SNAP - NYSE

Good afternoon, everyone, and welcome to Snap Inc.'s Fourth Quarter 2024 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 2024 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, earnings slides and investor letter and investor presentation. This conference call includes forward-looking statements, which are based on our assumptions 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-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 certain other items. 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 for joining our call. In Q4, we continued to make progress on our core priorities of growing our community and improving depth of engagement, driving top line revenue growth and diversifying our revenue sources, and building toward our long-term vision for augmented reality. Daily active users reached 453 million in Q4, an increase of 39 million year-over-year, and content viewers and total time spent watching content grew year-over-year. The progress we have made with our direct response advertising business, and the growth of our Snapchat+ subscription business contributed to Q4 revenue increasing 14% year-over-year to $1.56 billion. The benefits of our more focused investments are now evident in our improved profitability and free cash flow generation. In Q4, the combination of topline progress and expense discipline translated to $276 million of adjusted EBITDA and 60% adjusted EBITDA flow-through, $182 million of free cash flow, and $9 million of net income. In 2024, we generated $5.36 billion of revenue, which grew 16% year-over-year, driven primarily by DR ad revenue, which also grew 16% year-over-year for the full year. Snapchat+ grew from 7 million to 14 million subscribers in 2024, and other revenue, the majority of which is Snapchat+ subscription revenue, grew 131% year-over-year, exiting the year with an annualized revenue run rate of well over $500 million. We delivered $509 million of adjusted EBITDA for the full year, marking our fifth consecutive year of positive adjusted EBITDA. In 2024, we generated $219 million in free cash flow, achieving our fourth consecutive year of positive free cash flow. As we enter 2025, we are focused on key initiatives to build on the momentum we established in 2024. First, our new ad placements, Sponsored Snaps, and Promoted Places provide advertisers with incremental reach while enabling them to connect with our community in unique and personalized ways. Second, we are improving the way we go to market by providing advertising partners with actionable insights and introducing automated campaign optimization tools to enhance performance. Third, we are rolling out a simplified Snapchat experience designed to improve accessibility and usability for our community. Fourth, we will continue to advance our machine-learning infrastructure to drive higher quality ad interactions. Lastly, in 2024, we launched our fifth generation of spectacles powered by our new Snap OS operating system as well as our latest version of Lens Studio, which empowers developers to create innovative AR experiences that overlay computing on the real world. In 2025, we will expand our developer ecosystem by enhancing our tools to simplify AR creation and increase the number of spectacles experiences that can bring augmented reality into everyday life. We are also pleased to announce that Ajit Mohan will be our new Chief Business Officer. Ajit joined Snap over two years ago as President of APAC, where he rapidly grew our business and presence across the region. As Chief Business Officer, Ajit will be responsible for growing our advertising business across all regions and will lead our revenue product and business operations organizations to help bring greater alignment across our teams responsible for serving our advertising partners. Our progress in 2024 reinforces our confidence in our ability to adapt and innovate in a dynamic environment. We believe that the foundation we built positions Snap to unlock even greater value for our business, community, and partners in the years to come. We continue to make progress in growing our global community, reaching 453 million daily active users in Q4, an increase of 10 million quarter-over-quarter. Daily active users in North America was 100 million compared to 100 million in the prior quarter and 100 million in the prior year. Daily active users in Europe was 99 million compared to 99 million in the prior quarter and 96 million in the prior year. Daily active users in Rest of World was 254 million compared to 244 million in the prior quarter and 218 million in the prior year. Snapping with friends and family is the core of our service and the primary driver of the continued growth and long-term retention of our global community. In Q4, we introduced new features to inspire creation and help our communities strengthen their relationships through snapping. For example, in Q4, we launched new Bitmoji stickers based on new trends for Snapchatters to react and express themselves visually. We also announced new location sharing features in Family Center, our in-app hub for parental tools and resources, making it easier for families to stay connected while on the move. In addition, we launched new and early access Snapchat+ features including footsteps, which helps Snapchatters keep track of the places they visited on the Snap Map, and new app themes and custom backgrounds. In Q4, global time spent watching content grew year-over-year, driven primarily by strong growth in total time spent watching Spotlight. Our focus is now on refining the simple Snapchat experience in preparation for a broader rollout over the coming year, while also expanding our creator community to foster a vibrant content ecosystem. In Q4, we expanded Simple Snapchat testing to over 25 million Snapchatters in nearly every country where we offer Snapchat. While we will gain further insights from these initial tests in the months ahead, early learnings have already led to future refinements, including improvements to help Snapchatters more easily locate their subscriptions. These optimizations are aimed at improving the simple Snapchat experience for our power users in order to make the transition easier for some of our most engaged community members. We continue to see encouraging trends in engagement metrics, including increased content active days among less frequent and more casual users. We are particularly pleased with how Simple Snapchat is driving a shift in behavior with Snapchatter spending a greater share of their time watching content rather than scrolling to find something to watch. We will continue to test and learn, gain insights, and iterate accordingly in the months ahead to ensure a smooth rollout of Simple Snapchat. In Q4, we reaffirmed our commitment to fostering a dynamic and original content ecosystem on Snapchat. By prioritizing authentic creators and timely original content, we proactively balanced near-term view time with the long-term health of our platform. For example, comments on spotlight videos within 24 hours of submission increased significantly over the last three months, driven primarily by pressure content, leading to deeper engagement between Snapchatters and content from creators. In addition, more than 1 billion snaps were shared publicly on Snapchat every month in Q4 from our community creators and media partners. As part of our broader efforts to grow the creator community, we continue to invest in content creation tools in a diverse set of monetization opportunities. For example, we announced our new unified monetization program for creators that allows eligible creators to monetize spotlight videos, building on our storage revenue share program that helps creators monetize their stories. These initiatives are yielding results. Over the past year, we onboarded thousands of creators to our Snap Star program and the number of creators posting content grew more than 40% year-over-year in Q4. While we have onboarded many established creators and celebrities, we've also seen significant growth in creators that achieved Snap Star status by growing their following and business organically on Snapchat. For example, Ella Moncrief, a 20-year-old health and adventure enthusiast increased her Snapchat followers sixfold in just six months and has now established herself as one of our top viewed creators. These efforts underscore our dedication to empowering creators, strengthening the health of our content ecosystem, and delivering fresh, engaging content for our community. Augmented reality continues to inspire creation and drive engagement on Snapchat. A key driver of this is the growth of the vibrant AR developer and creator ecosystem we have supported over the last several years. More than 375,000 AR creators, developers, and teams from nearly every country in the world have built over 4 million lenses using Lens Studio. In Q4, we introduced the first two-person generative AI lens, which uses generative AI to create a personalized selfie together with a friend. In Q4, our new me in the 60s AI lens, which enabled Snapchatters to transform into a 60s version of themselves was viewed over 900 million times. To build on this momentum and to continue to support our AR Creator ecosystem, we expanded our Lens Creator Rewards program designed to reward the top lenses built by our community and introduce new lens challenges to help AR creators monetize their AR lenses. In Q4, we made significant strides in AI research and innovation. Our team developed a groundbreaking AI model capable of generating high resolution images on mobile devices in just seconds. This on-device model with only 379 million parameters is compact yet highly efficient, producing images in just 1.4 seconds on an iPhone 16 Pro Max. We are excited to bring this technology into production in the coming quarters. In addition, we launched Easy Lens in Lens Studio 5.4, an AI-powered tool that simplifies AR creation by enabling users to create and customized lenses through text prompts. The response has been remarkable. Within a month of launch, over 3,000 lenses have been published using Easy Lens with Snapchatters engaging with these lenses nearly 300 million times. This is a testament to the potential of AI to unlock creativity and drive engagement across our platform. Looking ahead, we are focused on innovating and enhancing our core product experience while continuing to invest in the future of augmented reality. We believe continued progress on these initiatives is a critical input to serving our community and expanding our long-term monetization opportunity. Over the past year, we've made significant progress on three foundational advertising platform initiatives, including better and larger ML models, improved utilization of privacy-safe signals and more performance ad formats to drive improved results for advertising partners. We continue to see strong demand for our Pixel Purchase and App Purchase Optimizations, which are becoming a more meaningful contributor to top line growth. For example, revenue from app-based purchase optimizations grew more than 70% year-over-year. Our recent expansion of 70 optimization to app install and in-app purchase is driving better performance for advertisers. For example, GoWish, a global digital wish list platform, leveraged 70 app install and in-app purchase, which resulted in a 70% decrease in cost per install and an increase of over 3,000% in-app installs in just 12 weeks, outperforming other large digital platforms. Over the past year, we've made significant enhancements to our lead generation products, including ad ranking model improvements, new creative customization, and integrations with preferred CRM partners. As a result, in Q4, we saw a six times increase year-over-year in the number of leads that were generated for advertisers while decreasing cost per lead by over 40% on average. For example, the University of Idaho leveraged our lead generation objective to help drive applications for its undergraduate programs and saw Snap emerge as the most effective platform, delivering 69% of all undergraduate conversions at a 22% lower cost per conversion compared to other social media platforms. The combination of more performance DR products, improved go-to-market operations optimized for small, medium-sized business customers, and a simplified ad-buying experience made SMBs the largest contributor to ad revenue growth in 2024. Snap promote has enabled SMBs and creators to promote their services, content, or products, reach new audiences, and measure ad performance, all within Snapchat on their mobile devices. Recently, we launched automated in-flight campaign recommendations, adaptive templates for campaign setup, and scaled creative editing to further improve our go-to-market strategy for SMBs. We also continue to invest in our partnerships ecosystem globally by building and deepening partnerships with leading marketing tech partners. For example, betPARX, an online gaming platform partnered with Snapchat and Aygo-Tech, a performance-driven marketing agency to drive lower funnel DR performance. By leveraging advanced optimization features, including granular targeting of high value engaged audiences, they achieved a 32% increase in ROAS and a five times increase in purchases compared to their previous Snapchat campaign. We believe automation is a key driver of advertiser performance and we remain focused on empowering advertisers to enhance their campaign outcomes through automation. For instance, in Q1, we will be testing our new Smart Budget Optimization feature, which automatically adjusts campaign budgets across assets to deliver the best results. We are focused on reaccelerating demand for upper-funnel brand revenue by continuing to deliver innovative and performant advertising products. We are prioritizing enhanced support for large brands and agencies by offering increased collaboration, platform integrations, and advanced measurement tools. For example, last year we launched a first-to-market partnership with media measurement and optimization company VideoAmp to provide our agency partners with reach, planning, and measurement tools. This initiative has since onboarded some of our largest agency partners, including Omnicom Media Group, IPG Mediabrands, and Dentsu, enabling them to build cross-screen media plans with Snapchat in mind and assess key metrics like incremental reach. Looking ahead, we remain committed to leveraging the unique ways our audience engages with Snapchat and delivering actionable, differentiated insights to empower our advertising partners and agencies. In Q4, we began testing two new ad placements, Sponsored Snaps and Promoted Places, designed to help advertisers engage with the Snapchat community in unique and impactful ways. Sponsored Snaps enable advertisers to connect visually with Snapchatters, delivering incremental reach and helping brands leave a lasting. The initial results have been promising with Sponsored Snaps delivering more than 50 million impressions on average in the US to Snapchatters 18 or older, making it our largest single-day reach product. Promoted Places enabled businesses to use the Snap Map to highlight Sponsored locations, encouraging Snapchatters to discover new places, engage with place profiles, and visit those locations in real life. For example, Taco Bell leveraged Promoted Places in Q4 and saw the number of place profile views on the increase by five times when compared to Snapchatters who are not exposed to the campaign. In Q4, Sponsored Snaps and Promoted Places grew the number of unique Snapchatters reached by advertising partners, delivering a 30% increase in reach on average in the US. In Q1, we plan to roll out Sponsored Snaps and Promoted Places to additional markets while also beginning limited testing of Pixel Purchase optimization for Sponsored Snaps as we begin to make this new placement available for lower funnel bidding objectives. We are excited to see these placements drive meaningful results for our partners and deepen engagement with our community. With that, I'd like to turn the call over to Derek to discuss our financial results.

Thanks, Evan, and good afternoon, everyone. In Q4, total revenue was $1.56 billion, up 14% year-over-year. Advertising revenue was $1.41 billion, up 10% year-over-year, driven primarily by growth from DR advertising revenue, which increased 14% year-over-year. Brand-oriented advertising revenue was down 1% year-over-year, driven by continued weakness that is concentrated among a relatively small group of large clients focused largely in North America. We drove robust growth from our SMB client segment globally as we continue to build towards a more diversified and performance-based advertising business. Other revenue, which is driven primarily by Snapchat+ subscription revenue, more than doubled year-over-year to reach $143 million in Q4, with Snapchat+ subscribers reaching 14 million in Q4. In Q4, North America revenue grew 8% year-over-year and Europe revenue grew 20% year-over-year with a relatively lower rate of growth in North America due to the impact of weaker large client upper funnel demand being relatively concentrated in this region. Rest of World revenue grew 35% year-over-year, driven by the continued progress with our DR ad platform and investments in go-to-market operations. Adjusted cost of revenue was $669 million in Q4, up 9% year-over-year. Infrastructure costs were the largest driver of the year-over-year increase due in large part to the ramp in ML and AI investments over the past year. Infrastructure cost per DAU was $0.84 in Q4, which is in line with the prior quarter and within our expected range of $0.83 to $0.85. The remaining components of adjusted cost of revenue were $289 million in Q4 or 19% of revenue, which is in line with the prior quarter and within our full-year cost structure guidance range of 19% to 21%. Adjusted gross margin was 57% in Q4, up from 54% in the prior quarter and 55% in the prior year. Adjusted operating expenses were $612 million in Q4, up 4% year-over-year. Personnel costs decreased 1% year-over-year, driven by a 7% year-over-year decline in full time headcount, partially offset by inflationary impacts on wage rates and lower payroll tax credits compared to the prior year. Lower personnel costs were partially offset by increases in legal costs, including litigation and regulatory compliance-related costs, as well as higher product-related research and development costs. Adjusted EBITDA was $276 million in Q4, up from $159 million in Q4 of the prior year, reflecting higher revenue and operating expense discipline. Adjusted EBITDA flow-through or the share of incremental year-over-year revenue that flowed through to adjusted EBITDA was 60% in Q4, reflecting seasonally higher revenue in Q4 and our continued prioritization of our investments to drive top line growth and deliver improved financial performance. We achieved net income of $9 million in Q4 compared to a net loss of $248 million in Q4 of the prior year. The $257 million year-over-year improvement reflects the flow-through of a $117 million improvement in adjusted EBITDA, a $78 million or 23% reduction in stock-based compensation and related expenses, favorable net investment impacts of $27 million due primarily to losses incurred in the prior year and an improvement of $22 million in nonrecurring items due to business restructuring costs incurred in the prior year. Free cash flow was $182 million in Q4, while operating cash flow was $231 million. Over the trailing 12 months, free cash flow was $219 million and operating cash flow was $413 million, as we continue to balance investments with top line growth to deliver sustained positive cash flow. Dilution or the year-over-year growth in our share count was just 1.2% in Q4. We ended Q4 with $3.4 billion in cash and marketable securities on hand and just $36 million of debt maturing in 2025. For the full-year, we generated $5.36 billion in revenue, reflecting 16% year-over-year growth, driven primarily by continued progress in lower funnel direct response revenue. We delivered $509 million in adjusted EBITDA, representing adjusted EBITDA flow through of 46%. Importantly, we came within or below our full-year cost structure guidance across all key metrics announced at the beginning of 2024 as we managed our investment levels in balance with the rate of revenue growth realized by our business. As we look ahead to 2025, we see additional opportunities to invest productively in scaling our business, given the foundational improvements we have made to our ad platform and the momentum we have established in our go-to-market initiatives, particularly the SMB segment. Our investment plans for 2025 reflect this optimism alongside a strong commitment to make further financial progress towards profitability as we scale. Just as we did in 2024, our intention is to calibrate our investments to revenue growth as we move through the year. As a result, we estimate that infrastructure cost per DAU will be within a range of $0.82 to $0.87 per quarter in 2025. We anticipate starting out at the low end of this range in Q1 as we benefit from recent pricing improvements and progressing to the higher end of this range as we move through the year, driven by planned investments to move toward even larger models and near real-time model refreshes. We estimate that the remaining components of adjusted cost of revenue will be a combined 19% to 20% of revenue in each quarter of 2025. We expect to grow full-time headcount by 8% to 10% over the course of 2025, with related costs growing slightly faster due to moderate wage inflation. We also anticipate that higher legal costs associated with litigation and compliance will contribute to adjusted operating expense growth. As a result, we estimate that full-year adjusted operating expenses will be between $2.7 billion and $2.75 billion. For SBC and related expenses, we anticipate growth to be approximately in line with the employee population growth, resulting in an estimated full year SBC expense of $1.15 billion to $1.2 billion. For Q1 specifically, we anticipate continued growth of our global community, and our Q1 guidance is built on the assumption that DAU will be approximately $459 million in Q1. Our Q1 guidance range for revenue is $1.325 billion to $1.36 billion. We estimate infrastructure cost per DAU in Q1 will be at the low end of the full year guidance range, while all other cost of revenue as a percentage of revenue will be within our full year cost structure range of 19% to 20%. For adjusted operating expense, we estimate year-over-year growth of 11% to 12% in Q1, driven by growth in headcount, higher legal-related costs, and a seasonal shift of marketing expenses into Q1 relative to the prior year. In addition, we have committed approximately $5 million to support communities and team members impacted by the recent wildfires to date in Q1 and anticipate we may make further commitments over time. Given the revenue range above and our investment plans for the quarter ahead, we estimate that adjusted EBITDA will be between $40 million and $75 million in Q1. As we continue to execute in the quarters ahead, we remain focused on growing and serving our community through innovative and responsible products that foster meaningful connections among Snapchatters, strengthening our DR business to deliver measurable rollouts for our advertising partners, diversifying our revenue streams to drive sustainable top line growth and scaling our investments strategically to deliver meaningful and sustained profitability and positive free cash flow. Thank you for joining our call today, and we will now take your questions.

[Operator Instructions] Our first question comes from Doug Anmuth with JPMorgan. Your line is now open.

Thanks so much for taking the question. Can you talk about the early results around Simple Snap now that it's rolled out to more than 25 million users? Are you seeing any differences across user GEOs? And how are you managing any user or advertiser budget disruption or impact associated with the rollout? Thanks.

Hi, Doug, thanks so much for the question. We're definitely continuing to see encouraging testing results, especially with engagement metrics like increased content active days. So we are seeing more casual users enjoy our content experiences more frequently. I think there are sort of two big puzzle pieces that we're still working on as it pertains to the rollout. The first is migrating story ad demand, which was typically filled in those tiles on the Stories page, migrating that to the in-feed or to our Sponsored Snap unit. And so that's going to be a priority on the -- on the advertising side. And then in terms of engagement, there's still a cohort of users who really come to Snapchat for our Stories page for the current tile base layout to the creators and publishers that they love and we still haven't been able to claw back some of the engagement losses we're seeing with that cohort. So we're very focused on continuing to iterate there. We've got a number of ideas on how we can solve so both of those pieces and we're going to work on rolling those out in the coming weeks or months.

Our next question comes from Rich Greenfield with LightShed Partners. Your line is now open.

Hi. I've got two kind of high level questions. You're the only mobile ad platform that's built a robust subscription business in Snap+. I think it's now like almost 10% of total revenues and it's by far your fastest driver of growth. I guess, Evan, how should we think about the growth potential in terms of not just subscribers and ARPU, but what are the features that you can add that would make this an even more meaningful product going forward? And then given everything that's happened with DeepSeek and sort of China-based AI in terms of innovations over the course of the past couple of weeks, just curious how you think the cost curve may be changing for AI and how that impacts the Snap cost structure over the coming year?

Hey, thanks, Rich, for the questions. Yeah, on Snapchat+, we're really excited about the progress there. And there's definitely been a lot of adoption, especially of our personalization features. People really like feeling like the app is made for them and changing its appearance or the icon, those sorts of things. I think as we look at the roadmap for feature development, one of the areas we're focused on is just the core engagement loop of snapping and how we can make that more differentiated with Snapchat+ features. So that will be a priority this year. And I also think there will be room for some price increases. I think the annual plan here in the US is about $2.50 a month. And I think folks have indicated that they're getting a lot of value from Snapchat+. So that may be another avenue in terms of growing ARPU over the longer term. As it pertains to DeepSeek, I mean, first, I would just say it's been really inspiring to see the innovation there. I love -- I think the founder made a comment along the lines of how capital is just not a long-term moat in the technology business and the way that constraints really can drive innovation and creativity. And so that was definitely an exciting development for the industry. But I think it just further validates our view that a lot of these models are going to continue to become commoditized over time and obviously are going to become more and more efficient to run. So hopefully, that will have some impact for us over the longer-term. I think right now, we're just sort of in the early experimentation phase with some of their open source work.

Our next question comes from Mark Shmulik with Bernstein. Your line is now open.

Hey, this is Luiza dialing in for Mark Shmulik. Can you provide any color on what you've seen around engagement and advertiser behavior since TikTok went dark in the app stores? And hopefully, we'll get an answer one way or another on TikTok resolution soon. But how does it affect the way you think about priorities for the year? And where do you expect to be most nimble? Will it be on Simple Snapchat?

Hi, Luiza, thanks so much for the question. I think some of the changes with TikTok, they've sort of been an -- I guess, an imperfect experiment. So we're not trying to draw too many conclusions from some of the engagement lift we saw when the app went dark for that brief period of time. I would say that the overall environment of uncertainty is benefiting our business. I mean, certainly, advertisers are very focused on contingency planning and diversifying their spend. And I think the same goes for creators who are really thinking hard about how they can build the most diversified engagement with their fanbase across various platforms, including Snapchat. So a big priority for us is really just helping make sure we support advertisers and creators during this period of uncertainty. And for creators in particular, we've been spending a lot of time working on just improving that overall creation flywheel. I mean, that's why we're seeing a 40% increase in the number of creators posting to Snapchat. And I think in Q4, we actually reached 1 billion public posts a month on Snapchat. So, the public content ecosystem is growing in a really nice and healthy way. And so we're just going to continue our focus there when it comes to our strategy and prioritization.

Our next question comes from Dan Salmon with New Street Research. Your line is now open.

Great, good afternoon. Thanks for taking the questions. Evan, I'd love to just dig into small and medium-sized advertiser growth more. You noted it was the biggest contributor to ad revenue in 2024 in the letter and Snap Promote remains a big part of that. Could you just talk a little bit more about what the team is doing to leverage that growth, helping them expand beyond Snap Promote, build full ads manager accounts, and start to get a little bit more sophisticated on the platform -- on the platform, excuse me. And then you talked a little bit last quarter about how that Snap Promote list goes sort of straight into the go-to-market team to help facilitate that. Any other initiatives that you'd highlight to help accelerate that growth or other ad products in general that you see that group really ticking up with that -- with ticking up strongly? Thanks.

Hey, Dan, it's Derek speaking. I'll take that one. First, we are really pleased with what we're seeing with the SMB segment. It's been a big focus area over the last year. There's sort of a combination here of more performance DR ad products, the improvements we made to our go-to-market operations that are specifically optimizing them for the SMB segment, and then we've done a lot of work to simplify the ad-buying experience, including elements that are automated make it a lot easier for our SMB advertisers to get started. Advertisers in the SMB segment in particular have benefited from our growing number of CAPI integration partners, including, for example, Snowflake, Datahash, Tealium, and LiveRamp that make it really fast and easy to integrate and benefit from the improved performance that CAPI can deliver. Snap Promote, as you noted, is also a key driver of the SMB advertiser growth. It makes it really easy for folks to get started right within the app and this contributed in part to the active advertisers from the segment more than doubling year-over-year in Q4. To build on this momentum, we've got a pretty robust roadmap of enhancements on the way for SMB clients. Just as an example there, we'll be testing in Q1 our new smart budget optimization feature, which will automatically adjust campaign budgets across assets to deliver the best results for the advertiser. And so that's a big part of it. You also note in some of our investments that we're looking at in the year ahead, not just the investments in product and [ends] (ph) to deliver the advertising roadmap, but also more resources specifically to help scale the SMB segment. So hopefully, that gives you a little bit of color about what's been driving the success there and how we'll be investing going forward.

Our next question comes from James Heaney with Jefferies. Your line is now open.

Great, guys. Thanks for the question. What if anything is factored into your Q1 revenue and user growth guides as it relates to the rollout of Simple Snapchat? Is it fair to say we're just too early for that to be meaningfully impacting results right now? And/or that maybe it could kind of occur later in the quarter? Thank you.

Hey there, thanks for the question. As it really pertains to the guide both for revenue and user growth and Simple Snapchat, there's really nothing material factored into either of those around Simple Snapchat. We're being really thoughtful, as Evan mentioned earlier, around the testing and learning and some of the things that we're rolling out to sort of optimize that experience. And so that's not really a big factor in how we're thinking about either the engagement growth or the revenue growth in the coming quarter. It's really about the momentum that we're seeing in the business, both in terms of the momentum on the DR side overall, some of the SMB strength that I just mentioned earlier and the growth that we're seeing in the global community more recently. So hopefully that helps a little bit and we'll continue to test and learn going forward.

Our next question comes from Shweta Khajuria with Wolfe Research. Your line is now open.

Okay. Thank you for taking my questions. Let me try two, please. The first one is just generally on verticals. Could you please comment on the overall demand environment as you see it for both across brand and DR? And then anything that jumped out to you that was in terms of demand trends, it was specifically muted trends that you saw or strength? And then my second question is on compute costs. And I think this was asked a bit earlier, but let me try it one more time. When you think about efficiency gains in your compute costs over the next year, two years or three years, how are you thinking about where you'd realize them the most? And how are you positioned to realize those gains? Thanks a lot.

Hey there. Thanks for the question. This Derek speaking. On verticals, specifically, what we're really seeing there is that we get the best results in verticals where we've really built out great product market fit. So, if you think, for example, it's been about a year and a half since we rolled out the new 70 Pixel Purchase optimization and that's been a very big driver of the DR business over the last year. And we're seeing really good results in retail, CPG and health and wellness with that particular optimization and of course, broadening out from there. As we've been able to make progress on rolling out through testing and then general availability, some of the improvements to other optimizations, we see the product market fit expand. So for example, we added a number of enhanced app-based optimizations around midyear of '24 based on our new sort of ML architecture and product stack. And we're seeing that work really well for more verticals. So for example, we saw more than 70% year-over-year growth with app purchase optimizations in Q4 and we're seeing that work for our gaming, our retail e-comm and financial services verticals. And so as we're able to make more progress in rolling out our improved ad stack against different optimizations, that really helps us expand the applicability of those to more verticals and make more progress. On compute costs, I think what we've seen over the long-term is a couple of things really go our way there. Number one, our teams have been very good about innovating very quickly, getting products out to our community really quickly and then based on what we see in utilization, being able to migrate between SKUs with cloud partners and to optimize our own code base in order to use the infrastructure as efficiently as possible. And I think what you're seeing is us being able to get better and better at that over time and it allows us to move really quickly and then come behind ourselves and be more efficient. And it's one of the wonderful things about having a cloud-first model is that you're not making these fixed commitments to infrastructure that are hard to then roll off from. I think the other thing is that our own scale is helping us and we've seen that through our own pricing improvements most recently and as we're able to take advantage of really advanced SKUs early in the going and then as we grow the scale on those and they become more commoditized, we're able to bring our rates down. And you're seeing that both in the Q4 result for [indiscernible] DAU and of course, in what we indicated our estimate would be for Q1 as well. So the key here is just to keep vigilant on that to constantly be pushing for the best pricing market and to work with our teams to really optimize our code structure and the SKUs that we're using over time in order to have the most efficient possible infrastructure stack. Thanks for the question, much appreciate it.

Our next question comes from Ken Gawrelski with Wells Fargo. Your line is now open.

Thank you very much. Two questions, please, on the ad side. First, I kind of on the upper funnel brand side, continued weakness there. Could you talk a little bit about from a category perspective? Are you continuing to see pressure in the same category as you talked about food and beverage in the past, but has that broadened out or does that roughly similar? And where do you see the opportunities? Are there new categories that there are potential opportunities there on the upper funnel brand side? And then the second one on the lower funnel side, a nice progress on doubling the number of advertisers. Could you talk about just the typical ramp period for those advertisers in terms of getting to kind of what a maybe a full run rate because that the volume increase is great? The question is, should we see continued momentum there on the direct response side and on the lower funnel side from that volume increase? Thank you.

Hey there, Ken, thanks for the question. As it pertains to the sort of upper funnel business and the source of the weakness there specifically, it continues to be concentrated in a relatively small number of larger upper funnel-oriented advertisers. I think our real focus there in terms of being able to reignite growth in this category and make progress is, number one, we're focused on accelerating our product innovation, and specifically, we're encouraged by the incremental reach that advertisers have realized in the early rollout of Sponsored Snaps and the positive feedback we're hearing from clients and agencies in those products. So looking forward to making that solution available to more partners over the course of the year ahead. We're also prioritizing support for large brands and agencies by offering enhanced client support, easier platform integrations, and advanced measurement tools. So, for example, last year, we launched a partnership with VideoAmp to provide agencies with reach, planning, and measurement tools that enable agencies to build multichannel media plans and then have the visibility to key metrics such as incremental reach. And so we're going to keep leaning into those innovations in order to be able to deliver improved performance for those advertisers. I also think it's just important to maintain our real focus and priority around diversifying the business and leaning into the places that are the focus of our roadmap. So as much as we'd like to see this category grow a lot faster, I think it's important that we have our resources focused on doubling down on the momentum that we're seeing with our direct response business, doubling down on the momentum that we're seeing with the SMB category and of course, continuing to invest in Snapchat+, so that over time, we continue to build a business that is more resilient, more performance-based, and more diversified. And that sort of gets into your second question around the drivers of growth and what we're seeing around customer ramps on the lower funnel. And I think it's important to think about the dichotomy between the growth in the active advertisers. We're really excited to see once again that we were able to more than double the active advertisers and you are seeing that being driven from account perspective by smaller customers, which is really exciting and Snap Promote is a very helpful tool in that regard. But then the overall growth in revenue, of course, is going to come even more from folks as they either grow into the medium advertiser segment or that start out there. And the key there is really about ease of getting started. So automated campaign setup, helping advertisers choose the right optimization rate out of the gate, helping them choose the right measurement solution with automated tooling, and then, of course, the ability to realize really good results and that's where the improved DR ad stack really makes a difference because that's going to be the key. In order for us to continue growing the active advertisers and growing the top line, we need to be delivering the returns on advertising spends that folks see that in their ROI and that's going to have them retain and grow their spend over time. So hopefully, that gives you a little context around what we're seeing there on both the upper and the lower funnel. Thank you.

Our last question comes from Deepak Mathivanan with Cantor Fitzgerald. Your line is now open.

Great. Thanks for taking the questions. Two ad product questions. First on Sponsored Snaps. The reach some of the advertisers are seeing on the early campaigns looks very strong. Can you talk about the go-to-market strategy this year for Sponsored Snap? How fast can you ramp the adoption of this in 2025? And then second one on DR ads, we're seeing companies like Meta and others deploy kind of GPUs to improve relevance beyond areas like creative iterations for the AI products. How do you think about that opportunity to kind of deploy additional compute and drive performance for our Snap's DRI products? Thank you very much.

Yeah. Thanks so much for the question. In terms of Sponsored Snaps, we're really excited about what we're seeing there. And one of the reasons why is I think the creative execution by advertisers has been really thoughtful, which has made for a really sort of native and organic feeling experience for folks who have received. Sponsored Snaps. So I think for us, as we look at scaling out demand for Sponsored Snaps, we want to do that in a way that's thoughtful and that really maintains a high bar for relevance. So we'll be starting with our Pixel Purchase GBB, where we've got a quite a significant diversity of advertisers and wide range of creatives and really holding a high bar for relevance as we bring that product to our auction. So that will be the first step and we'll learn from that. We've already been doing some preliminary testing there and then, of course, expand to other GBBs over time. As it pertains to our investments in machine learning for our advertising business, this is certainly a huge focus area for the company. Our ad business benefits a lot from the broader ML platform investments we've been making across the company. We're definitely experimenting with things like sequence models and other techniques to drive improved relevance. But some of these other themes like much larger models and fresher models really benefit our advertising business as well in addition to our content business, even though, of course, the corpus of ads is much smaller than the corpus of content that we need to recommend to our community.