Good afternoon, everyone, and welcome to Snap Inc.'s Second Quarter 2025 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 Second 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 two can be found in today's press release. Please note that when we discuss all of our expense figures, they will exclude stock-based compensation and related payroll taxes as well as depreciation and amortization and 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, everybody, and welcome to our call. In Q2, we made exciting progress on our long-term strategy to grow our community, enhance value for advertisers and invest in the future of augmented reality. Enriching relationships between friends and family is central to our mission, and we continue to build products that bring people together and spark conversations among Snapchatters from messaging and maps to personalized content and AR experiences. . Our team's continuous innovation was evident as we reached 932 million Monthly Active Users in Q2, an increase of 64 million or 7% year-over-year, moving us closer to our goal of serving 1 billion Snapchatters around the world. Our large and hard-to-reach audience, brand-safe environment and performance advertising platform continues to make us a valuable partner for businesses looking to grow with Gen Z and Millennials. One of the many things that sets Snapchat apart is the unique space to provide Snapchatters to feel free to express their creativity and maintain close relationships without the pressures of public performance. This authentic communication and self-expression is a key differentiator in the crowded digital landscape because it empowers brands to build strong relationships with their audience. Revenue increased 9% year-over-year to reach $1.34 billion in Q2, driven primarily by the continued growth of our small and medium customers and delivery against lower funnel objectives. Snapchat+ approached 16 million subscribers in Q2 and was the primary driver of other revenue, growing 64% year-over-year to reach an annualized run rate of nearly $700 million. To build on this momentum, we introduced Lens+, a new Snapchat+ subscription tier that offers access to exclusive new AI video lenses, emoji game lenses as well as early access to new features. We continue to focus on aligning our investments with our core strategic priorities while improving financial performance.…

Thanks, Evan. We continue to drive robust growth in our global community in Q2, with DAU reaching $469 million an increase of $37 million or 9% year-over-year, including $98 million DAU in North America, $100 million in Europe and $271 million in Rest of World. North America MAU was $159 million in Q2 and flat on a year-over-year basis, while North America unique Snap senders grew 2% year-over-year, which is an important input to long-term retention. As our global community continues to grow, we have continued to scale our top line with total revenue reaching $1.345 billion in Q2 and up 9% year-over-year. Our rate of top line growth was impacted by a number of factors in Q2, including an issue related to our ad platform, the timing of Ramadan and the effects of the de minimis changes. Unfortunately, in our efforts to improve advertiser performance, we shipped a change that caused some campaigns to clear the auction at substantially reduced prices. We have since reverted this change and advertising revenue growth has improved as advertisers adjust their bid strategies to achieve their objectives. Despite these headwinds, advertising revenue reached $1.174 billion in Q2, up 4% year-over-year, driven primarily by growth from DR advertising revenue, which increased 5% year-over-year. The growth in DR revenue was driven by strong demand for our Pixel purchase and app purchase optimizations as well as continued strength from the SMB client segment. We continue to benefit from strong Spotlight and creator stories engagement in Q2 as well as early contributions from Sponsored Snaps. And these factors contributed to total impressions growth of 15% year-over-year and our average eCPM declining 10% year- over-year. As we continue to build demand across these new drivers of impression growth, we anticipate that they will be increasingly accretive to top…

[Operator Instructions] The first question comes from Ross Sandler with Barclays.

Just one question and one housekeeping question. I Guess that's two total. So you sound pretty optimistic about what you're seeing early on with Sponsored Snaps. We know that's a big opportunity given how much traffic that surface sees within the app. So could you talk about what you saw in 2Q and the longer-term vision for this new ad unit? And then the housekeeping question is on the auction pricing issue in the quarter, could you just elaborate on what happened there? And what would ad revenue grown had that not happened? Thanks a lot.

Ross, thanks so much for the question. The rollout of Sponsored Snaps is definitely a very meaningful and profound evolution of our ad business because Sponsored Snaps really bring a native and highly performant ad placement to the most frequently used surface in Snapchat. So far, Sponsored Snaps have driven meaningful growth in both incremental reach and conversion for advertisers who utilize the placement. And we've been seeing some really great engagement from users as well. So after opening a Sponsored Snap from the chat feed, users exhibit significantly higher engagement per full screen ad view. Driving a 2x increase in conversion, a 5x increase in click to convert ratios and a 2x increase in website dwell times compared to other inventories. So I think the early signs are very positive. Of course, this is a profound shift in terms of available inventory on the service. So we tried to be really thoughtful about managing the supply growth with things like frequency caps and relevancy filters as we work to build more demand against this new inventory. I'll let Derek speak to the sort of revenue pacing throughout the quarter.

Ross, it's Derek speaking. So I think digging in on the impact in the quarter on the revenue, there are really multiple factors that we looked at in the quarter. One of them certainly is the one you mentioned around the ad platform. We also had a factor around the timing of Ramadan, which was less of a benefit in Q2 than in the prior year. And as well, there was the impact of the de minimis changes in the quarter. So each of those were a factor. I think maybe one of the things that could help out little bit in terms of understanding the relative impact of things would be to talk about the topography of ad revenue growth specifically over the last number of months as some of these shifts have come into the business. So if you recall, we grew ad revenue at a rate of approximately 9% in Q1. And what we saw in April is that ad revenue growth declined to approximately 1% before largely recovering as we move through May and what you saw in May is, number one, we've gone to the work of reverting the ad platform change, but also the factor around Ramadan obviously being diminished during that period of time. So we saw the recoveries we went through May. That really gave us the confidence to be able to roll out Sponsored Snaps more broadly, both from a regional and bidding objective perspective as we moved into June. And so that's where we've seen a little bit of the impact of all of this inventory that Evan just spoke about and how that's translated into lower platform-wide eCPMs and some of obviously improved pricing for our advertisers where a lot of that benefit is occurring at the moment. So the big focus at this point is building demand we have seen post the rollback of the ad change as we moved through June and into July. We've seen ad revenue specifically growing at a rate between 3% to 4% so give you a sense of how the topography sort of moved from 9% in Q1 to approximately 1% ad revenue in April than to a rate of recovering largely in May and then we're looking at 3% to 4% plus the roll back to that change. So hopefully, that gives you a better sense of how things have evolved as we've moved through these different factors. And we're excited now about ramping the demand into these new ad units and the performance that we're delivering for ad partners with this new inventory. Hopefully, that's helpful.

The next question comes from Rich Greenfield with LightShed Partners.

I guess just to sort of play off on -- let me just do a housekeeping first. You obviously just -- we're talking about a lot of the factors that hit DR, Derek, in that last answer. Could you give us a sense of what brand looks like? Obviously, I assume most of the impact that we saw on the bidding related to DR and that dropped from mid-teens to like 5% this quarter. If you could just give us a sense of like what's happening with brand advertising because I don't think you disclosed it this quarter versus the past. And then maybe just a big picture question for Evan. I think watching you have -- you've spoken on a bunch of podcasts. You've been -- done a bunch of interviews in the last several months. you clearly have a true passion for what you're building in AR and Specs, which you're going to roll out next year. If you could just maybe spend a minute, we've obviously heard both Meta and Google talked about their sort of plans for AR and glasses in the last several weeks. How does Snap's approach fundamentally differ? And then the piece of that is do you have the capital to pursue the vision on your own? Or do you need partners to bring this to fruition as you move forward?

I'll take the first one. So yes, correct. The majority of the deceleration quarter-over-quarter showed up in the DR advertising revenue. So we saw total ad revenue in Q2 was at 4% year-over-year we saw the DR ad revenue up 5% year-over-year, as you had mentioned. And brand advertising revenue was flat in Q2. So that slight improvement over the growth rate in the prior quarter. So Hopefully, that gives you a little bit of the sense of the topography of the revenue between the different splits there of DR brand. And obviously, in terms of the auction impact issue, yes, that accrued largely to the DR advertising line. So hopefully, that provides a little more context.

Thanks, Rich, for the question. Yes. We're incredibly passionate about the opportunity to reinvent the computer. People are spending more than 7 hours a day now, on average, staring down screens. And I think even just moving a couple of hours of that to looking out at the world through see-through lenses and a pair of glasses can make a meaningful difference for people's well-being, but also the way they interact with computing and in AI in general. So the opportunity is enormous. Obviously, this is a space we've been committed to. Actually, since before Snapchat had chat, so more than, I guess, 11 years now. And I think really fortunately, that's given us the time to compound our technical advantage and to build out our fully vertically integrated stack. Obviously, to be able to achieve the performance in such a small form factor, really controlling every aspect of the stack from the developer tools to the rendering engine to the operating system to the optical engine really helps us deliver, I think, a really compelling product experience. And of course, we benefit from the huge developer ecosystem we have today. People use Lenses and Snapchat more than 8 billion times every day. There's hundreds of thousands of developers who have built millions of Lenses. And so I think to already have such a strong driving developer community, I think, is a real advantage for us as we prepare for this launch next year. I think as it pertains to sort of the capital requirements, I guess what, over the last trailing 12 months, we've generated close to $400 million in free cash flow while investing in our long-term vision for Specs and really reinventing computing. So I think from a capital perspective, our own cash flow generation, obviously, the core Snapchat business generates a lot of cash. we've been able to reinvest that. And I think that's probably the lowest cost of capital we have. But from a partnership perspective, I think there's a real opportunity to work with partners to bring specs to market. And so that will be a big focus for us, obviously, in the lead up to the launch.

The following comes from Mark Shmulik with Bernstein.

Yes. I appreciate the color around how time spent with content is growing. Any color you can share on how kind of time spent with like snapping with friends and family has been tracking perhaps particularly in the U.S. where I think users declined by about 1 million? And then secondly, Snapchat+ growth continues to track real well. I think it's mid-teens revenue contribution here. So I I think we're now like 3 years into this product. I'm just wondering how your thinking has kind of evolved around how meaningful this business can be going forward.

Yes. Thanks, Mark. Certainly, we're excited about the growth. For example, on things like calling, we talked a bit about that earlier in the call, I think we've seen calling growth with friends and family grow something like 30% year-over-year, which has been really encouraging. In North America, in particular, Snap Send unique users grew by 10 -- sorry, 2% year-over-year. And North America MAU was flat year-over-year at $159 million. So we did see a slight decline in active days. Our focus on driving daily engagement is really around supporting communication between friends and family and, of course, continuing to improve the content experience as well. We've got some new products landing later this year. So we're excited about that. The team is heads down focusing on getting that out the door. In terms of other revenue or direct revenue business, the growth has really continued nicely. I mean we've achieved a $700 million annual run rate, growing 64% year-over-year. So that revenue is becoming much more meaningful to the business. And we see a lot of opportunity to continue to develop the Snapchat+ product, but also new products like Lens+ and potentially some new offerings around creators on Snapchat as well. So I think it's just a testament to the deep engagement people have with Snapchat and certainly our ability to continue to deliver new value that folks are willing to pay for. So it's been a really exciting area of growth in the business and I'm looking looking forward to investing more there.

The next question comes from Mark Mahaney with Evercore.

Okay. Two questions, please. You talked about that there at the end, stock-based compensation coming down. Just any color on the why? Is it just a new approach to how you're thinking about stock-based compensation as an expense item? And then secondly, going back to -- I know you've got a lot of interesting new monetization in Sponsored Snaps, but going back to just the core Spotlight -- not the core, but the Spotlight monetization, where are you on that? How do you feel about the progression of that, maybe not just in the quarter, but for the next year or two, your level of confidence and where you are in terms of load level of targeting, monetization, advertiser interest?

Mark, Derek speaking. On the SBC side, yes, the note there is we took down the full year cost structure guidance for SBC at the midpoint of that range for the full year, about $30 million lower than we've been in the prior quarter. That's the second reduction we've made to that estimate for the full year this year. So we're trying to be very careful and focused on our hiring, trying to make sure that our hiring is laser-focused on our core strategic priorities. And so as we've been able to manage that ramp and balance out the level of investment in the business relative to our observed growth in top line, to make sure that we're doing well on profitability and progress towards profitability over time. That balance is really showing out there. So thanks for noticing that, and we'll keep updating folks each quarter as we make progress there.

On the Spotlight monetization front, certainly, Spotlight revenue has become an increasing share of revenue overall, and that's been really exciting to see. We're doing some experiments around sort of more contextual placements, which we're excited about and going to continue to explore further. But overall, that inventory tends to perform quite well. I think the dwell times and sort of high consideration of that inventory is helpful for direct response advertisers. So we're also iterating on formats, but generally excited to see the progress on Spotlight monetization. And now that Spotlight total time spend is about 40% of time spent overall just becoming a more meaningful part of the business.

The next question comes from Justin Post with Bank of America.

Great. Just wondering if maybe you could outline some initiatives that you're really excited about to kind of maybe reaccelerate U.S. DAUs? And then second, on the guidance, it kind of implies similar growth despite the challenges in Q2. How are you thinking about the ad revenues embedded in there? And do you see opportunity for acceleration as especially Sponsored Snaps gets more implemented?

In terms of North America user engagement, I think one of the biggest shifts has really been from hosting stories for friends to sharing content that you find in Spotlight or stories and sending that to your friends to start a conversation. So historically, people would start conversations by replying to a friend story, that obviously still happens quite frequently today, but we've also seen the rise in content sharing as really a conversation starter and catalyst. So on the innovation front, we've been thinking a lot about new parts of the service that can help sort of inspire or kick start conversations. And as we think about innovation and landing some new products later in the year, that will really be a focus area.

And just in terms of what we're seeing in terms of opportunity for growth in Q3, you've likely heard me say earlier that since we've rolled back the ad platform issue, we're seeing ad revenue growth in the sort of 3% to 4% range. So that correlates pretty closely to the guidance range that we're seeing for Q3 on total revenue, maybe it went for a point of improvement as we move through the quarter. The big thing we see there, obviously, is number one, continuing the momentum we're seeing in direct monetization and other revenue, but also the work that we're going to be doing to build demand into Sponsored Snaps. The one thing I'll note there is to it's just comps as we moved through the quarter. There are obviously some big items last year with Olympics and so on. So we're going to be working to overcome that, too. And so the teams will be working hard to build demand into this new inventory and make sure that we power through those things as we go through the quarter. So largely reflective of the rate of growth that we're seeing today, maybe a little bit of improvement as we move to the quarter and execute. Hopefully, that gives better context.

The following question comes from Eric Sheridan with Goldman Sachs.

Maybe building on Rich's question earlier that was sort of anchored around spectacles and AR and where you're going longer term. Evan, I'd love to broaden out the question and talk a little bit more about the wider ecosystem when you think about how user interfaces might evolve from the current format in to where you want to take them over the medium to long term? And how do you think about the role of content and AI at the center of some of those experience as they move more towards spectacles and how much of those dynamics around content for AI, you feel you need to own, operate and build yourself rather than possibly build in partners and other ways to possibly scale those initiatives.

Yes. Thanks so much for the question. Obviously, it's been so exciting to see the developments in AI, and I think they're really helping accelerate our vision around making computing more human. Our AI investments are really focused on areas where we think we can differentiate. So we've done a lot around image and video generation, especially with on device models, which are really helpful in terms of scaling that capability to our entire community without any incremental cost for them, for example, in things like 3D generation as well. If you kind of think about the future of user interfaces or the future of lenses in general, I think it's quite likely that a lot of those experiences will be generative as well. So if you have a chance to try out our new Easy Lens tool, there's a Lens Studio web tool that's available now where you can create an augmented reality Lens with just a prompt. And I think as we look forward to the types of experiences people will be able to have with AR glasses, I think we're quickly moving to a world where those sorts of experiences can be generated on the fly. And again, that's an opportunity where we think we can really differentiate especially because we have developed the developer tools ourselves in support of this developer ecosystem. Developers can actually plug into these various Lens Studio tools as well and design their own plug-ins. So I think just looking towards the future here, we're going to invest where we can differentiate. Of course, having the glasses form factor allows you to provide much more contextually relevant computing experiences to understand not only what's on the screen or the Lens per se, but also the world around you, and we think that we can really build a competitive advantage there over time.

The next question comes from Dan Salmon with New Street Research.

Evan, could you take us a little deeper on your small and medium customer base? Maybe any color on the growth of the SMC count or broader total advertiser growth you can add? And it sounds like smart bidding has been a boost for SMCs. What other ad products are you seeing just the most traction with that group? And any insights on your road map for them from here would be great.

Yes. We're really excited about the progress with the SMC segment. It's the largest contributor to ad revenue growth in Q2. And I think our improved go-to-market operations and the simplification of some of our ad products and ad manager have been really helpful there. When it comes to the smart solutions for advertisers, obviously, budget optimization has been in testing and has driven some really strong results. And then auto targeting as well. We're finding that AI can really assist advertisers with finding the right audience to convert on their products and lower funnel goals. So certainly excited about a lot of the automation improvements there, and that's especially important for smaller advertisers who may not necessarily have the resources to manage campaigns in such a fine brand way. So I think automation will provide a big lift for SMCs, but advertisers more broadly as well.

Our last question comes from Benjamin Black with Deutsche Bank.

I just have one on Lens+ really, it would be great, Evan, if you could sort of talk a little bit about the reception maybe give us any sort of idea as to how conversion metrics or engagement trends are being -- or sort of panning out in the early innings? How big of an opportunity do you think this could ultimately be? And perhaps more broadly, how do you think about the interplay between pricing and subscription to drive growth within Snapchat+?

Yes. Thanks so much for the question. It's really early with Lens+, but we're super excited about it. Obviously, Lenses are really heavily engaged with on Snapchat with people using Lenses more than 8 billion times every day. So I do think the opportunity to offer exclusive lenses and of course, or AI lenses, which have proven incredibly popular, will be a strong driver of growth with Lens+. So I think there's a nice top of funnel there for sure. Looking more broadly at pricing, we think there's room to experiment on pricing. I think our primary focus so far has just been on continuing to build the value proposition for customers, and we see obviously new features being a major driver for new subscriber acquisition and retention as well. So it's a small but mighty team and I think, over time, especially given the size of the revenue opportunity in front of us. We'll be investing more in pricing experiments. But I'd say the primary focus for us is just continuing to build value for our subscribers in our community.

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