Operator: Our next question today comes from Justin Post with Bank of America.
Justin Post: Great. Maybe one for Evan. Just on the cost side, a pretty big change you made in January or planned in January but made recently. Can you talk about the motivation for that? And then, Derek, maybe explain when the benefit of that will hit, I’m assuming 2Q but maybe you could outline how much cost savings and when we’ll see it hit the model?
Evan Spiegel: Yes. Thanks for the question. It’s always painful and difficult to make these sorts of changes with our team. We’re really motivated by trying to move faster. Last year, towards the end of the year, we made a rather large change to our product team and restructured the team to just drive a lot more accountability and focus. And in doing so, we removed a number of layers of management. We saw the impact that, that had just in terms of the clarity and focus and the ability for people to collaborate and work together. And I think as well, we’re seeing a lot of benefits from getting folks together in the office and the sort of problem solving and creativity that comes out of that. So I think putting a real focus on reducing hierarchy and really an emphasis on bringing people together to solve problems has made a big difference for the business recently. And I think these changes will allow us to do more of that.
Derek Andersen: On the cost structure side, I think a few things to walk through here, just looking at their cost structure generally. One, we’re trying to make sure that we’ve got a really clear path to be generating meaningful adjusted EBITDA and positive free cash flow. And that’s really defining our investment levels and then we’re prioritizing within that. As I look forward to Q1, number one, we’ve seen a big increase in infrastructure costs in 2023, on the order of magnitude of about $100 million of quarterly run rate of higher infrastructure costs and that’s led to the rather significant increases in improper DAU [ph]. You saw that start to slow down as we went through the back half of 2023 and into Q4 of 2023 in terms of the sequential increase in the infrastructure for DAU and really look for that to continue to slow down or level off here as we move into Q1.
And that’s going to give us the opportunity to make progress against our medium- and long-term margin targets, given infrastructure is the biggest element of the cost of revenue side of things. As I look down to the OpEx side, just a couple of things to note. One, we had a really good outcome on Q4 adjusted EBITDA. Part of that was being at the higher end of our internal range we shared with you on revenue but part of that was about better flow-through. And we had lower-than-expected marketing costs, for example, in Q4. And timing-wise, you’re going to see some of those marketing costs in Q1 this year with the campaign that we’ve kicked off. And so you’re seeing a little bit of that as a onetime item flowing through the Q1 costs that, of course, are impacting the adjusted EBITDA guide in Q1.
From an ongoing cost structure perspective, though, to your question, yes, we made a very difficult decision earlier this week to restructure our team that impacted about 10% of the team. So about 60% or 2/3 of our OpEx is people or people related, so we would expect to see that help us on the OpEx side. But you probably will not expect to see that really fully reflected in the cost structure until Q2 and beyond. In Q2, we’ll be going through that transition and we’ll actually be incurring between $55 million and $75 million of restructuring costs in — largely in Q1, that will put downward pressure on net income in the quarter. So a lot of the cost structure benefits that you would expect to see there will show up in Q2 from an adjusted EBITDA perspective.
So if you’re sort of following through each of those pieces, then you’ve got a path here to a structure change in how to think about infrastructure and cost of revenue, where the lion’s share of the increase in infrastructure costs in 2023 are best thought of as fixed. Therefore, that gives us the ability to flow through at a really good rate as we have incremental revenue growth. You saw that in Q3 and Q4, where we flowed through more than 2/3 of incremental revenue to the adjusted EBITDA line. So that’s sort of an indication of how we can scale well on the gross margin line. And then from here, after restructuring on the OpEx side and getting to a good size on our overall fixed cost, cash cost structure, it’s about being disciplined from here which we expect to be able to do.
And the changes we make give us room to invest to support our growth is if we — if and when we accelerate revenue. The last thing I’d just touch on here, below the adjusted EBITDA line, SBC has been a real focus for us in trying to get to a sustainable level of SBC. The restructuring changes that we made earlier this week are going to help us significantly with making progress on that. The other is that we’ve been talking a lot throughout 2023 about SBC being elevated as a result of Refresh grants [ph] to the team and how that flows through gap measurement of SBC. We saw that impact begin to dissipate in Q4 of ’23, 24% year-over-year decline or $110 million year-over-year decline in SBC, largely driven by that impact rolling off. We’ll see that further dissipate into Q1 and later this year.
