Snap Inc. (NYSE:SNAP) Q4 2022 Earnings Call Transcript

Snap Inc. (NYSE:SNAP) Q4 2022 Earnings Call Transcript January 31, 2023

Operator: Good afternoon, everyone, and welcome to Snap Inc.’s Fourth Quarter 2022 Earnings Conference Call. At this time, participants are in a listen-only mode. I would now like to turn the call over to David Ometer, Head of Investor Relations.

David Ometer: Thank you, and good afternoon, everyone. Welcome to Snap’s fourth quarter 2022 earnings conference call. With us today are Evan Spiegel, Chief Executive Officer and Co-Founder; Jerry Hunter, Chief Operating Officer; and Derek Andersen, Chief Financial Officer. Please refer to our Investor Relations website at investor.snap.com to find today’s press release, slides, investor letter and investor presentation. This conference call includes forward-looking statements, which are based on our assumptions as of today. Actual results may differ materially from those expressed in these forward-looking statements, and we make no obligation to update our disclosures. For more information about factors that may cause actual results to differ materially from forward-looking statements, please refer to the press release we issued today as well as risks described in our most recent Form 10-Q, particularly in the section titled Risk Factors.

Today’s call will include both, GAAP and non-GAAP measures. Reconciliations between the two can be found in today’s press release. Please note that when we discuss all of our expense figures, it will exclude stock-based compensation and related payroll taxes as well as depreciation and amortization and nonrecurring charges. Please refer to our filings with the SEC to understand how we calculate any of the metrics discussed on today’s call. With that, I’d like to turn the call over to Evan.

Evan Spiegel: Hi, everyone, and thank you all for joining us. 2022 was a challenging year for our business as we continue to be impacted by macroeconomic headwinds, platform policy changes and increased competition. We’ve taken action to refocus our investments to support our three strategic priorities of growing our community and deepening their engagement with our products, accelerating and diversifying our revenue growth and investing in the future of augmented reality. We are focused on the most important inputs that we can control, delivering engaging experiences to Snapchatters and improving business outcomes for our advertising partners. We continue to drive strong growth in our community, ending the year at 375 million daily active users in Q4, an increase of 17% year-over-year.

Our team continues to innovate rapidly in ways that support the growth of our community. For example, in Q4, we released communities to expand our content offering on-boarded several new media partners, double down on our progress with spotlight and launch new Snapchat Plus features each of which helps drive engagement across our service. For the full year, we generated $4.6 billion of revenue up 12% year-over-year and generated $1.3 billion in the quarter or flat year-over-year, reflecting the rapid deceleration in digital advertising growth. Direct response advertising is a critical way that many companies grow their businesses, as it is one of the most performant and measurable forms of advertising. We have made progress updating and improving our ad platform over the past year across three key areas, investing in observability and measurement, improving engagement and conversion quality, and increasing the volume of high-quality engagements and conversions.

In the very near term, it will take time for these improvements to translate into improved top-line growth. Over the long term, we believe that delivering higher return on advertising spend and utilizing our inventory more efficiently are critical inputs to gaining share of wallet accelerating revenue growth and realizing the full ARPU potential of our business. We believe that the camera represents our greatest opportunity to improve the way people live and communicate. Over the last decade, we have made significant advances to our AR software and hardware that have enabled the growth of the sophisticated AR platform that we have today. Over 250 million Snapchatters engage with augmented reality every day on average, and we are investing rapidly and thoughtfully in the future of AR to further expand our leadership position.

We continued our path to sustainable profitability by generating $378 million of adjusted EBITDA in 2022 achieving our third consecutive year of positive adjusted EBITDA. We also generated $55 million of free cash flow in 2022, achieving our second consecutive year of positive free cash flow. 2022 brought significant challenges for our business and we have emerged with a highly engaged and growing community, a more focused team and cost structure a clear path to delivering sustained adjusted EBITDA profitability and positive free cash flow and a strong balance sheet with $3.9 billion in cash and marketable securities. We begin 2023 focused on executing against our three strategic priorities of growing our community and deepening their engagement with our products, accelerating and diversifying our revenue growth and investing in the future of augmented reality.

We look forward to sharing more about our progress and plans at our upcoming Investors Day on February 16, at our offices in Santa Monica. Thank you. And with that, we will begin our Q&A session.

See also 12 Cheap Bank Stocks To Buy  and 11 Most Undervalued Natural Gas Stocks To Buy.

Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. . The first question comes from Justin Post with Bank of America.

Justin Post: Great, thank you for taking my question. Clearly, it’s a tough environment for the digital economy overall. Can you talk about one of the some of the bigger first quarter revenue headwinds from Snap from a macro perspective? And then, can you go into the monetization changes that you’re making in the quarter that could have a positive longer impact on the model? Thank you.

Evan Spiegel: Thanks, Justin. Hey, its Evan. From our recent conversations with our partners, it seems like advertising demand hasn’t really improved, but it hasn’t gotten significantly worse, either. I mean, obviously, the brand spend is significantly reduced, like we saw in the quarter, but our direct response business continued to grow in Q4. And in general, it seems like our partners are just managing their spend very cautiously so that they can react quickly to any changes in the environment. I think as we look at Q1, the most significant impact thus far have really been the changes we’re making to our ad platform. Maybe just like taking a step back here. It’s really been on a journey re-architecting our ad platform. We shared a lot over the last year about our improvements to observability and measurability of conversions, things like our conversions API, or data cleanrooms, and multi-party computation, of course, our pixel implementation for e-commerce advertisers.

I think we have made good progress there, conversion API adoption continues to grow nicely. And the majority of our revenue is now measured using signals from conversions API, pixel integration scan, or MMPs. And so a lot of what we’ve been doing is taking this improved measurability and using it to improve the value of those conversions. And so some of the things we’ve shipped recently in Q1 at the beginning of the quarter are big changes to our in app UI, which we believe will help improve consideration because it aligns the ad UI with the more organic content experience. We’ve done a lot of work to improve our in-app Web View performance, which we believe can help contribute to improved conversions on the platform. We’ve updated our user ID graph, which helps improve attribution as well.

And some of the early results are promising. So for example, pixel advertisers utilizing one-zero attribution. For them clicks are 40% more likely to result in a conversion. We’re also seeing stuff like higher dwell times, higher non-bounce rates, and higher third-party match rate. So overall, obviously, the results are early, but we’re excited about these changes we are making. And then, what we’re doing is, we’re taking our machine learning models, and we’re training them on these higher value conversions, which will hopefully help us scale the overall number of those conversions over time. But the net-net, the impact in the short-term is really, that advertisers are experiencing these higher value conversions, but there are fewer of them as our models retrain, and hopefully, as we progress through the quarter, we can improve and increase that volume overall.

And obviously, in addition to larger advertisers, these changes really benefits smaller advertisers who are much more reliant on last click conversions for measurement, maybe because they haven’t implemented our conversions API, or don’t have a data cleanroom, for example. So, this I think, of course, is a near-term headwind to the business, but we’re very excited about the long-term potential of these changes, and we’re working really hard on it.

Operator: Thank you. The next question comes from Mark Shmulik with Alliance Bernstein.