Good afternoon, everyone, and welcome to Snap Inc.’s First Quarter 2023 Earnings Conference Call. At this time, participants are in a listen-only mode. I would now like to turn the call over to David Ometer, Head of Investor Relations.

Thank you and good afternoon, everyone. Welcome to Snap’s first quarter 2023 earnings conference call. With us today are Evan Spiegel, Chief Executive Officer and Co-Founder; Jerry Hunter, Chief Operating 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, investor letter, and investor presentation. This conference call includes forward-looking statements, which are based on our assumptions as of today. Actual results may differ materially from those expressed in these forward-looking statements, and we make no obligation to update our disclosures. For more information about factors that may cause actual results to differ materially from forward-looking statements, please refer to the press release we issued today, as well as risks described in our most recent Form 10-K, 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.

Hi, everyone, and thank you all for joining us. We began the year with an intense focus on growing our community, accelerating our revenue growth and leading in augmented reality. Our community continues to grow, reaching 383 million daily active users in Q1 and we are working to deepen engagement with our content platform while building innovative new features and services. Our focus on visual communication between friends and family has distinguished our platform from other Internet platforms. And in Q1, we built on this core offering with the introduction of My AI, our new AI-powered chat box. At our Annual Snap Partner Summit, we made My AI available to Snapchatters around the world and launched a range of new features, including the ability to add My AI to a conversation with friends, offer place recommendations from the Snap Map and suggest more relevant AR lenses. We are excited about the opportunities we see for more innovation, especially as we look across our application at how AI can further enhance the Snapchatter experience. We are working to accelerate our revenue growth, and we are using this opportunity to make significant improvements to our advertising platform to help drive increased return on investment for our advertising partners. We generated revenue of $989 million in Q1, an increase of 7% year-over-year, which was within the forecast range we shared entering the quarter. As expected, demand in Q1 was disrupted by the changes we made to our ad platform to drive more click-through conversions. While these changes are disruptive in the short-term, we are optimistic that our ad platform improvements are laying the foundation for future growth. We believe that delivering stronger return on ad spend for our advertising partners will enable us to increase our share of wallet over time in this…

Thank you. We will now begin the question-and-answer session. [Operator instructions] The first question is from the line of Mark Shmulik with Bernstein. You may proceed.

Hi, this is Jenny on behalf of Mark Shmulik. Two questions, if we may. Firstly, the investment you've made to build out DR was always going to hurt revenue in the short run. How confident are you that the benefit is still there? And when do you expect to see it? And what markers should we be looking out for? And then secondly, we've heard from appear just how much short-form video lifted time spent overall. Any color that you could share on how spotlight and creator stories is contributing to total time spend? Thank you.

Yes. Just taking a step back, we've done a lot of work over the last nine months to improve our advertising business, of course, starting with the organizational changes we made appointing Jerry as our Chief Operating Officer and hiring three new leaders across each of our regions. We've also hired a ton of strong leaders across monetization engineering and revenue product as well. And so it's been really great to bring that experience into the organization. And obviously, bringing all these leaders together, reporting to Jerry has really helped everyone get aligned on our strategy. So, we've been making a lot of progress improving the platform. A lot of the early work was really focused on signal recovery using privacy safe integrations like Cappy, for example, which we've discussed at length previously. We've also done a lot of work to improve the Post click experience with ads, which is made easier for Snapchatters to convert on platform and really help close the gap between the first-party and third-party metrics reporting, which is really important for advertiser trust. And then in the quarter, we also rolled out a new 70 pixel purchase offering for advertisers who want to bid against that objective. But the biggest change overall that we made in the quarter that was the most disruptive was really the transition to click-based ad interactions across our different advertising formats and then the retraining of our models against those clicks. So prior to these changes, ad interactions across the different content formats, like Spotlight and stories were different, which made a lot more confusing for our community to interact with ads on Snapchat. So, for example, in stories, people use a horizontal swipe to move to the next story and then a vertical swipe to open the ad. But…

Our next question is from Rich Greenfield with LightShed Partners.

Hi. Thanks for taking the question. I got a couple. I guess, given the infrastructure and creator investments that feel pretty vital to reversing the pressure you've seen on engagement in advertising, I guess the question is sort of why aren't you scaling back your AR investments? You talked about off-site partnerships, and I saw last week, things like AR Coke machines or vending machines, like why not scale back AR investments until you're in a better financial position? Obviously, it feels like meta has got the luxury of sort of walking and chewing gum, when I look at like their metaverse investment. I'm not sure you have that luxury. So how do you think about -- how do you balance sort of what you need to reaccelerate your core business versus sort of investing in the future. And then two, I guess, just sort of high – a big picture question, Evan of just -- obviously, you've got but now is going to be another quarter of revenue declines at least based on your internal forecast in Q2. What gives you confidence that you can return to robust growth? Because I think, obviously, the big challenge here is investor confidence in you and the team.

Hey, Rich, it's Derek speaking. I'm going to start here, and then I'm going to kick it to Evan at the end to expand a little bit. I think you step back on the cost structure, as we discussed at our recent Investor Day, we remain committed to balancing our investments and our growth over time and to the generation of adjusted EBITDA profitability and free cash flow over time as well. As part of that commitment, we took a significant action in Q3 of last year and over the course of the last two quarters to reprioritize our cost structure significantly, and we set a goal to remove $500 million from our cash cost structure in order to create a path to adjusted EBITDA profitability and positive free cash flow, even at reduced rates of growth. And as we noted in our letter, we actually exceeded the $500 million goal. In Q1 of this year, we realized $533 million in cash cost structure reductions. And that effort cleared the path for us to deliver adjusted EBITDA profitability and more than $100 million in free cash flow in Q1 despite the 7% decline in revenue year-over-year. So while we're pleased to achieve those outcomes that made such a difficult quarter for our top line, we believe that the best path to delivering sustained profitability and free cash flow generation over time lies in accelerating our top line growth and better capturing our ARPU opportunity. So, for example, the investments we're making in ML infrastructure to support our ad platform, the ML investments to deepen monetizable content engagement and the investments to develop my AI as a new input to understanding user interest and intent are all laser-focused on helping accelerate the top line. Similarly, the investments we're making in the…

Thanks so much for the question. I think as we look at our longer-term opportunity, the thing that really energizes us is just the strength of our community and their engagement. We now reach over 750 million monthly active users. And then we continue to innovate at a really rapid pace, I think, most recently with My AI, which is, I think, a really compelling extension to the messaging experience that people have on Snapchat. I think more tactically speaking, if you look at the influx of really strong leaders that we now have on the ad side and the ad platform improvements that we're making, that gives us a lot of confidence in our ability to accelerate revenue growth and -- and it's why we have the confidence to make the investments that Derek mentioned, which I think are going to be really important to moving quickly here. So I think just looking more broadly at the community and their engagement, we've never been more excited about our opportunity to really serve our community and, of course, realize the long-term potential of our business.

The next question is from Michael Morris with Guggenheim. Please proceed.

Thanks. Appreciate it. A couple of questions on AI. I guess, first, I'd be interested if you can share any early takes from the My AI distribution. I realize it's only been a week or so since it was a little out more broadly, but would be curious what you've seen from your user base as it pertains to the engagement with the product. And then second, just maybe to expand on what was asked previously, but the broader question of the role of AI and the different functions of the company driving engagement, helping advertisers with creative. Can you share more details on kind of the time frame to having that kind of functionality available and maybe, how you view competition with some of the larger players in the space that are clearly working very hard on this to keep engagement on their own platforms? Thank you.

Yes, of course. So maybe I'll just talk a little bit about the way that we use AI across several core pieces of our business. So I think the three sort of major areas are, of course, messaging, augmented reality and then content/ads. And so for a very long time, we've used AI in our ranking system for content and ads. It's really been the core driver of engagement growth for us. And we're going to continue to invest there, including with new and bigger models. And of course, I think we have a lot of the inputs we need to succeed there in terms of spotlight submissions, for example, and of course, the audience and the growth we have in time spent and Spotlight, which allows us to explore a lot more content for ranking. So I think, we're going to continue our momentum on the content and ad side. In augmented reality, we've seen AI play a really important role in new lens experiences, for example, our ML-driven lenses have driven a lot of engagement for SAP. And then, as we look at the longer-term future of augmented reality, we think that the intersection of AR and AI is going to really provide a much more compelling user interface for things like spectacles into the future. So that's a big research area for us. And then on the messaging side, we're really excited about conversational AI, because it really plays to our strength as a messaging platform. And we're finding that in addition to talking to friends and family all day long on Snapchat, people really enjoy communicating with My AI. So don't have any specific stats to share with you just yet, but we've been managing the rollout really carefully to make sure that the experience is fast despite some of the capacity constraints we're bumping up against. But we're being thoughtful and deliberate with the rollout. We're really excited to get it out to our entire community and we're really pleased with the engagement so far.

Next question is from Lloyd Walmsley with UBS.

Thanks. Two, if I can. First, just like, what inning are you guys in kind of rolling out the DR shift to last click in terms of just educating advertisers, training the models and kind of how do you rank the importance of getting that right to drive the faster growth? And then second one, I wanted to follow up on that last question on My AI, like how much do you see this providing you guys with more signal for advertising versus simply driving more engagement? Like, is that a meaningful opportunity for you guys? Anything you can share on early data from that and how you can kind of leverage that for monetization? Thanks.

Hi Lloyd. Thanks for that question. This is Jerry and I'll take that first question, and I'll hand it over to Evan for the second. For where we are on the DR changes, I mean, we went through a pretty major evolution on the platform. And as we mentioned in the letter, we're making progress across the three areas, investing in observability and measurement, improving the engagement and the quality of the conversions and increasing that volume pipe quality engagements and conversions. We think that the big model and UI changes that we made are behind us, but we're still working through some impacts and making some steady progress. We're also going to always be shipping improvements to the platform, but we expect that these future changes are going to be more incremental and less disruptive. On the importance of educating advertisers versus training the models is really both. What we've learned from these larger advertisers that we've worked with through this transition is a manager actually finding success now. We work with them to get to a place where they were finding positive ROI and then there's a few that we're still working with to get through the change to get them to positive ROI.

In terms of My AI, our primary focus right now is really on the community experience and trying to drive a lot of value for folks who are using My AI. Of course, the intent signal we get can be used to improve relevance of content or AR experiences, and that's definitely something we're working hard on. My AI can recommend places now and of course, recommend lenses. We're really excited to see folks engagement there. We are doing some early experimentation around monetization, including things like sponsored links, and I think the team will have more to share at our upcoming new funds presentation.

The next question is from Doug Anmuth with JPMorgan.

Hey. This is Katie on for Doug. Thanks for taking the question. Just wanted to dive deeper into some of the monthly revenue feeding. I believe you called out that March was up 21% month-over-month. So I'm just curious if you're seeing real uptick in demand for the course of the quarter, or is that more a function of easier comps with lapping potentially Russia and Ukraine a year ago. And then just curious if you're seeing any of that improvement continue into April so far. Thanks.

Hey, Derek speaking. I'll take that one. And I think maybe it makes sense to step back and just talk about the journey for Q1 and then what we're seeing into our internal forecast for Q2. On the macro side, well, the macro environment appears to have stabilized. It's stabilized at a much weaker level compared to where we were, for example, a year ago. We continue to be impacted by the platform policy changes and the tough competitive environment as well. In Q1 specifically, as we shared in our letter, the changes we made to our ad platform were disruptive. And while some advertisers have already recovered to prior levels, and while some new advertisers are finding success under these changes. There are a small number of our top advertisers that have not recovered, and this continues to be a headwind to demand as we start making our way into Q2. So while we're pleased with the progress we're seeing from many of our advertisers, there are, in many cases, growing off a smaller base, and it will take time for this more diverse base of smaller advertisers to drive the overall top line. In addition, we are concerned as we enter Q2 that there are some advertisers who rely on Lift studies that are provide measurement signals on a delayed basis. And then this could cause disruption in their spending in Q2 as they experience the initial impact of the changes we made in Q1 on a more delayed basis. Our internal forecast for Q2, therefore, reflects these challenges as well as the investments we're making to accelerate our progress towards improving our ad platform. Importantly, we are seeing sequential progress in the business. As we noted in the letter, month-over-month growth in March, for example, was 21%. And this was roughly in line with the seasonality month-over-month that we saw in 2021 and was well ahead of what we observed in 2022, although I know 2022 was impacted by the onset of the war in Ukraine. In addition, our internal forecast calls for at the midpoint 5% quarter-over-quarter growth, which is further demonstration of our expectation that we'll see more sequential progress for the business as we navigate the changes. So hopefully, that gives you a little bit of an understanding of the topography of what we saw in Q1 and how we expect that to transition into the new quarter.

The next question is from the line of Michael Nathanson with MoffettNathanson.

Thanks. Thank you, Derek. One is you've done a really nice job driving gross margin in the past few years. As you laid out in the letter, there's a couple of factors may make a tough this year. Can you give me a sense of where you think gross margins bottom out in the near term is to dimension it for us. And then you just mentioned that last answer about some small number of advertisers who have not yet returned to prior spending levels, what's causing that issue? And what alleviates that headwind to improve that situation? Thanks.

Sure. So starting on the gross margins. I think one of the things that’s challenging here, obviously, is that especially over any long period of time, gross margins are going to be impacted significantly by the top line revenue growth rate and in particular, top line revenue growth rate relative to our investments in infrastructure and so on. So I would say it starts with expectations around revenue on the top line. What we tried to do here though is, give you an understanding of where we are investing on the cost of revenue side and some magnitude to help you model out and sensitize where gross margins might have. So, specifically, one really big component, the largest component of cost of revenue is infrastructure cost per DAU. We shared in the letter that we expected sequentially that's likely to rise $0.08 to $0.12 off of the $0.59 base that we saw in the current. And that's really reflective of the significant investments we're looking at for ML infrastructure. The largest portion of that is designed specifically to drive optimization and performance of the ad platform. A smaller minority share of that, but still significant, is investments in ML to drive depth of engagement on the content platform. And of course, that drives directly into monetizable content and top line as well. And then a smaller minority portion is the investment in My AI, which again is directly attributable to contributing to the top line in the form of better understanding of user interest and intent. So, I think, in terms of other aspects of what's happening in cost of revenue and gross margins, over the last two quarters, we've taken an annualized $84 million out of fixed content cost, that's a little over $20 million a quarter. And we…

Our last question comes from Tom Champion with Piper Sandler.

Hi, good afternoon. Derek, curious if you could just talk about your advertising verticals and the pockets of strength and where it's weaker and how you're working with clients to build kind of relevant tools by vertical? Thank you.

Sure. I think actually, I might ask Jerry to step in on that one. I mean we've seen a continuation of strength in some of the same verticals we've been talking about for a few quarters, but you can probably talk a little bit more about some of the work that we're doing to support specific verticals under the new ad changes? A – Jerry Hunter: I mean, yeah, largely, we're working with advertisers on Cappy and making sure that we're collecting information and signals. We're also orienting both the sales force as well as our product team that actually works with customers to work directly with these customers and build tooling that helps them find the performance that they're looking for. And so we're doing these customer by customer, and we've seen some positive -- some very positive signals from some of these customers, where we've gotten that to get to a stronger ROAS post changes. We also have a bunch of other customers we're working with directly to improve their ROAS.

This concludes our question-and-answer session as well as Snap Inc.'s First Quarter 2023 Earnings Conference Call. Thank you for attending today's session. You may now disconnect.