Operator:.

Good afternoon, everyone and welcome to Snap Inc.'s Fourth Quarter and Full-Year 2018 Earnings Conference Call. At this time, all participants will be in a listen-only mode. After the prepared remarks, there will be a question-and-answer session. [Operator Instructions] This call will be recorded. Thank you very much. Mr.

David Ometer of Investor Relations, you may begin your presentation, sir..

Thank you and good afternoon everyone. Welcome to Snap’s fourth quarter and full-year 2018 earnings conference call. With us today are Evan Spiegel, Chief Executive Officer and Co‐Founder; Jeremi Gorman, Chief Business Officer; and Lara Sweet, Interim Chief Financial Officer.

Earlier today we made a slide presentation available that provides an overview of our user and financial metrics for the fourth quarter and full-year 2018, which can be found on our Investor Relations Web site at investor.snap.com. Now I will cover the Safe Harbor.

Today's call is to provide you with information regarding our fourth quarter and full-year 2018 performance in addition to our financial outlook. This conference call includes forward‐looking statements.

Any statement that refers to expectations, projections, guidance, or other characterizations of future events, including financial projections or future market conditions, is a forward‐looking statement based on assumptions 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 forward‐looking statements, please refer to the press release we issued today, as well as risks described in our quarterly report on Form 10‐Q for the quarter ended September 30, 2018, particularly in the section titled Risk Factors.

This information can be found in our other filings with the SEC, when available. Our commentary today will also include non‐GAAP financial measures and we believe that the use of these non‐GAAP financial measures provides an additional tool for investors to use in evaluating ongoing operating results and trends.

These measures should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. Reconciliations between GAAP and non‐GAAP metrics for our reported results can be found in our press release issued today, a copy of which can be found on our Investor Relations Web site.

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.

At times in our prepared remarks, or in response to questions, we may offer additional metrics to provide greater insight into our business or our quarterly and annual results. This additional detail may be one‐time in nature, and we may or may not provide an update in the future on these metrics.

Please refer to our filings with the SEC to understand how we calculate our metrics. With that, I'd like to turn the call over to Evan..

Hello everyone, and thanks for joining our call. In 2018, we focused on building a foundation for Snap to scale over the long-term by driving sustainable product innovation, scaling our advertising platform, and hiring the leadership team that will help us achieve our future goals.

We ended the year with user engagement stabilizing in advance of the broad rollout of our Android improvements, with overall Q4 daily active users flat quarter‐over‐quarter and average time spent above 30 minutes per day.

Despite a 0.3% decline in daily active users year‐over‐year, we feel we have made significant progress towards our mission of contributing to human progress because we’re now able to offer a higher quality content experience, while simultaneously empowering people to express themselves with their close friends and family.

These sorts of long-term investments will serve our business well as we continue to expand our product offerings and grow our business. We are substantially closer to achieving profitability, with our Q4 adjusted EBITDA loss of $50 million representing a 68% improvement when compared to Q4 of last year.

We have maintained a relatively flat cost structure across the past five quarters, while growing full‐year revenue of 43% year‐over‐year, with 100% of our incremental Q4 revenue flowing through to our bottom line. This limited our Q4 losses to just 13% of our revenue, compared to just one year ago when our Q4 losses totaled more than 50% of revenue.

We are proud of the progress we’ve made as we enter 2019 focused on growing our business and driving towards profitability. We have worked hard to develop our team and culture in 2018.

The transitions we made in both the Snapchat platform and our business last year were necessary and created many of the opportunities we have ahead of us, but change is always difficult and this past year was no exception.

We focused on building the leadership team we need in order to execute against our long‐term opportunity, and recently welcomed several talented and experienced leaders for the next stage of our company’s growth, including Jared Grusd, our Chief Strategy Officer, Jeremi Gorman, our Chief Business Officer, and Julie Henderson, our incoming Chief Communications Officer.

We are excited to benefit from their leadership and wealth of experience at some of the world’s leading tech and media companies as we scale our business moving forward.

We accomplished one of our boldest goals of 2018 with the redesign of our application, which laid the foundation for our long‐term success by providing a platform that expands our content offering while continuing to reinforce communication with close friends.

The new layout for Discover vastly expanded our content opportunity, allowing us to significantly increase our premium content offerings with the addition of hundreds of new Shows and Publishers in 2018. We also introduced new features on Discover that have helped generate a greater depth of engagement.

For example, you can now choose to be notified when the next episode of your favorite show comes out, and easily watch prior episodes in the meantime. In Q4, more than 60% of ESPN SportsCenter’s audience tuned in three or more times per week.

We launched The Dead Girls Detective Agency, a new Snap Original Show produced by our joint venture with NBCUniversal, and over 40% of the people that completed the first episode went on to watch the entire season. Bitmoji Stories, a new cartoon starring Snapchatters and their friends, reached over 40 million viewers in December.

Following our redesign and product improvements, 30% more people are now watching publisher stories and shows every day compared to last year, and each one is consuming more of these stories every day on average.

This also means that our partners can now reach more of our unique audience, and NBC News recently announced that two thirds of the 25 million to 35 million Snapchatters watching Stay Tuned represented a net new audience for them, meaning they were able to reach people that did not otherwise watch, read, or listen to NBC News on any other platform.

We also launched Commercials, which complement the high‐quality, narrative experience of shows with a premium non‐skippable video advertising format.

These new products, along with the increase in the breadth and depth of engagement with our Discover product following the redesign, helped us more than double the advertising revenue that we generated from premium content in Q4 when compared to last year.

By separating professional content creators from relationships with friends, we were able to achieve this content expansion while also reinforcing Snapchat’s core value of providing a fast way for people to communicate visually with their friends and family.

We believe that conversation and self‐expression between friends is extremely fulfilling for our community, which in turn makes Snapchat more valuable over the long-term. As a result of this behavior, Snapchat has become one of the most‐used cameras in the world.

We continued to invest in the value of these close relationships with our recent release of friendship profiles which makes it easy to look back over the shared memories that have been saved in your conversations with your friends.

This high‐frequency camera usage also drives our augmented reality platform, with the vast majority of our community engaging with augmented reality every day.

More than 70% of our daily audience plays with or views a lens every day on average, and our community played with or viewed lenses over 700 million times on New Year’s Eve, up 40% compared to last year.

We recently expanded our augmented reality platform to new devices with the launch of Snap Camera, which empowers people to use their favorite lenses when creating or streaming video on desktop and laptop computers. We’re excited to continue broadening the augmented reality experiences we provide to our community in the future.

We are seeing our investments in improving the Snapchat experience beginning to bear fruit on iOS. In Q4, our iOS daily active users increased both quarter‐over‐quarter and year‐over‐year, and average time spent on iOS grew faster during Q4 than it did last year.

This is great progress following our redesign, and we look forward to continuing to grow engagement on our platform. Our engineering team remains focused on rebuilding our Android application to improve performance and quality.

Early tests show promising results especially on less performant devices, including a 20% reduction in the average time it takes to open Snapchat.

Given these results, we have started rolling out the new version to a small percentage of our community, and we look forward to providing an improved Android experience to more devices and regions over time.

Our advertising business has progressed significantly following our transition to self‐serve last year, and in 2018 we focused on building our core ad platform and products to improve performance and scalability for both brand and performance marketers. Furthermore, we are now able to reach 70% of the total 13 to 34 year‐old U.S.

population with premium mobile video ads on a monthly basis. Our best‐in‐class advertising products and unique audience have set us up to become an indispensable partner for both brand and performance marketers.

Craig Stimmel, who leads digital partnerships for Procter & Gamble, recently told us, “To continue driving growth across our businesses, it is critical to connect with Gen Z and Millennials; Snapchat has been an important part in that strategy.

Across big brands like Crest and Gain to some of our newest direct‐to‐consumer brands including Native, we continue to see strong engagement against current and new buyers.” Now that we have built the fundamental self‐serve infrastructure for our advertising platform, we’ve the foundation to scale our advertising business in 2019.

Although 2018 was challenging in many ways, we are proud of the significant changes we have made to strengthen our company and grow our business over the long‐term. We brought together a more experienced leadership team, improved our core product to better serve our community, and built scalable infrastructure for our advertising business.

We did all of this while growing full‐year revenue 43% year‐over‐year and bringing profitability within reach. We are excited for the year ahead and we are confident that we are well positioned as we enter the new year with a stronger product, a stronger business, and a stronger team.

Now I’d like to introduce Jeremi Gorman who joined us in November as Chief Business Officer. In this role, Jeremi oversees revenue and customer operations across our business and we’re really excited to have her at Snap..

a picture or a video. Monetizing this with augmented reality, in an engaging way that empowers creativity, represents a significant opportunity for brand advertisers. These strengths have delivered strong results for our partners.

For example, new balance ran a highly creative sponsored AR Lens campaign to increase brand awareness among U.S soccer enthusiasts over the age of 25. They created an augmented reality experience which allowed fans to try on uniforms in an authentic stadium environment.

As measured by Millward Brown, the campaign drove over a 13.5 point lift in brand favorability. New Balance then utilized Snap Pixel and other campaign tools to re‐engage those same users with direct response Snap Ads, driving a 2.6x return on ad spend.

Direct‐response advertiser Pura Vida, a jewelry company founded in Costa Rica that supports hundreds of artisans worldwide, reported that Snapchat drove a 33% lower cost‐per‐acquisition than competing paid channels.

In 2019 and beyond, we will continue to improve our tooling, optimization, and formats to both deepen our relationships with existing partners, and rapidly onboard new ones. We have experienced quarterly growth in the number of active ad accounts every quarter since we launched our self‐service tool in Q2 of 2017.

Adding advertisers allows our marketplace to show more relevant and engaging ads to our users, which increases ad engagement rates overall, and subsequently helps the ad platform as a whole, simultaneously raising prices on a per impression basis, but decreasing cost per outcome for advertisers.

We recognize that the lines between performance and brand advertising continue to blur, and that every advertiser needs to prove strong, quantitative results no matter their key performance indicators.

We have reshaped Snap’s business teams to better support our partners by adopting a vertical model, so that Snap team members become deep experts in their partners’ businesses and industries.

This combination of vertical expertise, coupled with their knowledge of the Snapchat audience and platform will make for a more consultative and successful sales organization, and will enhance our relationships with our advertising partners.

We are building a mobile‐first, engagement‐driven, sustainable advertising business in a privacy‐safe way for our users that drives real business outcomes. We believe this will be a strategic advantage for us as we continue to drive the success of our ad platform going forward.

I couldn’t be more excited to be here at Snap, and I look forward to sharing more about our plans for 2019 and beyond. Thank you. And now I’d like to turn the call over to Lara..

Thanks, Jeremi. Our fourth quarter 2018 financial results reflect our focus on driving growth and operational efficiencies. This quarter we delivered strong financial performance compared to the prior year and the prior quarter. We generated significant growth and record results on the top line.

We also had strong improvements in gross margin, adjusted EBITDA, adjusted EBITDA margin and free cash flow. Our Q4 2018 operating cash flow improved $50 million to negative $126 million, compared with Q4 2017, and improved $6 million, compared with Q3 2018.

The year‐over‐year change in operating cash flow is driven by a $109 million improvement in adjusted EBITDA, offset by changes in the timing of working capital. Similarly, the sequential change in operating cash flow is driven by an $88 million improvement in adjusted EBITDA, offset by changes in the timing of working capital.

Our capital expenditures, which are nominal, are mainly associated with the build out of our office facilities. Q4 2018 capital expenditures were $23 million, up $2 million from Q4 2017 and $4 million lower than the prior quarter.

Our Q4 2018 free cash flow improved $49 million to negative $149 million compared with Q4 2017, and improved $10 million compared with Q3 2018. Common shares outstanding plus shares underlying stock‐based awards outstanding totaled 1,507 million on December 31, 2018, compared with 1,453 million a year-ago.

We ended the quarter with $1.3 billion of cash and marketable securities. Our change in cash for the quarter was negative $135 million. The change in cash was $120 million better than the prior year and improved $20 million versus the prior quarter as we continue to make progress towards generating free cash flow.

We feel good about our cash position as we move forward and scale our business. We have a number of drivers of revenue growth. For the quarter, we generated record revenue of $390 million, an increase of 36% year‐over‐year and 31% sequentially, and our full-year 2018 revenue was $1.2 billion, up 43% from 2017.

Daily active users were 186 million in Q4 2018, compared to 187 million in Q4 2017 and 186 million in Q3 2018. As a reminder, we experience seasonality in our user engagement, generally seeing higher engagement in December. Average revenue per user increased to $2.09, an improvement of 37% year‐over‐year and 31% sequentially.

Countries outside of North America represented 31% of total revenue, compared with 23% in Q4 2017 and 30% in Q3 2018. In terms of monetization, total impressions were up 179% year‐over‐year and 31% sequentially, while pricing was down 48% year‐over‐year and was up 3% sequentially.

For the quarter, cost of revenue was $202 million, an increase of 10% year‐over‐year and an increase of 6%,. Cost of revenue increased at a much slower rate than revenue growth of 36% year‐over‐year and 31% sequentially .Infrastructure costs were $134 million, an increase of 3% year‐over‐year, and a decrease of 4% sequentially.

Importantly, cost of revenue as a percentage of revenue declined meaningfully year‐over‐year and sequentially from 64% to 52%. Gross margin expanded substantially, which continues to demonstrate that our business model can scale profitably.

Gross margins were a record 48%, improving over 1,250 basis points year‐over‐ year and over 1,220 basis points sequentially. We are focused on driving operational efficiencies and improving the unit economics of our multi‐cloud environment as we scale over time.

Additionally, our model benefits from our cloud partners’ continuous investments in technology innovation and cost efficiencies, which are typically passed along to customers over time. The costs of our infrastructure model are included in adjusted EBITDA as opposed to capital expenditures, which are excluded from adjusted EBITDA.

This should result in higher Adjusted EBITDA to free cash flow conversion over time. In 2018, we achieved tens of millions of dollars in cloud infrastructure cost reductions as a result of our engineering efficiency programs.

For example, we launched an initiative focused on optimizing bandwidth usage on Snapchat, which not only reduced our infrastructure costs but should also result in data usage savings for our users and improved performance of the Snapchat application.

Infrastructure cost savings initiatives are a continuous, daily activity and can be achieved by executing client or server optimizations that reduce our overall cloud infrastructure costs.

These improvements in our cost structure resulted in leverage in our infrastructure costs in Q4 2018 and we remain focused on operating efficiencies and unit‐cost economics over the long‐term.

Operating expenses in the quarter were $238 million, down 9% year‐over‐year, and down 3% sequentially as compared to strong revenue growth of 36% year‐over‐year and 31% sequentially. We continue to focus on driving operating‐cost productivity across our business.

Operating expenses are primarily driven by employee‐related costs, which represent about two thirds of our operating expenses. We saw fixed‐cost leverage in employee related costs, which declined 10% year‐over‐year, and decreased 1% sequentially.

Operating expenses as a percentage of revenue improved meaningfully to 61%, compared with 91% in Q4 2017 and 82% in Q3 2018. Q4 2018 adjusted EBITDA was negative million, an improvement of $109 million over the prior year and an improvement of $88 million over the prior quarter.

This was the third consecutive quarter that we had an improvement in adjusted EBITDA year‐over‐year. Adjusted EBITDA margin for Q4 2018 improved significantly to negative 13%, compared with 56% in Q4 2017 and negative 46% in Q3 2018. Adjusted EBITDA leverage was 104% in the quarter, up versus 45% in the prior quarter.

Q4 Operating loss improved a $166 million over the prior year to negative 195 million and improved $129 million over the prior quarter. With respect to the first quarter of 2019, we expect our financial momentum to continue. These forward‐looking statements reflect our expectations as of February 5, 2019, and are subject to substantial uncertainty.

As mentioned at the start of the call, our results are inherently unpredictable and may be materially affected by many factors. Now I will share our Q1 2019 outlook. Revenue is expected to be between $285 million and $310 million, or to grow between 24% and 34% year‐over‐year.

As a reminder, our year‐over‐year growth rate will be impacted by the Q1 2018 Winter Olympics. There was a modest revenue boost of less than 10% of Q1 2018 revenue from that event. Adjusted EBITDA is expected to be between negative $165 million and negative $140 million, compared to negative $218 million in Q1 2018.

This guidance assumes, among other things, that no business acquisitions, investments, restructurings, or legal settlements are concluded in the quarter. While we are not going to give specific guidance on daily active users, we are cautiously optimistic and we do not foresee a sequential decline in daily active users in Q1 2019.

With that, let’s open up the line for questions..

Thank you. And that concludes the prepared remarks for today’s earnings call. And we will now begin the question-and-answer session. [Operator Instructions] And the first questioner today will be Justin Post with Merrill Lynch. Please go ahead with your question..

Hi, guys. Benjamin Garneau on for Justin. Thanks for taking my call. I was just wondering where you see the best opportunities on the sites for an improved monetization. And also just wondering if you had any update on the timeline for the updated android application? Thanks..

Hey, Justin. Yes, as far as monetization is concerned we are most focused on Discover and improving the depth of engagement there. We are really excited about the [indiscernible] improvements we are seeing around personalization. I think there is a lot more to do there and also around merchandising content more effectively.

I think today we see a lot of demand for content created by our community, a user generated content and also huge demand for shows and more premium content. And so we are working through is helping surface both of those types of content in a way that really resonates for users and it's easy to find. So we are working a lot on that.

And then, I think we continue to see huge opportunity around augmented reality. I think we have some of the most immersive advertising experiences in the world in our camera and advertisers are doing really incredible things there.

So I think looking out towards the future over the next 3 to 5 years, just focus on experiences and helping people, experience brands in its wholly new way to the camera will be very important to us..

And the next questioner today will be Jason Helfstein with Oppenheimer. Please go ahead..

Thanks. So let me sneak into just to clarify on the comment first on the guidance.

So are you thinking about it that you’re not obviously telling us exactly what the Olympic impact was, but should we broadly think it about it that if you took out that headwind, that revenue growth at the midpoint or the high-end would be in line with the fourth quarter, because if I use 8%, that will be 40% growth which will be an acceleration.

So just some more color there. And then, secondly can you talk about within demos, so in the quarter, daily user were flat as you call that quarter-to-quarter. If we think about it within demos, is 13% to 34% still growing, while 35% plus is declining. Any color there would be helpful. Thank you..

We can't give you more color on the guidance and we don’t breakout DAU like that. Although I would say we are very excited about the android opportunity. I think we shared last quarter that, a lot of the drag we were seeing on DAU is coming from android.

We’ve shifted most of our resources internally to the rebuilded android, and so we are really waiting for that to roll out broadly. So we continue to improve android experience.

I think for us, broadly speaking, the way to think about it, in terms of android opportunity, there's roughly 2 billion or so or may be more 2 billion people who are on android and don’t have Snapchat. So we can take a few percent market share there to make a real different story [indiscernible]..

And the next questioner today will be Ross Sandler with Barclays. Please go ahead..

Hey, guys. Two questions. What is the early data shown in the android test and I guess any update on the timing in terms of when that’s going to be rolled out. Any structural reason why once the [indiscernible] in place on the android side, that platform you can't be as good or showing as good results as we are seeing in iOS.

And then the second question is, Facebook now got 2 million advertisers barring [ph] stories. So how do you think, Jeremi, the standardization of this ad unit, we are seeing in the industry is going to have an impact on your conversations with advertisers in 2019.

Do you think that those conversations will be the easier? Do you see the advertiser adoption curve ramping up now that it's getting standardized. Thanks..

I think as it pertains to android, we are really excited about what we’re seeing, especially in terms of accessibility. So making the app more usable on low-end devices, in particular. So I think there are some incremental customers who just can't use our product today on lower end phones, they will be able to use it in the future.

We are definitely excited about that and I think for comparable devices, I do think that the android experience can certainly be equal to or even surpass what we see on iOS given our huge investment in restructuring the service and the way that works..

And thanks for the second question, Ross. We are really excited about the wide adoption of the vertical ad format. We really believe that rising tides, rise our boat when it comes to this.

We were widely criticized for this format several years ago and now it's becoming incredibly well adopted throughout the industry, and we believe that it will be a tailwind for our business to more advertisers that have the format, the more seamlessly they can buy on our platform.

And we do continue to add advertisers to the business every quarter since Q2 of 2017, and we really expect that this format will help us do even more of that..

And our next questioner today will be Mark Mahaney with RBC. Please go ahead with your question..

Okay. Two questions, please. And I think you were just talking about advertisers continuing to grow.

Any color on where some of the new advertisers are coming from? What are you seeing in terms -- is the ad revenue grown just by new advertisers or more spend by current advertisers, are there particular verticals that are starting to come on strong? And then, one question, could you quantify the percentage of your ad revenue that now comes from premium content? We assume its relatively small, but if you could quantify it, really appreciate it.

Thank you..

Thank you for the question. We don’t quantify the percentage of our revenue that comes from premium content, but I will answer the first part of your question. Thanks again for asking. We made a deliberate pivot to work with direct response advertisers last year as we shifted to self-service.

We are seeing highly performant ads and advertisers are allowed to bid up against their KPIs. So just app downloads or install or sales of direct-to-consumer businesses. So we are seeing a lot of success in that direct response business.

We have a lot of opportunity with brand advertisers where we do have success in our augmented reality format as well as our commercial format, which is a six second un-skippable video within our premium content. We know that there is still more opportunity with brand.

We reorganize the sales team accordingly, so that we can focus to go deep and broad with brand advertisers across the globe..

And our next questioner today will be Heath Terry with Goldman Sachs. Please go ahead..

Great. Thanks. Evan, over 30 minutes stat has been incredibly consistent since you guys went public.

Curious if you can share with us just sort of a little more depth even if it's just sort of qualitative in terms of how user engagement is evolving, whether its within certain demographics or cohorts, within certain products, always interested in sort of how people are using the product and how that time spent is split to the extent that you can sort of share with us where you're seeing those changes?.

Hi, Heath. Yes, thanks for the question. I mean, I think we’ve -- I’m not sure we’ve ever actually broken out time spent on our service. I think we talked a little bit in the script about how excited we are with what we’re seeing on the content side of the business.

So I think our big bet last year separating our content from friends, from content, from publishers and shows and things like that is really paying off. And I think it's going to be exciting to see what we can do in terms of personalization going forward. So in terms of time spent, that’s we are really excited about right now..

And the next questioner today will be John Egbert with Stifel. Please go ahead..

Thanks for taking the question. I think, Jeremi, noted how growing advertiser account can lead to rising yield per impression alongside decreasing cost per outcome for advertisers. Obviously, in aggregate pricing per impression is still down year-over-year, but less so quarter-for-quarter.

So I'm wondering if you're seeing like-for-like ad pricing growth or stabilization across any specific ad formats, maybe some of the ones that have been [indiscernible]..

While we don't -- thank for the question. While we don't break out the different pricing models across our different ad formats. I think that as were shown in the 3% sequential increase in pricing, there is a overall strength and adoption of our variety of formats.

And I think that gets us really excited as we look forward into 2019, as we deepen our engagement with our community and monetization opportunities..

The next questioner today will be Lloyd Walmsley with Deutsche Bank. Please go ahead..

Thanks.

Wondering when you look at the effort to return the user growth over in the near-term and over the longer term, what are -- what can you share on the go-to-market on driving that? Do you think it's more of a function for converting MAU to DAU or growing MAU into new demographics or geographies? I guess, beyond improving the android app, how do you kind of drive awareness of that and kind of where do you see the biggest sources of user growth..

Yes, so I mean, I think about this sort of in terms of three key priority areas. First and foremost, 13% to 34% in the U.S and Europe, which is a really strong core market for us. We are thinking a lot about deepening engagement and that have to do a lot with some of the content stuff we talked about today.

I think the second area of focus will be international, 13% to 34%, and even 13% to 24%, which is a massive opportunity primarily on android. So we’ve been working really hard on that over the past year to make sure that our product offerings really delight folks around the world.

And as part of that too we’re learning how to become a more global company in terms of our marketing and explaining our core product value to customers everywhere. So we are doing a lot of work on that and then sort of the last area that we’re thinking a lot about is how to expand 34% plus in our core markets.

And historically that’s happened naturally as people have gotten older, and so we focused on adding incremental younger users in the hope that they will grow old with us over time.

But I think now we're doing a lot more to customize and personalize the experience for folks who are little bit older whether that's in terms of our augmented reality experiences and making them perhaps, age-appropriate or also on the content side where I think we can continue to broaden our content offering to appeal the folks of all ages.

So those are sort of the three areas where we're investing and we are making progress on all three..

Our next questioner today will be Mark May with Citi. Please go ahead..

Thank you. In terms of the DAU outlook for Q1, is the potential for slightly better DAU growth in Q1 versus what you’re just reporting Q4, is that more driven by seasonality or would you attribute that to something else. And then on expenses, the company has done a lot over in the last year to right size the expense base.

How much more do you think you have there, or should we think about hitting breakeven and profitability targets going forward being driven much more by revenue or as opposed to save expense rationalization or more modest hiring plan? Thanks..

Thanks for the question. We are not going to give specific guidance on our daily active users, except that we are cautiously optimistic and we don't foresee a sequential decline in our DAUs in Q1 2019.

As it comes to breakeven, it's a reminder we had the internal stretch goal of accelerating revenue growth and full-year free cash flow and profitability, which is not a forecast and it's not guidance. But it is also what help us to achieve the strong results that we’ve seen this quarter.

And as we look forward to our -- achieving a profitability and free cash flow in the future, I think it really focuses on our revenue growth, which will come from expanding our community, increasing engagement, improving monetization, while keeping a close eye on the operating efficiencies that we've achieved to date..

Our next questioner today will be John Blackledge with Cowen. Please go ahead..

Great. Evan, you mentioned several new products like commercials, collection ads among others, is there one or two that you’re most excited about and maybe it could be most impactful for advertisers and scalable for Snap? And then, just on revenue, rest of world was stronger than we expected. Any color out there would be helpful. Thank you..

I’m really excited about commercials. Just one of the things that’s really exciting to me is that people are investing a lot in the quality of commercials and really taking the format seriously. So I think to see that level of narrative excellence and creativity around video on mobile, it's just great for the future.

So I think over the next 5 or 10 years as mobile video continues to develop, we are already seeing sort of the early stages of really advanced narrative development.

In a format that it really works for customers, because they’re already in lean back experience watching shows that have a more narrative -- have a narrative arc [ph] effectively over several minutes. So I think that for us is really exciting.

I think also in terms of augmented reality there have been some just beautiful executions lately on the augmented reality side as I think people are really testing their capabilities of Lens studio which has opened up a whole new avenue for creativity on our platform..

And the next questioner today will be Doug Anmuth with J.P. Morgan. Please go ahead..

Thanks for taking the questions. I mean, just wanted to ask about how you think about adding kind of more functionality into the platform, obviously, the 30 minutes plus daily is very strong engagement. But are there other things in terms of functionality things like gaming and potentially others that you can add into the platform.

And then, secondly, just curious if you think there are any -- I mean, key spots perhaps to fill across the management team? And then, just more broadly, how do you think about recruiting and retention given the departures that you've seen over the past year plus? Thank you..

Yes, there are huge opportunities for us across the platform to continue to build on functionality. I think gaming certainly is interesting, it's something that we’ve been looking out for quite some time So we will continue investing and innovating in the platform.

And I think as we look forward to CFO roles, a critical role for us, I think we are really fortunate to have Lara in the Interim role right now. She knows the company really well, has been with us for a long-time. So that really gives us the flexibility to take our time with the search and really get it right.

And I think if we look at this, the development over the leadership team, over the last year it's made a massive difference in the business and also for me personally because now I'm freed up to do the things I really love to do on the product side. So I think the teams really evolved and I think ready for the next stage of growth.

So just really excited to see everyone come together and to really see the teamwork. It's really exciting for me..

The next questioner today will be Rich Greenfield with BTIG. Please go ahead..

Hi. Thanks for taking the question. I got a couple. One, you've historically just -- maybe a quick housekeeping. You talked about Snaps per day, I was wondering if you could give us any update on kind of where that is in terms of usage.

And then, Evan, you laid out I know this letter got leaked [ph] and it wasn’t intended to leak, but you put out your 2019 okay hours and it was make Snapchat the fastest way to communicate, find best friends for all Snapchatters, achieve full year profitability, lead the way in augmented reality and spread positivity.

Wondering kind of how you think you’re positioned.

Is that still the goals for '19? Has that shifted since you wrote that late last year and how you’re thinking about it? And then just you’ve talked about it a few times in terms of kind of thinking about or rethinking Discover to make it highlight kind of the -- I would call the more professional content versus the more user generated content.

I know you mentioned it on last call that you were working on it. Where do we stand on kind of updating Discover to focus on publisher content? Thanks..

Thanks, Rich. Yes, so on the Snaps, we are above 3 billion a day. So I think that, I guess, the latest update there on the leaked memo. Those are still the goals and I think the team is executing really well against them. So happy to see the progress and I think we are going to continue to see it throughout the year.

And as far as Discover is concerned, there is sort of three things that I'm thinking about when it comes to our progress there. The first is personalization were I think we made the most progress in the last quarter. We’ve been really working to refine our algorithms there and we’re seeing improvements in time spent and things like that.

We are going to keep iterating on that. It's going to take time, but definitely seeing momentum there on the personalization front. The second thing we’re thinking a lot about is merchandising the content and really trying to help people find the things that they're interested in.

I think today it's almost like walking into a supermarket without the [indiscernible] or something like that. So I think for us to really organize things more effectively will be really beneficial to the community on Discover. And then the third piece that we are thinking a lot about is playback.

We really innovate around our full-screen, playback experience and I think there's more to do with playback there. So those are sort of the three things we're prioritizing when it comes to Discover..

The next questioner today will be Anthony Diclemente with Evercore. Please go ahead..

Great. Thanks, guys. Actually I have two for Lara. I think rest of world revenue and ARPU is up a lot year-over-year and sequentially. Was there anything to call out in there in terms of lump sum or partner payments, or potentially new countries that entered [ph] in the quarter or new contracts in that rest of world region.

And then secondly, a follow-up to the question about sustainability of the gross margin expansion.

Where can that go so that the efficiencies that you discuss from cloud partners and can those continue much further from here and I’m wondering whether additional restructurings in addition, I know you had AWS last year, was there anything -- any other cloud contracts that were improved in the quarter or since AWS? Thanks..

Thank you for the question. So I think as we look at international, we are really excited about how that has the ability to scale internationally through our self-serve platform, and additionally how our self-serve platform enables us to enter new markets more quickly. So we think we’ve a lot of opportunity there that we're excited about.

As we think about our sustainability of gross margin, I think it's really interesting when you look at our revenue growth and how our cost of revenue has increased at a slower rate than our revenue growth. And we expect to continue to see and focus on that trend.

When we look at our overall model with our partners, I think the exciting part is we’ve a continuous focus on looking at efficiencies and our infrastructure model, as does our benefit of the multi cloud model -- excuse me, where we benefit from our cloud partners continuous investments in technology innovation and cost efficiencies too, which we typically see that pass along to customers over time.

So we are pleased with that..

The next questioner today will be Brent Thill with Jefferies. Please go ahead with your question..

Thanks. Good afternoon. Evan, I just want to go back to the developing team and culture, there have been a lot of changes.

I'm just curious if you could comment on what percent of the change you think you’re through in the senior team? Are there any open -- opening to be on the CFO role that we have to consider?.

On the senior team, we are really focused on the CFO role and also on the marketing role. So those are the two priorities for me. Most of the changes we made over the past year, year and half as we look sort of forward towards the business scaling, I’m really happy with the way the teams come together and the way they’re working together.

So those are related to focus areas for us..

And the next question will be from Ron Josey with JMP Securities. Please go ahead..

Great. Thanks for taking the question. Jeremi, Evan, I wanted to talk a little bit more about just the sales force shift to a vertical model.

Jeremi, when you join what did you see that suggested that's the right thing to do, understanding that that there's a lot of businesses that are built that way and also when that took place? And then, the second sort of follow-up just on reach, you talked about reaching 70% of 13 to 34 year-old with premium video ads.

Just wondering how that trended over time? Thank you..

Thanks for the question, Ron. You’re right. There are a lot of sales teams that are aligned vertically. I think when I came in -- I’ve been here three months and when I came in I noticed that the team is really set up to get as big as -- big as possible, as quickly as possible.

And oftentimes that means everybody can go after every account and make every call that there is and it's the right thing to do during a growing business. But now that we’re over a $1 billion in revenue, the goal is really to ensure that we are set up for a durable structure for the future, and not as important in a vertical model.

But it allows us to do is to really understand our customers and the industries in which they operate, so that we can be consultative sellers and go deep with those particular brands. In addition, we have reorganized the sales team so that there is a specific set of people that will be focused on emerging accounts.

And what that means is that they have DR expertise that they're able to go deep on optimization and really grow that side of the business as well. Those are the two indicators to me that that this was the right thing to do. We made that change last week and it will be rolling over the next six months, so that we can continue to move forward.

In addition to that question to answer your second question, for our reach that we had 70% of 13 to 34-year-old and how that has tended over time, we're always working to grow ad reach efficiently with our engagement.

And our premium content is growing, and that’s very important as you can see from the way that people are taking -- they’re watching our shows in that lean back environment. That they’re completing shows that they started. That gives us more ad inventory in premium environment, so we can continue to grow on that really important base.

Thanks again for the question..

And the next questioner today will be Youssef Squali with SunTrust. Please go ahead..

Hi. This is Sagar on for Youssef. How are you thinking about the expansion of content creation or consumption on the other platforms or devices? You created Snap Camera last year and the reports potentially of allowing longer-lasting public Snap stories to better allow publishers to use for broader distribution on their properties.

Just hoping to get a better sense of how your thinking has been evolving there?.

We are constantly looking at opportunities to extend our platform, in particular our augmented reality platform as you mentioned is now that extended on to desktop and I think there are going to be more opportunities to extend that platform on to different cameras in the future. So that’s very exciting for us.

And then in terms of consumption, again always experimenting there and I think we’ve a lot of great unique content to offer..

The next questioner today will be Robert Gilbert with Wells Fargo Securities. Please go ahead..

Good afternoon and thanks for taking my questions. Two please. I wanted to ask first on the revenue share expense. It looks like it reaccelerated in the fourth quarter. Wondering if you could talk us through trend [indiscernible] particularly around shows.

Are you continuing to drive more fixers, variable deals and maybe if you could tell us how rapidly you’re amortizing investments and shows, assuming those are governed by more fixed deals. Then also on commercials, just wanted to ask about the sales channel there.

I think you mentioned in the deck and also in the press release the premium content targeting tool. Just wanted to ask are you limiting access on the product today and if you could talk about sort of pent-up demand that there might be for that product? Thank you..

Thank you for the question. I will talk about the content side. And -- we're really excited about our content platform and we are going to continue to invest in engagement there. I think when we talk about our content partners, making sure our partners are taking care of the priority for us.

And we think that our redesign enables the breadth and depth of engagement that is healthy for not only us, but the partners that we work with. And that’s demonstrated by the fact that 30% more people are watching our publisher stories and shows every day.

As it comes to how we actually structure those deals, that’s not something that we are going to go into at this time..

And to answer the second part of your question regarding commercials being a premium content targeting tool and whether or not we are limiting access for pent-up demand. This is a tool for big brands and agencies.

One of the things that excited me most about coming to Snap is that if I had a nickel for every time that I had heard that advertisers want unskippable video, I would have a lot of nickels.

And to say that we -- and have that format continuing to invest in it, build premium content and commerce and the commercials within them, really good that’s a platform to bring premium advertisers into that premium environment. I’m very confident with that format as the six second unskippable vertical video within premium content.

And we will continue to double down in that effort..

[Operator Instructions] And the next questioner today will be from James Lee with Mr. securities. Please go ahead..

Thanks a lot for taking my questions. I got a couple of questions regarding DR advertising and Jeremi maybe you can talk about, maybe DR as a percentage of revenue to help us understand kind of progress so far? And maybe you can break down, maybe some of the top verticals of DR specifically.

And last question, I’m particularly curious about your progress in e-commerce. Obviously, you guys talk about that in the past. And what specific improvement you’re working that not only allow you to gain scale and also drives better conversions? Thanks..

Sure. Thank you for the question. We don’t break that out specifically by vertical, but we are seeing a lot of success in gaming and in-app install and direct-to-consumer e-commerce as well.

We have made a lot of innovations in our e-commerce ads such as the collection ads, where you can feature up to four products within the ads and buy them directly from that environment. So we are continuing to innovate on those and we are seeing a lot of success. But we are just getting started with e-commerce.

We know that there are a lot of challenger brands, insurgent brands out there, and that we can help them reach their audiences, particularly when they can build on -- to bid on a KPI that’s relevant for them. If they want to sell more products they can bid to optimize that way, if they want more app installed, they can bid to optimize that way.

And we’ve had a lot of success with DR advertisers, although we don’t break out the specifics on that..

And our last questioner today will be Mark Kelley with Nomura. Please go ahead..

Great. Thanks very much. Just two quick ones.

Can you talk about what the Snap original show pipeline looks like this year? What kind of content can we expect and are there any target demos you like to prioritize? And then, I know you’re not given guidance for the full-year, but curious given that your cost structure has been pretty flat for several quarters, can we expect the EBITDA improvements that we saw through 2018 that kind of be the same in 2019? Thanks..

Yes, I don’t want to ruin the surprise on the shows -- the shows coming up, but I will say we have a partner summit coming up on April 4, in Los Angeles, which I think will be a great opportunity to celebrate [ph] our partners and a lot of their creativity that we are seeing on the platform. So April 4 will be a fun day for Snap..

And on the guidance standpoint, as you said, we are not going to provide full-year guidance.

But if you think about our results and how we are continued to focus on operating efficiencies, I think it's demonstrating the fact that while we are continuing to maintain a roughly flat cost structure, we are able to grow revenue and that’s something that we maintain critical focus on..

And this will conclude our question-and-answer session as well as Snap Inc.'s fourth-quarter and full-year 2018 earnings conference call. Thank you all for attending today's presentation, and you may now disconnect your lines..