Yahoo Finance Snap Inc. (NYSE:SNAP) Q1 2024 Earnings Call Transcript
Snap Inc. (NYSE:SNAP) Q1 2024 Earnings Call Transcript April 25, 2024
Snap Inc. beats earnings expectations. Reported EPS is $0.03, expectations were $-0.05. 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 Incorporated’s First Quarter 2024 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 first quarter 2024 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. I'm excited to share the progress we are making on our strategic priorities and the momentum we are building to capitalize on the long-term potential of our business. I'm deeply inspired by the dedication and efforts so many of our team members have put into serving our community and our partners, and it is gratifying to see our efforts beginning to bear fruit. On our call today, I'll open with some observations about our strategic direction and key developments and then you'll hear from Derek. The full financial detail is in our investor letter, but going forward, we'll also be giving more context on the earnings call. We remain committed to executing against our three strategic priorities; accelerating and diversifying our revenue growth, growing our community and deepening their engagement, and leading in augmented reality.
The most important strategic priority we set out for 2024 is accelerating and diversifying revenue growth. We have made significant progress to start the year with revenue growing 21% year-over-year, an acceleration of 16 percentage points over the prior quarter growth rate, which was driven by improvements we have made to our advertising platform and an increase in demand for our advertising solutions, while also benefiting from the impact of an improved operating environment. Our large hard-to-reach audience, brand-safe environment, and continued innovation and progress on our advertising platform have made us a valuable partner for businesses that want to reach the next generation. Our second strategic priority, designing innovative products and services that enhance people's relationships with their friends, family, and the world continues to drive the growth of our global community.
In Q1, we reached 422 million daily active users, an increase of 39 million or 10% year-over-year. We continue to broaden and deepen engagement with our content platform with the number of viewers and total time spent watching content growing globally year-over-year. Our focus on visual communication between friends and family is a strategic advantage that has enabled us to reach more than 75% of 13-year to 34-year old's in over 25 countries with these countries representing more than 50% of the global advertising market. Relationships are what drive the depth of engagement on our platform. Our goal is to ensure that Snapchat helps enhance relationships with the people who matter most. These relationships lead to increased daily active usage of our platform and happier members of our community.
Four out of five Snapchatters believe that connecting with friends is the simplest way to feel better. This year, we are particularly focused on helping lightly engaged new and resurrected Snapchatters build relationships on our platform. Building just one or two close relationships on Snapchat can dramatically increase the number of active days for these cohorts, while simultaneously leading to a happier and healthier community. Over 90% of Snapchatters say they feel comfortable, happy and connected when they use Snapchat. And Snapchat is ranked as the number one happiest platform when compared to other apps. We've been working hard to improve our advertising platform by helping our partners transition to new ways of measuring and optimizing their advertising spend in order to provide improved ROAS.
In Q1, ongoing momentum with our 7-0 Pixel Purchase optimization model led to a more than 75% increase in purchase-related conversions year-over-year. In addition, we are excited by the progress we're seeing with our small and medium-sized advertising partners. Today, small and medium-sized businesses and creators can promote their services, content or products and reach new audiences, all with just a few taps within the Snapchat application. This has been instrumental in significantly accelerating the number of SMB advertisers on Snapchat, which increased 85% year-over-year. As we look forward, the deliberate actions we've taken with our cost structure have cleared a path to meaningful adjusted EBITDA profitability and positive free cash flow.
We have invested heavily in cloud infrastructure over the past year in order to improve the performance of our advertising products and deepen engagement on our platform. We will continue to calibrate our investments carefully moving forward to ensure we build on this momentum while also realizing the operating leverage necessary to drive improved financial performance. We believe that a strong financial foundation and track record of innovation are critical inputs in fulfilling our vision of computing overlaid on the world. This is our third strategic priority. We have never worked on anything as profound and meaningful as augmented reality. AR enables us to service digital experiences seamlessly in the world around us, transforming the way we use computing in our daily lives.
Our AR products and services are driving major impact at scale today. On average, over 300 million people engage with augmented reality every single day on Snapchat. Our community plays with AR lenses billions of times per day on average, and our AR creator community has built millions of lenses using our Lens Studio software. Having a large engaged AR audience and creator community enables us to innovate rapidly. This unique position has allowed us to develop a lead and augmented reality over the last decade by leveraging one of the world's most used cameras, developing highly advanced technology and tools, and growing a vibrant AR creator ecosystem. We believe that our large and growing community, an innovative and engaging service that continues to evolve, and a strong balance sheet with positive free cash flow positions us well to achieve our long-term vision for augmented reality, which we believe will be one of the most meaningful advancements in computing that the world has ever seen.
With that, I'd like to turn the call over to Derek to speak about our financials.
Derek Andersen: Thanks Evan and good afternoon everyone. For the first quarter, revenue and adjusted EBITDA exceeded our expectations as a result of increased demand for our advertising solutions and an improved cost structure that enabled us to generate greater operating leverage. Q1 revenue grew 21% year-over-year to $1.195 billion, driven by the 14 percentage point acceleration in advertising revenue, which grew 16% year-over-year in Q1. The Direct Response, or DR portion of advertising revenue increased 17% year-over-year up from 3% growth in the prior quarter as we began to see improved ROAS for our advertising partners, translate into accelerating demand on our ad platform. Small and medium-sized advertisers, in particular, grew quickly in Q1, with active advertisers in this segment, up 85% year-over-year.
Brand-oriented advertising revenue increased 12% year-over-year, driven by strong demand for our takeover products in Q1 and an improved operating environment. We also continue to make progress towards diversifying our revenue sources with other revenue up 194% year-over-year to reach $87 million. Other revenue includes all non-advertising revenue and consists almost entirely of Snapchat+ subscription revenue. Snapchat+ subscribers topped $9 million in Q1, more than tripling year-over-year. From a regional perspective, we observed acceleration in both DR and brand-related advertising revenue growth across all regions in Q1. We were particularly pleased to see the improvements we have made to our ad platform translate to improved revenue growth in North America, where revenue grew 16% year-over-year in Q1, an acceleration of 14 percentage points over the prior quarter growth rate.
Brand-oriented demand in Rest of World and Europe accelerated at a relatively faster pace in Q1, as these regions were more significantly impacted by the war in the Middle East in the prior quarter. We observed the highest rate of acceleration in total advertising revenue growth in Rest of World in Q1, driven in part by strong seasonal demand during the Ramadan holiday, which was further amplified by the timing of the holiday season shifting into Q1 of the current year. Total adjusted cost of revenue was $570 million in Q1, up 31% year-over-year. Infrastructure costs were the largest driver of the year-over-year increase, driven in large part by the ramp in ML and AI investments to support our DR ad platform and content engagement that we implemented in Q2 and Q3 of the prior year.
The level of investment in ML and AI was relatively stable across Q4 of 2023 and Q1 of 2024, and we have continued to improve our cloud infrastructure unit costs through a combination of engineering efficiency and pricing improvements. In addition, we benefited from higher-than-average service provider credits in Q1 that helped to further reduce infrastructure costs in Q1. As a result, infrastructure cost per DAU declined from $0.84 in Q4 of 2023 to $0.80 in Q1 of 2024. The remaining components of adjusted cost of revenue, including content, developer, advertising and other partner costs were $232 million in Q1 or 19% of revenue, compared to 20% in the prior quarter and 21% in the prior year. Adjusted gross margin was 52% in Q1 compared to 55% in the prior quarter and 56% in the prior year.
The quarter-over-quarter decline in adjusted gross margin is driven entirely by seasonally lower revenue in Q1 compared to Q4, partially offset by the sequential decline in infrastructure costs per DAU. The year-over-year decline in adjusted gross margin reflects higher infrastructure investments that began to ramp-up in Q2 and Q3 of the prior year, which was partially offset by operating leverage from accelerating revenue growth in Q1. Adjusted operating expenses were $579 million in Q1, up 5% year-over-year. Personnel costs increased 4% year-over-year in Q1, driven primarily by the impact of higher personnel costs per regular full-time employee, which was partially offset by reductions in team size as a result of the restructuring initiatives.
We implemented the restructuring in phases throughout the quarter, resulting in a 3% decline in average head count year-over-year. We ended Q1 with 4,835 full-time head count, which was down 7% year-over-year and down 27% from our peak headcount in mid-Q3 of 2022. Adjusted EBITDA was $46 million in Q1, up from $1 million in Q1 of the prior year, reflecting both accelerating revenue growth and operating expense discipline. Net loss was $305 million in Q1 compared to $329 million in Q1 of the prior year. The improvement in net loss on a year-over-year basis reflects the flow-through of higher adjusted EBITDA and as well as a $60 million reduction in stock-based compensation and related expenses, or SBC, partially offset by transition costs of $70 million related to our restructuring initiatives.
The impact of past refresh grants on the GAAP accounting of SBC expense has now fully dissipated from the cost structure. This was the largest driver of the year-over-year decline in SBC in Q1 and followed by the impact of reduced headcount as a result of the recent restructuring. Dilution or growth in our share count was 3.8% in Q1, down from 5.7% in the prior quarter. As part of our efforts to responsibly manage the impact of SBC on our share count, we repurchased 21 million shares at a cost of $235 million in Q1 reflecting an average repurchase price of $11.19. Since we began opportunistically managing our share count through share repurchases in Q3 of 2022. We have repurchased 145 million shares, representing 8% of fully diluted shares outstanding at an average price of $9.86 per share a total cost of $1.4 billion.
Free cash flow was $38 million in Q1, as we continued to strategically prioritize our investments to drive sustained and meaningful positive free cash flow. We ended Q1 with $2.9 billion in cash and marketable securities on hand. In addition, in Q1, we repurchased $100 million of our outstanding 2025 convertible notes and $351 million of our outstanding 2026 convertible notes at prices below par value. Through these transactions, we have further reduced the level of debt maturing in the years ahead, while also eliminating the risk of future dilution from the repurchased convertible notes. Turning to our outlook. We anticipate continued growth of our global community and our Q2 guidance is built on the assumption that DAU will be approximately $431 million in Q2.
Our Q2 guidance range for revenue is $1.225 billion, to $1.255 billion, implying year-over-year revenue growth of 15% to 18%. This would represent a three to six percentage point deceleration in growth rate compared to Q1. And which we attribute to the three percentage point quarter-over-quarter acceleration in revenue growth experienced in the prior year and a further estimated three percentage point headwind due to changes in seasonality factors, including the timing of the Ramadan holiday season shifting toward Q1 in the current year and the impact of the leap day in Q1 of 2024. Our investment plans for Q2 include modest incremental investments in infrastructure, personnel and marketing to sustain the momentum we have established in our business as well as the impact of an increasing legal and regulatory burden on our cost structure.
Given the revenue range above and our investment plans for the quarter ahead, we estimate that adjusted EBITDA will be between $15 million and $45 million in Q2. We have made significant progress to optimize our cost structure and believe it will be productive to provide forward-looking insights into our estimated full year 2024 cost structure. We currently estimate that quarterly infrastructure cost per DAU will be in the $0.83 to $0.85 range for the remainder of 2024. We will continue to assess our infrastructure investment levels based on what is in the best long-term interest of our business. We expect the remaining components of cost of revenue, including content and developer partner costs, as well as advertising partner and other costs to remain relatively stable as a percentage of revenue at a combined 19% to 21% of revenue, which is within the range we have reported over the trailing four quarters.
We currently anticipate that the headcount and personnel costs will grow modestly as we move through 2024, resulting in full year adjusted operating expenses of approximately $2.425 billion to $2.55 billion. We see limited opportunity to productively reduce adjusted operating expenses below this range. And if we are able to sustain higher rates of revenue growth into the second half of 2024, we will invest prudently to support that growth. For SBC, we anticipate modest sequential growth as we move through 2024, resulting in an estimated full year SBC expense of $1.13 billion to $1.2 billion. With that, I'll kick it back to Evan for closing remarks.
Evan Spiegel: Thanks, Derek. As we continue to execute in the quarters ahead, we remain focused on serving our community with innovative and responsible products, investing in our direct response business to deliver measurable ROAS for our advertising partners, cultivating new sources of revenue to diversify our top line growth and scaling our investment levels prudently to deliver meaningful and sustained profitability and positive free cash flow. The most critical input to delivering on these strategic initiatives we laid out is innovation. That includes innovating on our products, our advertising platform and the future of augmented reality. We believe that our demonstrated track record of innovation over the last 12 years positions us well to deliver on this for our community, our partners and our investors. While there is still a lot of work to be done, we are pleased that this focus has translated into improved results in Q1. We will now begin our Q&A session.
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