Snap Inc. (SNAP) Q2 2018 Earnings Report, Transcript and Summary

Good afternoon, everyone. And welcome to Snap Inc.'s Second Quarter 2018 Earnings Call. At this time, participants are in a listen-only mode. After the prepared remarks, there will be a question-and-answer session [Operator Instructions]. This call will be recorded. Thank you very much. Mr. Arman Panjwani, Investor Relations, you may begin.

Thank you, and good afternoon, everyone. Welcome to Snap Inc.'s Second Quarter 2018 Earnings Conference Call. With us today are Evan Spiegel, CEO and Co Founder; Imran Khan, Chief Strategy Officer; Tim Stone, CFO and Kristin Southey, our new VP of Investor Relations. Please note that the format of this call will be slightly different than the calls we have hosted previously. To allow more time for question, Evan will provide a brief strategic update and Tim will provide a brief business overview and financial outlook for Q3, 2018 before we open the line for Q&A. We have also included additional supplemental financial information and business metrics for reference in our press release. Earlier today, we made a slide presentation available that provides an overview of our user and financial metrics for the second quarter of 2018, which can be found on our Investor Relations Web site. Now, I will quickly cover the Safe Harbor. Today's call is to provide you with information regarding our second quarter 2018 performance in addition to our financial outlook. This conference call includes forward-looking statements. Any statements that refers to expectations, projections, guidance or other characterizations of future events, including financial projections or future market conditions, is a forward-looking statement based on assumptions 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 forward-looking statements, please refer to the press release we issued today, as well as risks described in our quarterly report on Form 10-Q for the year ended March 31, 2018, particularly in the section titled Risk Factors. This information can be found in our other filings with the SEC, when available. Our commentary today will also include non-GAAP financial measures. We believe that the use of these non-GAAP financial measures provides an additional tool for Investors to use in evaluating ongoing operating results and trends. These measures should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. Reconciliations between GAAP and non-GAAP metrics for our reported results can be found in our press release issued today, a copy of which can be found on our Web site at investor.snap.com. 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 non-recurring charges. At times in our prepared remarks or in response to questions, we may offer additional metrics to provide greater insight into our business or our quarterly and annual results. This additional detail may be one-time in nature, and we may or may not provide an update in the future on these metrics. Please refer to our filings with the SEC to understand how we calculate our metrics. With that, I'd like to turn the call over to Evan.

Hi, everyone. And welcome to our Q2 earnings call. I'm really excited about the progress we've been making at Snap, and optimistic about the opportunities ahead as we continue to improve our team, reinforce our culture and invest in innovation. We have focused a lot of our time and effort this past year on developing our team, culture and leadership that we need to rapidly scale our business. Our team is passionate about our mission to contribute to human progress by empowering people to express themselves within the moment, learn about the world and have fun together. And we’ve redesigned our performance management processes to incorporate our values of being kind, smart and creative. For us, it’s not just about the work that we do it’s about the way that we do it. And we’ve worked hard to make sure that this positive attitude is reflected across our Company. It’s been so exciting to watch our team rise to the challenge of building a public company, while continuing to innovate and drive long-term value. Our team is much stronger today than it has ever been before. While our monthly active users continue to grow this quarter, we saw 2% decline in our daily active users. This was primarily driven by a slightly lower frequency of use among our user base due to the disruption caused by our redesign. It has been approximately six months since we broadly rolled out the redesign of our application and we have been working hard to iterate and improve Snapchat based on the feedback from our community. We feel that we have now addressed the biggest frustrations we’ve heard and are eager to make more progress on the tremendous opportunity we now have to show more of the right content to the right people. For example, the number of people that watch publisher stories and show the iOS every day has grown by more than 15% this year. And we are excited to bring the learnings from our iterations on iOS store to our Android application. Additionally, more Snaps from publisher stories and shows reviewed in July than any other month in our history. With the updated redesign, we've been able to combine the strength of our close friend network that brings people to Snapchat every day with an infinite scroll of personalized content. We’re working hard to expand the long-tail of our content offering and we are making steady progress on improving personalization. Despite our DAU results this quarter, we believe that this is an important evolution of our product that will help drive future growth and engagement. Our users continue to spend an average of over 30 minutes on Snapchat on a daily basis, and we are already starting to see meaningful improvements in leading growth indicators like new user retention. For example, new user retention for people older than 35 has increased more than 8% since we launched the redesign. We want Snapchat to work well everywhere, for everyone, no matter the device or network. And we've been focused on improving the quality of application on lower end devices and partnering with carriers to make Snapchat more accessible for everyone. New Snapchat users are predominantly using Android, and we've been working for over a year to completely rewrite our Android application. Even though our iterative efforts to improve the existing application has helped increase new user retention on Android by nearly 20% since Q4 of 2016, we believe that rewriting application presents a big opportunity and takes advantage of the latest Android capabilities and has a modularized structure that will make it easier for us to innovate in the future. Our internal test and our device lab show substantial improvements in important application performance metrics like the time it takes to open Snapchat and create a Snap, and we are beginning to test the limited version with beta users in select countries. Augmented reality continues to be a massive long-term opportunity for us, and we recently started rolling out Lens Explorer that allows users to browse thousands of lenses built by our community using Lens Studio. Lens Explorer celebrates the ingenuity of our communities and increases the creative power of the Snapchat camera. We also release Snappables, new augmented reality experiences that can be share with friends. Snappables help reduce the frictions and self-expression, and are a ton of fun to use together. For example, selfie mix, one of our first Snappables was used to create over 300 million snaps. We’re really excited about the progress we are making with Spectacles, our sunglasses with Snap. We released a new version Spectacles this quarter and we are learning a lot as we continue to reiterate based on customer feedback. When combined with our efforts in augmented reality, usually Spectacles represent an exciting opportunity as we build towards the future where computing is overlaid on the world. It has been almost two years since we began the transition to programmatic advertising and our team has moved quickly to build out advanced targeting, measurement, goal-based bidding, near real-time analytics and insights and so much more. All this has resulted in lower cost per impression, cost per slide and cost per install for advertisers, while simultaneously growing our advertising revenue 48% year-over-year. Our advertising is now cost effective, easy to buy and easy to measure. This has removed friction from our advertising business and allowed us to scale some many more advertisers than we could have reached with our direct sales force. Even though this transition wasn’t easy, it was the right thing to do for our business over the long-term, even at the expense of short-term revenue growth. These are the types of opportunities that inspire our team and play to our strength, because it requires strong conviction and the belief in the long-term. I'm really proud of the progress we're making towards building a sustainable business and generating free cash flow. We feel good about our cash position as we move forward and scale our business. I'd also like to take this opportunity to introduce Tim Stone. He’s brought a wealth of operational experience and a new perspective to our business, and we are grateful to have him on our team. I’m going to turn the call over to Tim to share more about the progress that we are making.

Thanks Evan. Our second quarter financial results reflect our focus on growth and operational efficiencies. Q2 2018 operating cash flow was negative $199 million, an improvement of $10 million compared to Q2 2017 and an improvement of $33 million compared with Q1 2018. The year-over-year change in operating cash flow is driven by $25 million improvement in adjusted EBITDA, offset by changes in the timing of working capital. Similarly, the sequential change in operating cash flow is driven by $49 million improvement in adjusted EBITDA, again offset by changes in the timing of working capital. Q2 2018 capital expenditures were $35 million, up from %19 million in Q2 2017 and down from $36 million in Q1 2018. As a reminder, the substantial majority of our capital expenditures are associated with office facilities. The additional capital expenditures this year are related to the build-out of our leased Santa Monica office facilities which we expect to moderate over the next several quarters. Q2 2018 free cash flow was negative $234 million, a decline of $5 million compared with Q2 2017, and an improvement of $34 million compared with Q1 2018. As a result of our relatively low capital expenditures, we should see strong adjusted EBITDA to free cash flow conversion over time. Common shares outstanding plus shares underlying stock-based awards outstanding total roughly $1.5 billion on June 30, 2018 compared to $1.4 billion years ago. Q2 2018 DAUs were $188 million, up 8% from $173 million in Q2 2017 and down from $191 million in Q1 2018. North America DAU were $80 million, up 7% from $75 million in Q2 2017 and down from $81 million in Q1 2018. Total revenue for the quarter was $262 million, an increase of 44% year-over-year and 14% sequentially, and our trailing 12 months revenue was $987 million, up 58% year-over-year. International countries represented 32% of total revenue, up from 19% in Q2 2017 and 26% in Q1 2018. As a reminder, we define international as revenue portions of countries outside of North America. ARPU increased to $1.40, an improvement of 34% year-over-year and 16% sequentially. Advertising revenue for the quarter was $260 million, an increase of 48% year-over-year and 14% sequentially, driven by traction in our global online sales business, which includes SMBs and sales partners and strong growth in international countries. Impressions were up 191% year-over-year and 26% sequentially. Pricing was down 52% year-over-year and 9% sequentially. It’s also interesting to look back two years before a shift to programmatic. Advertising revenues increased more than 2.5 times from $72 million in Q2 2016, and pricing is down over 90%. Approximately 75% of advertising our revenues transacted programmatically this quarter compared to 18% in Q2 2017. Programmatic advertising revenue grew 485% year-over-year and 34% sequentially, driven by the transition of all ad formats to our programmatic marketplace, traction in our global online sales business and strength in international countries. Programmatic impressions were up 722% year-over-year and 47% sequentially, while pricing was down 29% year-over-year and down 9% sequentially. These results exclude our on-demand Geofilter product and minimum guarantees. We will continue to transition our Creative Tools business to the programmatic platform throughout 2018. Cost of revenue was $184 million, an increase of 26% year-over-year and a decrease of 4% sequentially. Infrastructure costs were $136 million, an increase of 28% year-over-year and a decrease of 2% sequentially. We’re focused on driving operational efficiencies and improving the unit economics for a multi-cloud environment as it scale over time. Additionally, amount of benefits from our cloud partners’ continuous investments in technology, innovation and cost efficiencies which are typically passed along to customers overtime. The customer infrastructure model included an EBITDA as opposed to capital expenditures, which should result in higher EBITDA through free cash flow conversion over time. This year, we have seen several million dollars in cloud unit cost reductions and tens of millions of dollars in engineering and operating efficiency. These improvements in our cost structure results in leverage in our infrastructure in Q2 2018, and will remain focused on operating efficiencies and unit cost economics over the long-term. Operating expenses were $247 million, up 8% year-over-year and down 4% sequentially. We continue to focus on driving operating cost productivity across our business. Our operating expenses are primarily driven by labor costs, which represent about 60% of operating expenses, excluding stock-based compensation and related payroll taxes. We saw fixed cost leverage and people costs, which grew 9% year-over-year and were down 7% sequentially, compared to revenue growth of 44% year-over-year and 14% sequentially. Our cost structure, which includes customer revenue and operating expenses, was $431 million, an increase of 15% year-over-year and a decrease of 4% sequentially. Q2 2018 adjusted EBITDA was negative $169 million, an improvement of 13% year-over-year and 22% sequentially. Adjusted EBITDA margin for Q2 2018 improved to negative 64% compared with negative 107% in Q2 2017 and negative 94% in Q1 2018. We are focused on creating long-term shareholder value and are optimistic about the long-term potential for scale and leverage in our business. We’re investing in many innovation initiatives for our users, which we believe will enhance user experience and engagement, as well as drive revenue growth. At the same time, we are executing on operating cost efficiency initiatives as we drive toward free cash flow generation and operating profitability over time. For the first time, we are providing quarterly financial guidance for revenue and adjusted EBITDA. We believe that sharing our thoughts on our near-term financial outputs will be helpful to investors and inform external expectations. The following forward-looking statements reflect our expectations as of August 7, 2018, and are subject to substantial uncertainty. As mentioned at the start of the call, our results are inherently unpredictable and may be materially affected by many factors. Now, I will share our Q3 2018 outlook. Revenue is expected to be between $265 million and $290 million, or to grow between 27% and 39% year-over-year. Adjusted EBITDA is expected to be between negative $185 million and negative $160 million, compared to negative $179 million in Q3 2017. While we are not going to give DAU guidance, as a reminder, historically, Q3 DAU growth rates have trended down, both year-over-year and sequentially compared with Q2. This guidance assumes, among other things, that no business acquisitions, investments, restructurings, or legal settlements, are concluded in the quarter. And finally, I thought I’d also mention how glad I am that I joined Snap. It’s a great fit for me to be partnering with a leadership team that is so focused on the long-term. There are many opportunities for us to drive growth initiatives and operational excellence over time. One learning since joining Snap that enhanced my enthusiasm for our long-term opportunity is the reach of our global audience, which continued to grow and was higher than ever. In the U.S. and Canada, for example, we have over 100 million Monthly Active Users, a noteworthy achievement for a company that is less than seven years old. I am happy to introduce Kristin Southey who recently joined Snap as VP of Investor Relations. Some of you may already know her from her prior technology finance roles. I would also like to thank Arman for leading Investor Relations for the last year.

Thanks Tim. It’s great to be here and I look forward to working with everyone. With that, let’s open up the call for questions.

That concludes the prepared remarks for today’s earnings call, and we will now begin the question-and-answer session [Operator Instructions]. And our first question comes from Justin Post with Merrill Lynch. Please go ahead.

I guess, Tim first, since you’ve taken over one of the big questions for Snap is monetizing that large audience. And you mentioned you’re pretty positive on what you see as the reach. Since you’ve been there, what’s your enthusiasm for improving monetization of the audience? Do you think there’s a room there? And then secondly just on the financials. Looks like pricing is really is down significantly over the last two years. Do you think there is a bottom and could that help reaccelerate revenue growth when you get there? Thank you.

As it relates to the monetization, we see a lot of opportunities over time to monetize. Right now, we’re focused on driving innovation institutes for our users it will enhance user experience and engagement. And that will result in more modernization opportunity for us to over time as well. As you think about modernization, we’re looking at monetizing all aspects of the apps as well, not just the -- whether it’d be communication, the camera, as well as discover. So it represents a lot of opportunity for us over time. And as I said in the call, the size and reach of our global audience further reinforces that opportunity.

As it relates to revenue growth and pricing, Imran, do you want to take the pricing question.

Yes, I think the way we think about the business is showing our audience who would like ad, because when you show the most relevant ad to a consumer, it drives better experience for our users, as well as better ROI for our advertisers. So we are continuously focused on delivering that. And when you do that and you bring in more lot advertisers, pricing takes care of it. But we are maniacally focused on continue to improve experience across for both advertisers and our audience.

And our next question comes from Stephen Ju with Credit Suisse. Please go ahead.

Evan, can you talk about the timeline of when you think your rebuilt Android app will be deployed for globally. And any views at this point in terms of how many Android users globally may have signed up and subsequently churn, because the experience was suboptimal. And I guess Tim or Imran, your ROW revenue was up 65% sequentially. So wondering which country under product you went up to drive the growth there? Thanks.

We’re thinking a lot about how to reengage the Android community and let them know about the changes that we’re making to the Android application. Right now, we’ve been testing a lot internally. We’re beginning to roll it out in select markets in beta and we’re going to continue to learn and test. We want to make sure that as we roll it out that it’s a really great experience for people, no matter what handset they’re on.

With regards to 65% growth in the international market, we are very pleased with that growth rate. I think one of the key things we were able to achieve through programmatic advertising is to roll out that subservice advertising buying experience to many countries. In addition to we have a strong audience in countries like Australia. So we are very pleased with our growth rate.

And our next question comes from Ross Sandler with Barclays. Please go ahead.

Two quick questions on the guidance comments, if I can. So first on the DAUs, you say that the growth rates for both year-over-year and Q-over-Q should decelerate. So as we key off on the Q-over-Q comments that would give us something in the low 180s. Is that the right way to think about it? And then second on the revenue, 290 at the high end implies a slight decel from the 14% quarter-over-quarter that you just posted in Q2. So is there anything you would call out in 3Q that would cause a deceleration given that you just have the Olympics comp? And given the momentum you’re seeing in programmatic, why wouldn’t that lift us to higher growth rates at some point. Maybe you can flush out on that will be great.

On the DAU comments in the guidance, I did say we’re not going to be giving any DAU guidance, so there’s not much more than I can add there. I did point out, historically, we’ve see, decline in both year-over-year and sequentially in the rate of growth. But our expectations for DAU and MAU for that matter incorporate our financial outlook and the guidance we gave for revenue and EBITDA. As it relates to revenue, the revenue guidance -- we think the range and guidance we gave is appropriate and 27% and 39% year-over-year growth is your strong revenue growth, something’s you’re mindful of as it relates to the revenue growth guidance. Pricing, in the second quarter we saw 52% decline year-over-year in pricing, 9% quarter over quarter and particularly providing great value for our advertisers or ROI, pricing decline in the overall experience and investing a lot in that area. But again, we think the range of guidance is appropriate and reflect strong growth.

And our next question comes from Heath Terry with Goldman Sachs. Please go ahead.

Tim, I guess you’ve talked about the revenue side of things. Curious how as you've gotten settled in at Snap, how you’re thinking about the Company's cost structure, particularly given your prior experience, the cloud costs and the costs of serving the existing user base relative to what you think might be optimal? And then, Evan or Imran, I realized you’re not giving guidance on DAUs, but to the extent that we’re roughly halfway through the quarter, almost halfway through the quarter. Any color you can give us on what you're seeing in July and early August?

I’ll take the second question as well. We’re not providing any further commentary on DAU expectations for the third quarter, it’s reflected in the guidance. As it relates to the cost structure, I am optimistic on the opportunities for -- on the cost structure front, as well as driving growth. If you look at our infrastructure costs in the second quarter, there was some improvement in infrastructure costs per DAU that's reflecting, as I mentioned on the call, the unit costs economic improvements, as well as engineering and operating efficiencies we’re seeing. And that’s why we’re going to keep driving, as you can imagine, not only in the second quarter but persistently going forward. I think there’s a great deal of opportunity there, again not only to drive growth but also to drive operating cost efficiency. In the infrastructure side as well as in the operating expenses, we saw leverage in operating expenses this quarter as well. And that certainly reflects the headcount reduction we saw head reduction from Q1 to Q2, and we’re down about 200 so far this year. But for the back of this year, we’re going to continue to invest in innovation opportunities ahead of us, augmented reality and other areas, and expect our headcount to actually relatively consistent with the end of 2017 as we invest in these growth initiative opportunities. So on EBITDA, happy to see first time in our history improvement year-over-year in EBITDA loss and for us to be talking about leverage. So I'm happy to be talking about 31% leverage that we saw in EBITDA with EBITDA improving at greater rates than the change in revenue. So I guess overall I’d say I am optimistic for the opportunities ahead.

And our next question comes from Mark Mahaney with RBC Capital Markets. Please go ahead.

Let me try this. Evan, you talked about and somebody already asked you about Android. Let me try to draw you out a little bit more on that, and how about this. When do you think the Android user -- when would you like the Android user experience to match the iOS user experience, like in terms of the beta testing. Is this like months? Is it quarters? Is it a year or two? And then is there a drag in terms of the Android experience for advertisers versus the iOS experience for advertisers. Is that something that needs to be fixed too, or do they fixed whatever it is, contemporaneously or at the same time? Thanks Evan.

So I think in terms of accessibility of Snap worldwide and in particular with our Android product, there’s three components. I think the first one is obviously the application experience itself, it’s something we’re working really hard on and we’re excited to be testing that more widely and the early results internally have been very exciting. I think that another important piece of that is really the network speed and also the affordability of the network in these different countries. So I think hopefully as we tackle all three of those through the end of this year and next year, we’ll see a better android experience overall.

With regards to advertising, as we improve the advertising work, we’re going to continue to work on the client side to improve Android ad experience as well and that obviously have big opportunity to help revenue growth going forward.

Our next question is from John Egbert with Stifel. Please go ahead.

I had a few questions regarding the Snap Kit tools rolling out to developers. What are some of the biggest benefits you hope to see from allowing outside developers access to your audience? How do you think you approach these tools differently and then from your peers? And would love to year some of the innovative ways you’re seeing developers leverage these tools early on?

I think the thing we’re most excited about is way that’s empowering people to express themselves across a wide variety of applications. So I think, for example, Pandora being able to share of stickers of songs on Snaps is really exciting and that drives people to check out the music. I think another thing we’ve seen is really the expressive power of Bitmoji, which people are linking to applications and using in the form stickers as a way to communicate, not just in Snapchat but in other applications and services. And lastly, I think, as we approach Snapchat, I think one of the things we are really excited about is that the trust we built with our community in terms of way that we respect privacy, I think, is being appreciated and that makes people more likely to want to use Snap Kit, because they trust that that will protect their information. I think we’ve worked really hard to make sure that if you Snap Kit to login with other services that that will do a good job safeguarding your identity and information.

And our next question comes from Eric Sheridan with UBS. Please go ahead.

Maybe two if I can around the advertising business. With the 75% of revenue now going programmatic, is there a mix we think -- we should be thinking about you trying to get to over the medium to long-term of how much of this is programmatic versus direct. And what might some of the impacts might be for the cost structure of the business as that evolves? And then one follow up as you move to Creative Tools to programmatic is really going to frame whether that creates headwinds on pricing as we go through ‘18 and ’19? Thanks everyone.

With regards to percentage of programmatic. So I think long-term, our vision is to everybody should be able to buy advertising on our platform through subservice platform. And that is the most frictionless way for people to enjoy buying -- ad buying experience. With regards to how does that impact cost, even with the self service platform and programmatic advertising platform, you need to have our sales organization who are consulted it, who educate the market what’s the best practices. And we’re going to continue to innovate on our advertising product and our platform, so that advertising world can understand this product. So we will continue to invest in our self organization despite we automate the ad buying process and an ad delivery process. With regards to Creative Tools transition, Creative Tools are smaller percentage of our revenue as opposed to our Snap ad revenue. And also we have been very thoughtful how we are transitioning the Creative Tools business to programmatic. You saw some impact of that that’s negatively impacted the growth rate this quarter and it’s already baked into Tim’s guidance as well.

Our next question comes from the Lloyd Walmsley with Deutsche Bank. Please go ahead.

One for Evan, and maybe one for Imran. Evan, at just a high level aside from fixing the Android app. What do you think you guys need to do to reignite user growth? And I guess do you even need strong user growth to build a large and profitable ad business? And then for Imran, can you give us a sense of the mix of ad revenue between big brand advertisers and DR advertisers? You talked a lot about improvements on the ad tech side. So wondering what are some of the key challenges for scaling the DR side. Is it more features, more sales, and what are you doing to drive that shift? Thanks.

So I think as we look for user growth and/or opportunity, I think we talked a little bit about over 100 million monthly active users in the U.S. and Canada. In Canada, which is very significant scale obviously for a business as young as ours, so that’s one we’re really excited about. And I think what we’re seeing on the engagement side over 30 minutes today also represents significant opportunity for us. So I think as we go forward, obviously, DAU is something we’re very focused on over the past year or 18 months, we’ve primarily focused on the core product obviously improving the user experience by allowing people to explore a lot more content. So we think that there's a lot of upside there with the redesigned Discover platform. And as we work through some of these issues, we saw especially with the communications side of the product, we think there's a lot of opportunity to help people understand the value of Snap. So I think given the progress we made in a pretty shorter amount of time, we’re really excited about the opportunity and really the widespread appeal of Snap.

And maybe little bit to Evan’s and then answer your second question. I think when I talk to advertisers, they really appreciate our large audience in the developed market where purchasing power is big and advertising market is big. And also our millennial audience that -- the penetration we have among the millennial audience, which is very, very difficult to reach in traditional media. So we think that is very, very appreciative. With regards to DR business, our direct response business is doing incredibly well, and I couldn’t be more happy with it. Primarily when you put things in a perspective that we launched our AD Manager June of last year, so the progress we are seeing, I'm very pleased with it. I mean we are making a lot of improvements. So for example, our new -- few several new updates are objective based buying where we want help solve business objectives and we are continuing to make progress in our transition from product based buying to objective based buying. We now have nine different objectives to choose from, including driving and optimizing Web conversion. So let me give you an example. There’s this e-commerce company named Your Shop. Your Shop, they wanted to leverage our unique appeal to millennial audience ad they found great success. They drove 40% of Your Shop’s total installs from Snapchat, and at a 50% higher return on investment then what they were getting from other digital channels. So we couldn’t be more pleased to help all these small businesses to succeed on our platform and help them grow their business.

Our next question is from Mark May with Citi. Please go ahead.

A couple of more on the ad business please, with the significant increase in ad impressions recently. Could you talk about where you are from an ad load perspective? And if we should think of impression growth going forward, being driven more by user and time spent growth, or do you still have headroom with load and sell through? And then maybe separately, can you just talk about trends and user engagement with ads, maybe including view time, trends and click through rates? Thanks.

I think we -- Mark, we really focus on showing the most relevant ad to the most relative users, because even if I shown you one ad that is completely annoying that reduce your user experience. And if I show you five really good great that ad that you are engaging with them that drives better user experience. So I think the best way to think about the ad load is, are you doing the right work on the ranking side, are you doing the right work by bringing a lot more advertisers on the platform. So that we can show you the most relevant ad all the time, and that's we're working on and that's, I think we’re making good progress and delivering better ROI. I’ll give you an example. Dominos has been a great partner with us and they recently enabled conversion lift studies with us, and they were one of the initial partners. And they you have ran three successful lead studies to-date, archiving higher purchase lift in each subsequent test of the Snap ad campaign, because we’re trying to deliver the right ad to the right people. In terms of ad engagement, again going back to the right point, it's a ranking problem and we’re working really hard to improving on that, and the team is doing a really good job on that.

Our next question comes from Jason Helfstein with Oppenheimer. Please go ahead.

I think one of the things we focused on last quarter that came out was that ad agencies had gotten frustrated with the platform and some of the headlines around the platform, obviously, the numbers speaks for themselves. But can you give us just some more color on how you're working with the agencies? And do you feel like, in your opinion, we’ve crossed over and at this point now, you're getting less product questions from them and it's really more about the whole ROI discussion and what you can bring to the table there? Thanks.

I think with our attractive pricing, it gives an low density and option compared to other platforms. It gives incredible opportunity for advertisers to come and win on our platform. And one of the trends we have seen that with the headline with some of the advertisers who were looking for flashy things, yes, they were not necessarily engaged in Q1. But the advertisers who stayed with us, they have been very, very engaged and had some good success and increased their budget with us. So we’re really excited about that. And then in fact really in my monetization staff meeting, we’re talking about how we’re seeing success with the CPG customer, one CPG customer increasing their budget significantly, because they are seeing good ROI. So I couldn't be more happy with it, engaging with advertisers and focusing on ROI and driving value for them.

Our next question comes from Doug Anmuth with JPMorgan. Please go ahead.

Just one on advertising. Can you just talk a little bit more about the improvements in the ad targeting and measurement side, some of things you’re doing well, and then also where you think you still have challenges? And then, Tim, if you could -- any comments on the linearity of DAUs during 2Q, or any quantification on the World Cup ad dollars we’ve made during the quarter? Thanks.

Yes, I think do you want to take the second question first?

As it relates to DAUs during the quarter, we’re not going to be commenting on intra-quarter behavior on the DAU front beyond the comments we made of DAUs up 8% year-over-year and monthly active up to highest rate ever.

And with regards to targeting, we continued to make pretty significant progress from custom audience to building -- targeting capabilities based on users’ interests. One recent example is we extended our partnership with Nielsen, and now offering advertisers to ability to reach audiences based on actual purchase there. Advertisers can currently leverage over thousand different segments for targeting with thousands more coming. So we are really, really excited. One good example is advertisers can target their Snapchat campaign to people who purchased lipstick at a retail store. So we can get to that level of granularity. So we're very, very excited about it. With regards to -- one of the challenges that we talked about is, look I think, little bit as an opportunity is the Pixel. We continue to enroll the Pixel recently and we continue to make good progress. For example, we saw over 85% growth quarter-over-quarter in the number of advertisers actively spending ad accounts using their Pixel, and they are getting good traction. So one of the immense grooming -- direct-to-consumer grooming and lifestyle company called Manscaped, they wanted to drive customer acquisitions at scale and they leveraged our Pixel, to provide real time performance result, which allowed them to easily see which ads were driving in most conversion at or below its cost per acquisition target. And we’ve got this very good result, for example, the addition of Snapchat to their media mix model allowed the company to grow revenue by 17 percentage points in just two months. And Snapchat also provided to the high value customers with an average order value that is 20% higher than user acquired on other platforms. So we’re very excited. Again, our goal is to drive ROI, drive value to the advertisers at a very attractive price so that they can win on our platform and creating an win-win situation.

And then following up on your question on World Cup, major events like World Cup and Olympics last quarter are more engagement drivers for us, primarily on the communication front, 80 million people watching World Cup, the content on Snap, for example. But as far as the revenue is concerned, the major events provide a modest revenue impact, that’s less impactful as we scale over time and currently at a current scale well. And also we’ll be mindful of the fact that as we have evolved to be much more programmatic, it’s always on versus a less of an event-based, as well as a direct response historically. But related to the second quarter impact for the World Cup, again, that would also be reflected not only in our results but in our guidance expectations for Q3.

Our next question comes from Brian Nowak with Morgan Stanley. Please go ahead.

Hi, it’s actually [Alex Long] on for Brian, thanks for taking the question. I think in the prepared remarks, you highlighted drivers of ad revenue, including SMBs and international. And I think you touched on self-serve in Australians as helping international. But wondering if you can parse out some of the trends we’re seeing for SMBs, and anything incremental on the international front? And then second, as the Company continues to focus on operational efficiencies. How do you think about balancing growth versus investment and incremental margin trends as we head into 2019? Thanks.

So with regards to the SMB, our SMB business also known as global online solution business has been doing really, really well and we’re super excited about that business that’s growing at a very healthy pace. They’re on-boarding lot more advertisers on the platform, and so we're excited and the trend we’re seeing across the world on that group and with the one of our strong leadership team. So we’re super excited and I think nothing beyond to say at this point.

As it relates to your second question, I think we’re optimistic about the long-term potential and scale of the business. When we think about, whether it’s not an either or, it’s growth and operating efficiencies and that’s not just now but over the long term as well. And for example, we’ve talked about the second quarter driving operating efficiencies in infrastructure, as well as operating cost structure. In addition, we saw 48% year-over-year growth in revenue. So this is -- the focus on both growth and operational efficiency improvements as you drive towards free cash flow generation and operating profitability over time. And that's the focus for us, not just today but over the long-term.

Our next question comes from Anthony DiClemente with Evercore. Please go ahead.

Tim, in your remarks you talked about operating cost efficiencies. I wanted to ask in the Snap filings, there are minimum hosting cost commitments that are disclosed that go out over the next several years. To your comment suggests that there is a way or chance that the Snap wouldn’t ultimately perhaps spend at the minimum levels disclosed in those filings on the minimum hosting cost. And then also I guess related to your filings, I think you normally give snaps per day that was disclosed in the first quarter. Can you give that to us, what were snaps per day in the Q2, please. Thank you very much.

So I’ll take the cloud part of the comment first. We’re constantly in dialog with our cloud partners on optimizing our utilization and services over time. And as I said in the call, we’re driving not only unit cost economic improvements, as well as engineering and operating efficiency improvements. But we’re comfortable with the current agreements with our cloud partners and comfortable with current cloud strategy.

And in terms of snaps per day, we saw over 3 billion snaps per day in the quarter.

Our next question comes from Rich Greenfield with BTIG. Please go ahead.

I wanted to follow-up. In the prepared remarks, Evan, I think you talked about the fact that publisher stories or shows that basically daily viewership of those products was up about 15% year-over-year. I was wondering could you give us some color on what's actually happening with friend stories, which I think is a much bigger use case. Is the daily usage of friends story, both creation and consumption, is that upper down year-over-year? How does that track and how does that look? And then just curios, intellectually, as you look across the whole platform. What percentage of your DAUs, if you look at global DAUs. What percentage of people are actually using anything on the right side, whether it’d be a friend story, a publisher story, or a show. How many people actually touch one of those things on a daily basis? Thanks.

I’m not sure we disclosed the exact numbers. You’re right to point out the importance of friend stories, and that’s why we’re so focused on keeping that close friend network so that people feel comfortable expressing themselves. And we’ve really seen a lot of success with our Creative Tools, which really empower that expression. So we’re very focused on friend stories. And I think one of the great things we’ve seen with Discover is separating out friend stories rather than mixing them in with all sorts of other content, make them easier to find. And so having them at the top of the Discover page we think is a really important thing for the long-term of the business.

Our next question comes from Youssef Squali with SunTrust. Please go ahead.

First of all, Tim thanks for the guidance that's very helpful. And then, Evan, maybe these are two questions for you. You spoke about users’ engagement on the platform. I think 30 minutes per day on a daily basis. How has that metric trend over the last couple years and just how important is it for you guys to keep hitting your numbers and maybe hopefully continue to grow very fast without necessarily seeing growth in that metric? And lastly in terms of new user retention for people older than 35, I think you guys talked about plus 8%. What about younger audiences, what are you seeing there? Thank you.

So in terms of time spend, I think we’ve pretty consistently been disclosing over 30 minutes per day. One of the things that we think about a lot when we look at Discover, in particular, is really trying to make sure that people can find the right content. And so I think one of the most important things about the redesign is that we’re surfacing the right content to the right people as quickly as possible. So that one may go over that page, they can dive right in to content. So that’s how we’re thinking about time spent there. And then Tim, do you want to?

You covered it well. I don’t have anything else to add.

And our next question comes from Peter Stabler with Wells Fargo Securities. Please go ahead.

A couple on ARPU, if I could. Is it right to assume that the transition of programmatic started first and was most aggressive in North America? And related to that as we start lapping the fast adoption of programmatic, could investors expect ARPU in the U.S. to reaccelerate? And if so would that be faster than we see internationally? And I guess that's it for me. Thanks.

I think with regards to ARPU, I think many of the international market we started the business programmatic directly. I think in the U.S., our advertising business is more mature and we had this in-session order based buying process. With regards to ARPU, we don’t give ARPU guidance. But I think one of the key things is that we’re excited about the potential for our domestic U.S. business. We have more than 100 million monthly users in U.S. and Canada, which is a very large audience base, one of the largest ad market in the world, and there's a lot of opportunities on with lot more advertisers, there’s a lot of opportunities that goes deep into lot of advertisers. And so I think I'm really, really excited about our U.S. business and the domestic business our North American business. But beyond that, I cannot give you a specific ARPU guidance.

[Operator Instructions] Our next question comes from Brian Fitzgerald with Jefferies. Please go ahead.

Maybe as a follow-up to Eric's question, as you lap the rollout of the self-serve platform. Can you talk a bit about what you're seeing with respect to the auction dynamics? Are the majority of these auctions competitive at this point? And what does pricing look like there? Thanks.

I think more and more auctions are becoming competitive. And I think we’re bringing lot more advertisers on the platform. So I think beyond that, we’re not at this point, breaking down what’s that doing to the pricing. Again, I think it’s really important we're really focused on delivering the ROI to the advertisers and showing the most relevant ad to our consumers but as we think if we do that in the long term that takes care of the business.

Your next question comes from Brian Wieser with Pivotal Research. Please go ahead.

I just wondered if you could talk about whether or not the -- with just your perspective if the China export market might be contributing. And also did you see any impact from GDPR one way or the other? Thank you.

I think, with regards to GDPR, we’re very happy with our international growth -- international revenue growth of the business. It grew at a very healthy cliff, and couldn't be more happier. In fact, in terms of GDPR impact, we have not seen any material impact that I can discuss during this call in Q2. However, it’s still early and we are monitoring the situation very, very closely. With regards to China, I think China is a very interesting market. There's a lot of companies who are looking for global traffic, and Snap offers a very attractive audience in a developed market that could be very valuable to help those businesses grow. And I was recently in China meeting with advertisers and last week. However, we’re not breaking down what’s the revenue contribution from that market at this point.

And our next question comes from James Lee with Mizuho Securities. Please go ahead.

A follow up question on ARPU, I realized that your rest of the world ARPU is actually high than Europe. I was wondering is it sustainable? And when I look at Facebook’s APAC and rest of world ARPU, it’s only 25% in Europe. And just help us on say why that you’re able to monetize so well? Thanks.

I think again we’re not going to give ARPU guidance, but couple of things to keep in mind. If you look at our audience in the rest of the world that’s coming from market that is more amortizable like Australia or Middle East. And I think also our audience is a more millennial audience, which is also very, very attractive to a lot of advertisers. And so I think in terms of guidance, we cannot provide. But I think we are very, very excited about the demographic audience we have. And as the audience grows from various markets we’ll see how that ARPU trends. But we are really focused on driving overall revenue growth rather than on any specific region’s ARPU.

And this concludes our question-and-answer session as well as Snap Inc.’s second quarter 2018 earnings conference call. Thank you for attending today's session and you may now disconnect your lines.