Snap Inc. (NYSE:SNAP) Q4 2023 Earnings Call Transcript

Snap Inc. (NYSE:SNAP) Q4 2023 Earnings Call Transcript February 6, 2024

Snap Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon, everyone and welcome to Snap Inc.’s Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] 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 2023 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, 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 these 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, 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.

Evan Spiegel: Hi, everyone and thank you all for joining us. In Q4, we continued to make progress on our core priorities of growing our community and improving depth of engagement, driving top line growth and diversifying our revenue sources and carving a path to adjusted EBITDA profitability and positive free cash flow. Monthly active users increased more than 8% year-over-year and surpassed the 800 million milestone in Q4, demonstrating progress towards our goal of 1 billion monthly active users. Daily active users reached 414 million in Q4, an increase of 10% year-over-year and we continue to deepen engagement with our content platform, with the number of viewers and total time spent watching content growing year-over-year.

Revenue grew 5% year-over-year in Q4 to reach $1.361 billion as we remain focused on investing in our Direct Response business to deliver increased return on ad spend for our advertising partners. Adjusted gross margins expanded 1 percentage point quarter-over-quarter. Adjusted operating expenses declined by 2% year-over-year. And we delivered adjusted EBITDA of $159 million and free cash flow of $111 million in Q4. 2023 was a pivotal year for Snap as we focused relentlessly on adding value to our communities while evolving our business for long-term growth. Last year, we made transformative changes to our business by shifting to a more customer-centric approach, investing heavily in our ML platform to drive improved performance for our advertising partners and better leveraging privacy-safe signals for ranking and optimization.

We also transformed our go-to-market efforts with new regional leadership and a renewed focus on customer-oriented advertising solutions. We began 2024 with a focus on 3 initiatives that we believe are essential for Snapchat’s long-term success. First, we are continuing to evolve our machine learning models to drive more ad interactions across our platform. Second, we are working to unify the content experience across Spotlight and Stories to improve the user experience and deepen engagement. Lastly, we are shifting more of our focus towards user growth and deepening engagement in our most highly monetizable geographies, including North America and Europe. We believe that focusing on these initiatives will help us to increase daily active usage of Snapchat, deepen content engagement, improve performance for advertisers and ultimately accelerate revenue growth and drive increased free cash flow.

In order to best position our business to execute on these priorities and to ensure we have the capacity to invest incrementally to support our growth over time, we have made the difficult decision to restructure our team while continuing our investments in our highest priorities, including improved top line growth. We will reduce layers of management and concentrate our team members in major hub locations to support in-person collaboration, resulting in a reduction in our full-time workforce of approximately 10% in Q1 of 2024. The team members impacted by these changes are kind, smart and creative colleagues, who have been important contributors to our business during this challenging time and we are committed to supporting them in their transition.

Thank you. And with that, we will begin our Q&A session.

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Q&A Session

Operator: [Operator Instructions] The first question comes from Ross Sandler with Barclays.

Ross Sandler: Evan, question on the DR side of the ad business. So growth was comparable at 3% for the fourth quarter, about the same as the third quarter. So I guess, why aren’t we seeing more progress in getting that growth rate up to the levels of the broader digital ad industry? Like what’s holding us back right now? And then, your guidance for 1Q assumes that the trends accelerate upwards to low double digits to mid-teens, depending on the range. So what kind of acceleration are you seeing in DR thus far in 1Q? And what does that mean for the rest of 2024?

Evan Spiegel: Thanks, Ross. We’re really excited about the progress we’re seeing, especially in our lower funnel business and with small- and medium-sized advertisers. Purchase-related conversions grew 90% year-over-year in Q4. And we saw small- and medium-sized — a number of small and medium-sized advertisers grow 20% year-over-year. We really think this reflects more resilient revenue as well because as we’ve navigated some of these external challenges over the last couple of years, we found that those lower funnel dollars are just more resilient. I think looking ahead at Q1, the top end of the guidance range reflects a 10-point acceleration. So we are making progress here. Obviously, we wish we were moving faster but we’re working as hard as we can and pleased by what we’re seeing in the Direct Response business.

Operator: Our next question comes from Doug Anmuth with JPMorgan.

Doug Anmuth: Evan, you’ve talked a little bit about introducing a universal fee on the platform, perhaps unifying Stories and Spotlight content. Can you just talk about the opportunity here and how you could do this in a privacy- and brand-safe manner? And then, what it would mean for ad inventory and perhaps revenue?

Evan Spiegel: Yes. When we set out to build Spotlight, we actually built it on a totally separate stack, so meaning the ranking was separate stack, the inventory was separate from our Stories inventory and the user experience itself as well was different. We’ve really seen a lot of opportunity in bringing some of those improvements to Stories. Our Stories inventory is more constrained than Spotlight, for example. It doesn’t leverage some of the ranking improvements and model improvements we’ve made on Spotlight. And so we think unifying the Stories and Spotlight experience will bring a lot of the benefits we’ve seen on the Spotlight side in terms of personalization and the user experience to Stories as well. So we’re definitely excited about that.

A lot of the sort of under-the-hood work is well underway and we have some tests rolling out throughout the year that should get us closer to that unified experience. In terms of brand safety, we just completed a third-party audit on brand safety. I think we’re close to 99% of brand-safe content on Spotlight and close to 100% actually in terms of creator content, Snap Stars and the like. So I think one of the really unique things about Snapchat is that advertisers can get a brand-safe experience without paying a premium for it, like they have to do on other platforms, to avoid harmful content. So I do think we’ll be able to continue to extend those benefits to advertisers in this unified experience. And our very high levels of brand safety, I think, are a real differentiator for us.

Operator: Our next question comes from Eric Sheridan with Goldman Sachs.

Eric Sheridan: Evan, maybe if I could stick with the big-picture themes that you introduced in your introductory remarks. When you look across the competitive landscape of sort of social media, media consumption and the potential for rising utility around apps like yourself, how do you identify what you see as sort of the opportunity set and the potential challenges you’re trying to navigate around to sort of reposition the business for growth in users, engagement and monetization over the long term?

Evan Spiegel: Yes. Thanks for the question. As we’ve designed Snapchat and really architected the product, we thought about building it around some of the core ways that people use their smartphones. So things like talking with friends, taking pictures, watching content, these are the things that people do most often and really engage with the most on their phones. And I think, as we look at Snapchat, one of our biggest opportunities is actually the way the relationship between these different services that’s been a strategic advantage for us. If you think about growth of our Content business, what we’ve seen is we can grow the top of funnel as friends share content with each other, that brings more people into our content experience.

Or when we launched Spotlight, we leveraged the fact that so many people use our camera every day to create videos that we could generate a lot of inventory for our Spotlight product very, very quickly. So I think this relationship between our camera, our messaging service and of course, our content platform is really a key strategic advantage for us. And as we continue to focus on helping close friends and family stay in touch and communicate visually with one another, I think there’s a lot more opportunity for us ahead.

Operator: Our next question comes from Mark Shmulik with Bernstein.

Mark Shmulik: I noticed in the investor letter that there’s — one of the priorities is to focus on North America and Europe, growing users and deepening engagement. We saw a little bit of softness in North America DAU. Can you just share a little color as to why and perhaps below the surface, kind of some of the changes you’re doing as you think about focusing on growing engagement in these markets?