Good afternoon, everyone, and welcome to Snap Inc.'s Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to David Ometer, Head of Investor Relations. You may proceed.

Thank you, and good afternoon, everyone. Welcome to Snap's Third Quarter 2025 Earnings Conference Call. With us today are Evan Spiegel, Chief Executive Officer and Co-Founder; and Derek Andersen, Chief Financial Officer. Please refer to our Investor Relations website at investor.snap.com to find today's press release, earnings slides and investor letter. This conference call includes forward-looking statements, which are based on our assumptions as of today. Actual results may differ materially from those expressed in these forward-looking statements, and we make no obligation to update our disclosures. For more information about factors that may cause actual results to differ materially from these forward-looking statements, please refer to the press release we issued today as well as risks described in our most recent Form 10-K or Form 10-Q, particularly in the section titled Risk Factors. Today's call will include both GAAP and non-GAAP measures. Reconciliations between the 2 can be found in today's press release. Please note that when we discuss all of our expense figures, they will exclude stock-based compensation and related payroll taxes as well as depreciation and amortization and certain other items. Please refer to our filings with the SEC to understand how we calculate any of the metrics discussed on today's call. With that, I'd like to turn the call over to Evan.

Hi, everyone, and welcome to our call. In Q3, we made meaningful progress on our long-term strategy to grow our global community, deliver stronger performance for advertisers and invest in the future of augmented reality. At the core of Snapchat is a mission that has endured since our founding to reinvent the camera to strengthen human connection. Snapchat is built around real communication, helping people share moments and build closer relationships every day. This clarity of purpose continues to drive durable growth. Our community reached 477 million daily active users, an increase of 34 million or 8% year-over-year and 943 million monthly active users, an increase of 60 million or 7% year-over-year. With this momentum, we have made further progress toward our goal of reaching 1 billion monthly active users around the world. Revenue increased 10% year-over-year to $1.51 billion, driven by improved advertising demand and the rapid expansion of our direct revenue streams. On the advertising front, continued growth in our small- and medium-sized business customers and improvements in direct response advertising performance drove an acceleration in direct response advertising revenue, which increased 8% year-over-year and 13% quarter-over-quarter. Other revenue, which includes Snapchat+ subscription revenue increased 54% year-over-year to $190 million in Q3, reaching an annualized run rate of more than $750 million. To build on this momentum, we expanded our premium offerings, introducing new storage plans for memories and launched AI-powered experiences in Lens+ and Platinum bundles that we believe will deliver incremental value to our most engaged community members. We remain disciplined in aligning our investments with our core strategic priorities while driving operating leverage over time. In Q3, we delivered $182 million of adjusted EBITDA and generated $93 million of free cash flow while reducing our net loss by more than 30% year-over-year to $104 million,…

Thank you, Evan. In Q3, total revenue was $1.51 billion, up 10% year-over-year. Advertising revenue reached $1.32 billion in Q3, up 5% year-over-year, driven primarily by growth in DR advertising revenue, which increased 8% year-over-year. The growth in DR advertising revenue was driven by strong demand for our pixel purchase and app purchase optimizations as well as continued strength from the SMB client segment. Other revenue increased 54% year-over-year to $190 million in Q3, with the largest driver being Snapchat+ subscribers, which increased 35% year-over-year to approach 17 million in Q3. With the exception of our large customer business in North America, our advertising growth remains very strong. From a regional perspective, we saw a significant acceleration in advertising revenue growth in both Europe and Rest of World during Q3. In Europe, advertising revenue grew 12% year-over-year, an acceleration of 6 percentage points over the prior quarter. In Rest of World, advertising revenue grew 13% year-over-year, an acceleration of 10 percentage points compared to the prior quarter. In contrast, North America growth continued to lag the global business with advertising revenue growing 1% year-over-year in Q3. Within North America, our SMB advertising business grew at a rate of more than 25% in Q3, while our large client solutions business posted a modest decline in the quarter. The North America LCS business accounted for approximately 43% of total global revenue in Q3, decreasing is the share of total revenue by roughly 10 percentage points over the past 2 years, reflecting meaningful diversification of our revenue base as growth accelerates across other regions and customer segments. While this mix shift demonstrates healthy progress toward a more balanced business, the North America LCS segment remains the primary headwind to our overall revenue growth. Given the strong momentum we are seeing with our ad…

[Operator Instructions] The first question comes from Rich Greenfield with LightShed Partners.

I've got a couple. On the Perplexity partnership, which is really interesting that you're going to add it on to Snap AI, is the cash stock split already determined Evan? Or could it actually change based on factors that you can help us understand? And you talk about monetization for the partnership starting in 2026. The Snap ad sales, like will your ad sales team be selling ad units that appear in Perplexity or just help us understand what monetization could look like inside this Perplexity bot that's going to live inside a Snap. And then just a question for Derek. On a 2-year stack basis, it looks like cost of revenue really came down. You talked about a shift to Spotlight and Sponsored Snaps should we presume that the reason why we're seeing that leverage in cost of revenue is because you're not paying out to content owners the way you do in Discover for those ad units. Just would love to understand those 2 main things.

Rich, thanks so much for the question. We're really excited about the Perplexity partnership. And I think it sort of underscores Snapchat's role as a messaging service and how valuable that is in the age of AI, especially because Snapchat engagement is built around real relationships between friends and family, but also because conversational assistance is very quickly becoming the primary way that people are choosing to interact with information on the Internet. So I think we have a really unique opportunity ahead to help distribute AI agents through our chat interface and launching with Perplexity next year to bring their answer engine to Snapchat really in the default placement in our chat inbox is going to be really valuable to our community and hopefully, very valuable to Perplexity into Snap as well. And I think Perplexity's focus on trusted and verifiable sources really aligns with our values and makes them a good fit for our community. I think to answer your question from a monetization perspective, we don't expect to recognize any of the 400 million until we begin to roll out the integration likely towards the beginning of next year. And Perplexity will control the responses from their chatbot inside a Snapchat. So we won't be selling advertising against the Perplexity responses. But I do believe that the placement will help Perplexity drive additional subscribers, which I think is something that will be valuable to their business. I think just looking ahead, one of the things that's really exciting is the opportunity to expand to more partnerships. And advertisers are very focused on leveraging Sponsored Snaps to distribute conversational commerce experiences with their brands. So that's something we'll be experimenting with as we kick off next year.

I start thinking I can take the cost element of that question. As Evan noted in his letter earlier this call, we see a lot of opportunity to expand our gross margins, and we're working across a number of different fronts to achieve this including by improving the top line growth as well as becoming more efficient on cost of sales. So on the revenue front, we're broadly taking steps to better monetize our core product value. So we see Sponsored Snaps and Promoted Places were first steps on that journey. The ongoing growth of Snapchat+, the introduction of Lens+ and now the recent announcement and testing of memory storage plans are all examples with the latter being a great example of an area where we can flip a cost structure into a revenue-generating business line, the Perplexity deal is yet another example of a new line of revenue generation that helps expand the margins also. On the cost side, we see several dimensions to this, including work to optimize our content programs, recalibrating our investments in community growth and the cost to serve our community to better match the long-term financial potential of each market. In Q3 specifically, we're seeing the benefit of a mix shift in where impressions are being delivered, in particular to Sponsored Snaps and to a certain extent, Spotlight and as you've noted, these surfaces have higher margins, and this contributed directly to gross margin improvement of 55% in Q3, up from 52% in the prior quarter and 54% in the prior year. So lots of work to do there, but we're excited about the progress and what we saw there in Q3.

Next question comes from Mark Shmulik with AllianceBernstein.

Evan, just a follow-up on that last answer kind of beyond Perplexity. How do you see Snaps are all evolving here as kind of this distribution channel? It sounds like there may be something about kind of brand messaging integrations, but could we potentially see the ad stack open up as well? And then Derek, kind of on the commentary around the Q4 engagement headwinds, if we try to compartmentalize that, is the bulk of that kind of like onetime in nature as we kind of think about some of these regulatory type headwinds and then we kind of rebuild the ramp from there. Is that the right way to think about it?

Thanks so much for the question. I think as it pertains to opening up the platform further, what we're seeing is a lot of our advertising clients are investing a lot in these conversational experiences, whether they're educational or really designed to improve consideration or folks who are going and developing full-fledged commerce experiences inside their own chatbots. But despite all this investment in building out that customer experience, folks are struggling to find distribution channels for those experiences. And so while there's a lot of development of AI agents right now, I think we're very quickly seeing people shift their focus to try and to develop more distribution. So I think given Snap's primary engagement around messaging, there's a real opportunity to open up our chat inbox and chat interface to more of these agents and to really to distribute them through our Sponsored Snaps products. So that's an area of investment for us. The work we're doing to support Perplexity and the development of our APIs there will also support other partners over time, and it's certainly something we're excited about. I think it's also a really compelling customer experience given what we're seeing in the way people are shifting their behavior patterns to engage with these chatbots. So definitely, as a chat service, we're very excited about the evolution in the customer expectation there. I think as it pertains to the overall DAU growth and our efforts. We've been doing a lot to overcome ongoing engagement headwinds to DAU, primarily by introducing new conversation starters. So if you think historically on Snapchat a lot of conversations have been started by folks replying to friends stories. As we've seen engagement shift from things like friend stories to content posted on Spotlight, for example, we have to migrate that…

[Operator Instructions] The next question comes from Doug Anmuth with JPMorgan.

This is Maggie on for Doug. We can tell that midsized advertisers are clearly focused for Snap. Could you just expand a bit more on your go-to-market efforts and product road maps to unlock greater spend from this segment?

Yes. We're so excited about the growth we've been seeing with our small and medium-sized customers. We've obviously got very strong product market fit with our app product, lead gen, of course, our web direct response product as well. A lot of what we've been focused on from a product perspective, are things like speeding up signals onboarding or simplifying account setup. We've also improved partner onboarding as well, which is helping us scale, and we've seen some improvements in the median log in to spend time for that advertiser. cohort. I also just want to recognize the business development team has been doing a great job onboarding more customers. So we'll definitely be investing there as well as we work to further accelerate the growth we're seeing with small and medium customers.

The next question comes from Michael Morris with Guggenheim Securities.

Wanted to ask about direct response advertising. Can you share how much was the 8% growth in the quarter an acceleration from the core trend in the second quarter when we removed the impact of the execution error that you guys had. And then as you look forward, can you return to double-digit growth in direct response advertising. And if so, I know that you have a number of initiatives. I appreciate all the details. But would you maybe give us the top 2 or 3 contributors that can really impact that growth rate over the next year and I've got just slip one more in. Following the error that you did experience last quarter, could you just provide an update on your comfort and confidence with the stability of the bidding and optimization tools now that -- to kind of ensure that you wouldn't have that happen again.

It's Derek speaking. Thanks for the question. Yes, direct response revenue was up 8% year-over-year in the most recent quarter. It was an acceleration of 3 percentage points over the prior quarter. So we're pleased with the progress there. What we saw was good strength in our pixel purchase demand as well as the app to optimizations and really broadly across the SMB segment, helping to drive that acceleration in the quarter. When you're looking at ad revenue broadly with direct response being the vast majority of it, we saw really good strength across Europe and rest of world. Europe in particular, grew 12% year-over-year. That was an acceleration of 6 percentage points. Rest of World grew 13%, which is an acceleration of 10 percentage points in the quarter. So really strong results there, both across LCS and in particular, the SMC market there. As we look at North America, that business still lagged a little bit and so dragged on the rate of acceleration on the overall business as well as in DR specifically. Within North America, though really pleased with what we're seeing on the SMB segment up to more than 25% year-over-year in Q3. So given the strong momentum that we're seeing in Europe and Rest of World and with the SMB business globally, we're pretty pleased with what we're seeing on both the ad platform and our ad units there in terms of driving improvement on revenue and the business generally. I think as it pertains to our large client segment in North America, we saw a small decline there. We've been really focused on doubling down on what's working in the business, but also making targeted adjustments or go-to-market operations there in order to drive growth. We don't have recovery in that North America large client segment really baked in Q4, obviously, with the guide, but we expect that the work that we're doing there will help us build momentum over time. And if we can bring the growth in that portion of the business back up to what we're seeing elsewhere than that is the path to further improvement in the overall growth in ads business going forward. So hopefully, that gives you a sense of what's driving the growth and acceleration on DR. And of course, we're watching our ad platform extremely carefully and the road map there and working with our teams to execute well there, and I think it's showing up in the results that we're seeing on the ad platform across the business globally. Thanks very much.

The following comes from Shweta Khajuria with Wolfe Research.

Okay. I just had a quick 1 on infrastructure costs for next year. I guess, could you please talk to your conviction level on keeping infrastructure costs basically flat next year? And what, in your view, could drive those costs higher? And when would you think you would step in?

It's fair speaking here. There's a number of different drivers here. Obviously, over the last several years, one of the really big drivers of our growth in infrastructure cost has been the rapid growth and investment of ML and AI infrastructure. And we do expect that we're going to be able to deploy capacity there, but we're getting a big focus on capacity utilization improvement. The other is we've scaled the business, obviously, a lot with the growth in our community and there's an opportunity for us to do work around the efficiency of that cost structure and our cost to serve. So both in terms of the services we're utilizing from our cloud partners, the pricing of those services, but then also just how we're engineering our product and the cost to serve, which Evan talked about a little bit earlier in terms of our ability to calibrate that cost to serve relative to each market and its long-term financial potential. And so we think across each of these vectors that there's a lot of opportunity for us to make progress on the infrastructure costs and make progress towards that specific goal we had stated of working to make infrastructure flat into 2026. Hopefully, that gives you a little more color.

The final question comes from Ross Sandler with Barclays.

Great. Evan, just a question on spectacles. So there have been recent press reports about potential financial partners. And I think some of your peers have done partnerships with these manufacturing or distribution entities. So what's your latest thinking here? And your AR software stack is fairly advanced versus the field for smart glasses. So how are you thinking about leveraging software versus the hardware side? Just any updated thinking there would be great.

Thanks so much for the question, Ross. We've got a really exciting year ahead here as we prepare for the public release specs. And we've been thinking a lot about ways to accelerate our technical leadership in the space is a form factor, obviously, we've been focused on now for more than a decade. And I think we've been able to really leverage our advantages in terms of lens core huge ecosystem of lenses that have already been built, the amazing developer tools and Lens Studio and obviously, now the Snap operating system that runs on the current developer version of specs. So one of the things that we have been doing to create more optionality in terms of our ability to accelerate is putting specs into their own stand-alone 100% owned subsidiary. That will give us some options as we think about potential partners to work with to accelerate our leadership here in the space as we prepare for the public rollout. So definitely some great opportunities to partner. We really believe that the killer use case for specs is lenses, and we've seen some incredible lenses that have been created so far almost weekly, it seems like developers are rolling out new and unique experiences. So if you haven't gotten a chance to check out the latest, I'd highly recommend it. Thanks so much.

This concludes our question-and-answer session as well as Snap Inc.'s Third Quarter 2025 Earnings Conference Call. Thank you for attending today's session. You may now disconnect.