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Snap (NYSE: SNAP)
Q3 2024 Earnings Call
Oct 29, 2024, 5:00 p.m. ET
Snap’s Q3 2024 Results: Growth in Users and Revenue
Key Call Highlights
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good afternoon, everyone, and welcome to Snap Inc.’s third-quarter 2024 earnings conference call. [Operator instructions] Now, I would like to turn the call over to David Ometer, Head of Investor Relations.
David Ometer — Head of Investor Relations
Thank you, and good afternoon, everyone. Welcome to Snap’s third-quarter 2024 earnings call. Joining us are Evan Spiegel, CEO and co-founder, and Derek Andersen, CFO. Please check our Investor Relations website at investor.snap.com for today’s press release, earnings slides, and investor letter.
This call contains forward-looking statements limited to today’s assumptions. Actual results may vary significantly from these estimates. For more insights into factors that may cause variances, refer to our press release and our latest Form 10-K or Form 10-Q filings, specifically the Risk Factors section. Today’s discussion will include both GAAP and non-GAAP measures.
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In today’s call, we will clarify that our expense figures exclude stock-based compensation, payroll taxes, depreciation, and other items. Please consult our SEC filings for details on how we calculate any discussed metrics. Now, I’ll hand the call over to Evan.
Evan Thomas Spiegel — Co-Founder and Chief Executive Officer
Hello, everyone, and thank you for joining us. In Q3, we made notable progress toward our main goals: expanding our community, enhancing user engagement, increasing revenue, and diversifying our income sources, all while pursuing our long-term vision for Augmented Reality. We recorded 443 million daily active users in Q3, marking a year-over-year increase of 37 million. Engagement with our content platform continues to grow, as both the number of content viewers and overall time spent watching increase yearly.
The growth of our direct response advertising business and our Snapchat+ subscription contributed to a 15% rise in total revenue, reaching $1.37 billion. Notably, our total active advertisers more than doubled from last year. To accelerate this growth, we’re innovating our advertising products, investing in machine learning, and refining our marketing strategies for our advertising partners. We also held our Annual Snap Partner Summit in Q3, where we introduced several new initiatives.
We launched a simplified version of Snapchat aimed at growing our community and enhancing user engagement. Additionally, we debuted two new advertising placements, Sponsored Snaps and Promoted Places, designed to extend our partners’ reach. In line with our augmented reality vision, we released our fifth-generation AR glasses, the Spectacles, powered by Snap OS, along with new Generative AI tools for our AR Developer Platform. Developers are already creating impressive Lenses, and we’re excited to see the experiences they will develop for our community.
Our team’s rapid innovation reflects a leaner organizational structure focused on key priorities. This focus has contributed to our financial performance, with adjusted EBITDA reaching $132 million and free cash flow at $72 million in Q3. Going forward, we will strategically manage our investments to build on our momentum and improve financial outcomes.
In Q3, we introduced a streamlined version of Snapchat, focusing on three main experiences: connecting with friends, utilizing the camera, and watching engaging content. For users, this layout provides a more personal and easy-to-use interface, while it enhances content discovery for creators. Currently, around 10 million users are engaging with Simple Snapchat across various countries.
Overall, Simple Snapchat has successfully driven content engagement, particularly among casual users. This is crucial for community growth and advertising inventory. We are seeing strong results on Android devices, with increased content interaction metrics. For iOS users, while engagement remains positive, the effects are not yet as robust. Early results reinforce our confidence that this user experience will foster creativity, improve communication, and enhance content engagement.
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Snapchat’s User Growth and Innovation Drive Q3 Success
Snapchat is acutely aware that any substantial changes in user experience could disrupt its community and affect advertising efforts. The impact on user engagement may also shift as the platform tests features with new groups of users. Consequently, the company will prioritize testing and refining these experiences over the coming months to enhance satisfaction for both users and advertisers. In recent developments, Snapchat’s global community has expanded significantly, boasting 443 million daily active users in Q3, marking an increase of 11 million from the previous quarter.
Daily Active Users Reflect Steady Growth
In North America, daily active users stand at 100 million, remaining stable year-over-year. However, there was an uptick compared to the previous quarter, indicating that initiatives aimed at boosting user engagement are yielding early results. In Europe, daily active users grew to 99 million, an increase from both the prior quarter and the same period last year. Meanwhile, the Rest of the World segment saw daily active users rise to 244 million, up from 235 million in the previous quarter and 211 million from the prior year. The essence of Snapchat’s service lies in its ability to facilitate communication among friends and family, a crucial component driving growth and user retention.
AI Features and User Engagement Take Center Stage
Q3 saw the introduction of several AI-driven features, designed to encourage creativity and bolster conversations among users. One notable feature, AI-enabled Snapchat Memories, allows Snapchatters to share AI-generated collages and videos with friends. Additionally, a strategic partnership with Google Cloud has been expanded, utilizing the capabilities of Gemini on Vertex AI to enhance interactions with My AI, Snapchat’s AI chatbot. Not impressively, the number of snaps sent to My AI in the U.S. has more than tripled since last quarter.
Engagement on Snapchat’s content platform is flourishing as well, with users sharing spotlight content with friends, up more than 60% year-over-year during Q3. To further improve content interaction, Snapchat is enhancing its machine learning (ML) models for better ranking and personalization. Recent enhancements to the Spotlight recommendation system aim to align users’ interests more closely while new multimodal ML models better recognize diverse forms of content submitted by creators.
Support for Creators Fuels Content Supply
To increase the amount of available content, Snapchat is concentrating on growing its Creator community. In Q3, testing commenced on a new AI video generation tool that simplifies video creation through basic text or image prompts. These supportive measures contributed to a 50% year-over-year growth in creators posting content during Q3. As a result, global viewing time for content climbed 25% on a yearly basis and up 6% since last quarter.
In North America, content viewing time remained stable with only a minor decline of 1% year-over-year, but improved by 2% from the previous quarter. The higher growth of viewership outside North America can be attributed to the increasing impact of Spotlight on content viewing in those regions, where engagement continues to surge.
Augmented Reality Advances with New Tools
Snapchat’s use of augmented reality (AR) technology is proving to be transformative. Over 375,000 AR creators and teams worldwide have developed more than 4 million Lenses for users to enjoy. One widely popular Lens, the Past and Future Me AI Lens, received over 650 million views in Q3 alone. To capitalize on this momentum, Snapchat has rolled out an array of new generative AI tools in Lens Studio, like Easy Lens, which enables rapid AR experience creation. The excitement surrounding these innovations emphasizes the importance of a vibrant ecosystem for the long-term success of AR.
The introduction of the fifth generation of Spectacles, Snapchat’s innovative AR glasses, offers developers novel ways to harness AR capabilities. Backed by Snap OS, an operating system designed for intuitive user interaction, Spectacles facilitate the creation of immersive experiences and interactions with My AI. Developers are already utilizing Spectacles to create unique AR content, demonstrating Snapchat’s commitment to being a developer-friendly platform.
Advertising Initiatives Show Strong Results
Snapchat continues to advance on three key advertising initiatives: enhanced ML models, improved privacy measures, and more effective ad formats. The ongoing optimization for app install and purchase campaigns has produced promising results, including a 24% decrease in cost per install and a 27% drop in cost per purchase. Notably, Nexters, the company behind the popular game Hero Wars, reported a 19% increase in installs and a 56% uptick in purchases following the implementation of these optimizations.
Furthermore, Snapchat’s new Landing Page View optimization goal is designed to help advertisers direct higher-quality traffic to their sites. For example, with the support of Tinuiti, Wrangler saw a remarkable 34% increase in CPM efficiency and 380% more conversions through this optimization strategy. These advancements, combined with improvements catering to small and medium-sized businesses (SMBs), have doubled the total number of active advertisers year-over-year in Q3.
With their Snap Promote offering, Snapchat empowers SMBs and creators to easily promote services and measure ad performance on their mobile devices. Additionally, the company is enhancing the advertiser onboarding experience to facilitate a smoother setup and better campaign optimization. The recent launch of automated campaign features aims to streamline the advertising process, benefitting businesses like the U.S.-based cookie franchise Crumbl, which successfully integrated the new optimizations.
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Snapchat Sees Strong Growth in Advertising Revenue Amid New Product Launches
In Q3, Snapchat achieved a notable 32% increase in return on ad spend (ROAS) compared to the previous quarter, alongside a significant 242% boost in purchases. The company is committed to reinvigorating upper-funnel brand growth by rolling out innovative advertising formats and offering brands valuable insights. Key product launches this quarter included First Lens Unlimited, which provides advertisers the first slot in their AR Lens Carousel, resulting in an average 35% increase in additional impressions for partners during testing.
Additionally, Snapchat introduced the state-specific First Story, allowing U.S. advertisers to target campaigns to individual states or the entire country, featuring different creators per state. In our pursuit of expanding ad options, we are experimenting with two new placements: Sponsored Snaps and Promoted Places. Both placements build on the existing full-screen vertical video Snap Ad format, enabling advertisers to automate their placements without creating new ads. Sponsored Snaps allows businesses to visually engage with the Snapchat community, while Promoted Places uses the Snap Map to highlight sponsored local attractions.
These innovations are expected to provide significant additional inventory for advertisers over time. We anticipate the launch of Sponsored Snaps and Promoted Places in select regions in Q4. Now, I’ll hand it over to Derek to review our financial performance.
Derek Andersen — Chief Financial Officer
Thanks, Evan. In Q3, Snapchat’s total revenue reached $1.37 billion, marking a 15% increase year-over-year and an 11% rise quarter-over-quarter. Advertising revenue was $1.25 billion, showing a 10% improvement from the previous year due to a 16% increase in direct response (DR) advertising, aided by significant demand for our 7-0 Pixel Purchase optimization, which grew over 160% year-over-year. However, brand-oriented advertising revenue decreased by 1% year-over-year, mainly due to lacks in consumer discretionary sectors like technology, entertainment, and retail.
We are actively diversifying our revenue sources; “Other revenue” more than doubled to $123 million in Q3, primarily driven by Snapchat+ subscriptions, which have surpassed 12 million—more than double from last year. In the North America region, revenue climbed 9% year-over-year; however, growth in this area was constrained by weaker brand-oriented demand. Conversely, revenue from Europe surged by 24%, offsetting difficult comparisons from the previous year, while the Rest of World revenue increased by 32%, thanks to advancements in our DR ad platform.
In terms of global impression volume, we saw a 19% rise year-over-year, fueled by enhanced advertising delivery in Spotlight and Creator Stories. Despite this, eCPMs fell approximately 7% year-over-year as ad supply surpassed demand in Q3. The adjusted cost of revenue stood at $637 million, up 16% compared to last year, largely due to rising infrastructure costs related to our recent investments in machine learning and artificial intelligence. The cost per daily active user (DAU) for infrastructure was $0.84, an increase from $0.81 in the previous quarter and within our target range.
The remaining adjusted cost of revenue totaled $263 million in Q3, maintaining 19% of revenue and consistent with prior quarters, tracking within our annual guidance of 19% to 21%. The adjusted gross margin stabilized at 54%, aligning with prior quarters and last year’s figures. Operating expenses in Q3 were $604 million, reflecting a modest 1% year-over-year uptick. Personnel costs saw a 9% reduction due to an 11% decrease in full-time staff, but this was counterbalanced by higher marketing expenses related to our “More Snapchat” campaign and the Snap Partner Summit in Q3.
Adjusted EBITDA improved to $132 million from $40 million the previous year, driven by higher revenue and stricter expense management. Adjusted EBITDA flow-through, which measures how much of the revenue increase converts into adjusted EBITDA, stood at 50% this quarter. The net loss narrowed to $153 million, a $215 million or 58% improvement from last year’s Q3 loss of $368 million, largely due to increased adjusted EBITDA and a decrease in stock-based compensation.
This quarter saw stock-based compensation reduced to $266 million as headcount declined and the financial impact of equity grants was lower than the previous year. Free cash flow reached $72 million, with operating cash flow at $116 million. Over the past year, free cash flow totaled $147 million, and operating cash flow was $347 million, showcasing our efforts to balance investments and revenue growth to ensure ongoing positive cash flow. Our share dilution rate was down to 0.6% from 1.9% last quarter.
We concluded Q3 with $3.2 billion in cash and marketable securities, with no debt maturing this year, a testament to our stable financial foundation and ample liquidity. Moving into Q4, we expect to continue increasing our global user base, with guidance predicting DAUs at around 451 million.
We are optimistic about the growth prospects for Simple Snapchat, Sponsored Snaps, and Promoted Places, particularly noting early tests that show enhanced engagement among less active users. This presents opportunities for impression growth and expanded reach for our advertisers. While initial changes with Simple Snapchat may cause brief disruptions, further testing in key markets is underway, preparing for a possible wider rollout by early next year.
Moreover, demand from large enterprise clients has traditionally been a reliable source of revenue, especially in Q4, although this segment has lagged behind our overall ad performance recently.
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Snapchat’s Q4 Guidance and Strategic Insights Unveiled
The company has announced its Q4 revenue guidance, projecting a range of $1.51 billion to $1.56 billion. This represents an expected growth of 11% to 15% compared to last year. In terms of costs, Snapchat is on track with its full-year projections.
Cost Structure and Infrastructure Projections
Snapchat aims for a core cost of $0.83 to $0.85 per Daily Active User (DAU) in Q4. So far, the company has achieved the midpoint of this range in Q3, and with improvements in machine learning and AI capacity, the fourth quarter will likely reflect costs at the higher end of this range. Additionally, the guidance for other costs of revenue remains at 19% to 21% of total revenue. After hitting the low end in Q3, Snapchat expects to stay within this range for Q4.
On adjusted operating expenses, the anticipated full-year guidance ranges from $2.425 billion to $2.525 billion. In Q3, Snapchat’s run rate was aligned with the lower end, and a slight growth is expected in Q4. For stock-based compensation (SBC) and related expenses, guidance is set between $1.13 billion and $1.2 billion for the whole year. However, in Q3, the SBC expense was below this lower limit, and while growth is expected in Q4, the total for the year is projected to be 4% to 5% below the lower limit of guidance.
With the revenue guidance and cost optimizations in mind, Snapchat estimates a Q4 adjusted EBITDA between $210 million and $260 million. The company has also authorized a $500 million share repurchase program, aided by a strong balance sheet and a commitment to free cash flow generation, aimed at benefiting long-term shareholders. Looking forward, Snapchat plans to allocate investments wisely to promote both revenue growth and enhanced financial performance.
Thank you for participating in our call; we will now address your questions.
Questions & Answers:
Operator
[Operator instructions] Our first question today comes from Dan Salmon with New Street Research. Your line is now open.
Daniel Salmon — Analyst
Good afternoon, everyone. Evan, you mentioned the potential risks associated with the Simple Snapchat transition.
From what Derek outlined, it appears you’re testing the rollout in over a dozen markets while remaining careful not to disrupt higher monetizing areas. Could you elaborate on how your team is managing these risks and ensuring monetization remains a focus?
Evan Thomas Spiegel — Co-Founder and Chief Executive Officer
Thanks, Dan. We are enthusiastic about the long-term prospects for Simple Snapchat, especially with new users who show increased content engagement. However, careful iteration and testing are essential before widespread rollout.
We aim to better grasp how inventory will shift and its potential effect on monetization. For instance, we’re looking to reallocate story ad deliveries into interstitial placements instead of current tile-based formats. A shift of this nature can be disruptive, so we are adopting a careful approach of testing and learning to ensure our community and partners benefit from these adjustments.
Operator
Our next question comes from Rich Greenfield with LightShed Partners. Your line is now open.
Rich Greenfield — Analyst
I wanted to clarify if the Simple Snapchat rollout has begun in major markets like the U.S., U.K., France, and Germany. Considering the product’s positive engagement, are you prepared to accept temporary revenue impacts to implement it, or will you wait for revenue neutrality?
Evan Thomas Spiegel — Co-Founder and Chief Executive Officer
Thanks, Rich. We are still in the early stages of understanding the monetization implications of the Simple Snapchat rollout. Our priority remains to navigate these changes thoughtfully and to prepare our advertisers and partners adequately.
Engagement shifts, particularly with less engaged users, are encouraging, but our strategy is to prioritize a thorough understanding of monetization dynamics, potentially considering a phased rollout over time.
Operator
Our next question comes from Justin Post with Bank of America. Your line is now open.
Justin Post — Analyst
Thank you. I’d like to ask about Sponsored Snaps and Promoted Places. Can you share insights on the usage of these services and your long-term advertising strategy?
Evan Thomas Spiegel — Co-Founder and Chief Executive Officer
Sure, Justin. We are excited about the potential of both Sponsored Snaps and Promoted Places. These initiatives aim to build on our performance advertising foundation and leverage how our community interacts with Snapchat.
Initial feedback on Promoted Places has been positive, although it’s a bit too early to share specific data. Businesses are focused on driving foot traffic into retail locations to strengthen customer relationships, making this initiative crucial. We anticipate launching tests for Sponsored Snaps soon and look forward to sharing further insights as they come in.
Operator
Our next question comes from Ken Gawrelski with Wells Fargo. Your line is now open.
Ken Gawrelski — Analyst
Thank you. Regarding the Simple Snapchat launch, how do you prioritize engagement opportunities versus monetization? Is one more important than the other?
Snapchat’s CEO on Evolving Engagement and Future Advertising Strategies
Subheading: Insightful Discussion on Community Engagement and Advertising Trends
During a recent conversation, Evan Thomas Spiegel, the Co-Founder and Chief Executive Officer of Snapchat, addressed the need for advertisers to adopt a broader approach to spending. Instead of focusing solely on direct response campaigns, he emphasized the importance of allocating budgets across different products and services on the platform, akin to strategies that have succeeded for Google and Meta.
Spiegel highlighted that Snapchat’s ongoing mission is to enhance the product experience for its community. He mentioned the complexity that has developed within the app due to continuous innovation. Users currently navigate between multiple screens for tasks like watching Stories or Spotlight, which complicates the experience. A unified content experience is seen as a significant opportunity for improvement, making it easier for users to discover content.
This shift towards enhancing community engagement is expected not only to benefit users but also to create more opportunities for advertising partners to reach audiences effectively. Spiegel reiterated the importance of this balance between community interest and advertising needs.
Operator
Next, we hear from Mark Shmulik of Bernstein. Your line is now open.
Unknown Speaker – Bernstein – Analyst
Louisa here, representing Mark Shmulik. Could you elaborate on Spotlight engagement, particularly how viewership trends differ outside of North America?
Evan Thomas Spiegel – Co-Founder and Chief Executive Officer
Globally, we have noticed robust growth in Spotlight engagement. While North America has seen a decline in Stories content, it’s important to note that this has been balanced by gains in Spotlight. This indicates a shift in user behavior, contributing positively to our overall content engagement metrics.
Operator
Our next question comes from James Heaney with Jefferies. Your line is now open.
James Heaney – Analyst
Thank you for the opportunity to ask a question. Can you discuss the new app install product results? What steps are needed for app install clients to significantly impact your revenue? Also, how has Q4 revenue growth influenced your 11% to 15% guidance?
Derek Andersen – Chief Financial Officer
Thank you, James. Over this past year, we have employed a strategy of testing new optimizations and products with select clients before a wider rollout. As we see positive outcomes for these initial customers, we expand these products, ultimately contributing to revenue growth. In Q3, for instance, our app purchase optimization started yielding notable contributions to top-line growth.
Through the first three quarters, app install and purchase metrics show improvements, with the cost per install down 24% and cost per purchase down 27%. Such data serve as strong feedback to encourage broader adoption among advertisers. We intend to maintain this momentum through continued optimizations and effective go-to-market strategies. Our first major optimization, focusing on purchase, has significantly impacted revenue, demonstrating a 160% year-over-year increase.
Regarding your question about the guidance for Q4, it is traditionally a quarter biased towards later spending. Historically, brand advertising has seen a decline, and we don’t expect a significant change in this trend as we approach Q4. Nevertheless, recent product innovations, like the First Lens Unlimited, have shown promise and led to meaningful increases in impressions.
Operator
Our next question comes from Shweta Khajuria with Research. Your line is now open.
Shweta Khajuria – Analyst
Thank you for the opportunity to ask a question. Regarding revenue growth, could you clarify how you perceive the trajectory moving forward?
Snapchat’s Financial Strategy: Insights from Leadership on Ad Revenue Growth and Product Development
Analyzing the Confidence Behind Snapchat’s Ad Revenue Growth
In a recent discussion, Derek Andersen, Chief Financial Officer of Snapchat, shared insights into the company’s approach to boosting ad revenue faster than the industry average. With various product initiatives underway, including app optimizations and features announced at the Partner Summit, Andersen outlined the company’s strategy for upcoming growth.
Focus on Direct Response Business
Andersen emphasized a multi-faceted strategy, particularly concentrating on the direct response (DR) business, especially in the lower funnel area. The goal is to enhance product optimizations as well as to grow the small and medium-sized customer base. This segment shows promise, and improving their experiences is a key priority for Snapchat.
To build momentum, Snapchat is investing in machine learning (ML) and artificial intelligence (AI) technologies. This investment aims to improve ad personalization, ensuring users see relevant advertisements. By harnessing privacy-safe signals, the company seeks to improve its advertising models and continually refresh its offerings. Andersen noted the strong growth stemming from features such as the 7-0 Pixel Purchase, which has been successfully integrated with app objectives, contributing to revenue. These go-to-market initiatives are a significant part of Snapchat’s strategy to enhance product offerings for various client sizes.
To facilitate this growth, Snapchat has introduced tools like Snap Promote, which simplifies the advertising process for users and helps onboard customers swiftly onto the Ad Manager. Additionally, partnerships with integration companies are assisting small and medium-sized businesses in adopting the company’s products and optimizing their advertising strategies using better signals.
Upcoming Innovations with Spectacles
Switching gears to product innovation, Evan Spiegel, Co-Founder and CEO of Snapchat, responded to an inquiry about the company’s Spectacles. The latest generation of this product, revealed during the Partner Summit, has shown remarkable advancements compared to prior versions. Spiegel expressed enthusiasm for the potential of Spectacles, highlighting the importance of a robust developer ecosystem to create innovative Lens experiences before a widespread consumer launch.
He characterized the relationship between product availability and user engagement as a “chicken and egg” situation, where strong content drives consumer interest. By investing in Lens Studio, Snapchat provides developers the tools they need to create compelling augmented reality (AR) experiences. This ongoing initiative underlines Snapchat’s dedication to making Spectacles a valuable consumer product.
As they work towards launching Spectacles to consumers, the leadership remains focused on refining their strategy and executing crucial steps. With clear objectives and solid execution, Snapchat aims to not only captivate its user base but also significantly enhance its advertising revenue streams.
Call Participants:
- David Ometer — Head of Investor Relations
- Evan Thomas Spiegel — Co-Founder and Chief Executive Officer
- Derek Andersen — Chief Financial Officer
- Daniel Salmon — Analyst
- Ross Sandler — Analyst
This article is a transcript from a conference call produced for The Motley Fool. While efforts are made for accuracy, The Motley Fool advises conducting independent research and verifying information through official company communications.
The Motley Fool does not hold positions in any stocks mentioned and adheres to a strict disclosure policy.
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