Snap: 2Q20 earnings call transcript Daily active users increased 17% year-on-year to 238 million

On July 22, 2020, Snap, the parent company of social software Snapchat, released its second quarter report for fiscal year 2020. Data showed that Snap's second quarter revenue was $454 million, up 17% from $388 million in the same period last year; its net loss was $360 million, up 28% from $255 million in the same period last year;

After the financial report was released, Snap executives including Evan Spiegel, Jeremy Gorman, and Derek Anderson attended the subsequent financial report conference call to interpret the key points of the financial report and answer questions from analysts.

The following is the transcript of the earnings conference call:

Evan Spiegel

This has been an extremely challenging time, and our team has done an excellent job supporting the growth of our community, which grew 17% year-over-year to 238 million daily active users, and building our business with revenue growing 17% year-over-year to $454 million. While our revenue growth rate continues to be impacted by ongoing market disruptions, the fundamentals of our business are strong, with high engagement on our service supported by our multi-year investment in our self-serve advertising platform, which is helping our partners succeed and grow their businesses in this uncertain environment.

I’m most proud of the work our team did to create this quarter’s Snap Partner Summit, which took place virtually in the augmented world. We announced several new products like Mini, voice scanning, Camera Kit, locations on the Snap Map, Bitmoji for third-party games, as well as several new partnerships and all-new content. We also made Snapchat easier to navigate with the new Action Bar, which provides top-level navigation and easier access to Snap Map, Chat, Camera, and Discover, giving each platform more surface area and accessibility.

We’re working to overlay new computing experiences onto the world through augmented reality. Snap Partner Summit showcased some of our latest AR products, including local lenses that let people share augmented reality experiences, overlaid on neighborhood cityscapes, and SnapML, which enables members of our community to bring their machine learning models directly into Lenses on Snapchat. This enabled Gucci to leverage Wannaby’s foot-tracking technology to help people try on their latest sneakers in Snapchat, and even buy them directly in Lenses. These types of augmented reality experiences are especially powerful in a post-COVID retail environment, where brands are doubling down on virtual try-ons.

In addition to our new augmented reality products, we also released Minis to enable developers to build interactive and social experiences for our community. For example, when movie theaters reopen, friends will be able to browse and buy tickets together in the upcoming Atom Tickets Mini. We are excited to help partners understand how they will benefit from Snap's long-term vision and the many ways they can use our products and platform to connect with their communities and build businesses.

Our community grew 17% year-over-year, with an average of 238 million people using Snapchat every day during the quarter. This continues our recent momentum in daily active user growth, and over the last three quarters we've seen our highest year-over-year growth rate since 2017. We've now reached over 100 million people in the U.S. alone, with strong growth in our core markets of North America, Europe, and Australia.

We also continue to invest in app performance and localization to make our service more accessible to people around the world, and now more than 2 billion people use Snapchat in their native language. These efforts have helped us grow faster in emerging markets like India, where our daily active users have grown by more than 100% over the past year.

As the changing public health landscape accelerates the adoption of digital products, we believe we have a significant opportunity to further empower new behaviors through AR, entertainment, and commerce. For example, we continue to see increased engagement with our camera, and the number of Snaps created daily has grown at twice the rate of daily active users over the past year, making Snapchat one of the most frequently used cameras in the world.

We're particularly pleased to see adoption of our AR platform accelerating as well, with the number of people playing with Lenses daily increasing 37% year-over-year. This growth is driven in part by the community of talented Lens creators and partners who are creating and distributing Lenses on Snapchat.

Creators are quickly adopting new Lens Studio features to create Lenses that put lightsabers in your hands, turn the world into spaghetti, and let you try on clothes and makeup. Today, Snapchatters are using Lenses created by our community six times more than last year, and these Lenses now drive more than a quarter of all Lens engagement on Snapchat.

We’re excited to see that our product innovations in AR are empowering the creativity of our community of lens creators, which in turn is driving growth in user engagement. With so much happening in the world right now, our Discover platform is more important than ever to help our community stay informed and up-to-date on the latest events. During the pandemic, Snapchat has become the go-to destination for reliable and accurate news content, with more than half of the entire US Gen Z population watching COVID-related news created by partners.

Additionally, in the wake of the murders of George Floyd, Ahmaud Arbery, and Breonna Taylor, we’re publishing curated community stories featuring powerful Snaps from the community covering the latest news on peaceful protests and conversations about what it means to be black in America. We’re also launching Happening Now, a dedicated section of Discover that outlines breaking news from media partners like NBC News and ESPN in a single Snap.

In addition to news, Discover is delivering premium mobile entertainment experiences to our community as they shelter in their homes. For example, Will From Home peaked at the Fresh Prince of Bel-Air reunion and was watched by more than 35 million people. Snap Originals continue to attract audiences comparable to top TV series and have reached more than 75% of the U.S. Gen Z population so far this year.

Additionally, many of our media partners are successfully adapting TV properties for their platforms, reaching larger audiences that don't watch TV. According to eMarketer, the average U.S. adult spent 29 minutes more time on mobile content compared to TV, which decreased by 6 minutes in 2018. We believe this trend is driven primarily by younger generations, who spend a fraction of the time watching TV that their older counterparts do. This creates opportunities for our media partners, some of whom spend significant resources producing high-quality content for TV, to expand their total audience base to include these younger viewers.

Several of the shows that have found success on Discover were originally shot for linear TV and have reached more than 100 million viewers on Snapchat so far this year. We added more than 180 new Discover channels during the quarter and recently announced new partnerships with Disney, ESPN, NBC, ViacomCBS, the NBA and the NFL as we continue to scale our curated content business.

While our partners are experiencing many headwinds right now, our close collaboration with our platform and products is driving results in our advertising business. Revenue from our advertising business grew 17% year-over-year to $454 million. We are pleased to see our revenue continue to grow, especially amid extreme market disruption. As severely impacted companies like travel and in-theater entertainment have reduced spending, we have transitioned to helping them plan for a future recovery led in part by our audience. We have also found that certain industries, such as CPG, gaming, streaming services, and e-commerce, have benefited from COVID-related changes in consumer behavior and have been gravitating toward our platform as advertisers.

Our significant investments in our team and ad platform over the past several years have helped us deliver significant value to direct response and brand advertisers as they navigate rapid market change. Our direct response business continues to drive meaningful ROI at scale, particularly in the current environment as performance-oriented app and e-commerce advertisers look to reach customers who are increasingly engaging and transacting on the Internet rather than in person. We are accelerating this as we continue to make significant improvements to our ad products and back-end optimizations, which are helping us scale the results we deliver for our direct response advertisers.

For example, we’re rolling out dynamic ads globally so that retailers like Sephora and Adidas can run e-commerce campaigns on Snapchat that automatically optimize across their entire catalog. These product improvements are creating a virtuous cycle for our direct response business as well. The increasing quality and diversity of ad demand as we onboard more advertisers means we have more relevant ads to choose from when deciding which ad to show to a specific person at a specific time. This, in turn, drives more value for advertisers while reducing wasted impressions, all while reducing the perceived ad load for our community.

While these uncertain times have impacted many businesses in different ways, one consistent theme across all brands has been a focus on engaging customers in thoughtful and authentic ways. Brands have collaborated on many of the new products we are developing, including by investing heavily in our new augmented reality capabilities to reach audiences who can’t visit their stores or see their products in person.

We recently launched Brand Profiles, an important first step toward creating a native home for all the organic experiences brands build. Snapchatters can now visit profiles from brands like Dior, Target, and Tim Hortons to watch stories, experience AR experiences, and even buy products through our Native Commerce integration. We’re excited to grow our relationships with brands of all sizes as we continue to build tools for brands to organically engage with their audiences.

Finally, our growing focus on brand safety and privacy across the industry puts us in a unique position as we have invested in these areas since the beginning of our business. The foundation of both our consumer products and our advertising business is built on our commitment to protecting the privacy of our community and providing a safe environment for brands. We believe that building trust with our community and providing a safe environment on Snapchat is critical to our long-term success and will help us meet the high expectations of our community and advertising partners.

This reflects our broader commitment to having a positive impact with our company and our products. Our strategy is simple. We try to do the right thing, even when it’s hard, and we do our best to find and correct mistakes quickly. Looking ahead, we expect the current operating environment to become even more complex. This year alone, we have seen dramatic changes in the global economy, privacy and regulatory landscape, public health and social behavior, and direct confrontation with the unjust tradition and extreme inequality in the United States.

This means that our strategy of trying to do the right thing is more than just a moral imperative. We believe it’s the only way to achieve our long-term vision for our business. As we grow our global audience and expand our advertising and content partnerships, we have a lot to learn, which gives me great hope to see our team, community, and partners actively engaged in building a better future.

Jeremi Gorman

Thanks, Evan. In a challenging and evolving global environment, we are pleased with our results this quarter, and we continue to see tremendous strength and opportunity in our business as we support our communities and advertising partners. In the second quarter, our total revenue was $454 million, up 17% year-over-year. We are confident that our business is well-positioned for the long term, as evidenced by the resilience we've seen with our direct response advertisers and our continued success helping brands create valuable messages and reach their communities effectively.

Within Snap, we have many conversations about how our team, products, and business can drive positive change in the world. In the U.S., our platform reaches 90% of 13-24 year olds and 75% of 13-34 year olds. This audience is critical to advertisers as the Snapchat generation forms lifelong habits, and also because young people are focused on driving change in the world and building a better future. We take our responsibility to educate, inform, and support this incredible generation very seriously, and we are committed to using our business as a force for good.

Given the relationship we’ve built with the global Snapchat community, we’ve been able to help brands deliver timely messages that resonate with 13-34 year olds who see the world differently than their parents’ generation. This is especially important in the context of current events, as advertisers look to align their messages with what our community is looking for: positivity, kindness, and most importantly, authenticity. We’ve worked with brands in a number of verticals that are well-positioned in the current environment, such as consumer packaged goods, gaming, streaming, and e-commerce, while also helping our partners chart recovery roadmaps for industries that have been greatly impacted by COVID-19.

We had the privilege of working closely with Monster Energy to adapt a new campaign for their Snapchat to respond to stay-at-home orders through their #CrushQuarantine campaign across Snap ads, commercials, story ads, and lenses. Monster’s multi-ad product exposure ultimately drove a 12-point lift in ad awareness and a 5-point lift in message association. Our large audience, creative formats, and advanced measurement tools provide brands like Monster Energy with a significant opportunity to reach Snapchatters during a global pandemic.

Our team has also been working hard to provide businesses with helpful products and resources to navigate the current economic climate. We’ve added multi-country targeting capabilities, allowing advertisers to optimize for top-performing customers no matter where they are, and accommodating location-agnostic products and services like commerce, fintech, and gaming.

Additionally, we launched Places on the Snap Map to highlight businesses that are popular with the community and provide information like hours, reviews, and delivery options through third-party partners. While we’re just getting started with this opportunity, as areas around the world begin to safely reopen, we’ll be there to help the Snapchat Generation support their favorite local businesses and discover new ones.

We remain focused on overcoming the ARPU opportunity through three key priorities. First, investing in our advertising platform to improve relevance and deliver measurable ROI. Second, efficiently scaling our sales and marketing capabilities to support our advertising partners around the world. Third, building innovative advertising experiences through video and augmented reality that deliver real business value. Our three priorities, combined with our unique reach and growing global audience, enable us to improve performance at scale.

Since completing our transition to a self-service advertising platform, we have been able to reliably translate improvements in relevance, optimization and measurement into revenue growth by delivering higher ROI. In times of disruption, marketers have to make difficult decisions. They need flexibility, creativity and strong relationships, but most importantly, they need efficient media. Advertisers are becoming more performance-focused, and economic conditions only accelerated this trend this quarter. Our flexible and advanced self-service platform, powerful suite of performance advertising products, and our relentless focus on measurement and ROI continue to help our advertising partners drive positive outcomes.

The global health crisis has also accelerated the shift to a digital economy. Our advertising partners are exploring more ways to deliver services digitally, including at-home fitness apps, online education programs, retail stores and restaurants offering online ordering and delivery services, and mobile-first banking and transactions. The crisis is encouraging all business owners to adopt digital marketing methods to engage with customers around the world, and we are well positioned to capitalize on this shift. Our early investments in building the foundation of our global business have paid off and resulted in the highest number of active advertisers so far this quarter.

We have built a complete suite of advertising products designed to meet advertisers’ needs in this new world, especially for e-commerce, such as swipe to call, pixel verified purchases, app re-engagement and dynamic ads. We recently launched dynamic ads globally and we are seeing advertisers already starting to see success with this new ad format. Rob Seidu, Senior Director of Media Activation at adidas, said: “Adidas has further accelerated its digital business in the wake of the COVID-19 pandemic. E-commerce is a key focus for us in 2020 and beyond, and we were excited to beta test Snapchat’s dynamic ads in the UK, Germany, France and the Netherlands. Within a few weeks, we saw a 52% increase in return on ad spend, and we have subsequently increased our investment.”

More e-commerce businesses are adopting our Snap pixel to optimize for down-funnel purchase goals, which shows that we are seeing more demand from businesses measuring campaigns through first-party attribution. For example, in Q2 2020, Chipotle launched a new free delivery campaign on Snapchat to drive purchases on Chipotle.com as well as within its app. Their campaign drove 3x more attributed purchases compared to their Q1 2020 campaign and saw a 171% improvement in return on ad spend quarter-over-quarter. We remain committed to helping businesses like Chipotle turn measurement and optimization into meaningful conversions and strong ROI.

Our second priority is to increase demand through better service for our advertising partners. We continue to hire talented sales professionals to build and improve our vertical reach, serving many advertisers around the world. While we were unable to hold in-person meetings with our advertising partners, our team quickly focused its efforts on virtual industry education, with our team leading thought leadership webinars during quarantine and partnering with many industry leaders like Shopify and Smartly.io to further educate advertisers on our powerful advertising tools and capabilities. We are also supporting advertisers by building more on-demand learning tools like Snap Focus, which includes six learning courses that cover everything advertisers need to know to create their first campaign.

Our third priority is leading innovative advertising. Over the past five years, we have been building a strong video business with the goal of connecting brands and advertisers to the Snapchat Generation. For example, COVERGIRL Clean Fresh came to Snapchat to reach the hard-to-reach Gen Z and Millennial female audience. Their campaign relied heavily on premium video, which included Snap Select ads, Snap Ads, and filters.

Of the total audience, 62% was unique to Snap. The campaign delivered a 9 percentage point lift in ad awareness and 4.5x lift in purchase intent over the Snap US CPG Norm. This is just one of many examples of a larger shift in how Gen Z and Millennials are consuming content. It’s getting harder to reach audiences on linear TV or commercial-supported streaming, and it’s not just younger generations, with over 35% of people seeing daily average Discover viewership increase by over 40% year-over-year.

Building on this growth and in response to the evolving needs of our advertising partners, we launched First Commercial, giving advertisers a way to reserve the first commercial a Snapchatter sees in the first Show they watch, giving brands that all-important first impression. Our ads are designed for social video and online video buyers to drive growing online video and TV budgets into our carefully curated, brand-safe content environments.

In fact, content on the Discovery platform is brand-safe by design. To provide advertisers with fixed-price reserved inventory next to this content, we introduced Snap Select, where ads appear only in content from our hand-curated shows and media brands like ESPN, NBC, and People. In Q2, we expanded Snap Select curated ad placement options to five themes: Sports, Entertainment, Beauty, Lifestyle, and News, allowing advertisers to reach audiences across verticals.

We believe the future of customer interaction is immersive. The most engaging and creative ads on our platform are powered by our augmented reality lenses. Brands from all walks of life are working with us to deliver fun ads on Snapchat that they can play with and share with their friends. Ultimately, we want to give advertisers the tools to build a digital layer around their products.

For example, we recently launched an augmented reality lens “Try It On” campaign with luxury brand Gucci, which allowed Snapchatters to virtually try on and purchase some of Gucci’s most iconic shoes through Snapchat. The lens was played with our community for an average of 22 seconds and generated a 5x return on ad spend in certain markets. Snapchatters are actively looking for more and more ways to engage with brands on our platform, and we’re excited to help partners like Gucci connect with them

During this time, we believe that AR try-on will be extremely important to the future of commerce, and we are excited to work with more partners to build incredible experiences for our community.

Longer term, we see a huge opportunity for brands to provide utility to Snapchatters while generating real business value on our service — not just through content ads. Brands are starting to invest beyond advertising on Snapchat by building fun, engaging, and useful experiences for Snapchatters. Evan highlighted earlier that the launch of Brand Profiles this month is a key pillar of that future. Today, our focus is on giving Brands a home for all of the innovative AR experiences they create, as well as their Stories. We believe that in the future, Snapchatters will naturally engage with businesses of all sizes on our service. For brands like Target, this could mean they visited a Target store on a map to check store hours; used a Mini to find the best offers with friends; tried on the latest looks through AR lenses; and more.

In the five years since launching advertising on Snapchat, we’ve created the industry’s first vertical video format, brought branded AR experiences mainstream, and pioneered privacy-safe, mobile-first ads to help advertisers everywhere reach communities. We will continue to invest in the long term by demonstrating measurable ROI to our advertising partners, empowering our teams to speak strategically about the value of advertising, and helping advertisers scale through innovative ad products and services.

"We have built a powerful advertising platform to serve the Snapchat generation, who are digitally native and uniquely positioned to help jumpstart the recovery. Given our young and influential community, the depth of their engagement on the platform and our overall opportunity to capture share in the growing digital advertising market, we believe we are well-positioned to deliver business results for advertisers over the long term."

Derek Andersen: Our second quarter financial results reflect our continued success in growing our community, investing focusedly in the future of our business, and efficiently scaling our operations to achieve profitability and positive free cash flow.

As Evan mentioned earlier, our community grew to 238 million daily active users in the second quarter, reflecting year-over-year growth of 17%, or 35 million. Growth in our community was strong, however the final result was below our previous estimate of 239 million. When shelter-in-place orders began, people sought to stay connected and entertained at home, and we observed an increase in daily active users that informed our initial estimates. As shelter-in-place conditions persisted, the initial uptick was faster than we expected. While the unusual circumstances impacted user growth in the quarter, we are pleased with the overall level of growth, and this growth continued month-over-month from April to May and May to June.

Growth in our community continued to be broad-based in the second quarter. In North America, DAUs grew 9% year-over-year to 90 million. In Europe, DAUs grew 12% to 71 million. In the rest of the world, DAUs grew 37% to 77 million. The large growth in the rest of the world follows the rebuild of our Android app in 2019 and our efforts to further localize the product. A great example of this momentum is in India, where daily active users more than doubled year-over-year in the second quarter. We see significant opportunity to continue growing our community as we further invest in localizing our product through language support, local content, and marketing partnerships across multiple regions.

Second quarter revenue was $454 million, up 17% year-over-year. While our full quarter growth rate exceeded the quarter-to-date results we previously shared on our call, the path to this result was not a straight line. The operating environment remains challenging as the coronavirus continues to impact macroeconomic conditions and our advertisers' businesses. Many of our advertisers have seen disruptions to their businesses, particularly those that rely on face-to-face interactions with their customers, such as restaurants, entertainment venues, transportation services, brick-and-mortar retailers and hotel providers, among others.

Additionally, many advertisers paused spend for a period of time during the quarter in order to swap out creatives for messaging that is more appropriate for a given time. These challenging circumstances interrupted otherwise strong momentum in our self-service platform. We continue to see strong adoption of our goal-based bidding products, driven by demand for down-funnel bidding goals such as pixel-verified purchases, pixel-verified subscriptions, app purchases, and other goals tied to a directly measurable return on ad spend. For example, pixel-verified purchase revenue grew more than 4x year-over-year in Q2 and is now one of our most important goal-based bidding products.

From a regional perspective, our North American revenue grew 18% year-over-year in the second quarter, roughly in line with the overall business. In Europe, operating income grew 30% year-over-year as the end of stay-at-home orders in Europe facilitated an improved operating environment in the region. Additionally, Europe was relatively less impacted in the second quarter by advertisers pausing spend to switch out creative messaging. In the rest of the world, revenue grew 2% year-over-year in the second quarter, a relatively lower growth rate reflecting COVID-19-related operating headwinds that were more pronounced for our advertising partners in the region, including restrictions on cash transactions in certain countries, which remain important for direct response advertisers, and supply chain issues that had a greater impact on certain e-commerce categories in the region,

ARPU remained stable in the second quarter as year-over-year growth in daily active users roughly equaled year-over-year growth in revenue. Higher sell-through rates for impressions and strong growth in content engagement drove nearly doubling of year-over-year growth in the second quarter. As a result, eCPMs declined 24% year-over-year in the second quarter, broadly consistent with the decline seen in the prior quarter. While we expect to achieve market-level eCPMs for audiences and ad units over time, relatively low eCPMs serve us well in the short term to attract and retain new advertisers by helping them deliver an attractive return on their ad spend.

Gross margin was 47% in the second quarter, up one point from the same period last year. Infrastructure costs per DAU were $0.69 in the second quarter, the lowest DAU cost we have reported since the first quarter of 2017, following our annual infrastructure cost camp as our engineers invest time in infrastructure efficiency projects beyond our ongoing cost management initiatives.

On the content side, we've been increasing our investments in premium content and are seeing strong returns on those investments, with the average daily number of Snapchatters watching shows growing more than 45% year-over-year in the second quarter.

Additionally, we continue to see our overall Discover audience mature, with the daily average number of Snapchatters engaging with Discover content in the 35 and older age group growing at over 40% in the second quarter. We are particularly pleased that we are able to grow our community at a strong pace and invest in premium content while continuing to expand gross margins.

Operating expenses were $307 million in the second quarter, up 19% year-over-year. This increase reflects our continued investment in our talent base, primarily driven by growth in our engineering and monetization teams. Over the past year, we have seen employee retention rates stabilize and improve significantly, helping to ensure that investments in our talent base are highly productive, as evidenced by the product innovation showcased at our recent Partner Summit.

We also made investments in marketing to grow our advertiser base and Snapchatter community, which contributed in part to strong growth in these areas. These investments have been partially offset by savings from lower travel and event-related expenses while our teams continue to work largely from home.

Adjusted EBITDA for the second quarter was negative $96 million, a negative $17 million year-over-year. We are prudently prioritizing our investments amid an uncertain operating environment, but we remain focused on investing in the long-term growth of our business to build on the momentum we have established with our community and advertising partners. While this has put downward pressure on adjusted EBITDA in the short term, we believe this is the right decision for the long-term health of our business given the strength of our balance sheet.

Second quarter operating income was negative $311 million, or $6 million, negative year-over-year as lower stock-based compensation partially offset the year-over-year decline in Adjusted EBITDA. Total stock-based compensation decreased approximately 5% year-over-year even as we continue to grow our team. This decline occurred as our team continued to transition toward a sustainable and competitive compensation structure established in the years following our IPO. As we seek to build shareholder value over the long term, we believe that careful management of stock-based compensation programs is an important input to effectively managing our fully diluted shares outstanding.

Net income for the second quarter was negative $326 million, down $71 million from the prior year period, reflecting the aforementioned flow of operating income, increased interest expense related to last year's issuance of convertible notes and a one-time gain in the prior year related to the disposition of certain assets.

Free cash flow was negative $82 million in the second quarter, up $21 million year-over-year, driven by lower adjusted EBITDA, higher interest expense and higher capital expenditures, mostly offset by efficiencies from higher net working capital as we continue to scale our business. We ended the second quarter with $2.8 billion in cash and marketable securities, up from $2.1 billion at the end of the first quarter, reflecting proceeds from convertible notes issued in the second quarter. When combined with our undrawn credit facilities, we currently have access to approximately $4 billion in total capital, which ensures we have the necessary working capital to focus on long-term operations regardless of the operating environment.

Similar to the previous quarter, we do not intend to provide financial guidance for the third quarter, but we do want to provide an information about where we are today and how we plan to invest in the business. So far, we estimate that revenue growth in the third quarter will reach 32% year-on-year by July 19. While we are cautiously optimistic about these trends over time, we are also aware that operations may remain volatile and economic conditions may continue. Further deterioration. For example, historically, advertising demand in the third quarter has been driven, and these factors seem unlikely to be achieved in the same way as in previous years, including the back-to-school season, the movie release schedule, and the operations of various sports leagues.

At present, it is difficult to predict how these factors affect advertising demand for the rest of the third quarter. Currently, our best estimate is that our revenue growth rate throughout the quarter may be lower than the estimated real growth rate so far this quarter, so we have an internal investment plan based on revenue growth of approximately 20%. We intend to continue investing in our business in the third quarter, and our estimate of the cost structure assumes that daily active users in the third quarter will be between 242 and 244 million.

This means that daily active users will grow by about 15% to 16% year-on-year or 32 million to 34 million. In terms of expenses, we currently expect that the sum of revenue and operating costs, including in adjusted EBITDA calculations, will increase year-on-year in the third quarter as a percentage of mid-20s to lows as continued investment in the long-term growth of our business.

Given that a small portion of our cost structure changes directly with revenue in the near term, we currently expect no significant difference in cost growth estimates regardless of revenue outcomes in the third quarter.

Despite uncertainty over the short-term revenue growth rate in a challenging operating environment, we are happy with the potential strong momentum of Snapchatter and the advertiser community, and we remain highly optimistic about the long-term outlook for the business.

Thank you for joining our call today and we will now handle your issue.

Question and Answer Session

Ross Sandler

Hello everyone. What I just want to know on the call is, is the situation really improving? So, can you talk about what caused the growth rate to go from the mid-twenties in the second quarter to the thirties in July? And then maybe beyond the reason given a minute ago, why do you expect this to drop in the future? Or is it just some conservatism joining the program? Then there is any color in the last few months, which is any color that has helped since the latest update on brand advertising revenue relative to the direct response to the growth rate of advertising revenue. Thanks a lot.

Evan Spiegel

Of course. Thanks Rose for the question. Here, I'm going to say more about what we're very proud of the work the team has done to achieve the results of the business. We're working from home, and they've been challenging the operational environment for the past quarter and continue to do that today. We mentioned this in a previous call that we had a growth rate of 15% in the first few weeks of the second quarter, so our final 17% result was only slightly above that level, but the result wasn't straight. For some time, advertisers had to pause, shift, create something like this, so it wasn't straight. They face challenges in their business due to ** and other distractions.

And, as time goes by, it’s better for the moment, many advertisers have paused spending, but specifically, our direct response business improvements are resilient, and we continue to benefit from growing products that adopt target-based bidding, which is driving the continued growth of overall revenue you’re seeing now.

As for the rest of the world, the brand aspect of the business has begun to recover as revenue growth resumes in other parts of the world. This part helps us improve our performance for the quarter. In addition, we see strength in categories such as CPG, streaming, home fitness and technology, and of course, demand in areas such as tourism, catering will continue to decline, although they are still facing challenges in this environment. We hope that the trends we have observed recently will continue to exist, but we also realize that the operating environment is indeed still challenging.

Historically, many of the factors that contributed to the third quarter's growth are unlikely to happen this year as they did in previous years. An example of this could be the beginning of the NFL season, moving the tent pole movie out of the summer movie season, etc., all of which will happen, but in a somewhat strange way. This will add a little color to the cautious attitude.

Rich Greenfield

Hi, there are a few questions. I mean, I think first of all, Evan, you've talked about a lot of your investments in content, and it's obvious that Discover looks very different. You've put in a lot of effort on Minis, and essentially, a lot of other things are spent improving the product. Strangely, why are we seeing a slowdown in user growth? It seems Snap is much better than six months and twelve months ago. I might even be particularly calling for Europe, like why is the growth in Europe going to be after Android, and why are we not going to continue to see a trend of rising content?

Then, like the elephant in the room, there was a boycott because I'm sure you and everyone know some of your peers, especially Facebook. What factors caused the diversion of spending on other platforms when you think of the comments Jeremi and Derek talked about in the third and even the fourth quarter? How do you literally stop spending on Facebook or some other platforms using the name of a major advertiser?

Derek Andersen

Hey Rich, it's Derek's speech. Regarding growth, I'll answer the first part of your question. The first thing I want to share is that we're happy with the trajectory of the community over the past year. We added 35 million DAUs in the second quarter since 2017, the highest quarter of absolute year-on-year growth we've achieved since 2017. After rebuilding Android apps in early 2019 and subsequently localizing the product, we've seen higher growth rates in the rest of the world. I specifically pointed out some of the achievements we've achieved in India in the preparation speech. We've also seen fairly healthy growth rates in the more mature markets in North America and Europe.

Our estimate of the third quarter DAU is 15% to 16% year-on-year, which, as you pointed out, is 1% to 2% lower than the year-on-year growth we observed in the second quarter. I can share some other background information here. First, I would like to point out that the third quarter of the previous quarter reflected the full quarter-on-quarter earnings of our AR products launched in the mid-Q2 2019. As a result, this has led to a tougher year-on-year performance for the next quarter of the quarter.

Furthermore, quarter-on-quarter growth in Q3 is usually lower than quarter-on-quarter, so our estimates of quarter-on-quarter growth in Q3 have taken it into account. Therefore, after taking these factors into account, we believe that the estimates for quarter-on-quarter reflect the continuation of healthy potential growth trends we have observed in our business over the past year.

So, in the long run, we continue to see a lot of opportunities to grow our community. So we focus on investing in our products to achieve this opportunity. That’s why we share plans to continue investing in our talent base, quality content and marketing, and to work further to localize our products over time. So thank you again for your question. Hope it helps.

I'll leave it to Jeremi for the second part.

Jeremi Gorman

Very good, thank you, Rich asked the question. I want to talk specifically about Facebook boycotts you. At the moment, it is difficult to determine exactly how Facebook boycotts affect revenue. Some Facebook boycotts can also be related to the overall content marketing budget if the environment allows. What we know is that the top level of participating organizations is always positive.

This conversation opened the door for us to do this very frequently at the CEO and CMO level. Especially from the outset, we designed in a brand-safe, hand-curated way. There is no town hall and the ability to post uncensored users to our entire community. And, as advertisers evaluate platforms that align with their values, these smart decisions made years ago are crucial.

That being said, most of our revenue is VR, a segment that has not been widely involved in boycotts. With the advent of dynamic advertising, the increase in global positioning, etc., we will continue to deliver results for those advertisers, which puts us in a good position to constantly win and retain these advertisers without being boycotted.

Heath Terry

When we think about the problem from a higher level, I wonder if you can give us some sense of evolution of the advertising foundation during the crisis. In terms of verticals, what you were seeing at the time, and the kind of technology they used to interact with you. Especially when you see advertisers are new to the platform, where are their spending coming from? At the same level, I guess it’s about your users, how are the behaviors of users who are new to the platform differently? Maybe it can be quantified based on the time spent on the platform and how it evolves.

Jeremi Gorman

Of course. Thank you for your question, Heath. The early investments we made to build a global business base have indeed paid off and we have attracted the most active advertisers from the quarter to date. As I mentioned earlier, we do continue to see the strength of categories like CPG streaming in the home fitness and tech, and we talked about the tourism and restaurant industries earlier, which is still challenged. The sales team does continue to support advertisers in all current fields, whether they are economically challenged or not so that we can focus on the long-term development of our business, but we focus our resources on the advertiser’s direct reaction space that continues to spend on advertising budgets.

We've been seeing direct responses to the strong demand from advertisers who are looking for lower channel data optimization and delivering ROI. I think the way I look at it overall is that the global health crisis has accelerated the shift to a digital economy. So everything in the category is – the field that is seen among new advertisers, retained advertisers and growing advertisers, just like they're back to omnichannel home fitness, online education, retail stores, and restaurants that offer online ordering and delivery services, mobile banking. I could go on, but the call was short. So I just wanted to take a little bit of the overall content and then discuss it in the second part of your question.

Evan Spiegel

Hey Heath, it's Ivan. Thanks for your involvement in the question. As we mentioned, obviously, we're very excited about what we're seeing on the content platform, where content consumption has increased by over 40% year-on-year, and the huge increase in Snap creations we've seen in cameras in terms of growth and uniqueness has surpassed the growth of DAU. What we're so excited about is that we've launched this new action bar at SPS, which actually lifts all these different platforms and gives people a larger surface area so that people can use all of our products across Snapchat.

So we actually think that this will be a great way for people to learn about Snapchat when they first sign up. As you mentioned, when people sign up, their behavior develops over time as they understand the service. So by removing friction in the process and helping people transition across all of our different platforms, it really can unlock more value from Snapchat. So we are so excited about everything we see on the platform, with a huge amount of motivation and engagement that is driving the entire business.

Michael Levin

Thank you for your question. Both of you have quoted dynamic product ads. I would like to hear more about this. Specifically, I mean, do you think what adoption rate can be seen from business advertisers? And I think it's probably within the scope of adoption, like advertisers are already ready for it at this point, or what they need to do to keep them going so they can keep moving forward and start bringing you up the catalog. Thank you very much.

Jeremi Gorman

Yes, we are very excited about the development of dynamic advertising. We are seeing strong growth globally and we are excited to be based on the successful experiences and lessons we initially launched in the U.S. Now we have solid early success stories in the Middle East and North Africa, Europe and Canada. This is an area we will continue to invest in. We are very excited about the progress ahead of the holidays and see adoption in many verticals.

Advertisers are absolutely ready for this. Its design is similar to other products on the market, and Dynamic Ads now processes over $100 million in catalogues every day, which lists a range of rich items that Snapchatters is interested in and most relevant to. This is an important milestone in our pursuit of always keeping budgets as it involves e-commerce in particular, but it can also be leveraged more widely as we continue to grow. As the name implies, it will be dynamically updated to the catalogue, and we will remain consistent as advertisers continue to adopt this technology.

Lloyd Walmsley

First, you said in the last quarter that the upfront commitment for the year doubled. Wondering whether most of the spending is planned for the second half of the year, or whether it has been done in the first half results. Do you feel like, given what happened this year, is this a reliable commitment. Then, I think second, back to what you said about DAU growth, it does improve every quarter, but slightly below your expectations. What you specifically want to point out is what is lower than expected, for example, is this related to this new navigation bar? Is this as expected? Anything you can share will help. Thanks.

Jeremi Gorman

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Derek Anderson

Hey, this is Derek's talk. I can answer the second part of your question here. As far as the texture of the DAU growth for the quarter. I think at the beginning of the quarter, we were very satisfied with the increase in participation due to the extensive shelter-in-place orders and maintained. And we're seeing a preliminary increase in the frequency of participation there, which led to an increase in DAU. We're satisfied with that. As I mentioned in my prepared remarks, the reduction was faster than our estimates, which is why our revenue was about $1 million lower than the estimate given by our previous call.

But I'm sharing there too, we're seeing DAU grow continuously from April to May and then again from May to June, so it's going to continue growing there. Regarding your questions about new net worth in the quarter, or the quarter isn't a big factor, but I think we're happy with their early results locally and all the new products we've launched. We've been rigorously tested to make sure it's reviewed to the community. We're happy with the early results there. So thank you for asking this question and hope other contexts help you.

Mark Mahani

Thank you. Are you taking positive steps to restore ROW growth, you do call it a weak link, but are there a lot of it that is macro or what can be done to accelerate that growth? Secondly, we have a lot of political ads posted online, not $3 billion or $4 billion, but that's a big number. And I know you'd love to show as much transparency as possible around the ads, but what are you doing with these ad revenues? I think part of the presentation you have is crucial for both parties. I think in these upcoming elections, I think it's a great place to get the message to them. But, are you trying to take advantage of the money you're spending on political ads? Thank you very much.

Derek Andersen

Mark, thank you for your question. This is Derek's speech. I'll answer the first part of your question, about the growth rate we're seeing in "The rest of the world". You may have noticed that in recent quarters, the rest of the world is usually the fastest growing region of our revenue. So we're very disappointed with the 2% year-on-year growth in the second quarter. Unfortunately, revenue in the rest of the world is more affected by COVID-related factors than other regions, including some of the items I mentioned in my prepared comments, such as restrictions on cash transactions and disruptions in supply chains, and e-commerce retail.

I would add, however, that luckily, we have seen revenue growth in the rest of the world since then, which has promoted to some extent the better results we have seen in the third quarter so far. Although the interruptions and disruptions we experienced in the second quarter are disappointing, now we are happy with the trends we are seeing there, and things are now looking much better. I'll hand it over to Jeremi to handle the second part of your issue.

Jeremy Goman

Of course. So, it’s about political advertising, yes, we are actively serving this segment because we serve 90% of the U.S. people aged 13 to 24 and 75% of the U.S. aged 13 to 34 to get them more aware of the problem, and any fact-based approach is crucial, and we are the area. To ensure transparency in political advertising on Snapchat, all political issues and publicity ads and information about impression spending and payment entities, as well as our Snap political and publicity ad library are publicly available.

We have very specific guidelines for political advertising that apply to advertising related to election and advocacy issues. But most broadly, we do believe that Snapchat can play a significant role in getting first-time voters to our best. We look forward to providing our community with a responsible path to engage with their elected officials, candidates and campaigns.

Analyst

Thank you for asking my question. This is James playing for Brent. At the Partner Summit, you announced a Snap Map update with locations. Can you do a more in-depth study of your strategies for building a specific product? Then I was curious if you could comment on how your plan ends up monetizing the map and what that time range looks like? Thank you very much.

Evan Spiegel

Hey James. Thanks for the question. We are so excited about what we see on the map and we think it represents a huge opportunity because we are personalizing on the map to reflect your view of the world today. Most people use maps to find routes and directions, rather than to know the world around them in a personalized way. So when we consider adding your friends to the map and adding places that are important to you, we think snapshot maps can better reflect your perception of the world around you.

So over time we believe this will create an opportunity to make money as people are browsing using mathematical methods to see what their friends are doing to see what happens in different locations, and this mass consumption method is different from the A-B wayfinding approach that often happens on maps today. So we have taken some intermediate steps in monetization; it’s good to help local businesses reopen after COVID lockdown, provide free advertising credits, and make it easy for them to create snapshot ads. However, we will continue to work on these products, especially when building products around locations and lists, helping to recommend locations to different friends. We think that over time, this is a big opportunity.

Doug Ammos

Thanks for asking the question. One to Evan, one to Derek. Evan just wanted to ask about some key moves to expand the international user base, especially in the rest of the world. Obviously, the reconstruction of Android apps is important, but what are you most concerned about right now, when you are going to make snap a more global product with local and cultural relevance, then on Derek, obviously, in terms of EBITDA profitability and the development of the last 4th quarter, can you talk about how to recover in the future? Then, how to control everything, and comment on that in the prepared comments. Thanks.

Evan Spiegel

Thanks for your question. We are very excited about the momentum we are seeing in the rest of the world, and the investments we make on Android are certainly rewarding. There is still a lot of work to do to improve service performance, minimize data consumption, build partnerships to help make this data more affordable around the world. Of course, we will continue to localize our products and locally local content, local creators, and building local AR experiences, and we have seen an increase in engagement. So there is definitely a lot of investment out there, but what excites me is that the fundamentals are already in place. They are seeing growth.

Derek Anderson

Hey Derek, I’m here to answer your next two questions. We have never provided full-year guidance on the profit path, but we do share that we have set a goal earlier this year to achieve adjusted EBITDA profitability in 2020. Obviously, the operating environment since we set our internal targets and revenue growth rates is currently lower than what we expected to enter the year. Most of our cost structures will not change directly with revenue, so a lower revenue growth rate will have a fairly direct impact on this path to profitability in the near term.

We have carefully considered the priorities of investments, so considering these changes in the operating environment, we are still focused on investing in the long-term growth of our business in order to gain a stronger, better position to achieve long-term sustained profitability. We have given quite clear guidance on the expected investment levels entering the third quarter, and that investment levels will not change much by revenues in the quarter. Therefore, we do not want to achieve the internal targets for fiscal 2020 as the operating environment has not improved significantly and revenue growth has not continued to improve. In the long run, we will continue to prioritize achieving the same profitability and positive free cash flow long term so that we can become stronger.

Then, to further expand the issues about the FCC and manage them, we believe that stock-based compensation is one of our biggest spending items and is obviously the reason why stocks have been completely diluted over time. Therefore, we believe that careful management of stock-based compensation plans is the key to effectively managing fully diluted stocks over time.

So, while we continue to expand our team size, the total stock compensation in the most recent quarter has dropped by about 5% year-on-year. And the per capita decline is more than 20%, as our team continues to transition to a sustainable and competitive compensation structure established in the years after the IPO, including additional investment in cash compensation programs. Over time, we will continue to optimize these procedures to ensure our procedures are both sustainable and competitive.

Partly due to careful management of these plans, we are starting to see a decrease in growth rate for fully diluted stocks in addition to a decline in stock compensation. So we have actually seen that in the past two quarters, the growth rate for fully diluted stocks has dropped to between 3% and 4%, compared to 5% to 6% in the previous year.

So we are very concerned about this. We understand the key inputs to build shareholder value in the long term, so we will focus on managing it. We also believe that if we can continue to scale up revenue and manage our investments carefully, we will be able to make additional investments over time and move towards positive free cash flow. Of course, this will also open up more channels for managing these factors in the long run. So hopefully, more information about the path to profitability and how we can really manage the key parts of the cost base.

Justin Post

There are a few questions, obviously interested in the acceleration in July. Just wondering we know that the first half of June is tough for the industry. What big improvements have you seen from the second half of June to July? I wondering if you can help us. Second, just wondering how you look at the pipeline of discovering content and game content in the second half of the year, where there is a lot of interesting stuff. Are you expecting that the second half of the year will show more shows and more content instead of what will be able to release in the first half of the year? Thanks a lot.

Derek Andersen

Hey Justin, it's Derek's speech. I can just talk about the first part of the revenue growth perspective. Obviously, we're seeing the full year – the growth rate of 17% throughout the quarter is higher than we started. But, as we mentioned, there were some disruptions in the quarter because we saw some pauses for swapping out ideas and so on. So we've obviously seen some improvements lately, and as we pointed out, the results for the quarter are obviously better so far than early July. So for that point, there's not a balance in terms of trajectory. But obviously, the recent improvements have been improved for all the reasons we mentioned earlier, and I'll hand it over to the second part of your question.

Evan Spiegel

Thank you for the question. Yes, we are very excited about the content and gaming pipeline and the new Minis product that just released a wider range of releases. We are really happy with all the experiences that the developers have created by bringing friends together to work in Snapchat. So it's very exciting and we're going to have a great time in the second half of the year.

Eric Sheridan

Thank you very much for asking this question, maybe two short questions if you can. Evan, the U.S. government has published some discussions on exploring the role of TikTok in the U.S. market. You have commented on certain social media environments and some regulatory environments, and I wonder if you have to take this central action from the U.S. government. What does this mean not only to the U.S., but to the world when you think about the coming years? That will be the first question.

The second question, maybe you should look at the third and fourth quarters, and the recovery may require a foothold, is there a dynamic change where there should be such a big difference in business performance in each region? In the tough competition? Do you see a reason that the business should become more consistent in overall growth over time? Just want to ask a bigger question there. Thanks a lot.

Evan Spiegel

Of course. Thank you for the question. Yes, I think it's really interesting to see the US government's great success in solving the Chinese-based consumer technology companies. I think it really makes us more of a free market problem because these businesses are able to take advantage of a huge consumer base of over a billion and obviously the second largest economy in the world and China and use their success to enter the US market, which is a smaller market in terms of people. So it's fascinating to see the government work to address this apparent concern about national security.

So I'm not sure what the road from here looks like, but you should point out correctly - with the success of Chinese consumer technology, the ecosystem has changed a bit. I think a lot of people are asking this really interesting question, and people really think that the next consumer technology hottest will be a startup. In this case, in fact, the next consumer technology hit in the US seems to be a very large Chinese conglomerate with many services globally. So, I think that might reshape people's perception of the technological landscape here in the US. We're definitely interested in seeing all this going forward.

Derek Andersen

Hi Eric, is the second part of the question Derek is talking about, where I can answer the question. I think in terms of the forward-looking nature of regional growth rates, what I want to say is that the operating conditions we currently have in terms of the operating environment, at least for the next quarter, and that's why we didn't choose to provide formal guidance in the quarter.

So, before we have a better understanding of how the operating environment will recover to really make specific comments on expectations of quarterly growth rates, I don’t think we can really stand up. Obviously, we hope we can see the trends we’ve seen continue to exist lately, so demand will continue to grow, but we also understand that the operating environment has been particularly uncertain lately, and there is always a possibility that the macro environment may deteriorate.

So we want to be prepared for the environment we are moving forward and obviously hope that things will continue to improve, but that depends a lot on the operating environment. So hopefully, at least in the next quarter, you can get a better idea of ​​what we think.

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