Snap Inc. (NYSE:SNAP) Q3 2023 Earnings Call Transcript

Snap Inc. (NYSE:SNAP) Q3 2023 Earnings Call Transcript October 24, 2023

Snap Inc. beats earnings expectations. Reported EPS is $0.02, expectations were $0.00808.

Operator: Good afternoon, everyone, and welcome to Snap Inc.’s Third 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.

David Ometer: Thank you, and good afternoon, everyone. Welcome to Snap’s third 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 make no obligation to update our disclosures. 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.

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 non-recurring charges. 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 Spiegel: Hi, everyone, and thank you all for joining us. Our revenue returned to positive growth in Q3, increasing 5% year-over-year and flowing through to positive adjusted EBITDA as our reprioritized cost structure demonstrated the leverage in our business model. We are focused on improving our advertising platform to drive higher return on investment for our advertising partners, and we have evolved our go-to-market efforts to better serve our partners and drive customer success. We also made progress toward diversifying our revenue with Snapchat+ reaching more than 5 million subscribers in the quarter, resulting in Snapchat+ revenue growing more than 250% year-over-year. Our focus on visual communication between friends and family is a strategic advantage that has enabled us to build engaging and retentive products and services across our platform.

Our community grew to 406 million daily active users in Q3, and we are working to further deepen content engagement by focusing on three key areas: investing in our ML models to improve content ranking and personalization across all of our content surfaces; growing our creator community and diversity of content by supporting and rewarding creators; and using content to start conversations and build relationships across our service. We continue to leverage AI technology to deliver new products and features to our community. Since launching My AI, more than 200 million people have sent more than 20 billion messages, which we believe makes My AI one of the most used AI chatbots available today. More than 250 million Snapchatters engage with AR experiences on our platform every day on average.

On November 9, we will be live streaming our sixth annual Lens Fest. We’re thrilled to have the opportunity to bring together the vibrant Snap AR community of developers and creators that are collaborating with us to push boundaries, redefine what’s possible with augmented reality, and build businesses along the way. Given the progress we have made with our ad platform, the leadership team we have built, the work we have done to reprioritize our cost structure and the strength of our balance sheet, we believe we are well positioned to continue making progress on our top strategic priorities. As we move forward into Q4 and 2024, we remain focused on investing in our platform to sustain community growth, investing heavily in our direct-response business to deliver measurable return on ad spend, and cultivating new sources of revenue to diversify our top-line growth to build a more resilient business.

I want to thank Jerry Hunter, our Chief Operating Officer, for seven years of service at Snap. Jerry has notified us of his intent to retire and will be transitioning his responsibilities by the end of the month. I am deeply grateful to Jerry for the meaningful contributions he has made over his many years at Snap. His work to improve our advertising platform, serve our community, and build a strong team has helped to lay the foundation for our future growth. Thank you. And with that, we will begin our Q&A session.

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Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Doug Anmuth with JPMorgan.

Doug Anmuth: Thanks for taking the questions. Your 4Q revenue guide mostly implies the deceleration versus 3Q, and I think that’s coming on much easier comps. I was just hoping you could provide some color on October performance, especially given the war in the Middle East. And we know that 4Q is back-end weighted, and I think the brand comps in particular get easier through the quarter. Just hoping you could talk about what’s embedded there. Thank you.

Derek Andersen: Hi, there. Doug, it’s Derek speaking. I’ll take that one for you. First and foremost, you’re right, we had a quarter in Q3 that we’re pretty pleased with on the progress we made on top-line. There’s a lot that went into that. We had a number of drivers to that outcome, including the progress we’ve made on our direct-response ad platform. We continue to make really significant investments in the ad ranking and optimization, incorporating a much broader range of signals into the ad platform and driving much larger models. And we’ve also instituted a much faster pace of experimentation. All of that’s leading to more precise conversion predictions, improved ROI for advertisers. And as we noted in the letter in particular, 7/0 has been a bright spot in the quarter in terms of driving Pixel Purchase behavior and the year-over-year and quarter-over-quarter growth that we saw in lower funnel.

And I also note that part of the strength in Q3 was around brand advertising where we saw really good uptake on our Total Takeover products, including First Story that launched in the period. So, really pleased with the momentum that we saw there. And I think as you look into Q4, I think we talked about a little bit in the letter, but to share some high-level color, we believe we’re on the right path for the DR platform. So, we’re pleased with the continuous progress we’re making there, working with our partners on making their privacy safe integrations with the platform, higher quality and more performance for them and driving performance. We’re also pleased with what we’re seeing on our scaled solutions for small and medium-sized businesses and what that drove out in terms of quarter-over-quarter growth in Q3 of 11% in aggregate and the DR business returning to year-over-year growth.

So, we’re really pleased with fundamentally what we’re seeing there and what we’re executing against into the new quarter. I think on the brand side in particular, coming off of the progress that we saw in Q3 with those new brand products seeing really good uptake, you’re right, as we move into Q4, Q4 is a little bit different as a quarter. Historically, we’ve seen a little bit larger share of the revenue coming from brand products in Q4. And then two, the Q4 business being a little bit more back-end weighted than other quarters historically as well. So, both of those things sort of impacting visibility. And brand having grown at a slower rate in Q3 and being a larger share of the business in Q4 sort of brings a little bit of a mix shift headwind.

And then last, the point that you raised very specifically, which is what we’ve seen since the onset of the war in the Middle East is we have had a number of primarily brand-oriented campaigns pause spending in the early period after the onset of the war there in the Middle East. I will say that we have seen a lot of those campaigns resume spending. And the impact to our daily run rate has reduced significantly as a result of that. But we also have seen a very small amount of incremental campaign pauses triple in more recently. And so, one of the things that we’ve tried to do here when we’re thinking about giving forward-looking information for Q4 is number one, be transparent about what we’ve seen quarter-to-date on that side. And then, I think when we look back historically, for example, to what we all experienced at the onset of the war in Ukraine and the impact that that had on folks’ business and the operating environment, I think we’ve realized that war is fundamentally unpredictable.