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

Thank you and good afternoon everyone. Welcome to Snap’s Third Quarter 2018 Earnings Conference Call. With us today are Evan Spiegel, CEO and Co-Founder and Tim Stone, CFO. Earlier today, we made a slide presentation available that provides an overview of our user and financial metrics for the third quarter of 2018, which can be found on our Investor Relations website. Now, I will cover the Safe Harbor. Today's call is to provide you with information regarding our third 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 quarter ended June 30, 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. And 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 website 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 quarterly earnings call. We recently celebrated our seventh anniversary and I wanted to share some highlights of where we are today and how we plan to drive growth and profitability in the future. Through the hard work, dedication and innovation of our team, today, we have one of the largest and most engaged mobile communities in the world. We have grown our community and engagement because we are different. We are the fastest way to visually communicate with close friends and family. We built Snapchat shots from the ground up to empower people to express themselves instantly through our camera, resulting in over 3 billion snaps created every day. We're a fun place to learn about the world on our discover content platform. We have built a premium mobile content experience that complements content created by your friends and we are built for mobile. We believe that mobile devices present unique opportunities like communicating visually and we are excited about the future of innovation on mobile platforms. We have attracted a large and loyal community, because our core visual communication product is built to support people’s close friendships. Over 60% of our daily active users create snaps every day, because they use our service to talk with their close friends and family. Every product we have is built around our core communications product. We have been successful in launching new products and features by expanding the use of our personal communications product into other areas like memories or discover that increase engagement and drive our advertising business. Over the past two years, we have transformed our advertising model to self-service and we are now beginning to see the results. Trailing 12 month revenue has grown over 50% and now exceeds $1 billion, as we…

Thanks, Evan. Our third quarter financial results reflect our focus on driving growth and operational efficiencies. This quarter, we delivered strong financial performance compared to the prior year and the prior quarter. We generated significant growth and record results in the topline. We also had strong improvements in gross margin, adjusted EBITDA, adjusted EBITDA margin and free cash flow. Our Q3 operating cash flow improved 61 million to negative 133 million compared with Q3 2017 and improved 67 million compared to Q2 2018. The year-over-year change in operating cash flow is driven by a $41 million improvement in adjusted EBITDA and by changes in the timing of working capital. Similarly, the sequential change in operating cash flow is driven by a $31 million improvement in adjusted EBITDA and changes in the timing of working capital. Our capital expenditures, which are nominal are mainly associated with building out our office facilities. Q3 capital expenditures are 26 million, flat from Q3 2017 and 9 million lower than the prior quarter. Q3 free cash flow improve 61 million to negative 159 million compared with Q3 2017 and improved 75 million compared with Q2 2018. Our current infrastructure model does not require capital investment, which results in strong adjusted EBITDA to free cash flow conversion, as we continue to scale. Common shares outstanding plus shares underlying stock-based awards outstanding totaled 1476 million on September 30, 2018 compared with 1441 million a year ago. We ended the quarter with 1.4 billion of cash and marketable securities. Our change in cash for the quarter was negative 156 million. The change in cash was 344 million better than the prior year and improved 96 million versus the prior quarter, as we continue to make progress toward generating free cash flow. We have a number of drivers of…

[Operator Instructions] And the first questioner today will be Ross Sandler with Barclays.

This is Mario Lu on for Ross. I was just wondering, if you could give us an update on the new Android rewrite, call mushroom, that is being tested in a handful of markets. Anything you see that would suggest that the global rollout of this rewrite could potentially reverse the trend that Android has had thus far on DAU growth and just to piggyback on that, Evan, in your internal letter to employees last month, you mentioned that you expect DAUs to grow in 2019. What factors give you the confidence that it will grow, whether it be in the Android rewrite or other factors?

Hey, Mario. Thanks for the question. We're really excited about what we're seeing on the project code name Mushroom. We still have a bunch of work to do there. I think quality takes time. I mean, we really want to make sure that we have the right foundation for the application going forward, because that will also help us innovate quickly as well. So excited about what we're seeing there and we're going to wait till we get it right before we roll it out broadly. As we look at DAU growth going forward, I think the best way to think about it is really expanding from our core of 13 to 34 in the US and Europe. And so in order to expand from that core, we basically have to do two things. We have to grow up 34 plus in those markets, which we think is more of a marketing and communications challenge around our core value proposition of being a fast way to communicate visually and with close friends and then also providing our core product value in rest of world markets and that we view, especially for the 13 to 34 audience, which in many developing markets, their demographics actually skew young. So that should help us. But what we're seeing there is about the technical challenge and so I think the redesign or sorry the rebuild of Android will help with that significantly. And then beyond that, we're continuing to make performance improvements, reduce the amount of bandwidth that our service uses and that's how we’re thinking about DAU growth going forward.

And our next questioner today will be Lloyd Walmsley with Deutsche Bank.

This is Greg Vlahakis on for Lloyd. I was just wondering, last three Q, you all had mentioned that you just create over 3.5 billion snaps per day, but last quarter and now this quarter, you all are saying that users create 3 billion snaps per day and the community is growing 5% year-of-year. So I was just wondering why this phenomenon is happening? Is it the redesign or are people just watching more shows and not really creating content there more consuming content. And then the second question is just, do you all feel that you can grow advertising count and spend without necessarily growing your user base a lot. Thanks.

Yes. So I think as we look at the Snap create number, that's something that was ramping pretty significantly in to the redesign and then fell with the redesign. And I think as we explained previously, the redesign did hurt our core communications product and we, I think, iOS in particular, we’re happy with what we're seeing after the redesign, we're making progress there and we're going to bring those changes that we've made over to Android when we released the rebuild widely. So that's sort of how to think about our progress and I think we also mentioned, at least in the remarks that over 60% of our user base is creating snaps every day. So, we're excited about the creation we're seeing on the service, but of course, there are lots of opportunities around shows and the other content projects and I think what's really exciting is that the creation on our platform drives that content experience. So we're focused on both. And then, as it regards to advertisers, there's a ton of room to on board more advertisers, as I think, you've seen over the past year and a half, as we thought about programmatic, we really want to expand our ad products to all sorts of people all over the world and the only way to do that was to move to self-serve in our problematic infrastructure. So we've been really focused on expanding the base of advertisers and tons of room there.

And our next questioner today will be Mark Mahaney with RBC Capital Markets.

Questions have to do with one. The decline in DAUs, why will DAUs decline sequentially in Q4 and then this goal of acceleration, just go through, I know, it's not guidance, but what would be the factors that would actually cause acceleration in revenue growth in 2019, just theoretically. Thank you.

So, as it relates to DAU, we're not giving any further commentary beyond what was already said. Expect DAU to decline sequentially, but we are excited about the opportunity to grow the community over time, growing abroad in the community, we think comes from as Evan mentioned earlier, improving the app, the user experience of the Android and increasing awareness of the value proposition, not just with 13 to 34 year olds in developing markets, but also 35 plus in the developed markets. So I think there is opportunity for us to grow DAU over time and we're excited to continue to build Snap and Snap Ad for our users. And as it relates to 2019, I do want to emphasize that I’m sure you are aware, but you are aware about the nature of your question, that internal goals are just there, they’re internal goals, they’re are not a plan and not a forecast or an expectation, and they’re certainly not guidance. We had an internal stretch goal for 2018 for example that talked about breaking even in 2018 and as a result of that stretch goal, we have produced results that you've seen in Q2 and Q3 this year with improvement in EBITDA year-over-year and strong revenue growth in the forecast for Q4, suggesting the continuation of the same with EBITDA, the momentum accelerating and a third consecutive quarter of EBITDA improvement as you drive toward operating profitability and free cash flow generation. On the growth front, what would cause growth to accelerate in our internal stretch goal scenario, the things we've been talking about, expanding the community, increasing engagement and then also improving monetization? So with advertisers for example, better measurement, more optimization and better relevance, as we continue to innovate on the formats for advertisers. On the engagement side, we talked about our premium content, how the site redesign has resulted in more users than ever before, engaging in our premium content and the quantity and quality of content making that more relevant to users all the time with Snap originals and 21 unique shows over 10 million monthly viewers. And then again on the community side, the opportunity to expand the community over time. So, those are some of the things we’d factor into revenue growth acceleration and we’ll have to wait and see how things play out over time.

And the next questioner today will be Justin Post with Bank of America.

This is Ryan Goodman in for Justin. A couple of questions. One, so just as you focus the app back to core speed of communications functionality, can you talk about the strategy to monetize that time spent and then longer term, just how you envision communications evolving as a driver to total revenue? And then second one just a quick one, the premium ads, you mentioned it briefly in the prepared comments, it sounds like advertisers are responding favorably, non-skippable is still relatively new to Snapchat, so just any sense as to how if at all that's impacting user engagement with the underlying content.

So I think at a high level, when we talk about the communications product, it's important to understand that that communications product is really what drives that high frequency engagement and growth of the service as friends communicate with one another and then what we've done is basically build other platforms around that core communication. So whether that's our content business, whether that's our maps product or even memories, we continue to innovate on the platform and use that communication to drive the growth of other revenue generating products. So while we do monetize communication with our creative tools and augmented reality, we also see a huge opportunity to build other businesses around that core communication flow and so I think it's just important to understand that the communication flow is what creates these other opportunities for our business. And then I think when it comes to non-skippable, the most important thing for us was really having high quality content and a lean back content experience, because that's what allows non-skippable to work really well. So that's what we’ve been focused on creating shows, on creating high quality content, on boarding more creators and I think once we saw that lean back behavior emerge with shows, which is why we're really excited about, we thought that was a great opportunity to introduce the commercials at unit and so really, really happy to see how that's performing and I think that'll be great for us going forward.

And the next questioner today will be Jason Helfstein with Oppenheimer.

So besides performance issues that specifically relate to Android that presumably get addressed in mushroom, are there any other product issues that you feel need to be addressed in the near term that could be impacting DAU. And then I mean I guess in the last question, you kind of touched on it, but just wanted to get more thoughts on the importance of curated versus user content and kind of what you've learned over the last few months on the curated content side?

On the product side, specifically, I think one thing I mentioned a little bit earlier, we do see a lot of room to improve our bandwidth consumption. One of the things we hear from customers today is that we use a huge amount of bandwidth as they communicate visually and I think we have identified a bunch of opportunities over the next year to reduce that bandwidth consumption, which we think could make a difference for the product. So that’s one thing that we're seeing on the product side in addition to mushroom and then as it pertains to curated versus user content, we’ve seen a huge opportunity in premium content. One of the ways for us to think about content at least is how exclusive it is to the platform and so for us, that the content created by friends for a small group of friends is exclusive to Snap inherently because that content isn’t seeking a broader audience and premium content is also exclusive to Snap and I think there's a lot of room to invest in both. And then in the middle, you have, I think, influencer content, which is also important to our business and a part of that mix. And I think we're still trying to figure out the best tools to build. We've announced, I think, in a very limited group, some analytics tools for those types of creators and going forward, we’re going to be building more tools to help them create content. So I think those are sort of the three buckets and we're working on making sure they all integrate well together, because different people like watching different things.

The next questioner today will be John Egbert with Stifel.

The redesign obviously brought some challenges, but it sounds like there were some tangible benefits from the change as well. Is there any way to quantify the impact to premium content viewing in terms of either audience traction or time spent with publisher content and I was also wondering if this is having a meaningful impact on available advertising inventory?

Yeah. We're really excited about the opportunities that the redesign has created kind of similarly to the way that our programmatic change was difficult at first, but ultimately the right thing for the long term. We see the redesign the same way and we're investing for the future of our content business. So I don't, I can't quantify that specifically for you. I think earlier in the remarks, we mentioned that more people are watching more premium content and that's why we're excited about, maybe we can quantify that for you in the future. But certainly there's a lot of opportunity there and there's just huge demand for premium mobile content. I think one of the things we're specifically excited about is how much we've innovated and iterated on the narrative formats of mobile content. A lot of people have been trying to figure out what mobile video really works and now with shows, we're seeing a bunch of engagement, because I think the narrative structure is made for mobile in a way that resonates totally differently than videos made either for the Internet or for television.

The next questioner today will be Rich Greenfield with BTIG.

I guess a few things, when you think about the product, Evan, you know, you mentioned that you think your main issue in growing users, it sounds like is a marketing communications challenge and not a product problem, but when -- in the leaked memo that came out, it sounded like you were going to be making some pretty meaningful product changes. I’m just wondering how you square those two things. Two, when we look at discover, I still remember you being very focused when it initially launched with kind of the beauty and elegance and simplicity of Discover and now, so much of Discover and I realize you're separating out shows or series, but most of Discover seems very much kind of racy click baity content focused around kind of who can promote the most TNA to drive a click. I'm wondering from a user standpoint, does that make it harder to grow more mature users on the platform and how do advertisers react to that type of click bait content that they're seeing throughout the platform and do you have to change that in terms of product changes over the coming year to drive advertising and users further? And then just a quick housekeeping comment, Tim, I think on the last call, you had mentioned over 100 MAUs, it was the first time you ever broke it out for North America. Is that number up or down this quarter? I don't see any disclosure in your prepared remarks or in the release?

So I think as I mentioned earlier on the call, we're really thinking about DAU growth in two ways. The first obviously is broadening our 13 to 34 days in the US and Europe, so include 34 plus users, also, you mentioned is a marketing and comp challenge but then we're also thinking about all the people know outside of the US and Europe who are predominantly on Android devices, oftentimes, in low connectivity environments and how we can improve the product to better serve those customers and of course we're handling that with the mushroom rebuild. We're also working on that, as I mentioned on the bandwidth consumption issue. So I think there are a bunch of product improvements that we can make, especially for 13 to 34 market outside of the US and Europe and that may involve changing some features as well or otherwise changing the application. Obviously, we want to make sure that we're doing our best to serve Snapchatters. So, yeah, and then I think, as it pertains to Discover, as you mentioned, I think there's a lot of opportunity to continue improving that product. We're trying to get the right mix of content. There's a lot of demand for premium content. There still remains a lot of demand for popular stories for influencer content for what we call official accounts. And so right now, those different types of stories are all blended together enough personalized for you feed and I think there are opportunities to improve that layout and potentially separate out that content in a way that makes sense for users and I think one of the problems that you identified is that cold start experience. So what does it look like when you first come into the service and how does it get personalized for you over time? And that's definitely a problem that we're working on, but we just released the redesign this year. So I view this as just the beginning of really improving our content business, but I think unequivocally, it's created a really terrific opportunity to expand into premium content, but also popular stores.

And Rich, it’s Tim. On the MAU question, that was the spot metric we shared last quarter. It’s not something we intend to share on a regular basis and in the US and Canada, as you said, we shared over 100 million – made over 100 million MAU and that remains the case.

And our next questioner today will be Brent Thill with Jefferies.

This is [indiscernible] on for Brent. You noted in your prepared remarks that you crossed 85% of revenue being transacted through self-service, just curious about when you think that might start to plateau as a percentage of revenue. And then also following up on that, you noted pricing down 15% sequentially after being down 9% last quarter, could you maybe walk us through what you’re seeing in the auction dynamics in terms of competitiveness of those auctions and as you get more advertisers, how do you expect that to change overtime?

So I think when we talk about that transition to programmatic, I think we’re effectively there. We’ll continue to transition a little bit over the next couple of quarters, but at 85% we feel like we’re pretty much there, which is really exciting for us. And then as you mentioned pricing coming down, a lot of that has to do with how we’re optimizing, we’re doing a much better job now, helping people bid against conversion events and all sorts of important objectives. So, I think as we get better optimization over time, hopefully, we’ll continue to be able to drive pricing down even further for those advertisers, while still increasing revenue overall.

And the next questioner today will be Mark Kelley with Nomura.

We’ve heard some positive feedback from advertisers in terms of the ROI they’re getting when they use the SDK. I’m just curious if you think advertisers using pixel see similar results given that it’s not as tailored to their needs? And then second, do you have any early thoughts on the EU capital directives that are kind of in the works right now, especially in the cost side of things. Thanks.

As we look at the pixel, we’re really focused right now on the early stages of the pixel, which is really about getting it adopted widely. We’re making great progress there and then overtime, we’ll be able to do a better job bidding against those conversion events that the pixel observes. And then overtime, we should see a lower cost per outcome for advertisers using the pixel. And then no thoughts at this time on the e Directive.

And our last questioner for today will be Brian Wieser with Pivotal Research.

I was wondering if you could talk a bit about churn trends and to the extent you can provide any characterization on gross additions versus net additions, is that a factor or just wondering if you can give us any color on how that might be trending?

I couldn’t tell that was about users or advertisers, but we’re not able to give any guidance on churn.

And this will conclude the question-and-answer session as well as Snap, Inc.’s third quarter 2018 earnings conference call. Thank you for attending today’s session and you may now disconnect your lines.