will now begin the Q&A 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 key.

David Ohmmeter: Key members impacted by these changes are kind smart and creative colleagues, who have been important contributors to our business. During this challenging time and we are committed to supporting them in their transition. Thank.

Speaker Change: Thank you and with that we will begin our Q&A session.

Speaker Change: Thank you.

Speaker Change: We will now begin the Q&A session.

Speaker Change: I ask a question you May press Star then one on your Touchtone phone.

Speaker Change: If youre using a speakerphone please pick up your handset before pressing the keys.

Speaker Change: To withdraw your question. Please press Star then two.

Operator: To withdraw your question, please press star then two. In the interest of time, please ask you to limit yourself to one question. After your initial question, your line will be muted. At this time, we will pause momentarily to assemble our roster. The first question comes from Ross Sandler with Barclays. Please proceed.

Speaker Change: In interest of time. Please ask please limit yourself to one question. After your initial question your line will be muted.

Speaker Change: At this time, we will pause momentarily to assemble our roster.

Speaker Change: The first question comes from Ross Sandler with Barclays. Please proceed.

Speaker Change: Great.

Ross Sandler: Evan, question on the DR side of the ad business. So growth was comparable at 3% for the fourth quarter, about the same as the third quarter. So I guess why aren't we seeing more progress in getting that growth rate up to the levels of the broader digital ad industry? Like what's holding us back right now? And then your guidance for 1Q assumes that the trends accelerate upwards to, you know, low double digits to mid teens, depending on the range. So what kind of acceleration are you seeing in DR thus far in 1Q?

Ross Sandler: Question on the Dr side of the business so growth was comparable at 3% for the fourth quarter about the same as the third quarter. So I guess why aren't we seeing more progress in getting that growth rate up to the levels of the broader digital AD industry like what's holding us back right now and then.

Ross Sandler: Your guidance for <unk> assumes that.

Ross Sandler: The trends accelerate upwards to low double digits to mid teens, depending on the range.

Ross Sandler: So what kind of acceleration are you seeing in Dr. Thus far in <unk> and what does that mean for the rest of 2024. Thank you.

Evan Thomas Spiegel: And what does that mean for the rest of 2024? Thank you. Trust, you know, we're really excited about the progress we're seeing, especially in our lower funnel business. And with small and medium sized advertisers, purchase-related conversions grew 90% year over year in Q4. And we saw a small and medium-sized advertiser, the number of small and medium-sized advertisers grow 20% year over year. We really think this reflects more resilient revenue as well. Because as we've navigated some of these external challenges over the last couple years, we found that those lower funnel dollars are just more resilient. I think, you know, looking ahead to Q1, the top end of the guidance range reflects a 10 point acceleration. So we are making progress here. Obviously, we wish we were moving faster, but we're working as hard as we can and are pleased by what we're seeing in the direct response. Our next question comes from Doug Anmuth with J.P. Morgan. Please proceed.

Speaker Change: Thanks, Ross, we're really excited about the progress, we're seeing especially in our lower funnel business and with small and medium sized advertisers purchase related conversions grew 90% year over year in Q4, and we saw a small and medium size average the number of small and medium sized advertisers grow 20%.

Speaker Change: <unk> year over year, we really think this reflects more resilient revenue as well because as we've navigated some of these external challenges over the last couple of years. We've found that those lower funnel dollars are just more resilient I think looking ahead at Q1, the top end of the guidance range reflects a 10 point acceleration. So we are making progress here, obviously, we wish we were.

Speaker Change: We're moving faster, but we're working as hard as we can.

Speaker Change: Please by what we're seeing in the direct response business.

Speaker Change: Our next question comes from Doug Anmuth with J P. Morgan.

Doug Anmuth: Please proceed.

Doug Anmuth: Thanks for taking the question.

Doug Anmuth: Thanks for taking the question. Evan, you've talked a little bit about introducing a universal feed on the platform, perhaps unifying stories and spotlight content. Can you just talk about the opportunity here and how you could do this in a privacy and brand safe manner and then what it would mean for ad inventory and perhaps revenue?

Doug Anmuth: And then you talked a little bit about introducing a universal feed on the platform, perhaps unifying stories and spotlight content can you just talk about the opportunity here and how you can do this in a privacy and brand safe manner, and then what it would mean for AD inventory and perhaps revenue. Thanks.

Evan Thomas Spiegel: Thanks. Yeah, when we set out to build Spotlight, we actually built it on a totally separate stack. Meaning, you know, the ranking was a separate stack, the inventory was separate from our stories inventory, and the user experience itself, as well, was different. We've really seen a lot of opportunity in bringing some of those improvements to stories. Our story inventory is more constrained than Spotlight, for example; it doesn't leverage some of the ranking improvements and model improvements we've made on Spotlight. And so we think unifying the stories and So we're definitely excited about that a lot of the sort of under the hood work is well underway.

Speaker Change: Yes, well when we set out to build spotlight, we actually built on totally separate stack, so meaning the ranking.

Separate stack the inventory was separate from our stories inventory and the user experience itself as well I was different we've really seen a lot of opportunity in bringing some of those improvements to stories are stories inventory is more constrained and spotlight for example, it doesn't leverage some of the ranking improvements in model improvements.

Speaker Change: We have made on spotlight and so we think unifying the stories and spotlight experience will bring a lot of the benefits we've seen on the spotlight side in terms of personalization and the user experience to stories as well. So so were definitely excited about that a lot of the.

Speaker Change: Sort of under the Hood work is well underway and we have some tests rolling out.

Evan Thomas Spiegel: And we have some tests rolling out, you know, throughout the year that should get us closer to that unified experience. In terms of brand safety, you know, we just completed a third-party audit on brand safety. I think we're close to 99% of brand safe content on Spotlight and, you know, close to 100%, actually, in terms of creator content, you know, Snapstars and the like. So I think one of the really unique things about Snapchat is that advertisers can get a brand safe experience without paying a premium for it, like they have to do on other platforms to avoid harmful content.

Speaker Change: Throughout the year that should get us closer to that unified experience in terms of brand safety. We just completed a third party audit on brand safety I think we are about close to 99% brand safe content on spotlight and.

Speaker Change: Close to a 100% actually in terms of greater content snap Sars and the like so I think one of the really unique things about snapshot is that advertisers can get a brand safe experience without paying a premium for it like they have to do on other platforms to avoid harmful content. So I do think we'll be able to continue to extend those benefits to advertisers and this unified <unk>.

Eric J. Sheridan: So I do think we'll be able to continue to extend those benefits to advertisers in this unified experience, and very high levels of brand safety, I think are a real differentiator for us. Our next question comes from Eric Sheridan with Goldman Sachs. Please proceed.

Speaker Change: Variance in our very high levels of brand safety I think are a real differentiator for us.

Speaker Change: Yeah.

Speaker Change: Our next question comes from Eric Sheridan with Goldman Sachs. Please proceed.

Eric J. Sheridan: Thanks for taking the question, maybe if I could stick with the big picture themes that you introduced in your introductory remarks, when you look across the competitive landscape of sort of social media media consumption and the potential for rising utility around apps like yourself. How do you identify would you see as sort of the opportunity set and the potential challenge.

Evan Thomas Spiegel: Thanks for taking the question. Evan, maybe I could stick with the big picture themes that you introduced in your introductory remarks. When you look across the competitive landscape of sort of social media, media consumption, and the potential for rising utility around apps like yourself, how do you identify what you see as sort of the opportunity set and the potential challenges you're trying to navigate around to sort of reposition the business for growth in user engagement and monetization over the long term? Thanks so much.

Eric J. Sheridan: As you are trying to navigate around to sort of reposition the business for growth in users engagement and monetization over the long term. Thanks, so much.

Speaker Change: Yeah. Thanks, Thanks for the question as we've designed snapshot and really Architected the product we've thought about building it around some of the core ways that people use their smartphones, so things like talking with friends, taking pictures watching content. These are the things that people do most often.

Evan Thomas Spiegel: Yeah, thanks for the question. As we've designed Snapchat and really architected the product, we've thought about building it around some of the core ways that people use their smartphones. So things like talking with friends, taking pictures, watching content, these are the things that people do most often, you know, and really engage with the most on their phones. And I think, as we look at Snapchat, one of our biggest opportunities is actually the way, you know, the relationship between these different services. That's been a strategic advantage for us. You know, if you think about the growth of our content business, what we've seen is we can grow the top of the funnel as friends share content with each other, and that brings more people into our content experience. Or, you know, when we launched Spotlight, we leveraged the fact that so many people use our camera every day to create videos so we could generate a lot of inventory for our Spotlight product very, very quickly.

Speaker Change: And really engage with the most on their phones and I think as we look it sounds like one of our biggest opportunities is actually the way the relationship between these different services that's been a strategic advantage for us. If you think about the growth of our content business. What we've seen is we can grow the top of funnel as friends share content with each other that brings more people into our content.

Speaker Change: And so when we launched spotlight, we leverage the fact that so many people use our camera everyday to create videos that we could generate a lot of inventory for our spotlight products very very quickly. So I think this relationship between our camera or a messaging service and of course, our content platform is really a key strategic advantage for us and as we continue to focus on helping close friends and <unk>.

Mark Mahaney: So I think this relationship between our camera, our messaging service, and, of course, our content platform is really a key strategic advantage for us. And, you know, as we continue to focus on helping close friends and family stay in touch and communicate visually with one another, I think there's a lot more opportunity for us ahead. Our next question comes from Mark Shmulek with Barnes. Please proceed. Uh, yes. Hi.

Speaker Change: Family stay in touch and communicate visually with one another I think theres a lot more opportunity for us ahead.

Speaker Change: Our next question comes from Mark Shmulik with Bernstein.

Mark Mahaney: These proceed.

Yes, hi, thanks for taking my question.

Evan Thomas Spiegel: Thanks for taking the question. Uh, you know, notice in the investor letter that one of the priorities is to focus on North America and Europe, uh, you know, growing users and deepening engagement. We saw a little bit of a softness in North America, DAU. Can you just share a little color as to why?

I noticed in the Investor letter that there is one of the priority is to focus on North America, and Europe growing users deepening engagement, we saw a little bit of softness.

Mark Mahaney: In North America, you can you just share a little color as to why and perhaps below the surface kind of some of the changes you're doing as you think about focusing on growing engagement in these markets. Thank you.

Evan Thomas Spiegel: And perhaps, below the surface, kind of some of the changes you're doing as you think about focusing on growing engagement in these markets. Thank you. Yeah, thanks for the question. You know, as we look at North America DAU in the fourth quarter, that decline was more, you know, mostly an artifact of rounding. We're not expecting a further decline in North America in Q1.

Yes. Thanks for the question as we look at North America in the fourth quarter that decline was mostly an artifact of rounding we're not expecting a further decline in North America in Q1, I do think overall, though there is an opportunity for us to invest more in growth in North America, and Europe over the past five to seven year.

Evan Thomas Spiegel: I do think, overall, though, there is an opportunity for us to invest more in growth in North America and Europe. Over the past, you know, five to seven years, we've really focused on our Android product and growth and, you know, emerging markets. That's really, you know, about attracting a large volume of new users. I think in places like North America and Europe, we can do a better job on iOS and really resurrecting people who tried Snapchat or who aren't coming into the service as often or when they come back, you know, to receive a message from their friends, helping them onboard with our other different features.

So we've really focused on our Android product and growth in emerging markets. That's really about attracting a large volume of new users I think in places like North America and in Europe, We can do a better job on iOS and really on resurrecting people, who tried snapchat or who aren't coming into the service as often or when they come back.

Mark Mahaney: We receive a message from their friends, helping them onboard to our other different features so that's going to be an increasing focus for us and we will.

Evan Thomas Spiegel: So that's going to be an increasing focus for us. And we'll, you know, we'll be investing more there over the coming years. We're kind of currently just really sizing that opportunity and really understanding it. We obviously reach a very large number, I think, you know, more than 75% of 13 to 34-year-olds in over 20 countries.

Mark Mahaney: We will be investing more there over the coming years, we're kind of currently just really sizing that opportunity and really understanding. It. We obviously reach a very large number I think more than 75% of 13 to 34 year olds in over 20 countries, but I do think there is some headroom to continue to grow our business in Europe, and North America in terms of users.

Richard Greenfield: But I do think there's some headroom to continue to grow our business in Europe and North America in terms of users. Our next question comes from Rich Greenfield with Light Shed Partners. Please proceed. Hi, thanks for taking the question. You know, Evan, I guess...

Mark Mahaney: Our next question comes from Rich Greenfield with bloodshed partners.

Richard Greenfield: Please proceed hi, Thanks, Hi, Thanks for taking the question Evan I guess.

Evan Thomas Spiegel: This all kind of comes down to investor questions or type of scale. The SNAP smaller scale relative to meta, is that just sort of a fundamental long-term issue? Because I think people are looking at meta growing 30% at a tremendous underlying scale and, you know, certainly spending very, very aggressively on AI and ML. And is that the limiting factor on your growth?

Richard Greenfield: What kind of comes down to the investor questions or types of scale.

Richard Greenfield: The snap smaller scale relative to meta is that just sort of.

Richard Greenfield: Our fundamental long term issue because I think people are looking at growing 30% a tremendous underlying scale.

And certainly spending very very aggressively on AI and ml.

Speaker Change: Is that's the limiting factor on your growth I mean, 10% to 15 as you noted is obviously a pretty nice acceleration from where you were this quarter at five right.

Richard Greenfield: It's obviously a pretty nice acceleration from where you were this quarter at five, but. You know, backing out subscription, you could probably at the bottom end still grow below 10% at. So just as we think about sort of 2020, for, Q1 the low point, meaning is there a dramatic acceleration that you see possible throughout the whole year as you lean into DR and the ML investments pay off, or are you just sort of fundamentally disadvantaged?

Speaker Change: Backing out subscription you probably you could at the bottom and still grow below 10% of AD only.

Speaker Change: So just as we think about sort of 2024.

Speaker Change: Is Q1, the low point, meaning is there a dramatic acceleration that you see possible throughout the whole year as you lean into Dr and the ml investments pay off.

Speaker Change: Or are you just sort of fundamentally disadvantaged I think thats what it is.

Evan Thomas Spiegel: I think that's what, you know, investors who are obviously seeing what happened to the staff overnight are trying to struggle with. Yeah, thanks, Rich. You know, I think, as you know, a platform that serves over 800 million people around the world. We're certainly one of the largest internet services; we aren't as large as some players, but I think there's an enormous opportunity for us to continue to grow our business. I think, you know, as you look at sort of the overall revenue resilience, one of the things we've really focused on in the last couple of years is pivoting to lower funnel objectives for advertising partners, and especially, you know, small and medium sized businesses. We historically had more of a brand-focused advertising business, and it's taken quite a lot of work and investment.

Speaker Change: <unk>, who are obviously seeing what's happened to the staff overnight or trying to struggle with and understand thank you.

Speaker Change: Yes, Thanks Richard.

Speaker Change: <unk> is a platform that serves over 800 million people around the world. We're certainly one of the largest internet services, we arent as large as some players, but I think there's enormous opportunity for us to continue to grow our business I think as you look at sort of the overall revenue resilience one of the things we've really focused on in the last couple of years is pivoting to lower funnel.

Speaker Change: <unk> for advertising partners, and especially small and medium sized businesses. We historically it had more of a brand focused advertising business and it's taken quite a lot of work and investment we're certainly.

Evan Thomas Spiegel: We're certainly, you know, trying to play catch up here on the direct response side, but we are seeing evidence that that's working. So I think, you know, as we look at our seven zero product, for example, in the way that it's really driving purchases for advertisers, that tells me that as we, you know, apply those learnings to other categories, like apps, for example, we'll be able to see more momentum and progress there. So it certainly has been a difficult transition, you know, from a more brand-oriented business to direct response.

Speaker Change: Trying to trying to play catch up here on the direct response side, but we are seeing evidence that that's working so I think as we look at our seven zero product for example, and the way that that's really driving purchases for advertisers that tells me that as we apply those learnings to other categories like apps for example that we'll be able to see more momentum and progress there. So.

Speaker Change: It certainly has been a difficult transition from from them. There are more brand oriented business to direct response, but we are making a lot of progress and when I look at the work we've done just on the modeling side and the scale of our models now and our ability to utilize pressure more realtime signals in a privacy safe way across our platform I do think we are.

James Heaney: But we are making a lot of progress. And, you know, when I look at the work we've done just on the modeling side, and the scale of our models now, and our ability to utilize, you know, fresher, more real-time signals in a privacy-safe way across our platform, I do think we're making significant progress. And, you know, we're optimistic that we can continue to accelerate. Our next question comes from James Heaney, with Jeff. Please proceed.

Speaker Change: Making significant progress and we're optimistic that we can continue to accelerate.

Speaker Change: Our next question comes from James <unk> with Jefferies. Please proceed.

Derek Andersen: Great, thanks for the question. Derek, can you just give a little bit more detail about what you're seeing so far in Q1, whether that's January or early February? The guide implies a pretty decent acceleration in revenue growth, so just curious, you know, what's specifically giving you that confidence to get back into, you know, the mid-teens at the high point. Thank you. Hey, it's Derek.

James: Okay, great. Thanks for the question Derek can you just give a little bit more detail about what youre seeing so far in Q1, whether that's January early February.

James: No the guide implies a pretty decent acceleration in revenue growth. So just curious what specifically, giving you that confidence to get back into the mid teens at the high point. Thank you.

Derek Andersen: Thanks for the question. You know, I think at a very high level that we're off to a good start. It's early in the quarter, we're only about a month in, but we're off to a good start.

Hey, it's Derek Thanks for the question.

Derek Anderson: No I think at a very high level, we're off to a good start it's early in the quarter, we're only about a month in but.

Derek Anderson: We're off to a good start and as Evan said, we've made a lot of progress with the AD platform in the trailing year.

Derek Andersen: And as Evan said, we've made a lot of progress with the ad platform in the past year. I think we're really looking for here are sort of, you know, four high-level things. One is a significant improvement to the ad platform fundamentally, you know, then improvements to our go-to-market, then delivering better ROAS to advertisers, and then that translating into budgets moving over, and advertisers growing. And then we made a lot of fundamental improvements to the ad platform and our go-to-market last year. You know, Evan touched on a lot of that and how that started showing up and improved ROAS in Q4, whether that was the more than 90% growth and purchase-related conversions in Q4 and also early input signs and advertiser growth with the more than 20% growth in small and medium-sized customers in Q4.

Derek Anderson: We're really looking for here is sort of high level things one is significant improvement to the AD platform fundamentally.

Derek Anderson: Then improvements to our go to market, then delivering better ROE as to advertisers and then that translating into budgets moving over and advertisers growing.

Derek Anderson: We made a lot of fundamental improvements to the AD platform and our go to market last year.

<unk> touched on a lot of that and how that started showing up in improved ROE as in Q4, whether that was the more than 90% growth in purchase related conversions in Q4, and also early input signs and advertiser growth with the more than 20% growth in.

Derek Anderson: Small and medium sized customers in Q4. So you are seeing that those fundamental improvements to the platform and our go to market efforts starting to translate into results for advertisers and then seeing that in some of our outputs and with a good start here and then reflected in the guide that we've provided so.

Derek Andersen: So you're seeing, you know, that those fundamental improvements to the platform and our go-to-market efforts are starting to translate into results for advertisers. And then we see that in some of our outputs, with a good start here, and then reflected in the guide that we've provided. So we're definitely seeing progress there and are pleased with the start that we're off to. And that's reflected in the guide. And as you noted, at the high end of the guide, we'd be looking at a 10 percentage point acceleration in the year over year growth rate, which would certainly be good progress, you know, in a single quarter, and we'd love to build from there. So, look, thanks for the question.

We're definitely seeing progress there and I am pleased with the start that we're off to and that's reflected in the guide and as you noted at the high end of the guide we'd be looking at a 10 percentage point acceleration in the year over year growth rate.

Derek Anderson: Which would certainly be good progress.

Derek Anderson: A single quarter, and we book to build from there so.

Speaker Change: Thanks for the question and hopefully you are seeing the progress that we are.

Derek Andersen: And hopefully you're seeing, you know, the progress that we are. Our next question today comes from Justin Post with Bank of America. Please. Great. Thanks. Maybe one for Evan.

Speaker Change: Yeah.

Speaker Change: Our next question today comes from Justin Post with Bank of America. Please.

Justin Post: Please proceed.

Justin Post: Great. Thanks, maybe one for Evan.

Justin Post: Just on the cost side, you know, pretty big change you made in January or planned in January but made recently. Can you talk about the motivation for that? And then Derek, maybe explain when the benefit of that will hit. I'm assuming 2Q, but maybe you could outline how much cost savings and when we'll see it hit the model. Thank you.

Justin Post: Just on the cost side, a pretty big change you made in January or planned in January but it made recently can you talk about the motivation for that and then Derek maybe explain.

Justin Post: When the benefit of that will hit I am assuming <unk>, but maybe you could outline how much the cost savings and we will see it hit the model. Thank you.

Derek Anderson: Yes. Thanks for the question, it's always painful and difficult to make these sorts of changes with our team, we're really motivated by trying to move faster.

Evan Thomas Spiegel: Yeah, thanks for the question. It's always painful and difficult to make these sorts of changes with our team. We're really motivated by trying to move faster. You know, last year, towards the end of the year, we made a rather large change to our product team and restructured the team to just drive a lot more accountability and focus. And in doing so, we removed a number of layers of management, and we saw the impact that that had just in terms of clarity and focus and the ability for people to collaborate and work together. And I think, you know, as well, we're seeing a lot of benefits from getting folks together in the office and the sort of problem-solving and creativity that comes out of that.

Derek Anderson: Last year towards the end of the year, we made a rather large change to our product team.

Derek Anderson: And restructured the team.

Speaker Change: So just drive a lot more accountability and focus and in doing so we removed a number of layers of management. We saw the impact that that had just in terms of the clarity and focus and the ability for people to collaborate and work together.

Speaker Change: And I think as well, we're seeing a lot of benefits from getting folks together in the office and the sort of problem solving and creativity that comes out of that so I think putting a real focus on reducing hierarchy and really an emphasis on bringing people together to solve problems has made a big difference to the business recently and I think these changes will allow us to do more of that.

Evan Thomas Spiegel: So I think putting a real focus on reducing hierarchy and really putting people together to solve problems has made a big difference for the business recently. And I think these changes will allow us to do more of that. Hey, on the cost structure side, you know, I think a few things to walk through here, just looking at the cost structure generally. One, we're trying to make sure that we've got a really clear path to be generating meaningful adjusted EBITDA and positive free cash flow. And that's really defining our investment levels. And then we're prioritizing within that, as I look forward to Q1, number one, we've seen a big increase in infrastructure costs in 2023, on the order of magnitude of about $100 million of quarterly run rate higher infrastructure costs.

Speaker Change: Hey on the on the <unk>.

Speaker Change: Cost structure side, I think a few things to work through here just looking at their cost structure generally one we're trying to make sure that we've got a really clear path to be generating meaningful adjusted EBITDA and positive free cash flow.

Speaker Change: And Thats really defining our investment levels and then we're prioritizing within that as I look forward. The Q1 number one we've seen a big increase in infrastructure costs in 2023.

Speaker Change: On the order of magnitude of about $100 million of quarterly run rate of higher infrastructure costs, and that's led to the rather significant increases in per per DAU. You saw that started to slow down as we went through the back half of 2023 and into Q4 of 2023 in terms of the sequential increase in the <unk>.

Derek Andersen: And that's led to rather significant increases in input per Dow. But you saw that start to slow down as we went through the back half of 2023 and into Q4 of 2023, in terms of the sequential increase in infrastructure per Dow. And really look for that to continue to slow down or level off here, as we move into Q1. And that's going to give us the opportunity, you know, to make progress against our medium and long-term margin targets given infrastructure is the biggest element of the cost of revenue side of things. If I look down, you know, to the OPEC side, there are just a couple of things to note.

Speaker Change: Infrastructure per down and really look for that to continue to slow down or level off here.

Speaker Change: As we move into Q1, and that's going to give us the opportunity to.

Speaker Change: Make progress against our medium and long term margin targets given infrastructure is the biggest element of the cost of revenue side of things as I look down to the Opex side, just a couple of things to note. One we had a really good outcome on Q4 adjusted EBITA part of that we're seeing at the higher end of our internal range, we shared with you on revenue.

Derek Andersen: One, you know, we had a really good outcome on Q4 adjusted EBITDA, part of that was being at the higher end of our internal range we shared with you on revenue. But part of that was about better flow through, and we had lower than expected marketing costs, for example, in Q4. And timing wise, you're going to see some of those marketing costs in Q1 this year with the campaign that we've kicked off. And so you're seeing a little bit of that as a one-time item flowing through the Q1 costs, but of course, they're impacting the adjusted EBITDA margin in Q1. From an ongoing cost structure perspective, though, to answer your question, yes, we made the very difficult decision earlier this week to restructure our team that impacted about 10% of the team. So you know, about 60% to two-thirds of our OPECs are people related.

What part of that was about better flow through and we had a.

Speaker Change: Lower.

Speaker Change: And then I expected marketing cost for example, in Q4 and timing wise Youre going to see some of those marketing costs. In Q1. This year with a campaign that we've kicked off and so youre seeing a little bit of that as a onetime item flowing through to Q1 costs that of course are impacting the adjusted EBITDA guide in Q1.

Speaker Change: From an ongoing cost structure perspective, though to your question, yes, we made the very difficult decision.

Speaker Change: Earlier this week to restructure our team that impacted about 10% of the team. So about 62% to two thirds of our Opex is people are people related so we would expect.

Derek Andersen: So we would expect to see that, you know, help us on the OPEC side. But you probably will not expect to see that really fully reflected in the cost structure until Q2 and beyond. You know, in Q2, we'll be going through that transition. And we'll actually be incurring between 55 and $75 million of restructuring costs in largely in Q1. It'll put downward pressure on net income in the quarter.

Speaker Change: To see that.

Speaker Change: Help us on the Opex side, but you probably will not expect to see that really fully reflected in the cost structure until Q2 and beyond.

Speaker Change: In Q2 will be going through that transition and will actually be incurring between 55 and $75 million of restructuring costs in largely in Q1 that will put downward pressure on net income in the quarter. So a lot of the cost structure benefits that you would expect to see there will show up in Q2.

Derek Andersen: So a lot of the cost structure benefits that you would expect to see there will show up in Q2 from an adjusted EBITDA perspective. So if you're sort of falling through each of those pieces, then you've got a path here to, you know, a structure change and how to think about infrastructure and revenue costs, where the lion's share of the increase in infrastructure costs in 2023 is best thought of as fixed. And therefore, that gives us the ability to flow through at a really good rate, as we have done in criminal revenue growth.

Speaker Change: From an adjusted EBITDA perspective so.

Speaker Change: If you're if you're sort of falling through each of those pieces, then you've got a half year or two.

Speaker Change: Our structure change and how to think about infrastructure and cost of revenue were built.

Speaker Change: The lion's share of the increase in infrastructure costs in 2023, our best thought of as fixed and therefore that gives us the ability to flow through at a really good rate as we have incremental revenue growth you saw that in Q3, and Q4 will flow through more than two thirds of incremental revenue to the adjusted EBITDA line. So that's sort of an indication of how we can scale well on the <unk>.

Derek Andersen: You saw that in Q3 and Q4, we flowed through more than two-thirds of incremental revenue to the adjusted EBITDA line. So that's sort of an indication of how we can scale well on the gross margin line. And then from here, after restructuring on the OPEC side and getting to a good size on our overall fixed cost cash cost structure, you know, it's about being disciplined from here, which we expect to be able to do, and the changes we may make may give us room to invest to support our growth are if and when we accelerate revenue. The last thing I just touch on here, you know, below the adjusted EBITDA line, SBC has been a real focus for us in trying to get to a sustainable level.

Speaker Change: Margin line and then from here after restructuring on the Opex side and getting to a good size on our overall fixed cost cash cost structure.

Speaker Change: Being disciplined from here, which we expect to be able to do in the changes we may give us room to invest to support our growth is if we if and when we accelerate revenue. The last thing I'll just touch on here below the adjusted EBITDA line SPC has been a real focus for us and trying to get to a sustainable level of SBC the restructuring.

Derek Andersen: The restructuring changes that we made earlier this week are going to help us significantly with making progress on that. The other thing is that we've been talking a lot throughout 2023 about SBC being elevated as a result of refresh grants to the team and how that flows through gap measurement of SBC. We saw that impact begin to dissipate in Q4 of 2023. A 24% year over year decline or $110 million year over year decline in SBC, you know, largely driven by that impact rolling off.

Speaker Change: <unk> that we made earlier this week are going to help us significantly with making progress on that and the other is that we've been talking a lot throughout 2023 about SBC being elevated as a result of refresh grants to the team and how that flows through GAAP measurement of FTC, we saw that impact begin to do.

Speaker Change: Paid in Q4 of 23, 24% year over year decline of $10 million year over year decline in SBC, largely driven by that impact rolling off we will see that further dissipate into Q1 and later this year. So.

Derek Andersen: We'll see that further dissipate into Q1 and later this year. So, really getting the cost structure in a much better place here to carve a path to profitability, sustain free cash flow, and sustainable rates of SBC and dilution. So hopefully that helps. And look, I know it's a long answer to a short question. But the last thing I'd add is just on managing SBC. It's been a real focus to get the share count right. We've bought back nearly $1.2 billion of our shares over the last 18 months, you know, at prices below $10. That's really helped us here to get through this period of transition with the business at a level of share count growth that's more sustainable. Since IPO, we've kept that number at around 3.6% CAGR.

Speaker Change: Really getting our cost structure in a much better place here to carve a path to profitability and sustained free cash flow and sustainable rates of SBC and dilution. So hopefully that helps and then look I know, it's a long answer to a short question, but the thing I'd add is just on managing the SBC, it's been a real focus to get the share count right.

Speaker Change: Bought back nearly $1 2 billion of our.

Speaker Change: Our shares over the last 18 months at prices below $10.

Speaker Change: That's really helped us here to get through this period of transition with the business with with a level of share count growth. It's more sustainable since IPO, we've kept that number at around three 6% CAGR. So.

Derek Andersen: So hopefully you can see the discipline in the cost structure with the changes we've made, and you'll see us level out at a cost structure that scales well to produce profitability and free cash flow. So thanks for the question and for bearing with me for the long answer. Your next question today comes from Stephen Ju with UBS.

Speaker Change: Hopefully you can see the discipline in our cost structure with the changes we've made and youll see us level out on a cost structure that scales well to produce profitability and free cash flow. So thanks for the question and bearing with the long answer.

Speaker Change: Our next question today comes from Stephen Ju with UBS. Please proceed.

Stephen Ju: You know, aside from what sounds like a benefit to engagement, I think you've previously talked about how my AI has been helping you gather more intent data. So, you know, we're wondering if you can help draw the line from that as a concept to revenue benefit, as you continue to underwrite the incremental cost to serve. Thank you.

Stephen Ju: Aside from what sounds like benefit to engagement I think.

Stephen Ju: Previously you've talked about how by AI has been helping you gather more data so.

Stephen Ju: Wondering if you can help draw the line from that as a concept to revenue benefit.

Stephen Ju: As you continue to underwrite the incremental cost to serve thank you.

Evan Thomas Spiegel: Yeah, thanks for the question. We certainly do think that that signal can be another input into our models to help deliver more relevant and engaging advertising. You know, we made a lot of progress on the cost to serve side in terms of MyAI. And, you know, we've been testing routing queries to different models and whatnot to help reduce costs depending on the complexity of the query. I'd say overall, our generative AI efforts have been much more focused on image and video models and, you know, helping people edit their snaps or generate snaps in new and entertaining ways and really using that as an on ramp to Snapchat Plus. We're really excited that we reached more than 7 million Snapchat Plus subscribers in Q4. And I do think that Snapchat Plus will be a way to monetize some of these, you know, more intensive image and video offerings Our last question comes from Mark Mahaney with Evercore. Please proceed.

Speaker Change: Yes. Thanks for the question, we certainly do think that that signal can be another input into our models to help deliver more relevant.

Speaker Change: And engaging advertising we've made a lot of progress on the on the cost to serve side in terms of my eye and we've been testing a routing queries to different models and whatnot to help reduce costs, depending on the complexity of the query I'd say overall, our generative AI efforts have been much more focused on image and video models and helping people.

Speaker Change: Edit their snaps or generate snaps and new and entertaining ways and really using that as an on ramp to snapshot plus we're really excited that we reached.

Speaker Change: One 7 million snapshot plus subscribers in Q4, and I do think that Snapchat plus.

Speaker Change: Way to monetize some of these.

Speaker Change: A more intensive image and video offerings, so that we're rolling out.

Speaker Change: Yeah.

Speaker Change: Our last question comes from Mark Mahaney with Evercore. Please.

Mark Mahaney: Please proceed.

Mark Mahaney: Thanks, Evan you talk about the unifying the content experience across stores and spotlight could you talk about the degree of difficulty in doing that you find use cases are such that people just pick one users pick one or two one of those in silo off there and it's going to be hard to unify that that experience and if it is hard how do you plan to do.

Mark Mahaney: Thanks, Evan. You talked about unifying the content experience across stories and spotlight. Did you talk about the degree of difficulty in doing that? Do you find use cases are such that people just pick one or two users, pick one or two, one of those, and silo off there, and it's going to be hard to unify that experience? And if it is hard, how do you plan to do that?

Evan Thomas Spiegel: Just any more color on how you unify the content experience? Thank you. Yeah, thanks, Mark. I'd say overall, anytime you're asking people to change their behavior, that can be difficult. That's why we're really trying to be thoughtful about it. I think one of the most frustrating things from a user experience perspective is that the UI and navigation for Spotlight are different than the UI and navigation for Stories. So, you know, the initial steps here are really trying to unify the UI and then unify the navigation and make sure there aren't any, you know, negative secondary impacts on, you know, various parts of our business. But I think overall, you know, as we look at the way that Spotlight's been able to drive some really significant engagement growth and, you know, really the opportunity to broaden out our inventory pool and our ranking models in a holistic way, I think that, you know, those benefits will outweigh, you know, whatever disruptions we have to navigate as we unify that user interface and navigation. This concludes our Q&A session as well as SNAP's Inc. Fourth Quarter 2023 Earnings Conference Call. Thank you all for attending today's session; you may now disconnect.

Mark Mahaney: Just any more color on how you unify the content experience. Thank you.

Evan Thomas Spiegel: Yeah, Thanks, Mark I'd say overall anytime youre asking people to change their behavior that can be difficult. That's why we're really trying to be thoughtful about it and I think one of the most frustrating things from a user experience perspective is that the UI and navigation for spotlight is different than the UI and navigation for stories. So the initial steps here are really two.

Evan Thomas Spiegel: Lying to unify the UI and then unify the navigation and make sure there aren't any negative secondary impacts.

Evan Thomas Spiegel: Two.

Evan Thomas Spiegel: Parts of our business, but I think overall as we look at the way that spotlight has been able to drive some really significant engagement growth and really the opportunity to broaden out our inventory pool.

Evan Thomas Spiegel: Two our ranking models in a holistic way I think.

Evan Thomas Spiegel: These benefits will outweigh whatever disruptions, we have to navigate as we unify that user interface navigation.

Speaker Change: This concludes our Q&A session as well as snaps Incorporated's fourth quarter 2020 earnings conference call.

Speaker Change: Thank you all for attending today's session you may now disconnect.

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