Snap Inc. (SNAP) Earnings Call Transcript & Summary

All right. We're going to go ahead and get started. I'm Doug Anmuth, JPMorgan's Internet analyst. We're pleased to have with us Snap Co-Founder and CEO, Evan Spiegel. Snap is a technology company that leverages the camera to improve the way people live and communicate. The company has more than 420 million daily active users, 800 million monthlies. We expect Snap to have more than $5.3 billion in revenue this year, the bulk of which is advertising, but there's also a nice emerging business in Snap+ (sic) [ Snapchat+ ] with more than 9 million subscribers. Evan cofounded Snap in 2011 while studying at Stanford. Welcome, Evan.

Thank you so much. Great to be here.

So were you here 2 years ago?

Two years ago, a fateful day.

Okay. A lot has changed in the business since then. Maybe you can start by talking about how the team has changed, how the ad platform has changed and kind of where you are along this path.

Yes, absolutely. So we made a lot of progress in the last 2 years. They were very disruptive for our business, whether it was the platform policy changes or obviously, the changing macroeconomic environment, increased competition. And so it became very, very clear that we need to move quickly to improve our performance advertising platform. Historically, we've had direct response advertising, but our business was strongest with really upper and middle funnel -- upper and mid-funnel products and with large advertising partners. So we really needed to diversify our business and reach smaller and medium-sized businesses, and we needed to go much lower funnel really because I think that's where advertisers find the most value where they can drive more causal purchases or conversions on our platform. So that involved, in many cases, rebuilding parts of our team, so we could really bring on that expertise in lower funnel advertising; of course, rebuilding our advertising platform; investing heavily in machine learning, where we had to build much larger models, leverage privacy-safe signal; and of course, release a whole new set of offerings for advertisers, starting first with commerce products, with purchase-related conversions and then more recently with app-based advertising. So it's certainly been a journey, but I'm excited by the progress the team is making. There's a lot more to do, but we really are starting to see the fruits.

Okay. So let's dig in a little bit, 1Q, in particular. You showed some meaningful progress. Maybe you can talk about what you think the biggest driver was there, how you're thinking about that through '24 and then also, how you're thinking about ad backdrop and kind of macro versus more company-specific Snap initiatives.

Yes. So I think we really started to see progress, at least in terms of advertiser performance in the back half of last year, but that didn't immediately translate to increased budgets. I think the progress we saw in Q4, in particular, where advertisers were really able to measure their return on investment translate into, I think, maybe increased share or additional budgets in 2024. And certainly, Q1 was an early indicator that we're making progress there. We've just been laser-focused on advertiser KPIs, especially with lower funnel performance. We found that if we're able to meet or exceed an advertiser KPI, they'll give us additional budget. And in that regard, we just really have to be more effective than the last marginal dollar spent on another platform. So we definitely are beginning to see progress there, but that's really tied to the performance that advertisers are seeing. I think looking at the broader macro backdrop, I do think it has been getting more constructive, I think, largely because a lot of the consumer demand driven by the COVID pandemic, a lot of the supply chain issues as well have started to subside. And in fact, in many cases, I think you have excess supply and reduced demand and so advertising is a really effective tool, especially performance advertising for businesses who are looking to generate more demand in a cost-effective way. So I do think that has been helpful and constructive. We'll see, of course, what happens in the balance of the year. But so far, off to a solid start, I would say.

Okay. And when you think about the DR rebuild that you've embarked on, maybe you can talk about kind of what inning you think you're in, what improvements specifically have really been strongest and what's really driving that big increase in SMBs that you're seeing.

I think a lot of the foundational improvements have been completed over the last 2 years. So as I mentioned, the investments we've made in our ML platform, of course, in conversions API to be able to utilize privacy-safe signals. And I think now we're really going to each of our product offerings, into each of the different advertiser verticals and looking at how we can continue to improve. So in the case of our dynamic product ads, for example, we're doing a much better job with product selection. I think that's a real opportunity for us historically, where we've underutilized the signals that we've had and not done a particularly compelling job presenting those catalog products. So that's an area of focus for us. As I mentioned, we've been working a lot on releasing our app products. Those have now been GA-ed broadly. So we're very excited. Our teams have been going to market with those products this quarter. So excited to see some traction on the app side. Of course, that's very early, and we've got some work to do there, but exciting to have those products out. So yes, I think there's a lot more to do, but the foundational pieces are in place, and now we're really going vertical-by-vertical to make sure we have the right product offering for advertising partners.

Okay. Maybe you can talk a little bit about the role that AI plays in your ad stack, how you think about it in terms of automating campaign creation process and then also kind of building out a more fully automated end-to-end solution.

Yes. The primary focus to date has really been around personalization and recommendation of advertising, showing the right ad to the right person and being able to start consolidating our goal-based bidding models into just several much larger models. In the past, we were running many small models often for related GBBs. And so I think those larger models are, at least from what we've seen, are able to drive better performance. So certainly, that model consolidation process has been really helpful for us, in addition to leveraging more signals, as I mentioned, of course, in a privacy-safe way. I think as it pertains to generative AI and campaign creation, there's definitely some opportunity around creative. As I mentioned, the dynamic product ads and catalog ads, we can make them look a lot more appealing, leveraging generative AI can also help advertisers get through campaign set up a lot faster, whether it's generating copy or things like that, those have been helpful tools as well. But I think the big performance gains we've seen so far are less in campaign setup and things like that and more on the model side. And then really actually just making sure that we can configure campaigns correctly or at least default advertisers into the right campaign configuration based on their vertical.

Okay. Great. China-based advertisers have certainly driven some strength in the U.S. across digital ads more broadly. When you think about a potential TikTok ban or divestment, any sense just in terms of how marketers might be rethinking budgets? And what is Snap seeing along these issues?

Yes. I think the China export advertising is certainly a large opportunity for us. I don't think we benefited as much as other players from that opportunity, at least over the past couple of quarters. As we continue to evolve our product offering and work closely with advertising partners in China, I do think that we can deliver results, whether it's for e-commerce folks or gaming companies. And so I am excited about the way that our product is evolving and some of the work that we're doing with our advertising partners over there. I think as it pertains to TikTok, obviously, still a long road ahead. I do think we've sort of looked to India, for example, where -- and TikTok was banned in India. That was a tailwind for our business in terms of engagement. And so I do think, depending on the outcome here, that could change the dynamic.

Okay. Let me shift gears to Snap+, now at more than 9 million subscribers, about 7% of overall revenue in the quarter. Maybe you could just talk a little bit about the product, some of the features that really differentiate it, how you think it's resonating most with users.

It's been really fun building the Snapchat+ product. Our team really loves to innovate, and we get all these requests all the time for our community for specific features that they want. And historically, we had a hard time justifying some of those features because we knew they wouldn't be used by a lot of people. We knew they'd only be used by some of the most passionate Snapchatters. And so building Snapchat+ was, I think, a really helpful way to align the interest of our community and all the features they want with the investments we've been able to make on the product and design side to be able to continue innovating and testing new products with people who really love our service and are willing to pay a little bit to get access to some of those features. So, so far, the traction has been surprising to us in the beginning. We really just started because we knew we had to meaningfully ramp our ML investments. And so we wanted to take a little bit of the edge off the ML investments while the ad business overall was experiencing some challenges. And so far, it's been helpful certainly in doing that and has been contributing more to revenue. So we'll continue to iterate on that product. It's definitely been a pleasant surprise.

Okay. Great. Taking a step back, when you think about the changes that you've made in the business over the last couple of years, certainly, some of that has been just around teams in terms of geographic heads and engineering, for example. How do you think about where the overall leadership team is now and the key strengths?

Over the last couple of years, we've really built a strong leadership team. As you mentioned on the go-to-market side, one of the challenges we had historically is we really had a global leader of our go-to-market functions. And what we found is that we weren't doing a great job of meeting market-specific needs, whether that was in APAC, the China export business, for example, or in EMEA. And so we built out a new structure with 3 regional presidents, president of the Americas, of EMEA and the APAC region. And so far, that's just driven a lot more focus in the countries where we have strong penetration. We reached more than 75% of 13 to 34 year olds in more than 28 countries. And so making sure we have the right level of leadership and attention in market has really been helpful for us. And on the engineering side as well, on revenue product, we certainly have made a number of leadership changes, again, just to build that expertise around lower funnel performance advertising.

Okay. Maybe you can talk a little bit about kind of the transition, how you're doing in terms of capturing more always-on type of budgets for marketers. That's something where we've seen certainly with other companies when they've been able to really grasp that and get scale there that you can see a real change in terms of the numbers. Maybe you can talk about that for Snap.

Yes. At this point, I think it's really advertiser-specific. And in terms of what we're seeing, some advertisers have already gone through a test and learn phase with us and been working with us for many, many years and already allocate a very significant percent of their digital advertising budget to Snap. And so I think a lot of it, what it is in terms of our focus as a team is looking at those advertisers where we have been successful, understanding that there are a lot of similarly situated advertisers or look-alike advertisers who aren't yet utilizing our solutions and helping them go through that same test-and-learn process to ramp with us. And that's definitely relevant in terms of our large advertisers, but we have an enormous long tail small-, medium-sized businesses that can utilize our tools to grow, and that's been a very big focus as well. So I think we're now at a place where we have product market fit in many of these important verticals. We've seen a lot of traction with advertisers, and it's about scaling that out to more and more partners.

Okay. Shifting to product kind of more broadly, user growth has remained solid, time spent with content in North America stabilized. What do you think the biggest driver of DAU growth and improvements in engagement have been and will be going forward?

Snapchat is about communicating with your close friends and family. It's designed to enhance the relationships that you have with the people that are closest to you. And what we continue to see is when people onboard to Snap and they add their close friends, their best friends, they find that this new way of communicating visually is just incredibly enriching and they stay with us over a long period of time. So what continues to drive the growth of Snapchat is really that connection that people are able to make with their close friends when they use our service because it's just so much more expressive than a text message or something like that. And that I think is where we continue to focus, how we continue to evolve our products to deepen those -- deepen and strengthen those relationships.

Okay. And does anything stand out there just geographically in terms of users? It sounds like you're kind of refocusing efforts somewhat more -- in some of the more highly monetized regions to drive more user growth and deepen engagement, some of those areas where you have been more penetrated.

Yes. Our overall focus over the last 5 or so years, I would say, has really been around emerging markets, typically Android devices and lots of net new users to Snap. And recently, we've really just felt like there's more headroom for us to grow in North America. I mean even though we reach more than 75% of 13 to 34 year olds in the U.S., for example, I think we can obviously continue to grow with the community that we already have, but also acquire new customers. And so as part of that, we've really had to shift our efforts and our engineering and product focus more towards iOS, for example, here in the United States, more towards the resurrected user experience, meaning that a lot of people here in the United States have already downloaded Snapchat once. And so it's more about helping them re-onboard to Snapchat, reconnect with the friends that are most important to them to make sure that we drive that engagement and retention. So I think there's a big opportunity there. We are beginning to shift more resource and focus there, and that does represent a higher ARPU opportunity.

Okay. I have more questions, obviously, but we're going to also go to the audience for questions. So if you have any, please raise your hand and mics will come by. Evan, maybe you can talk about some of the features and products that within the core set, certainly within the app, but are more emerging, like Spotlight, for example, maps, kind of where you see biggest opportunities there.

Yes. On the content side of our business, historically, our service started with messaging. So people were sending photos and videos to one another to really just to have a conversation. And over time, we realized there was a big opportunity that some percent of the time, people would post those photos and videos to stories to put them in chronological order and share not just with 1 or 2 friends, but with all their friends on Snapchat. But we also recognize that there was a real constraint to building a content business around friends because people only have a certain number of real friends, only a small percent overall. Those real friends are posting all the time. And so naturally, the content supply is limited, if you want to build a content business around your real friends. So we focused on building a business that would supplement content from your friends with recommended content. And we made a unique choice at the time to moderate that content to make sure that the content on our platform is appropriate for the audiences that are watching it, that it didn't contain hate speech or misinformation, these sorts of things that I think other more open platforms have really struggled with. So we built a business around recommended content, first with stories, more recently with Spotlight, which consists of short-form video. And we've now been in the process of reconciling those 2 content stacks because they were built separately and historically didn't share signal. And so we're quite excited about the progress we've been making on bringing Stories and Spotlight together into one unified content experience to share that signal across both of those platforms. We think that will lead to a much better user experience overall.

Okay. I'm sure there are questions in here somewhere. But let me ask you about you run a really interesting ad campaign, which is basically kind of like Snap is not really social media, for example. You'll correct me if I have it slightly off. But I guess the -- well, first, what do you really mean by that? And what are you trying to get across in that campaign, which I think actually really stands out? And then second, your platform is unique and that it doesn't really have a feed for example, which, of course, others have been able to monetize really well. So how do you kind of resist that urge to do something like that?

Yes. I think at this moment in time, people are really questioning the way that social media makes them feel about themselves, about their relationships. I think oftentimes, it can feel like a popularity contest. And that was certainly what Bobby and I experienced when we were growing up. We grew up with social media, and we just found that people only shared kind of what was pretty or perfect, the best moments in their day and not kind of the whole of human experience. And so in building Snapchat, we created a place where people could express themselves more completely and share with friends, whether it's a good -- a great day or a bad day and share that full range of human emotion without the judgment of public likes and comments and these sorts of things. And when we look at the data and we hear back from our community about all the different types of products they use, they consistently say that Snapchat is the happiest platform. And that's something that we really wanted to help the broader public understand that there is an alternative to social media that can help you connect more deeply with your friends and do it in a way that's visual and I think helps people convey that full range of emotion that's so important to deepening relationships. And so I think as it pertains to growing our business and monetizing over time, making sure that we have a differentiated position in what is a very competitive market is critically important to us. And I think that's why, over the last 13 years, we have been able to consistently grow even in the face of very, very intense competition because we offer a product experience that's fundamentally different. And that extends to some of our early choices around data privacy, around deleting message contents by default. In the past, everything was saved forever and made public to things like stories, of course. And so I think it's been a really important moment to remind people that you don't have to use social media and feel bad about yourself to connect with your friends. And in fact, Snapchat is there to support those relationships.