Good afternoon everyone and welcome to Snap, Inc's Third Quarter 2021 Earnings Conference Call. At this time, participants are in a listen-only mode. After the prepared remarks, there will be a question-and-answer session. This call will be recorded. Thank you very much. Betsy Frank, Senior Director of Investor Relations, you may begin.

Thank you, and good afternoon, everyone. Welcome to Snap Third Quarter 2021 Earnings conference call. With us today are Evan Spiegel, Chief Executive Officer and Co-Founder, Jeremi Gorman, Chief Business Officer, and Derek Andersen, Chief Financial Officer. Please refer to our Investor Relations website at investor.snap.com to find today's press release, slides, a copy of our prepared remarks, and our updated 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 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 non-recurring charges. 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.

Thank you all for joining us. This quarter we celebrated Snap's 10-year anniversary, and as we reflect on the progress we've made over the past decade, we have never been more excited about our future. Bobby and I grew up with social media and we wanted to build something different, a way for people to have fun and express themselves without the permanence and pressure of public likes and comments. We built a camera to make it easier for people to communicate with close friends and family and express themselves visually. And today we reach more than 500 million people, including more than 75% of 13 to 34 year - old’s in the U.S, Canada, France, the UK, Australia, and the Netherlands. We have innovated on top of our camera and build augmented reality, content, and mapping platforms that each reach hundreds of millions of people. We are now operating our advertising business at scale, providing us with the resources we need to invest in our long-term vision of computing overlaid on the world through our camera. And we are just getting started. This quarter, we grew daily active users to 306 million, marking our fourth consecutive quarter of more than 20% year-over-year growth. We grew sequentially in North America and Europe, which represent our largest monetization opportunities in the near and medium-term, and we continue to build on our momentum in the rest of world geographies, where we see massive long-term potential. Our DAU and rest-of-world represents just 5% of the overall rest-of-world smartphone population, which is currently more than 2 billion people and growing. Many of the mixed engagement trends we observed during the pandemic and that we discussed on our last earnings call have continued through the third quarter. On one hand, while total content viewership and…

Thanks, Evan. In Q3, we generated total revenue of $1.067 billion, an increase of 57% year-over-year, as we grappled with industry changes to the way advertising is targeted, optimized, and measured on iOS that created a more significant impact on our business than we had expected. Despite these challenges, we crossed 1 billion in quarterly revenue for the first time, and we remain focused on our long-term opportunity to support our community and advertising partners, which we believe will be driven by three key priorities. First, driving ROI through measurement, ranking, and optimization. Second, investing in our sales and marketing functions by continuing to train, hire, and build for scale. Third, building innovative ad experiences around video and augmented reality with a focus on commerce. Additionally, we reach a valuable and hard-to-find audience, which continues to grow around the world. Together, we believe that over the long term, these factors will allow us to drive performance at scale for businesses around the world. We are continuing to work through the ongoing changes to digital advertising driven by Apple's App tracking transparency framework, which was introduced as part of IOS 14.5. We saw meaningful adoption in June and July, when Apple pushed all of its users to update to the new version of iOS speaking, these changes have upended many of the industry norms and advertiser behaviors that were built on IDFA, Apple's unique device identifier for advertising, over the past decade, which now require a double opt-in by users in order to access directly. As part of these changes, Apple rolled out SKAdNetwork or SKAN as a proprietary solution to allow app-based advertisers to continue measuring their advertising on iOS. The initial results we observed using SKAN were generally aligned with prior industry standard solutions. And we were among the…

Thanks, Jeremi. Our Q3 financial results reflect our priorities of growing our community, making focused investments in the future of our business, and scaling our operations efficiently in order to drive towards profitability and positive free cash flow. As Evan mentioned earlier, our community grew to 306 million daily active users in Q3. An increase of 57 million or 23% year-over-year. Q3 marks our fourth consecutive quarter of year-over-year growth in excess of 20%. And it's tied with the prior quarter for the highest rate of growth for our community in more than four years. In North America, DAU grew by 6 million or 7% year-over-year to reach 96 million. In Europe, DAU grew by 8 million or 11% year-over-year to reach 80 million. In rest of world, DAU grew by 43 million or 49% year-over-year to reach 130 million. As we continue to execute against the international growth playbook we laid out at our Investor Day earlier this year, including investments in local language support, local content, local marketing partnerships, and support for local creator communities. Total revenue for Q3 was one billion, sixty-seven million, an increase of 57% year-over-year. This was 3 million below our guidance range entering the quarter, which primarily reflect headwinds associated with iOS platform policy changes. Direct response advertising has comprised the majority of our business for some time now, and has also been growing at relatively higher rates in recent quarters due to the impact of changes in the iOS ecosystem that affect optimization and measurement of direct response advertising objectives. The revenue from this portion of Business was approximately flat quarter-over-quarter. Our brand focused advertising business was the primary driver of sequential growth in Q3, and remained healthiest in North America during the quarter. In North America, our revenue grew 60% year-over-year…

That concludes the prepared remarks for today's earnings call. And we will now begin the question-and-answer session. . At this time, we will pause momentarily to assemble our roster. The first question comes from Rich Greenfield with LightShed Partners, please go ahead.

Hi. Thanks for taking the question. Evan, as you think about it, we've assumed that you'd be growing 60% plus in Q4 revenues, if not for, I guess, Apple and these supply chain issues. Obviously, I know you can't really comment on or solve the supply chain issues, but, I guess, as we think about the Issues going on with Apple, is getting back to a normal or getting back to normal, is it a quarter away, quarters away, years? And then, I think back in March, just related to this, I think at March at an investor conference, you talked about your confidence in growing 50% in terms of multi-year revenue growth rate. How confident are you, you get back to that, again, whether it's quarter, quarters or years?

Hey Rich. Thanks so much for the question and share your disappointment. This has definitely been a frustrating setback for us. But I think over the long term these privacy changes and protecting privacy for users of IOS and of course, the Snapchat community, is really important to the long-term health of the ecosystem and something that we fully support. I think when we saw these changes coming, our primary focus was the performance of our advertising platform in the face of this signal law. So, could we still really drive advertising performance, optimize campaigns, make sure our adds were in front of the right people. And we spent the vast majority of our engineering time and effort and energy, making sure our ads were still really effective. And we did all sorts of revenue back testing to make sure that we could be revenue neutral. We were really confident in our ability to drive results with our advertising platform despite the signal loss. But what I think we really underestimated where the tooling changes. And so, what I mean by that specifically is that, advertisers have essentially for a long time now. use a set of really sophisticated tools to measure and optimize their campaign. So that allows them to test out a bunch of different creative and see what's performing more effectively and so on and so forth. And the big change there was that with these new Apple changes, those tools were essentially rendered blind, and in their place, Apple released a new product called SKAdNetwork that allows advertisers to measure across different advertising platforms but without a lot of the flexibility that they're used to. For example, you can only really measure your advertising results using the success parameters that Apple's already defined. The reporting is…

Hey, Rich, it's Derek speaking. I will take the second half of your question as it pertains to long-term growth opportunity of the business. The first thing I'd share here is that we believe the fundamentals of our business are intact and we remain confident in the long-term growth potential of the business. We believe we made significant progress on demonstrating the capacity of our business to drive elevated growth rates or return. So, for example, we've now exceeded 50% year-over-year growth for 5 consecutive quarters. And we've delivered a 2-year cumulative average growth rate of 55%. T hat said, we are seeing significant headwinds heading into Q4 that are driving a near-term deceleration in our topline, including the iOS ad changes that Evan just spoke about, as well as the supply chain disruptions and labor market headwinds. While the challenges we face in the near-term are significant, we believe they are transitory. We believe the fundamentals of our business remain strong. Our community is growing at the fastest rates we have reported in more than four years. We continue to have deep penetration of hard-to-reach audiences in the most attractive advertising markets in the world. And measurement issues aside, our ads continue to drive impact and we continue to have significant opportunities to expand our monetization to more screens within our app in order to grow our ARPU over time. So, we continue to be focused on investing in our teams and our products in order to overcome the near-term challenges and to support the long-term growth of our business. Thanks for the question and I hope that provides some helpful additional context.

Our next question comes from Eric Sheridan with Goldman Sachs, please go ahead.

Thanks for taking the question and maybe I'll follow up on Rich's broader point and try to narrow it down a little bit. If we look out over the next 12 months, can you give us a little bit of sense of how much of investments need to be made in some of these solutions to transition the advertising industry and your advertiser based to where you want them to go, and maybe drill down a little bit deeper in terms of duration of what it would take to prove out on some of the additional solutions for folks to get more comfort in measurement and attribution over the medium to long term. Thanks so much.

Sure. Thanks so much for the question. This is Jeremi. We are definitely focused on assisting our advertisers in terms of navigating this environment, it's the most important thing that we can do. As Evan mentioned, it's definitely a change from last decade or longer. And we want to make sure that we're with them every single step of the way to ensure they have the solutions that they need in place to measure the efficacy of their advertising, so it's our most important priority. Here's what we're doing. There are three primary areas where we see the opportunities to help them. First, just for the advertisers who choose to utilize SKAdNetwork, we're sharing best practices to best ensure that advertisers can remain successful as they test and learn with less information than they're used to, as Evan mentioned. Secondly, onboarding advertisers into our first-party privacy-safe solutions such as Advanced Conversions, the way it worked seamlessly with our mobile measurement partners and uses aggregated privacy-safe methodologies help advertisers understand the impact does not their media mix. That's also new. So that's important to know -- Advanced Conversions -- and people are also going to have to take time to test and learn, to better understand how it works in partnership with SKAdNetwork and so on and so forth. So, we're working with them, product engineering, as well as sales account management. The whole team holding hands with our customers to ensure that they get the best experiences. Third, we are investing in growing our set of native experiences. And that will allow advertisers to drive ROI with deeper experiences. But all within Snapchat. And so, one of the things that's really important about that is that they will be able to get signals from within our app itself, which include…

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

Great. Jeremy, just one follow-up on that last answer, and then maybe one for Derek. So, if we look at the average e-commerce campaign on Snapchat, how much is the on iOS eroded versus what you were seeing back in prior to June. And do you think these tooling solutions are going to bring us back to previous levels or do you view all this privacy stuff just kind of permanently impairing the rollout that e-commerce companies can achieve on Snap? And then Derek, you've talked in the past, a couple of years ago about how the fourth quarter usually has a bigger mix of brand advertising relative to other quarters, and how direct response mix is down a little bit. So, I guess how much of this 30% growth that we're guiding to in 4Q is based on that mix dynamic, and maybe a little color on what those two channels are assumed to grow. Is it -- are they both growing about the same in the fourth quarter? That will be helpful. Thanks a lot.

Sure thing. I can take the first part of your question. We can't be specific on return on ad spend, but web is less affected because of the privacy-safe snap pixel and conversion API. We're really able to better understand and drive performance for e-commerce. In addition to that, we have advanced conversions for the web advertisers -- what we talked about in the last answer, but that's actually been available since the Spring. So, we're continuing to learn, test, iterate with our advertising partners there. And then in terms of just in general, our first-party measurement tools and studies continue to show that our ads are effective and they are approximately as effective as they were prior to these changes. So, it's really that the loss of signal required significant changes to our overall technology, and we believe it's actually mostly a measurement challenge, not a question of the efficacy of our advertising, and as we talked about before, it's going to take time for advertisers to sort through what they are seeing in their new measurement solutions. And relative to what they have available to them, including an SKAdNetwork, and with conversion studies. We are optimistic that our first-party solutions, including Advanced Conversions and estimated conversions are going to help close that measurement gap for our advertising partners. And we look forward to seeing those be fully adopted. And in the meantime, we're going to be validating with our partners, third-party, first-party, through things like conversion-less studies as well as MMM studies, et cetera, to calibrate across I will let Derek answer this part.

Hey Ross. Thanks for the question. I will take the part about the mix and the business heading into Q4. So, the first thing I'd share is just that both the brand and the DR portions of our business are impacted by the headwinds we're seeing in Q4. Our DR business, which is the majority of our revenue, is facing the headwinds directly from the iOS platform changes that we described earlier. The supply chain and labor shortage related headwinds that we're seeing in Q4 impact a wide variety of advertising partners across a wide variety of industries, including both brand and DR oriented advertising partners. So, we would normally expect a bit of a mix shift towards brand-oriented spending in the second half of Q4. And this is typically helpful to driving the overall demand and therefore pricing in the auction during this period. Yeah. Heading into this quarter, I think it's challenging to predict the exact mix or precise mix, but our guide reflects both of these two headwinds persisting throughout Q4. So hopefully that gives you a little bit more context and is help with your question.

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

Thanks for taking the questions. I just wanted to follow-up on Ross' question. Derek, just wondering if you could be any more specific in terms of the ad categories and verticals that you're seeing most impacted by both the IOS changes and then also the supply chain and labor disruptions. And then, a separate topic, just curious on Spotlight, how you're thinking about the product there and when it will be the right time to move beyond some of the very early ad testing and monetize the product in a bigger way. Thanks.

It's Derek speaking. I could take the second half of your question first then I'll turn it over to Jeremi to talk about the advertising partners and how they're being impacted. In terms of Spotlight, it's very early for this platform. We're excited about the early results that we're seeing from an engagement perspective. We're also -- in terms of having seen the DAU on that platform continuing to grow quarter-over-quarter in time spent per DAU. We're also pleased to see that after the changes we've made to our creator fund that we've seen, the submissions doubled quarter-over-quarter. So, we're pleased, but it remains early for this platform. We're excited about the potential for the platform to add to our ARPU opportunity over the long term. But we're focused still on making sure that the customer experience is great and continuing to invest in optimization and our creator community. I will turn it over to Jeremi to talk about the specific impacts on different customer categories.

Sure. Yes, definitely. Thanks Derek. So just to talk about some of the verticals we're seeing most impacted by the iOS changes, and then also by the supply and inventory constraints. We've been meeting with a lot of advertisers, have a lot of meetings here, and we're hearing from partners across a wide variety of industries and geographies that they're facing headwinds in their business related to the disruptions in global supply chain, as well as labor shortages and later -- labor competition. So, when they're talking about the product, putting marketing into the product when there's already low-margin, for instance, can erode margin. And furthermore, they don't necessarily want to accelerate the sales of products that they are going to have a hard time getting into the hands of customers. And that is somewhat broad sweeping in terms of the supply chain issues which I'm sure we about more broadly than just on this call here. But one of the things I think that's great is that there are still categories where there is an opportunity for us. Those were less reliant on supply chain, things like streaming, things like entertainment. We're seeing travel come back, which is really exciting. And Fintech, etc. Those types of resources are not as impacted by supply chain and we've done this successfully in the past. When COVID hit last year, we -- it suddenly disrupted a number of our key verticals in the way that supply chain is doing so right now, and we were able to redeploy our resources across sales and product and marketing to focus on the categories with momentum and those who can win despite an externality or macroeconomic condition that may be impacting their businesses. We did that successfully before by supporting our partners who are facing challenges, while doubling down on those less reliant on those macro conditions. We expect this to impact advertiser demand in the short-term. In particular, and in many cases with the backup with the ships in Los Angeles and everything else we've been reading about. And we also expect that conflated with the IOS platform, is that what we're seeing is that some of these clients are just going to take this additional time to test and learn as they navigate the changes to the IOS platform and the diminished need to drive incremental demand at the same time because their supply chains aren't able to operate at peak capacity. But we have plenty of these categories that aren't reliant and we're having great meetings with them. And as said, early tests show that the performance still looks good in those categories, and so we'll navigate this as we've done some of the externalities in the past. The underlying fundamentals of the business haven't changed and we're just remaining laser-focused on working with our advertising partners to get through these challenges.

Our next question comes from Q - Brent Thill with Jefferies. Please go ahead.

Thanks. Derek, is there an easy way to frame IDFA versus supply chain? Is IDFA 80%, 90% of the headwind, 10 to 20 on supply chain? It's just an easy framework how you're thinking about the balance of those two and there was just a follow-up question as it relates to what your impacting from the next version of iOS 15 and that headwind you've in. Can you just give us a sense of what that is?

Hey, thanks for the question. I think -- you know what I would say is when you look at Q3 and the impacts that we saw in Q3 relative to our expectations entering the quarter, the majority -- the primary driver of the impact there is really about the impacts on headwinds associated with the platform changes on iOS. Those changes accelerated as we moved through the quarter. So, what you are seeing when we go into Q4 is a full quarter impact of those issues on Q4. And the reason that we're mentioning IOS 15 is that that's going to continue to disrupt the advertising ecosystem, which is critical -- getting a stable base under the advertising ecosystem, so that advertisers have some stability to then be able to adopt tools, test tools, and understand their impact is really important. So that is contributing to the IOS headwinds persisting throughout Q4. In terms of giving you a specific breakdown of the mix of the impact between the supply chain and labor shortage headwinds and the IOS headwinds, I think that's very difficult. Hard because the two of them compound on one another in terms of their impact on the contestation, and therefore, the level of pricing that we would expect to see in the auction, especially in the second half of the quarter, which makes delineating between the two impacts, unfortunately, challenging. So hopefully that gives you a little bit of context to your question.

Yes, it does. Thanks, Derek.

Our next question comes from Tom Champion with Piper Sandler. Please go ahead.

Hi. Good afternoon, everyone. Maybe for Derek. Relative to our estimates, it looks like Europe and rest-of-world's revenue was a little more impacted by headwinds in 3Q. Just curious if that's the case or if there's anything to call out here. And then relative to content submissions on Spotlight doubling quarter-over-quarter, can you just update us on how you're investing directly behind this? Maybe how do you creator futures play into this momentum and just anymore comments on how usage trended quarter-over-quarter as well. Thank you.

Sure. Thanks for the question. So, I think when we were looking at the performance by region, we're continuing to make progress on hiring and investing in our team globally across sales, marketing, partnerships, and sales support, as we believe this will position us well to grow our business over the longer-term. In Q3 our business was healthiest in North America because we continue to benefit from the significant investments we have made in sales and sales support in the prior year. We're in the early stages of ramping the investments in our team internationally, but we are making progress, and this is a driver of our rapid headcount and OpEx growth that you can see in the recent quarters. That being said, it takes time for those resources to become productive. So, we don't expect an immediate impact to the topline in the near-term, but that should give you a little bit of context about why North America performed relatively better in the period. I'm going to turn it over to Evan to share a little bit more about how we're thinking about the product and our investments around engagement on Spotlight.

Hey, Tom. Thanks for the question. We're certainly excited about what we're seeing on Spotlight. I'd say the primary focus and the biggest investments we're making in Spotlight are really in the underlying infrastructure, the content understanding, content recommendation, and ranking so that we can make sure that as people submit new content to Spotlight, we understand what's most compelling, who that will appeal to the most in terms of their own unique interest, and then make sure that content is really distributed to that. And that's how we can ensure creator success, not just for the most famous creator s that get a huge number of views across a really big audience. But for creators that also want to reach a niche audience with their own unique interest. And so being able to really understand the content of the Snap allows us to help creators who are just getting started, who maybe don't appeal to as big of an audience is still find that success on our platform. So, I think the infrastructure piece is critical and that's where a lot of our focus is right now. And as we evolve the creator program and the way that we're rewarding folks who are submitting content, we've also found new ways to incentivize the diversity of content submission, which again is then making it easier for our systems to understand a wider variety of content and make sure it gets to the right people. So, I'd say that's the primary focus right now. That will also help, of course, drive overall time spent viewing content, which has -- creates this positive flywheel where more creators are getting more visibility and finding more success. And then, of course, we're also investing in new ways for creators to monetize with Snap. The latest, of course, being our gifting program, which is off to a pretty fun start, where folks who find creators they really like, they can send them gifts and messages to build a relationship and say thanks for the great content that they're making. And we also have a creator marketplace as well to make it easier for brands to partner with creators and create sponsored content. So, yeah, there's a lot going on there, but I think the fundamental thing we're really focused on, at least over the next year or two is really the content recommendation and understanding, and that's our key infrastructure.

This concludes our question-and-answer session, as well as Snap Inc's third quarter 2021 earnings conference call. Thank you for attending today's session. You may now disconnect.