Snap Inc. (SNAP) Earnings Call Transcript & Summary

Great. Thanks, everyone, for joining us virtually today. Before we get started, I just want to mention that we'll take questions from the audience via Zoom, so please go to the Q&A button to submit. So I'm Doug Anmuth, JPMorgan's Internet analyst. We're pleased to have with us Evan Spiegel, Co-Founder and CEO of Snap. So Snap is a camera company focused on improving the way people live and communicate. The Snapchat camera is one of the most used cameras in the world and enables self-expression while also reducing friction typically associated with creating and sharing content. Snap has nearly 230 million daily active users and we project revenue north of $1.9 billion this year. Evan cofounded Snap in 2011 while studying at Stanford. Welcome, Evan.

Thanks, Doug. Thanks for having me. Excited to be here.

Absolutely. So let's kick off. So Snap was founded about 9 years ago, became a public company just over 3 years ago. Can you talk about some of the biggest ways the company has evolved over these past few years?

Sure. I think the biggest transformation has really been evolving from a product to a business. And I think what's so exciting about that has been growing this business has actually allowed us to reinvest in our product. And so this app that really started as a way to really easily visually communicate with your friends has become so much more. So now people consume content on Snap. They use all of our AR products and platform. They play games with their friends. And so I think the really exciting thing on this evolution from a product that has brought a lot of joy to people's lives to a real business has been that our ability to serve our community and our customers has just improved dramatically. And with that, obviously, our team has grown of course. But really, I think the biggest shift is just the increasing ability for us to invest in serving our community in the future and the increase in opportunities that, that creates overall.

Okay. Great. All right. So we'll hit on some more of that as we go. But let's start and talk about product. So we've also seen a lot of changes there, certainly over the last few years. You've gone through the app redesign, where you separated private and public for users; relaunched on Android, which was pretty significant; and then also continued to evolve in the AR space. So how do you feel about where Snaps products are now? And what are the key areas where you want to focus on evolving going forward?

Yes. We're so excited about the momentum we're seeing across the business. And as you mentioned, what we've been able to do is take a lot of our different product features and actually evolve them into platforms. And that's been a really important strategy for us over the past couple of years. And that began, of course, with our Stories product that initially was designed for friends to share stories of their day with one another. But very quickly, we realized that there was a huge opportunity in mobile video overall and that our community really wanted more, and they wanted higher quality content. And we saw when we looked at other different evolutions of media over time, that one thing happened, whether it was on radio or television, one thing happened every single time, which is that consumer tastes evolved and they wanted better content. And so we really saw this opportunity to get ahead of that evolution that we knew was coming in mobile video and invest in bringing premium content to our community. And so at the time, if you had told people there would be a show hosted by Will Smith on Snapchat and that the viewership would exceed linear television, I think people would be shocked to hear that 5 years ago when we started building that mobile video platform. But I think today, what's been so amazing is we've been able to use that engagement with friends and with stories created by friends to start delivering this premium content. And that business has really evolved for us. The audience has expanded. And also the time spent watching that premium content has expanded. And we just have a feeling that this is just getting started. Because you've seen this massive shift from linear television, especially for the 13 to 34 demographic to mobile video. So that's been a huge platform transition for us over the past couple of years. The other one, as you mentioned, is augmented reality. That's a little newer than our content business. But even so, we've seen hundreds of thousands, I mean, a million-plus Lenses created by our community now, and that really started as something where there were 3, 5, 10 Lenses just created by our own internal team. But what we did was make our own AR authoring tools available to our wider community and we help them get distribution for their AR experiences. And now we have a ton of engagement driven by our community. And so I think that evolution on the AR side, from being just a product that we created to a real platform, is really exciting. And of course, the future of AR over the next 10 years, I think, will move beyond the smartphone. But for the next 3 to 5 years, certainly, will be focused on the smartphone. And I think we've got some great momentum there. And then, of course, we've invested in things like gaming, as well, that we're really excited about. But I think the big theme here is taking these core product innovations and then expanding on them to build them into platforms, where we really are able to drive value not only for our community, but also for our partners.

Right. So let's hit on -- I want to hit on AR a little bit. I know you said it's kind of further out. But you've also said that you really have the only full functioning AR platform out there. I'm just curious why that's important over time.

Yes. So I think as you look at the future of computing, it's easy to see why the camera is strategically so important. And the Snapchat camera, in particular, understands you and who you are and your friends and the types of content that you like to engage with. But it also is getting better and better every day at understanding the world around you. And so when computers can fully understand the world around you, the context that you're in, and also understand who you are, they can get better and better at recommending different experiences and helping you solve problems. And that will be part of this big shift away from input-based computing, where you have to tell your computer everything. You got to type it all in, and that's a really high friction way of engaging with computers to a world where computers are going to be suggesting different experiences to you based on who you are and the context that you're in. And the camera is absolutely critical to that understanding of the world and of who you are. So that's why we think the camera is so important. And then what we can do is build on top of this understanding of the world with all of these different augmented reality experiences. And today, the vast majority of those AR experiences are really around entertainment, right? They are a way to spend time and see the world around you in a different way. But over the next few years, increasingly, AR experiences are going to be used to save time. And I think that's a really exciting shift. So we see that today with things like Amazon product search, where you can scan a product and buy it on Amazon really quickly, much easier than typing it in and trying to go find it online, or just with things like solving math problems. So our partner, Photomath, has this really great product where you just press and hold, then it will show you how to solve the problem that's in front of you. And so I think this is really the beginning of helping cameras understand the world around you, and therefore, helping computers understand the world around you and provide added value experiences. So in the short term, really on smartphones, we are going to be in this transition from AR as a way to spend time to AR as a way to save time. And that will kind of be the next 3 to 5 years. And then beyond that, of course, wearable technology will become increasingly important.

Okay. Let's talk about DAU growth. So you've seen accelerating DAU growth now for 4 straight quarters. I know you probably hit on some of it discussing products, but how do you think about the key drivers over the last few quarters? And then also kind of going forward? And just curious how a user's experience on Snap evolves from when they first join the platform?

One of the key focuses we've had over the past couple of years is just reducing the friction for people to use Snapchat. So we found that when they can use Snapchat, it's really fast and easy to find their friends, they love it because it unlocks this new way of communicating visually, and it's so much better than sending text messages back and forth, which can be a little awkward. It's hard to really explain how you feel. And when you can transition to communicating visually, it just unlocks this whole range of human expression that's not possible via text. So a lot of what we've tried to do is just reduce the barriers to getting to that aha moment that you have with visual communication and with our product. And one of the key pieces of that strategy has really been focusing on Android. So historically, our Android products really underperformed our iOS product, and that impacted our ability to grow in markets that were majority Android. The markets that were closer to 50-50 or even close to majority iOS, those iOS users were so engaged that they were helping engage the Android users. And so it wasn't as much of an issue in those markets. But when we looked at markets that were vast majority Android, it was really hard for us to get a foothold and grow because the product just simply wasn't performing. So we took the time to rebuild the Android application from the ground up. And then we think its performance in a very near future can surpass iOS, which is really exciting because we've innovated and totally rethought the way that we actually offer the service, really by taking the different platforms we have, like our content platform, our AR platform, our communication platform, and bundling them separately in the app so that they're able to load dynamically when people are using the product. And so disentangling all the different platforms we have in our service and separating them out so that they load faster and much more efficient has made a huge difference in the consumer experience. So that's been a huge priority for us. And of course, we've also seen a huge opportunity just localizing the content that we have on our platform. So we try to make sure there are custom AR experiences for all the different markets that we're in, that there's content that is reflective of the local culture. And we've seen that make a huge difference as well. So our strategy is really to make sure that we reduce friction in terms of participating in the service, but also make sure that this service is locally relevant in all the different markets where we operate.

Okay. So I guess we should be looking for some iOS changes here coming up? All right. So part of our thesis on Snap has been just about the diversity in the platform as users spend more time on Discover, for example, and then also with Original Shows. So you've talked about more than half of Gen Z in the U.S. is watching news content on Discover. And then you actually saw Discover time double year-over-year in 1Q actually among users 35 years old and up. So just curious, how are you attracting users? And how has the content strategy shifted across kind of that broader spectrum? And you added, I think, 91 new channels in 1Q. How do you keep users engaged and aware of what's available on the platform?

It's a really good question. So at a high level, we're very fortunate to have this amazing top of funnel in terms of our community coming into Snapchat every day to talk with their friends and view stories from their friends. And so what we're then able to do is take all of that engagement around content created by your friends and help you learn more about the other products and services that we offer. So Discover content is one of those. And what we've been able to do is learn a lot about what our community is interested in because they're so highly engaged with our service, and that helps us figure out where to invest in terms of growing our content business and what sorts of content are going to be appealing to our audience. And then of course, we really try to personalize that experience because, as you mentioned, folks that are over the age of 35 want to watch different things than maybe folks who are 18 or something like that. And so what we've now been able to do is obviously personalize the content experience based on what you're interested in and your personal preferences. So I think the key thing is just really letting our community lead our investments because they're very vocal and they tell us what they're interested in and passionate about. And then it's really our job to feed those interests and passions. And that's what's allowed us to continue to grow this engagement. I think the other thing that's been so exciting is given the growth of the platform and how many people are engaging with premium content, more and more really talented creators and producers want to build content for Snapchat because they know that's where the audience is. And they really want to reach this younger generation. We reach more 13 to 34 year olds in the U.S. than Facebook or Instagram, Twitter or any of these other platforms. And I think people know strategically how important that future generation is to the world and to their business, and they want to be communicating with that community. And so that is increasingly what we're seeing from creators. So then we're able to partner with creators and say, here's what we're learning and seeing on our platform, this is what our community is really excited about. And when we can intersect that with their ideas and their creativity, we're able to create these totally new shows that speak to our community.

What content are you particularly excited about on the platform? And what creators have you seen come on recently who would surprise people, who might not be as engaged with Snap?

Yes. I mean I think one of my favorites recently is Will From Home. So Will Smith created a show from his garage while in quarantine and brought all of his friends and did a Fresh Prince reunion. And it was just a ton of fun. And his creativity and just sort of zest for life was infectious. And I think seeing that level of content on our platform has been really exciting. But to your point, I think it's not just the entertaining content, it's also the news that can be really valuable. So we have a show called Good Luck America on Snapchat, and Dr. Fauci came and was able to share with our audience what he was seeing and how he's thinking about the world. And so I think it's exciting to see this younger generation engage in content in new ways and to be able to build a totally new style of video entertainment and the news that speaks to this audience.

Okay. Great. So let's shift a little bit. So we talked obviously about the strong engagement. We know, in particular, kind of the even bigger spikes that you've seen over the last couple of months, average time spent up 20% from late January to late March. How is this crisis in the behavior that you're seeing from your users, how does it influence your product road map going forward, your approach to AR and to video? So that's kind of one question, one big question. And then the second is how does it shift how you run Snap as a company?

Yes. Those are really great questions. So I think at a high level, outside of, I think, the important role we can play for our community in terms of educating folks about coronavirus or supporting local businesses, all the things that we can do to help in this really difficult circumstance, I think if you look at our product road map and the trajectory of our business, this is much more of an acceleration than a change. And so a lot of the behaviors, things like augmented reality to mobile gaming, those are things that, frankly, accelerated beyond our imagination. These are things that we thought would take a decade or more to really mature. And so to see all of that happen so quickly, I think, has been staggering, frankly. And when you look at the business side, things like e-commerce adoption are really important to the overall value of our business, because as more and more commerce moves online, folks are shifting their spend from retail locations and retail team members to investing in online advertising, because there's this big shift really from having your store in a mall where people are hanging out to having your store online where people are hanging out. And so I think, ultimately, those are the sorts of really interesting trends that we also believe will support the long-term growth and value of the business. And frankly, they're just unimaginable. So this change has been staggering in terms of the business and certainly accelerated a lot of the things that we've been focused on for a long time. I think as it pertains to the company, I've been so impressed by the way our team has executed, and more importantly, the way that they've supported one another. I mean, this is a really challenging time and everyone's circumstances are really different. So whether you're alone in an apartment and struggling with that loneliness or you're with young children, like our house, it can be really, really challenging and really different for everyone. And so that empathy-based leadership is so important. And I'm just proud of the way that our team has supported each other during this time. I think the other thing that's been really cool to see is that now that everyone's communicated -- communicating via video, our global teams feel much more included. And so there isn't this sort of sense of like a home team advantage when you're in our office in L.A. relative to being in our offices around the world. And I think that's something that I really hope will stay. That's really exciting because I can feel the way that our team is working together now. Everyone is an equal square on the video chat screen, and I think that sort of teamwork and that dynamic is actually a welcome shift. So there's certainly a lot to learn. It's still very, very early. But overall, I've been really impressed by the way our team is executing. And I think everyone just feels so grateful that our product is really needed right now, and it's a really good way to support our community, and that's very inspiring. So every day when you wake up, there's really a reason to get the work done because we know we're supporting hundreds of millions of people out there who are using our service to stay close to their friends and family, and that's what motivates us.

It's great to hear. Okay. Let's shift and talk about advertising a little bit. So in January and February, growth accelerated pretty meaningfully. So your 4Q is 44% growth. January and February went to 58%. Maybe you can talk about what drove that acceleration? What are you most excited about in the advertising business on a more normalized basis?

Yes, definitely. So the business has been firing on all cylinders, as you mentioned. I think one of the things that we did over the past couple of years, it was a very challenging transition, was to move to an auction-based advertising model. And that took pricing down in the short term, something like 95%. I mean, it was really challenging for the business. And that was right around the time that we made a lot of changes to the application as well. And so there was certainly like a perfect storm of challenges over the last couple years that we really worked through. I think the good thing is that we're seeing all of those changes really pay off, and that's what's so exciting. So we're able to offer really great products to direct response advertisers, who are seeing a real return on their investment. And we're also able to offer really high-quality brand advertising products, like commercials, that brand advertisers are looking for. So whether you're trying to shape someone's perception and change their mind with brand advertising or you're trying to get someone to take an action with direct response advertising, we have a full product suite across AR and video that I think is very compelling for advertisers. And when you combine that with our unique audience and our unduplicated reach among 13 to 34 year olds in the U.S. and Europe, I think we've just become an essential part of a lot of advertisers' strategies. So that's really what we've been seeing and what we're so excited about. And at the same time, we're still a tiny, tiny fraction of the overall digital ad market. And so I think we see so much headroom to grow here especially relative to our audience and their engagement. And so as we look at the ad business right now, it's just -- it's really, I think, gratifying for the team who went through a really difficult time over the past couple of years in these transitions to see all of those investments really pay off. And so that's what's showing up in the numbers.

Okay. That's great. So March and April, not surprisingly, you saw the sharp deceleration. Growth rates, you talked about down to about 11% in the third week of April. Just -- if you could talk more about direct response and self-serve, how that's enabled you to keep growing during this time and how it's obviously proven more resilient. We've heard that certainly from some other online ad companies as well. And how does that help you in both stronger and softer ad markets?

Yes. Well, as you mentioned, we're really excited that we're continuing to grow during this time. I think one of the things, as I mentioned, we went through this really difficult transition. We changed the service. And actually, what we learned from that period of time is that when brand advertisers like thought we weren't cool anymore and wanted to pull back their spends, so we made changes to the application and our community reacted really strongly to those changes. We learned a really important lesson, which is that if we don't have a business that's built on delivering real ROI to people, they don't have to use our product or like us or think we're cool or anything like that, they just have to get a real return on their investment. That's critical to maintaining our growth and also to be able to make the sort of long-term decisions and changes that we want to make to our product over time. And so we knew, through that experience, we had to build a resilient business and one that was just predicated on delivering real value to advertisers. And we know that those budgets are the last to be cut, right? If you can really provide the value that advertisers are looking for, if you can help them with real conversions, whether that's through our pixel purchase or our down funnel optimization against in-app events. These are the sorts of things that businesses are really willing to pay for because it drives their business and helps them grow. And so that was a really challenging realization to come to over the last couple of years as we took the business through those transitions. But we're happy that we did that then. And in a sense, it's a little bit what our business is experiencing now, where brand advertisers are pulling back either because their core business is really challenged or because they need to rework their creative and their messaging, which is no longer as relevant for corona -- this kind of coronavirus world. And so as these brands are sort of retrenching and regrouping, I'm reminded of some of the experience that we went through in the past when brand advertisers didn't want to work with us because they didn't think we were cool anymore. And we're just so grateful that we invested so heavily in this direct response business where we just deliver results for our partners, and that makes them want to spend more. So I think that really shaped a lot of our experience. And going into this pandemic, we made a lot of those transitions already, and that's why you're seeing this continued growth.

Okay. So we get questions a lot about Snap's ad load. Just curious how you think about that concept of ad load for Snap kind of across the different parts of the app. And how do you -- how does ad load and monetization currently tie with engagement across the platform when you kind of go from left to right across, well, let's say, chat, camera, Discover and Shows, for example?

Yes. So I think the best way to think about it is in terms of sort of platform maturity. I mean, at a high level, obviously, we're demand constrained, not supply constrained, and we see a huge amount of potential going forward in the business just relative to all of the user engagement. But as you mentioned, the way that we think about monetizing our business is really relative to all the different platforms that we have. So for example, our content platform is the most mature. It has the most mature ad products and some are really sophisticated optimization against those video-based products. And we continue to see a lot of opportunity there. And what we're trying to do is evolve that product offering like we have in the last year with things like Commercials and Snap Select, that really create opportunities for brand advertisers while continuing to serve direct response advertisers who want to convert off those video views. And then as we look at other pieces of our business like our augmented reality business, that really allows advertisers to immerse their customers in a really unique experience, and the engagement that advertisers see around those AR products is really, really compelling. This is especially true for the entertainment folks, but increasingly true for people who are experimenting with product try on in areas like beauty, which I think is very exciting. And certainly, the beginning of, I think, more trends in terms of virtual and digital try on overall. So that's maybe less developed than our content business, but certainly we're seeing some great momentum there. And people are able to buy distribution against their AR experiences and AR advertisements in our camera. And then we have things like our gaming platform and our math that currently aren't being monetized but are seeing a lot of engagement. And so those are businesses we're excited about building in the future. And so I think if you look at Snapchat, we have this really unique audience and people who are communicating with their friends all day long, and then we're able to bring them into all of these different platform experiences that provide more value to their lives. And then over time, as we grow those platforms and mature those products, we layer in monetization.

Okay. So that kind of moves us toward ARPU. Curious how you think about the ability for Snap to close the ARPU gap with other platforms? What gives you the confidence here? What are the constraints on ad growth? You mentioned demand constrained. I mean is that the biggest thing in your view, kind of the number of advertisers?

Demand is certainly a piece of it, but that demand has to be combined with really sophisticated optimization, which is an area that we've been investing a lot in because we want to be able to help advertisers find their customers really, really efficiently, and that actually creates more opportunity for more advertisers while also improving the user experience because there's a much greater variety of ads overall. So I think one of the things we just continue to work on is driving that efficiency and that ROI for advertisers because we know that will be a big driver of our growth over time. And certainly, as we look at the engagement, over 30 minutes a day on average, the unique audience and their increasing engagement with all of the different platforms that we have, whether that's maps, gaming, the camera, content, we see a huge amount of opportunity into the future.

Okay. So we've seen companies take kind of various approaches to managing their P&L during this crisis. Hoping you can talk about why it's important for Snap to invest through the downturn? What the areas are that you'll prioritize and where you could ease up a little bit?

Yes, definitely. So over the past couple of years, we really focused a lot on running our business efficiently and on cost containment. So from 2017 to 2019, I want to say, headcount grew like 4% and revenue grew 100-plus percent. So I think we really demonstrated through that period of time that we're able to run the business efficiently and with really high leverage. But as you pointed out, there's a lot of opportunity right now. There are certainly a lot of really, really talented people who are looking for new opportunities. And we want to -- we'd really love to have them come work at Snap. And so we are continuing to hire, and it is getting easier to hire, which is actually something that I think for a lot of technology companies has been a challenge over the past couple of years. Talent has been in very high demand. It's taken longer to hire really talented people. And so there's a really unique moment in time here, I think, for some businesses to invest and continue to grow. So I think we're coming out of a period of time where we really focused heavily on efficiency. And because of the increased opportunity, frankly, in this environment, it would make sense for us to invest and to continue our momentum. And I think continuing that momentum and building on that momentum is really important because it's a lot cheaper and a lot less expensive than trying to restart momentum or to build momentum in the first place. And so we're going to be investing to continue all the great momentum that we're seeing in the business and also because there's a lot more opportunity now even relative to 6, 9 months ago. So this is an exciting time for our business, and again really because we focused on cost containment and that foundation over the past couple of years, we now have an opportunity to lean into a market environment that is very, very different than the one just 6 to 9 months ago.

So just given all of that, you were on a path toward full year EBITDA profit in 2020, kind of pre-COVID. We know, as you said, you'll invest for the long-term. Just how do you think about profit and free cash flow generation over time? We often see online ad margins at 30%, 40%, sometimes even higher. Is that possible for Snap long term?

Yes, we certainly think so. This business is very high margin, as you mentioned. And really, the way to think about that is just to look at our infrastructure costs on a user basis and ARPU. And so we managed to hold those infrastructure costs relatively flat over time despite increasing engagement, offering a lot of these new products and services because we've been able to drive down the unit cost of that infrastructure and at the same time, to really ramp ARPU over time. And so that's sort of how to think about it. And again, as we start monetizing these other platforms that we provide, we think that will also contribute to all the momentum we're seeing on the content side and with augmented reality. So I definitely think that this business model is clearly very attractive. But we have to continue to invest over the long term. And I don't think it would be wise for us to respond to a short-term shock like this with a big change in our long-term investment strategy because the opportunity is so big, because we're still taking share. And so I think given how young the business is and how much opportunity we see, it's really important to actually invest through these short-term shocks relative to our long-term opportunity.

Okay. So I know you get this question frequently, but we'll ask again. But just curious, how does Snap think about TikTok? You have a relationship as an advertising partner, and also, I would say, an engagement competitor. Just how do you think about that and whether that's sustainable over time? And where is their time and engagement coming from?

It's a great question. So I think both of our businesses are really fortunate to be growing in an industry that's growing overall. So as you know, mobile time spend continues to grow. And I think that's something that bodes very well for both of our businesses. And as you mentioned, they've been a great partner, and they offer a service that's fundamentally different than Snapchat. Snapchat is really focused on your core friends and family, and helping you stay in touch with them. And of course, we've built on top of that with all these different platforms, as I mentioned. TikTok is much more focused on entertainment and really driven by user-generated content, premium user-generated content. But they're going to be very competitive, I think, in the market. They're going to do a great job continuing to grow their business. They're extremely aggressive, and we really admire them, frankly, and have learned a lot from them. And so I think the important thing in our industry is to always learn from the amazing innovations and products that other people build and make sure that we're integrating those learnings into our products and the way that we're thinking about our business. And I think one of the things that they have done really effectively, starting with [ Snapchat ] and now, again, with TikTok, is leveraging ML to filter huge volumes of content and surface the stuff that's most compelling. And I think if you look at social media, historically, that was done through your friend graph. So you would pick the people you wanted to see content from and then see that content. And I think what we've seen that has shifted pretty dramatically and quickly with TikTok is that by leveraging ML instead of friend connections, you can filter a much larger amount of content and surface stuff that's really compelling. So that's definitely something we've learned, and we apply a lot of those learnings to our own content business and have gotten better and better at recommending relevant content over time.

Okay. Great. You recently did a capital raise of about $1 billion. What -- how should we think about that just in terms of use of proceeds? And just in general, how do you think about M&A here, particularly as it's during this difficult time?

Yes. I think it's still early in the evolution of this crisis overall. But already, we've seen a lot of opportunity. And what we wanted to do is create some flexibility so that if we saw some really unique opportunities out there that we didn't think we'd otherwise see, that we'd have the flexibility to invest and grow our business over the long term. So it just -- I think, relative to the strength and momentum we're seeing in the business made a lot of sense to preserve that flexibility and hopefully find some really interesting opportunities and people to partner with through this challenge.

Okay. Cool. All right. We are almost at the end. We're going to do a quick word association. So I'm going to give you about 10 words or terms, and then you can just tell me the first thing that comes to mind, okay? All right. Gen Z.

Passionate.

Engagement.

Growing.

Discover.

Opportunity.

Facebook.

Big.

Direct response.

Critical.

Original Shows.

Fun.

ARPU.

Growing.

TikTok.

Growing.

AR.

Massive long-term opportunity.

And camera.

The center of computing in the future.

All right. Great. Thank you, Evan. We're going to leave it there.

Awesome. Thanks so much. Appreciate it.

Thanks, everybody. Appreciate it.