Good afternoon, everyone, and welcome to Snap Inc.'s First Quarter 2024 Earnings Conference Call. [Operator Instructions] 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 2024 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 investors.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 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 thank you all for joining us. I'm excited to share the progress we are making on our strategic priorities and the momentum we are building to capitalize on the long-term potential of our business. I'm deeply inspired by the dedication and efforts so many of our team members have put into serving our community and our partners, and it is gratifying to see our efforts beginning to bear fruit. On our call today, I'll open with some observations about our strategic direction and key developments and then you'll hear from Derek. The full financial detail is in our investor letter, but going forward, we'll also be giving more context on the earnings call. We remain committed to executing against our 3 strategic priorities: accelerating and diversifying our revenue growth, growing our community and deepening their engagement and leading in augmented reality. The most important strategic priority we set out for 2024 is accelerating and diversifying revenue growth. We have made significant progress to start the year with revenue growing 21% year-over-year, an acceleration of 16 percentage points over the prior quarter growth rate, which was driven by improvements we have made to our advertising platform and an increase in demand for our advertising solutions while also benefiting from the impact of an improved operating environment. Our large hard-to-reach audience, brand-safe environment and continued innovation and progress on our advertising platform have made us a valuable partner for businesses that want to reach the next generation. Our second strategic priority, designing innovative products and services that enhance people's relationships with their friends, family and the world continues to drive the growth of our global community. In Q1, we reached 422 million daily active users, an increase of 39 million or 10% year-over-year. We continue to broaden and deepen…

Thanks, Evan, and good afternoon, everyone. For the first quarter, revenue and adjusted EBITDA exceeded our expectations as a result of increased demand for our advertising solutions and an improved cost structure that enabled us to generate greater operating leverage. Q1 revenue grew 21% year-over-year to $1.195 billion, driven by the 14 percentage point acceleration in advertising revenue, which grew 16% year-over-year in Q1. The Direct Response, or DR portion of advertising revenue increased 17% year-over-year, up from 3% growth in the prior quarter as we began to see improved ROAS for our advertising partners, translate into accelerating demand on our ad platform. . Small- and medium-sized advertisers, in particular, grew quickly in Q1, with active advertisers in this segment, up 85% year-over-year. Brand-oriented advertising revenue increased 12% year-over-year, driven by strong demand for our takeover products in Q1 and an improved operating environment. We also continue to make progress towards diversifying our revenue sources with other revenue up 194% year-over-year to reach $87 million. Other revenue includes all nonadvertising revenue and consists almost entirely of Snapchat+ subscription revenue. Snapchat+ subscribers topped 9 million in Q1, more than tripling year-over-year. From a regional perspective, we observed acceleration in both DR and brand-related advertising revenue growth across all regions in Q1. We were particularly pleased to see the improvements we have made to our ad platform translate to improved revenue growth in North America, where revenue grew 16% year-over-year in Q1, an acceleration of 14 percentage points over the prior quarter growth rate. Brand-oriented demand in Rest of World and Europe accelerated at a relatively faster pace in Q1 as these regions were more significantly impacted by the war in the Middle East in the prior quarter. We observed the highest rate of acceleration in total advertising revenue growth in Rest…

Thanks, Derek. As we continue to execute in the quarters ahead, we remain focused on serving our community with innovative and responsible products, investing in our direct response business to deliver measurable ROAS for our advertising partners, cultivating new sources of revenue to diversify our top line growth and scaling our investment levels prudently to deliver meaningful and sustained profitability and positive free cash flow. The most critical input to delivering on these strategic initiatives we laid out is innovation. That includes innovating on our products, our advertising platform and the future of augmented reality. We believe that our demonstrated track record of innovation over the last 12 years positions us well to deliver on this for our community, our partners and our investors. While there is still a lot of work to be done, we are pleased that this focus has translated into improved results in Q1. We will now begin our Q&A session.

[Operator Instructions] Our first question comes from Doug Anmuth with JPMorgan.

Can you just help us understand the drivers and you listed a number of things, but just help us kind of frame and maybe prioritize the drivers of the DR acceleration in 1Q? And just kind of how you think about linearity and progression through '24? And then if you could comment just on the slight decel that you're guiding to in the second quarter as well.

Doug, it's Derek. Thanks for the question. I think, look, at the first outset, I would say that probably the most important takeaway or theme of the top line results is just how broad-based the acceleration was on the top line. You mentioned DR specifically, but we did see each of brand DR and those 2 pillars across all 3 of our regions accelerate in the quarter. We also saw that the SMB customer base grew quite quickly, active advertisers, they are up 85%. And also then looking over at the Snapchat+ business also subs tripling or more year-over-year to 9 million. So we did see a really broad-based improvement in the top line. On the DR side, specifically, I think you've probably seen that we've been making really significant investments in that line of business over the last year, and we made a lot of investments in infrastructure to help improve their number one, leveraging more of our privacy say, signals for ranking and optimization and then continuing to evolve our models to incorporate more of those signals making larger models and refreshing them more frequently. And we've seen really good momentum, in particular on the 7-0 pixel purchase optimization that led to more than 75% increase in purchase-related conversions in Q1. And we're making progress on some of the nuts and bolts there around, for example, CAPI adoption we saw a more than 300% increase year-over-year on that. And we now have coverage there of approximately half of the DR revenue. And you made some improvements just in expanding the addressable market there, with the rollout of 7-0 optimization to app install and app purchase with additional app goals coming in Q2 on the road map there. So there's a lot of progress on that front. We're seeing…

Our next question comes from Ken Gawrelski with Wells Fargo.

Evan and Derek, you discussed on the fourth quarter earnings call, a shift in the company resources to grow engagement in North America and EMEA. Can you talk about any early progress? I know North America DAUs were flat quarter-over-quarter in 1Q, but maybe any early thoughts on future North America growth for 2Q and beyond and maybe that what's incorporated in that and the early look at 2Q DAUs, please?

Thanks, Ken. Yes, we certainly have been shifting more of our resourcing and focus to growth in North America and Europe. It's a different opportunity set. Historically, we were more focused on new users and developing markets who are typically on Android devices. This is really about focusing more on reengagement with users who have downloaded Snapchat before and who may not be using it as often as some of their friends and those users are typically on iOS. So I'd say the opportunity set overall is different. And in our early explorations, we're finding a lot of opportunity to improve that product experience. So the near-term and month-over-month trends have been pretty constructive growth from February to March and March to April month to date in North America has been positive. So we're making progress here. It is early, but we are seeing a lot of opportunity and eager to improve the product for our community in North America and Europe. .

Our next question comes from Rich Greenfield with LightShed Partners.

Look, I think the -- Evan, when I look at the time spent watching content globally, it was up, but North America was relatively -- you sort of signaled the last couple of quarters, it's flattish. But you keep calling out Spotlight momentum. And it feels like if I think about how you shift time spent on the platform or grow time spent on the platform, it seems like Spotlights the key to unlocking meaningful growth. Yes, creator stores are growing, but especially as you unify the feed, it feels like spotlights so important. And I guess could you just -- as you look across the landscape, real short TikTok versus Spotlight. How do you evaluate where Spotlight is today on a relative basis versus the choices consumers have very similar? I realize it's not exact, but a similar experience. And how aggressively are you investing to take share with Spotlight?

Thanks, Rich. Yes, as we look at Spotlight and Creator stories, they've definitely been bright spots in terms of time spent. As you mentioned, we are really working to simplify and unify the experience, both in terms of the user perspective. So one unified feed of content, but also the ranking stack, which is going to enable us to really share signal engagement signals between stories and Spotlight, which we just haven't done historically. So we think that will really help personalize the experience overall. I'd say looking at the feedback from our community, one area where we can really improve is in making the content feel more timely and topical. We have a lot of great signals from our community about things that are trending, things that they're interested in, in a given moment. But we haven't done a very good job surfacing the corresponding content that we also have as well because people are making billions of snaps every day on Snapchat. So I think there's work to be done to make our content experience feel more timely and topical, and then we're spending a lot of focus on the creator journey overall. That journey from using Snapchat to communicate with 100 friends to growing a following of millions. And really making sure that people are creating great stories or great Spotlight content can be discovered and then grow that following and ultimately build a business over time. So that's been a big focus as well. Certainly, a big opportunity for us, and we're working away at it.

Next question comes from Ross Sandler with Barclays.

Yes. So it sounds like you're upgrading revamping the app install or app kind of transaction category within the DR business. Can you just remind us like back in the day, how big that category...

And it appears we lost connection with Ross. Our next question today comes from James Heaney with Jefferies.

Over the last few quarters, you've continued to grow your advertiser count at a pretty healthy clip. Can you guys just talk about this newer cohort of advertisers and what their propensity to spend looks like relative to older advertiser cohorts? And at what point do you feel like your SMB revenue starts to become more material?

Thanks. I think to start, we're growing a newer segment of customers here, and I think that's really exciting to broadening out the overall base of advertisers. So I shared earlier in response to another question that we've seen the active advertiser count on the small and medium-sized customer base up to 85% year-over-year and it being the fastest-growing customer segment. So that is very exciting. And I think overall, you're seeing a broadening of the base of advertisers. There's a journey. I think that you're going to see advertisers go through in terms of one coming on to the platform, initial testing, seeing performance with some of these scaled self-serve products and then being able to grow and optimize. And of course, as we continue to bring more privacy safe signals into our models and invest in bigger models and get better and better at optimization and ranking, those products become more performant. They deliver better ROAS to those customers and they give them the ability to bid and expand their budget. So I do think there's a journey here. I think what's really exciting is to see the ad platform delivering the kind of results that can help us grow that customer base. Because over the long term, the small and medium-sized customer base is going to be an absolutely critical ingredient to reaching the full monetization potential of the business. So off to a good start and a lot of work to do to continue helping more of these advertisers through that journey. Hopefully, that context helps.

Our next question comes from Michael Morris with Guggenheim.

Wanted to ask you about spending and investment. Large companies in the technology sector are certainly increasing their investment in artificial intelligence infrastructure. Can you talk about your level of investment currently, whether you think that's sufficient? And how you think about your size and scale relative to larger players? And what it takes for you to continue to be competitive in connecting with your audience? And if I could just ask one follow-up on those statistics, Derek, that you reported and just shared about the CAPI integrations and the purchase conversions, the numbers are very large, far ahead of where your revenue growth is. Can you just talk about what it takes to get more of your customer base engaged with those? And can that drive acceleration in that revenue in the coming quarters and years?

I can start around the scale and scope of the infrastructure investments, and you're going to see those show up in really a couple of places. Number one, we shared last year that we scaled up our ML and AI infrastructure spending into the range of about $100 million a quarter starting in Q2 and Q3 of last year. And then we shared that, that investment -- larger investments were relatively stable over the last 2 quarters. Obviously, with the full year range on infrastructure for Dow, stepping up from $0.80 in Q1 to $0.83 to $0.85 in the remaining quarters of the year. We've given ourselves room to invest more there. I think the important -- there's a couple of important things I would say, just to put our investment in perspective. One is that we're investing on a different model. Rather than CapEx, it's showing up as a cloud infrastructure cost that's running through cost of revenue. But two, there's a multiplier on that spend as an ongoing operating expense relative to the underlying CapEx it represents. So while we might be spending hundreds of millions a year currently on this type of infrastructure, the underlying capital is multiples of that. So the scale of the infrastructure that we have access to, to run our models is obviously much, much larger. And so that's giving the business access to a lot of capacity. And I think second and perhaps really over the long term, the most important thing is whether or not we're seeing the returns on that investment that are going to allow us to continue to scale that investment profitably for the business. And I think what you're seeing in the results in Q1 here are proof points that those investments that we've made in that…

Our next question comes from Benjamin Black of Deutsche Bank.

Great. Can you talk a little bit more about your build-out of the app value optimization? How meaningful could that be? Is there any risk of disruption to the app install business in that progress there? And perhaps more broadly, what are some of the other initiatives you have on the product road map over the next 12 to 18 months that you're excited about? .

Yes. Thanks so much for the question. On the app side, the biggest thing we've been working on lately is just landing these model updates. We, I guess, in the last week or so, have updated our app install models, both for scan and non-scan. So that's been great. And we now have our app install 7-0 and app purchase 7-0 products in testing. It's very early, but the results have been promising so far. We also have a new scan offering that we're just introducing to our customers. So we'll be excited to get their feedback and see how that can improve their performance, and we have a number of customers testing that already. I think value optimization will follow. We've really just been focused on driving more click-through installs at much lower CPIs for our advertising partners. And then we'll be working more on the value optimization piece. I think just broadly looking at the advertising platform, we have made a lot of progress, as Derek mentioned, on signals and running much larger unified models, of course, the ad interactions as well in the ad formats. I think sort of looking ahead, we've been working on things like product selection for our dynamic product ads product. We've been making progress with things like cold start, which is especially relevant for SMB advertisers at lower levels of spend to help them find success. So I think there's a lot more work to do, but we're building on a solid foundation now, and we've been able to make some very rapid progress.

Our next question comes from Mark Shmulik with Bernstein.

A couple, if I may. The first just on Snap Stars. It sounds like it's growing quite well and really contributing to engagement. Just wanted to kind of ask how do we think about the philosophy as we think about onboarding more Snap Stars, more spotlight more broadcast out media and how does that fit in the long-term engagement strategy kind of balancing it with like deepening connections with friends, family and people you care about? And then just the second question for Derek. We've heard from others just on the recovery of the digital ad market, certain verticals coming back kind of quicker than others. Any color you can share just about the vertical mix you've seen?

Thanks so much for the question. Yes, as we look at content on Snapchat, I think the most successful content is really about relationships. And those can be relationships with your close friends and family, but it could also be relationships with Snap Stars. And that's the feedback we hear from Snap Stars as well that the engagement they have and the relationship they're able to build with their audience on Snapchat is really unparalleled. And one of the reasons why they love investing in our platform. As we look at scaling the Snap Star program, I'd say today, the focus is mostly around looking at countries, geographies where we're sort of under-indexed in investing in Snap Stars there so we can build out more local language content. We're also looking at interest. A lot of Snap Stars create content around their interests. That could be food or travel, sports, those sorts of things. And so we're really looking at this intersection of the geographies where we have Snap Stars and on the interest as well and really lining up with that up with our community and what they're looking for. So yes, I would say overall, to your point, relationships really do drive that content consumption on our service, and that's why Snap Stars are such an important part of our offering.

In terms of color on the verticals and where we're seeing the operating environment generally as we went through Q1, number one, I think we've seen the improvement in the operating environment to be fairly broad into Q1 and that we did see certain regions particularly impacted by the war in the Middle East in Q4. And so that certainly we've seen demand, as we mentioned in the letter, really improve on that front quarter-over-quarter. But I think more broadly, we saw a much more robust brand environment, which played out in all of our regions in Q1. And then from a DR perspective, it's really about fit. And of course, with purchase optimization and the scale that self-serve SMB product is working really well. We've seen verticals such as CPG e-commerce restaurants and travel and SMBs broadly working really well. And I think what we're excited about is to be able to broaden that out to a wider set of customers as we introduce more of these out-based optimizations and start to address other verticals. So a much better environment in Q1 for sure. Thank you for the question.

Our last question comes from Dan Salmon with New Street Research.

Can you hear me, okay?

Yes, we can.

Okay. Good. Sorry about that. So 2 questions. Evan, I'm just curious, any early learnings from your ad partnership with Amazon and whether or not you'd consider more ad partners that can bring incremental demand? Both Amazon and Google are cloud partners after all and it could be interesting. And then second for Derek, can we just go back to the SMB advertiser growth at 85%? I mean that's significant acceleration. Was there something like onetime in that? Or is that the type of level of growth you can expect throughout the year?

Yes, as we look at Amazon partnership and what they're doing with Handshake, I do think that's a great learning opportunity for us. It's still very early, but I think what's exciting is being able to bring relevant products to Amazon shoppers inside the Snapchat experience. We know that people now shop where they consume content and so to be able to offer a relevant product selection in line and allow people to check out with one tap is certainly an exciting product development. So we'll obviously continue to learn there and evolve that product. I do think just separately that some of these ad partnerships we've done and work we've done with other demand partners have been important elements of our growth, and we do see continued opportunity there.

Dan, on the question about SMB, I would agree. I mean, that growth on the active advertisers is obviously a really important input to building what we hope will be a very big business for us over time. And we're early in the going. So there's a lot of opportunity set here both in terms of product market fit as we are able to have more optimizations that are going to appeal to a wider and wider audience in that SMB set. And I think we're learning a lot about how to use integration partners to help make it easier for these advertisers to onboard over time as well as the ability to work our funnels, whether that's from awareness to onboarding an acquisition to trial and discovery and through the scaling process of delivering ROAS for these partners. So we're early in the going there, but excited about the progress we're seeing so far, and it's something that we'll hope to build on as we go forward. So thanks for the questions. And hopefully, that gives you a little more perspective of how we're thinking about it.

This concludes our Q&A session as well as Snap Inc. First Quarter 2024 Earnings Conference Call. Thank you all for attending today's session. You may now disconnect.