Good afternoon, everyone, and welcome to Snap Inc.'s Third 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 third 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. 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 or 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 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..

Sponsored Snaps and Promoted Places. Importantly, both of these placements are designed to leverage our existing full-screen vertical video Snap Ad format so that advertisers can automate placement across our service without having to develop bespoke creatives.

Sponsored Snaps will empower advertisers to communicate visually with the Snapchat community, making the core functionality of Snapchat accessible to advertisers. Promoted Places enables businesses to use the Snap Map to suggest sponsored places of interest to Snapchatters.

Sponsored Snaps and Promoted Places will help businesses reach Snapchatters in engaging ways across our differentiated service and we believe these new ad placements will contribute meaningful incremental advertising inventory over time. We are on track to launch Sponsored Snaps and Promoted Places in certain geographies in Q4.

With that, I'd like to turn the call over to Derek to discuss our financial results..

Thanks, Evan. In Q3, total revenue was $1.37 billion, up 15% year-over-year and 11% quarter-over-quarter. Advertising revenue was $1.25 billion, up 10% year-over-year, driven primarily by growth from DR advertising revenue, which increased 16% year-over-year.

DR ad revenue growth was driven by continued strong demand for our 7-0 pixel purchase optimization that was up more than 160% year-over-year, as well as a growing contribution from App Purchase optimization.

Brand-oriented advertising revenue was down 1% year-over-year as we continued to see weak demand from certain consumer discretionary verticals, including technology, entertainment and retail. We continue to make progress toward diversifying our revenue sources with other revenue more than doubling year-over-year to reach $123 million in Q3.

Other revenue includes all non-advertising revenue, the majority of which is Snapchat+ subscription revenue, and Snapchat+ subscribers more than doubled year-over-year to exceed 12 million in Q3.

In Q3, North America revenue grew 9% year-over-year, with the relatively lower rate of growth in this region due to the impact of weaker Brand-oriented demand being relatively concentrated in North America.

Europe revenue grew 24% year-over-year, as continued progress on our DR ad platform fully offset the impact of more challenging prior year comparisons. Rest of World revenue grew 32% year-over-year, driven by the continued progress with our DR ad platform.

Global impression volume grew approximately 19% year-over-year, driven in large part by expanded advertising delivery within Spotlight and Creator Stories. Total eCPMs were down approximately 7% year-over-year as inventory growth exceeded advertising demand growth in Q3. Adjusted cost of revenue was $637 million in Q3, up 16% 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 Q3, which is up from $0.81 in the prior quarter, and within our expected range of $0.83 to $0.85.

The remaining components of adjusted cost of revenue were $263 million in Q3, or 19% of revenue, which is in line with the prior quarter and at the lower end of our full year cost structure guidance range of 19% to 21%. Adjusted gross margin was relatively stable at 54% in Q3, up from 53% in the prior quarter, but in line with 54% in the prior year.

Adjusted operating expenses were $604 million in Q3, up 1% year-over-year. Personnel costs decreased 9% year-over-year, driven by an 11% year-over-year decline in full-time headcount.

This was partially offset by higher marketing costs related to our ongoing More Snapchat campaign, as well as the impact of our Snap Partner Summit, which occurred in Q3 this year compared to Q2 in the prior year.

Increases in legal related costs year-over-year, including the impact of complying with an increasingly complex global regulatory environment, were also a key factor in offsetting lower personnel costs in Q3.

Adjusted EBITDA was $132 million in Q3, up from $40 million in Q3 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 50% in Q3, as we continue to carefully prioritize our investments to drive top-line growth and deliver improved financial performance.

Net loss was $153 million in Q3, compared to a net loss of $368 million in Q3 of the prior year.

The $215 million or 58% improvement in net loss year-over-year largely reflects the flow-through of a $92 million improvement in adjusted EBITDA, a $94 million or 26% reduction in stock-based compensation and related expenses, and the impact of $19 million of restructuring costs in the prior year.

The reduction in SBC, to $266 million in the current quarter, reflects reduced headcount and the diminished impact of refresh equity grants relative to the prior year. Free cash flow was $72 million in Q3 while operating cash flow was $116 million.

Over the trailing 12 months, free cash flow was $147 million and operating cash flow was $347 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 0.6% in Q3, down from 1.9% in the prior quarter.

We ended Q3 with $3.2 billion in cash and marketable securities on hand and no debt maturing in the current year, which reflects our ongoing commitment to maintaining a conservative balance sheet with ample liquidity for our operations.

As we enter Q4, we anticipate continued growth of our global community and our Q4 guidance is built on the assumption that DAU will be approximately 451 million in Q4. We are excited about the potential for Simple Snapchat, Sponsored Snaps, and Promoted Places to contribute to top-line growth over time.

In particular, we are encouraged by early testing results that show content engagement gains among less frequently engaged users of Snapchat as we believe this can be an important input to impression growth and incremental reach for advertisers.

While we believe growth in content engagement and demand for the new ad placements may build over time, many of the changes associated with Simple Snapchat occur immediately as Snapchatters transition to the new user experience, which presents the risk of near-term disruption.

While we do not currently anticipate a broad roll-out of Simple Snapchat in our most highly monetized markets until Q1 at the earliest, we have now begun limited testing in these markets and may further expand this testing as we move through Q4.

In addition, upper-funnel advertising from large enterprise clients has historically been an important component of demand in Q4, and this portion of the business has been underperforming our overall ads business in recent quarters.

Given these factors, our Q4 guidance range for revenue is $1.51 billion to $1.56 billion, implying year-over-year revenue growth of 11% to 15%. From a cost structure perspective, we are tracking well against our full year cost structure guidance. For infrastructure, our guidance was for quarterly costs of $0.83 to $0.85 per DAU.

We hit the mid-point of this range in Q3, and with growing ML and AI capacity utilization being partially offset by the benefit of recent pricing improvements, we anticipate being nearer the top end of this range in Q4. For all other cost of revenue, our guidance range was 19% to 21% of revenue.

We came in at the low end of this range in Q3, and anticipate being within the range again in Q4. For adjusted operating expenses, we provided full year guidance of $2.425 billion to $2.525 billion.

In Q3, our annualized run rate was consistent with the low end of this range, and with modest sequential growth forecasted for Q4, we expect to be near the low end of the range for the full year. For SBC and related expenses, we guided for a range of $1.13 billion to $1.2 billion for the full year.

In Q3, the annualized run rate of our SBC expense was below the low end of this range. We anticipate modest sequential growth in SBC expense in Q4 and, therefore, anticipate we will come in 4% to 5% below the low end of our guidance range for the full year.

Given the revenue range above and the progress we have made to optimize our cost structure, we estimate that adjusted EBITDA will be between $210 million and $260 million in Q4.

Given the strength of our balance sheet, our progress towards sustained free cash flow generation, and our desire to opportunistically manage our share count for the benefit of our long-term shareholders, we have authorized a new share repurchase program in the amount of $500 million.

As we move forward, we will remain focused on prioritizing our investments carefully to drive top-line growth alongside improved financial performance. Thank you for joining our call today, and we will now take your questions..

Thank you. We will now begin the Q&A session. [Operator Instructions] Our first question today comes from Dan Salmon with New Street Research. Your line is now open..

Okay. Great. Good afternoon, everyone. Evan, you highlighted the potential risk of Simple Snapchat transition in your comments. Derek walked through the sort of timing of testing. Both mentioned over a dozen markets and mentioned that you're being cautious on how you move testing into higher monetizing markets. So, the high level makes a lot of sense.

Could you maybe take us a layer deeper on how you and the team are monitoring and managing that risk on a regular basis, including how you're ensuring you don't see a monetization headwind from the changes? Thanks..

Thanks, Dan. We're definitely excited about the long-term opportunity for Simple Snapchat. And that's especially with new and less engaged users where we've seen some of the biggest increases in content engagement, but we definitely have a lot of work to do to iterate and test before we begin a broader rollout.

So that will include things like better understanding the shifts in inventory and potential impacts to monetization. For example, we'll be working to move more of the story ad delivery into interstitial placements rather than tile-based ads in the current Discover feed.

So, certainly changes of scale have the potential to be disruptive, which is why we're taking this test-and-learn approach. And ultimately, we really want our community and our partners to benefit from these changes..

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

Sorry about that. Just want to follow-up on Simple Snapchat. When you said you started to roll it out in some major markets this quarter, have you done that in the US, UK, France, Germany, like some of your big ad markets? The reason I ask is, obviously, the product looks great.

It's driving engagement, but I think what we're all trying to understand is, are you willing to take some near-term disruption revenue wise next year to rollout the superior product, or will you wait until it's a revenue-neutral shift to wait to roll it out? Like, we're just trying to understand what will happen to make you roll it out more broadly if that makes sense?.

Thanks, Rich. Yeah, we're still early in the journey on understanding the monetization dynamics and some of those inventory shifts and how that could impact revenue. We certainly want to take the time to work through those sorts of changes and make sure advertisers and our partners, for example, are prepared for those sorts of changes.

So, all that to say I think it's pretty early right now. And while we are excited about some of the engagement shifts we've seen with new and less engaged users, we're going to take our time to really understand the monetization dynamics and work through some of those changes.

So, our goal is really to take our community and our partners along for that journey and so we're going to keep testing and learning here and potentially even explore something like a phased rollout, for example, over an extended period of time..

Our next question comes from Justin Post with Bank of America. Your line is now open..

Great. Thank you. Just wanted to ask about Sponsored Snaps and Promoted Places. I know you mentioned you're pretty excited about the long-term opportunity. Can you help us just understand the usage those services get and how you're thinking about inserting ads and how that could look for you in the very long term? Thank you..

Thanks, Justin.

Yeah, we're really excited about these two new ad placements that will really be leveraging the foundation we built for performance advertising over the past couple of years with really the vision that Snap Ads can be fungible across many different placements across Snapchat that leverage the unique and differentiated ways that our community engages across our platform.

I think in the case of Promoted Places, we've gotten some great early feedback. We've run some initial tests, although I think it's a bit too early to share the data there. But in general, we're just seeing a lot of businesses really focused on driving more people in-store into their retail locations to try and strengthen that customer relationship.

I think many brands are feeling like they've been disintermediated with their digital relationship with customers. And so, being able to bring people into their retail establishments and really strengthen that relationship with their customers is something that's important to them. So, the feedback there has been great.

And we have some Sponsored Snap tests forthcoming in the quarter. So, once we have some more data back there, we'll be eager to share that as well..

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

Thank you. Appreciate it.

Want to ask, when you think about the key objectives for the simplified app launch, when you think about the opportunities and engagement versus monetization, if you could kind of weigh the two and if there's one that kind of is more important than the other? And the second one is, how do you think of -- what will it take to get advertisers to spend more broadly, not only always on, which is more of a direct response or SME behavior, but also spend kind of give you a budget and allow you to allocate across the different products and services on Snap, which we've seen to be very successful at both Google and Meta? Thank you..

Yeah. Thanks, Ken. I think, as we look at the evolution with Simple Snapchat, our North Star has always been creating the best possible product experience for our community, and a product experience that they really love.

I think there are some challenges today, as we've innovated over the years and created all these new ways to engage, with Snapchat, the app has become quite complex. And even basic things like watching Stories or watching Spotlight, that's something that people have to do in two different screens right now.

And so, being able to unify the content experience I think is something that's going to be a really important step in the right direction for us. Same goes for content discovery, for example. I think today the tile-based content discovery is just not as effective as full-screen content discovery.

And so, I think that's a big opportunity that will not only benefit folks using Snapchat, but also creators who are working really hard to reach our audience with really compelling content. So I think, in general, this North Star of our community and, of course, our partners like creators is really important to us.

And then, what we found is that, that over the over the long term, tends to create more opportunity for advertising partners as well, as they're able to reach our audience through these different parts of our service.

So, I think, the North Star is going to be the community engagement and then thinking about how we can best manage this transition so that our advertising partners and our content partners can benefit from it as well..

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

Hi. I'm [Louisa] (ph) speaking on behalf of Mark Shmulik. So, I have a question -- we have a question on Spotlight engagement.

Is Spotlight viewership behavior outside of North America different? Can you provide some more color on that?.

We've seen really strong growth in Spotlight engagement globally. I think North America, as we shared in the letter, we've essentially been offsetting some declines with the Stories content engagement, while we've seen growth in Spotlight. So, I think you're just seeing a bit of a mix shift there.

But overall, the growth of Spotlight and the depth of engagement has been a big driver of content view time growth for us..

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

Great. Thank you for taking the question.

Can you talk about the results that you're seeing from the new app install product? And what needs to happen for app install clients to become a more meaningful driver of your top-line results? And then, just curious if you can comment on the revenue growth that you're seeing so far in Q4 that helped inform your 11% to 15% guide. Thank you..

Hey there, James. It's Derek speaking. Thanks for the question.

On the app side, I think one of the things that we've seen as an ongoing trend is that we sort of walked new optimizations and products through the process of testing with initial existing clients on a limited basis, getting to a point where we can see really good results for those customers, and then expanding that and go to market, evangelizing those results and driving broader adoption, which tends to then lead to general availability and then eventually a bigger contribution to the actual revenue growth over time.

So, if I look in particular over this year, in Q3, we saw app purchase optimization start to become a growing contributor to the top-line growth. So that's something that we launched much earlier in the year. It went through that testing phase and expansion in go to market and now is becoming a contributor, which is wonderful to see.

If we think about app install and app purchase, those are things that we extended our 7-0 optimization framework to, and we've seen clear performance improvements for advertisers. We've shared some case studies there. But from a metrics point of view, for example, we've seen cost per install is down 24%, and cost per purchase is down 27%.

So, those are really exciting results to see for our customers and then give us results that we can evangelize to others.

So, I think the key here is to keep rolling out the adoption of those, expand the testing, evangelize those results in case studies to the customer verticals where we have really good product market fit and continue to drive that through the elevation, the execution in the go to market.

If we look back further, the first optimization on the rebuild of the DR business that we rolled out well more than a year ago was the 7-0 Pixel Purchase optimization. And that's really one that's gone through the entire evolution of the launch, test, evangelize, and grow, and we saw that up a 160% year-over-year in the most recent quarter.

So, hoping to drive continued results there and build on the momentum that we have with the overall DR business. Thanks for the question. Hopefully, that helps.

When we're thinking about the -- your other question around the guide into Q4 and what's informing that, obviously, Q4 has historically been a pretty back-end weighted quarter, and so, limited -- to read through to the back half is always challenging.

I think one of the things we're focused on is the momentum that we're seeing in different parts of the business. So, I just talked a lot about the DR business. We're focused on continued execution there, continued [healthy] (ph) adoption, continued rollout of the app optimizations and client performance.

On the Brand side, we're not expecting any significant recovery there. We've been down 1% year-over-year in each of the last two quarters, not anticipating a major shift there as we go into Q4. And obviously, that's an important component of revenue in the final quarter of the year.

Our product execution is the key that we're focused on there in terms of igniting growth long term. So, you did see us rollout some product optimizations the most recent quarter, including First Lens Unlimited, which allows our advertisers to reach folks with the first impression of the day and the first slot in the Lens Carousel.

That's seeing some really nice early results, drove 30% -- 35% actually, increase in incremental impressions. And we also launched the State-specific First Story, which is a product that allows advertisers to, target individual creative to specific states or to target the entire country with different creative for different states.

So there's a lot of product innovation going in there, and that's the key to improving that growth over the longer term, but not expecting a big improvement on the Brand side in particular in Q4. So those are some of the dynamics we're seeing that alongside the very limited testing of Simple Snapshot that are informing the range there.

And hopefully, that gives you a little color..

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

Thank you so much for taking my question.

I guess, regarding top-line growth, so when you think about the trajectory of your revenue growth and excluding, I guess, Snapchat+ subscription, just the advertising growth, what gives you most confidence in your ability to deliver faster than overall digital ad market growth? I mean, you have a lot of product initiatives going on from CAPI integrations ongoing with app optimizations and then the announcements that you had during your Partner Summit, and that includes Simple Snapchat and Sponsored Snaps and Promoted Places, even if that takes a little bit longer, in your mind for monetization.

So, could you help us think through how -- what gives you confidence as you think about maybe near to midterm in terms of ad revenue growth? Thank you..

Hey, there, it's Derek speaking. I think the answer here is multilayered. To start, I think over the long term, we are most focused on the execution of the direct response business and specifically the lower-funnel DR business in terms of rolling our product optimizations.

And then, and on top of that, we're very focused on growing the small- and medium-sized customer segment and making sure that we build on the momentum there.

So, if I talk through each one of those, I'd say there's a multilayered approach here, where we're executing against a number of different initiatives to be able to drive that sustained and higher rate of growth on that -- those components of the business.

So specifically, first is the continued ongoing buildout of the ML and AI architecture at the company that feeds into our ability to have better personalization and recommendation of ads, getting the right ad in front of the right person.

We continue to make progress on having more signals coming into the platform and harvesting more of the privacy safe signals that exist on the platform, getting more of that harnessed into much larger models and our ability to refresh those more frequently.

Then, you can see the steady drumbeat of us delivering, rolling out, and then optimizing new goals for advertisers. We talked earlier about the really strong growth we're seeing with 7-0 Pixel Purchase, how we rolled that out and extended that framework to some of the app objectives and how that's starting to deliver growth.

And then, go to market efforts, on all client sizes, to basically deliver those optimizations to folks where we have great product market fit. One of the muscles that we're really learning to build here is go to market on SMC, and there's a lot of learnings there and a lot of work to do.

So, for example, we've -- number one, been able to roll out Snap Promote as a great way for advertisers to get started with just a couple of clicks right in the app. So, the lowest friction way to get started.

We've also, for folks using Ad Manager, made it a lot easier for them to very quickly onboard there, get started with automated recommendations, for campaign setup and optimization.

And then, we're getting very good at integration partners there that are helping us not only drive direct, where we've made it much easier to do direct integrations with CAPI, but then we've got a long and extending list of integration partners that are making it much easier for small- and medium-sized customers to adopt CAPI and get started with that, feeding their performance with better signals and feedback loops.

So, there's a lot of work to be done here. And I think the sort of simplest answer to your question is, the roadmap here is very clear. We have a lot of work to do and a lot of things to execute against. We have a very clear idea of what we need to do, and the team's pace of execution has been very solid.

And so, the focus now is just to continue to execute that roadmap, deliver for our customers, and drive the results. Hopefully, that helps a little bit there..

Our last question comes from Ross Sandler with Barclays. Your line is now open..

Great. Thanks for squeezing me in. Evan, a question on the Spectacle. So, the demo was pretty insane at the Partner Summit compared to once some of us have tried out prior versions of that product.

So, I guess the question is, what level of investment and what pace or timing of when that could be a consumer product are you expecting? And then, related to that, now that we've seen what Meta is doing with Orion, how does that impact like both the investment level and the pace by which you're going to get that market to the consumer -- get the product to the consumer perhaps quicker than before or not? Just your thoughts on that would be great..

Thanks, Ross. Yeah, we're really excited about the progress we're making with Spectacles and it's been really exciting to share the fifth generation with so many of our partners and developers. I think right now we're just really focused on helping people build amazing lenses for Spectacles.

I think one of the challenges that any new computing platform sort of faces is this chicken and egg problem of people really needing, in our case, new lens experiences to use when they first buy AR glasses.

And so, by focusing on really seeding and supporting that developer ecosystem and making sure there are amazing lenses for people to use when they buy the consumer product, I think we're really focused on the key problem we need to solve in advance of widespread consumer adoption. So, we're going to stay focused there for now.

It's been so exciting to see the amazing lenses people have already built in the weeks since launch. And we think there's just a huge opportunity to transform the way people use computing, grounded in the real world and together with their friends and leveraging natural interactions.

And this is a vision we've been working towards for over a decade now. And so, we have some very unique assets to leverage like Lens Studio, which helps people build these really complex AR experiences and then run them in a really performant way on Lens Core that powers not just the Snapchat application, but also our Spectacles glasses.

So, that alongside all of our investments in hardware and the progress we've made, just makes me really excited about where we are now and, of course, the potential to get this into customers' hands. So, we're going to stay focused on our strategy and keep executing. We're really excited to share, more with you soon..

Thank you. This concludes our Q&A session as well as Snap Inc.'s third quarter 2024 earnings conference call. Thank you for attending today's session. You may now disconnect..