Snap Inc

NYSE:SNAP

Earnings Call Transcript 2022-Q1

[Operator]

Good afternoon, everyone and welcome to Snap Inc.’s First Quarter 2022 Earnings Conference Call. [Operator Instructions] This call will be recorded. Thank you very much. David Ometer, Head of Investor Relations, you may begin.

[David Ometer, Head, Investor Relations]

Thank you and good afternoon, everyone. Welcome to Snap’s first quarter 2022 earnings conference call. With us today are Evan Spiegel, Chief Executive Officer and Co-Founder; Jeremi Gorman, Chief Business Officer; and Derek Andersen, Chief Financial Officer.

Please refer to our Investor Relations website at investor.snap.com to find today’s press release, slides, prepared remarks and our updated investor presentation. This conference call includes forward-looking statements, which are based on our assumptions as of today. Actual results may differ materially from those expressed in these forward-looking statements and we make no obligation to update our disclosures. For more information about factors that may cause actual results to differ materially from forward-looking statements, please refer to the press release we issued today as well as risks described in our most recent Form 10-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 non-recurring charges. Please refer to our filings with the SEC to understand how we calculate any of the metrics discussed on today’s call.

With that, I’d like to turn the call over to Evan.

[Evan Spiegel, Chief Executive Officer and Co-Founder]

Thank you all so much for joining us. The first quarter of 2022 proved more challenging than we had expected and our team was able to make significant progress against our goals despite the increased volatility in the operating environment. Our community grew 18% year-over-year to 332 million daily active users and revenue grew 38% year-over-year to $1.06 billion. This resulted in adjusted EBITDA of $64 million and free cash flow of $106 million, marking our third quarter of positive free cash flow.

While we are pleased with our progress, given the macroeconomic environment, we also recognize that we have a significant amount of work to do to realize our long-term opportunity and we believe we are well positioned to invest through the turbulence. A great deal of our focus has been supporting our team members located in Ukraine and helping our Ukrainian colleagues. The war in Ukraine is heartbreaking for all of us, especially because Ukraine is the birthplace of Looksery, a company that laid the foundation for Snap’s augmented reality platform. As we look forward to our Snap Partner Summit on April 28, where we will celebrate our partners and launch new products, our thoughts and prayers are with our Ukrainian team members and their families, not only because of these horrible circumstances, but because they have made so many of our innovations possible.

We have remained focused on expanding our product offering and deepening engagement with our global community, which grew by 13 million daily active users in the quarter. The future of our business depends on the engagement of our community and we are pleased to see elevated growth rates in the rest of world region, where we added 10 million daily active users in the quarter. This rest of world growth follows our investments in building out the team and operations necessary to accelerate our growth in geographies where our community has demonstrated a clear product market fit with Snapchat as well as our efforts to localize our product offering and improve application performance across a wide range of devices.

Our community in North America and Europe continued to grow and these geographies represent our largest monetization opportunities in the near and medium term. We believe that reinventing the camera represents our greatest opportunity to improve the way people live and communicate. What began as an application for visual communication has evolved into a leading augmented reality platform, where creators are building unique and innovative AR experiences in Lens Studio and distributing them on Snapchat and in their own applications using Camera Kit.

Over 250 million Snapchatters engage with augmented reality everyday on average across a variety of use cases, including entertainment, fashion and education. Over 250,000 creators have built more than 2.5 million lenses and Snapchatters played with lenses created by our community more than twice as much this quarter when compared to Q1 2021. We recently launched our ASL Alphabet Lens, a first-of-its-kind AR experience that inspires Snapchatters to learn American Sign Language through the Snapchat Camera. The ASL Alphabet Lens uses advanced hand tracking to recognize hand poses and gestures, providing feedback as people practice communicating with sign language.

We also launched Custom Landmarkers in Lens Studio, helping creators to build location-based lenses for local places they care about, from statues to storefronts, to tell richer stories about their communities through AR. In partnership with Tukwini Mandela and Black Cultural Archives, we released our Hidden Black Stories’ local lens, transforming London’s Trafalgar Square into an AR experience that showcases key moments, figures and stories from Black British history.

In an effort to educate our community on the power of AR, we announced a new augmented reality creator program in India powered by Lens Studio. The program will include an online developer course and a series of challenges that aim to empower developers and local creators across the country. In celebration of International Women’s Day, we launched an AR Lensathon consisting of three workshops across Southeast Asia to encourage the participation of young women in new digital fields like augmented reality. We believe that augmented reality belongs everywhere, not just on Snapchat. We built Camera Kit to enable our partners to leverage our augmented reality platform in their own websites and applications.

Through Camera Kit, we can help grow the ecosystem of AR developers and help businesses understand the immense potential of AR. We are excited by the growing demand from businesses, who want to bring Snap’s AR capabilities into their own apps and websites. For example, Zoog, a storytelling app for families, integrated Camera Kit to help people bond by sharing stories while using lenses to resemble storybook characters. We continue to make meaningful progress overlaying computing on the world through Spectacles, our augmented reality glasses. Hundreds of creators are developing AR lenses for Spectacles, building new immersive and interactive experiences like reimagining a restaurant menu in three dimensions or enhancing a workout routine.

We have continued to make software improvements and offer new capabilities for developers, including a new voice ML template in Lens Studio, which enables creators to build voice-enabled experiences without scripting and Lens Studio streaming mode, which helps creators develop lenses with hand tracking from a first person perspective. With our powerful developer tools in Lens Studio and distribution through Snapchat, Camera Kit and Spectacles, we have created a compelling platform for creators to build and share augmented reality experiences, reaching hundreds of millions of people and exploring the next generation of computing.

We continue to provide value for our growing community through our diverse content offerings, which include our two content platforms, Stories and Spotlight. Our Stories platform enables Snapchatters to share snaps with their friends in narrative form via friend stories and watch content from professional publishers and influencers in Discover. Spotlight is our newest content platform for showcasing the most entertaining snaps created by our community. In Q1, overall time spent watching content globally grew on a year-over-year basis driven primarily by growth in time spent with content in Discover and Spotlight.

We continue to see growth in viewership of content on Discover, which has become a destination for credible and entertaining content for our community. For example, total daily time spent by Snapchatters 25 and older, engaging with shows and publisher content on Discover, increased by more than 25% year-over-year. We expanded our international content offerings by partnering with News UK, TF1 and Le Monde in France and MBC and Al Arabiya in the Middle East.

Snap Originals represent another important element of our strategy to improve the diversity of available content on Discover. Over 10 million viewers have watched Breakwater, our new Snap Original about the dystopian future caused by climate change that featured episodic AR lenses in partnership with Verizon, helping Snapchatters to immerse themselves in the show. Our content partners continue to find success on our platform with 6 Discover partners reaching over 100 million global viewers in Q1.

We are also investing in new tools and capabilities to better serve our content partners and to help them reach new audiences on Snapchat. We recently announced Dynamic stories and new Discover format that allows publishers to automatically create stories based on news they publish online to help Snapchatters learn about the world as it happens. Early partners include GQ, Vogue, CNN, ESPN and The Wall Street Journal.

We are very excited about the long-term potential of Spotlight. While still early in its growth and evolution, we are pleased with the engagement we are seeing with total time spent growing 230% year-over-year. Over the last several months, we have focused on building the tools and infrastructure to help creators of all kinds thrive on Spotlight and we observed a 3.5x increase in the number of Spotlight submissions using our AR lenses or Creative Tools compared with Q1 2021. Spotlight offers opportunities for creators to improve discoverability and get more reach with their snaps.

We continue to focus on the relationship between Stories and Spotlight where creators can use Spotlight to start building an audience and deepen their relationship with that audience through their stories. Today, there are many different ways for creators to grow an audience and build a business on Snapchat. Creators can open shops to sell merchandise, join our creator marketplace, receive virtual gifts from fans and monetize their content via our recently announced mid-roll ads in Stories.

We continue to innovate on our map to bring utility and value to our community and partners. As Snapchatters are able to move about the world again, we are seeing upticks in engagement on the Map. While still very early, we are encouraged to see that Snapchatters open places from the Map more than twice as often this quarter when compared to Q1 2021. We also added a new way to help Snapchatters discover live events with the launch of our Ticketmaster layer. Snapchatters can now browse Ticketmaster’s upcoming events on the Map based on what is happening nearby. We see incredible potential for innovation across our communications platform, which brings enormous value to our community by connecting people with their close friends and family.

In addition to adding several new chat features, including Chat Replies, Bitmoji reactions and poll stickers, it’s also where our community can launch Games and Minis, two platforms built to reimagine shared experiences with friends. We were pleased to see returning gaming partners, Funday Factory and Voodoo launch new game titles in Q1. Our gaming partners are finding success growing their businesses with more than one-third of our current gaming partners having made over $1 million in revenue. Minis represent a new platform for social experiences. We have seen recent momentum with Givingli’s second Mini Send Gifts where Snapchatters can send gift cards to friends. Discover partner, Wave Sports and Entertainment, launched the Gym Heroes Mini, a social fitness experience on Snapchat that offers original daily fitness challenges and full workouts curated by fitness experts. The Mini is designed for Snapchatters to challenge their friends and collaborating groups toward their workout goals.

We are so excited about the growth of our community and the evolution of our service and we can’t wait to share more at our Snap Partner Summit next week on April 28. We will meet the challenges of the current operating environment by prioritizing the needs of our community and partners, who are essential to our success and we will continue to invest against our enormous opportunity in augmented reality as we work to accelerate our roadmap and deliver against our long-term plans for computing overlaid on the world.

I will now turn it over to Jeremi to discuss more about our business.

[Jeremi Gorman, Chief Business Officer]

Thanks, Evan. We continue to make progress against the many opportunities we have to support our community and advertising partners globally. In Q1, we generated total revenue of $1.06 billion, an increase of 38% year-over-year. We continued to work through platform policy changes, which are primarily impacting direct response advertising partners and we believe that we are building effective measurement solutions for advertisers to prove the efficacy of their campaigns.

In addition to these ongoing platform-related headwinds, supply chain shortages and labor disruptions, rising inflation and geopolitical unrest are presenting challenges for a wider array of industry verticals than in the prior quarter. Nonetheless, we saw strong growth in verticals like financial services and streaming, which each grew well over 50% year-over-year. We believe that the impact from the ongoing platform policy changes was compounded by macroeconomic challenges, which are now the primary headwinds to client demands.

We remain focused on supporting our community and advertising partners. We will do so by continuing to focus on our three key priorities: first, driving measurable ROI; second, deepening our vertical expertise and growing our sales capacity; third, creating innovative ad formats focused on video and augmented reality. Our commitment to these priorities, along with our unique reach and global growing audience allows us to drive performance at scale for businesses around the world. Our team continues to help advertisers navigate the platform policy changes through the enablement and utilization of privacy-preserving measurement solutions. We have made a significant push to improve our first-party solutions as we seek to help advertisers adapt to the platform policy changes. The first step was to drive broad availability of these solutions, which we have largely achieved.

Now we are working towards achieving broad utilization of and full confidence in these measurement solutions. While it can take time for advertisers to tune their campaigns using our new measurement solutions, some advertisers who have invested early in our first-party solutions are seeing signs of success. Beauty brands, Nice One, implemented our conversions API, or CAPI on both web and app to deepen its partnership with Snap and leverage the full integration across its platform. After integrating CAPI for web and app, the multi-product integration resulted in a 6x increase in return on ad spend above its non-integrated results.

We also continue to innovate by improving our first-party measurement solutions with features like estimated conversions, which helps provide more granular and timely results in a privacy safe manner and improvements to CAPI, which strengthens Snap’s direct advertiser data integration, allowing advertisers to measure conversions from multiple sources. Launched in 2018, CAPI also provides advertisers with more sophisticated incremental measurement solutions such as conversion lift. For example, sports betting company, DraftKings, ran a conversion lift study in the 2 weeks leading up to the Super Bowl across several established sports book states and observed a 10.8% lift in app installs and a 188% lift in first-time deposits for male 21 plus, outpacing their install and deposit goals.

As we continue working to drive measurable ROI for advertisers of all sizes, improving the efficiency of our offering and lowering the effort it takes to utilize our platform is a major focus. By lowering the cost and decreasing the time to create personalized ads, we can improve ROI by reducing the investment it takes to achieve a given return. One notable example is our progress with Dynamic Ads. By dynamically building ads for product catalogs, we are able to greatly expand the set of ads that are created. Dynamic Ads can update automatically as new products are entered into the catalog remaining up-to-date and driving ROI. As a result, revenue from Dynamic Ads more than tripled year-over-year.

In addition to Dynamic Ads, we are also increasing the automation of our Ad Suite through multi-format ad delivery, which allows our systems to optimize across formats to achieve the best ROI for our advertisers in the most relevant ads for our community. These features reduce setup time, increase delivery efficiency and expand advertiser’s addressable audience. We are seeing strong adoption of our automated offerings and we will prioritize these efforts in the year ahead.

We continue to add deep domain expertise with our verticalized sales strategy, allowing us to effectively serve advertisers of all types and sizes. Our work with agency and advertising partners over the past year has resulted in upfront commitments for 2022 that are more than 60% higher than the total upfront commitments made in 2021. We view upfront commitments as a signal of strong confidence from agency and advertising partners as we become a part of their always-on performance-oriented advertising strategy. While the majority of our revenue today is generated from video ads, we believe we are still early in terms of realizing the full monetization potential of our content platform.

Today, we comprise less than 2% of the $210 billion U.S. digital ad market and less than 1% of the $520 billion global digital ad market, while reaching nearly half of U.S. smartphone users and more than 75% of 13 to 34 year olds in over 20 countries. In addition, mobile advertising is growing faster than desktop advertising, video advertising is growing faster than non-video advertising and self-serve advertising is expected to make up 90% of all digital display ad spend in 2022. These trends are favorable for our strategy and we believe our video advertising business has the potential to deliver robust top line growth.

Our unique and innovative AR lenses give our team a huge opportunity to attract advertisers across multiple verticals. In the past, larger brands use augmented reality for brand moments to drive awareness and reach through expensive one-day takeover lenses. Today, both brand and performance-oriented advertisers are utilizing augmented reality to drive significant and measurable business results. We are also adding more tools to help our advertising partners find customers and build their businesses on Snapchat. We launched our first SNAP AR certification on Snap Focus called Augmented Reality Strategies for Advertisers. This five-part learning pathway offers hands-on education and real life examples to help advertisers gain a deeper understanding of how AR is an essential tool for business and marketing objectives.

We continue to invest in Arcadia, our global creative studio for branded augmented reality experiences. The team has been hard at work creating, managing and launching several experiences. Most recently, a Verizon 5G connected Snapchat Lens for the big game in our hometown of L.A., letting Snapchatters team up and battle with other groups to take control of a giant virtual airship hovering above the field. Arcadia also created a 5G AR lens in partnership with Verizon and Cirque du Soleil that transports the renowned O performance in Las Vegas to the palm of a Snapchatters hand. We have a notable acceleration in the number of advertisers leveraging our self-service tools for AR with over 70% of AR revenue now delivered via our self-serve ad platform. We recently brought our GBB pixel purchase optimization to AR and we are also investing in additional features for ad manager to make it easier for advertisers to create, manage and deploy their AR experiences.

Following the launch of First Commercial in October 2020, we recently launched First Lens, which enables advertisers to reserve the first sponsored lens impression of Snapchatter seasonal lens carousel. First Lens offers more operational ease, because bookings are made through ads manager and it simultaneously improves the Snapchatter experience by surfacing the First Lens based on relevance. A top priority for AR is reducing the barrier to creation and helping brands understand the importance of AR experiences and the value they can drive. While we are still in the early stages of AR advertiser adoption, we are already making solid progress and investing to build the AR ecosystem.

For example, Nike recently launched its Nike By You Sneaker customization lens in order to drive increased engagement with its Nike app and generate membership sign-ups. The multi-cell campaign resulted in an increase in sign-ups, especially among 13 to 17 year olds, a key demographic for Nike’s program. After the success of the AR campaign in the U.S., Nike has scaled its lens campaign to additional regions internationally. These results are emblematic of a larger shift we’re seeing with AR transforming e-commerce by increasing conversion rates. We believe that virtual try-on represents a massive opportunity to improve the way our community shops and experiences new products.

Businesses are benefiting from creating their own public profile, which offers a free permanent home on Snapchat, where they can showcase compelling AR experiences and share shoppable products directly within the app. Online retail platform GOAT recently created a profile and uploaded two AR shoe try-on lenses. In the first week alone, they sought over 1 million plays, encouraging GOAT to further invest in their Snapchat presence.

We are seeing higher retention for advertisers who have activated their public profile, a promising early indication than an organic presence on Snapchat is meaningful for advertiser return on ad spend. Lastly, when brands use a portfolio approach of combining sponsored AR lenses with Snap Ads, they are able to drive higher ROI and lower cost per outcome. For example, Electronic Arts ran a campaign for its Madden NFL ‘22 video game franchise, which included Commercial, Snap Ads, Lenses, Filters and Story Ads, where each of these products saw a significant lift in higher and lower funnel metrics. For Snapchatters that we’re exposed to all three ad products, we saw even higher lift. This is why we are so excited about multi-format delivery, which enables these types of campaigns with greater ease. While the macro operating environment remains challenging and difficult to predict, we continue to invest in product innovation to help advertising partners scale, build strong relationships with advertisers across verticals and improve our targeting and measurement capabilities for businesses.

Based on the size of our audience, there are high levels of engagement across our service and our overall opportunity in the growing digital advertising market, we believe we are well positioned to drive business results for advertisers over the long-term.

And with that, I’d like to turn the call over to Derek.

[Derek Andersen, Chief Financial Officer]

Thanks, Jeremi. Our Q1 financial results reflect our priorities of growing our community, making focused investments in the future of our business and scaling our operations efficiently in order to drive towards profitability and positive free cash flow. As Evan mentioned earlier, our community grew to 332 million daily active users in Q1, an increase of 52 million or 18% year-over-year. In North America, DAU grew by 5% year-over-year to reach 98 million. In Europe, DAU grew by 10% to reach 84 million. In rest of world, DAU grew by 36% to reach 150 million as we continue to invest in local language support, local content, local marketing partnerships and support from local creator communities.

Total revenue for Q1 was $1.63 billion, an increase of 38% year-over-year. Revenue growth in Q1 initially exceeded our expectations entering the quarter, with year-over-year growth of approximately 44% through February 23. In the days immediately following Russia’s invasion of Ukraine on February 24, we observed that a large number of advertisers initially paused their campaigns. The vast majority of clients resumed their campaigns within 10 days following the invasion. And daily average revenue in March exceeded pre-invasion levels, but the rate of year-over-year growth remained below pre-invasion levels at approximately 32% from February 24 through the end of Q1.

The slowdown in the rate of year-over-year growth observed post the invasion of Ukraine was broad-based, with the deceleration evident in both our direct response and brand advertising businesses, and to many industry verticals. In the latter portion of Q1, advertisers in a wider variety of industry groups reported concerns related to the macro operating environment, including continued supply chain disruptions rising input costs, economic concerns due to rising interest rates and concerns related to geopolitical risks stemming from the war in Ukraine. While the impact of these headwinds was felt broadly, our brand advertising business grew at a relatively slower rate of 26% year-over-year in Q1, as new headwinds built on top of supply chain and labor supply headwinds already impacting a subset of industry sectors coming into this quarter.

Despite the challenging operating environment, we were encouraged by the progress in our direct response advertising business with a year-over-year growth rate of 43% for the full quarter and nearly 50% prior to the invasion of Ukraine. A small subset of lower funnel app-based GBBs such as in-app purchase continued to be the most impacted by the platform policy changes. The rollout of our privacy-preserving first-party measurement solutions continues to progress with these solutions now enabled for advertisers representing more than 90% of direct response advertising revenue.

We are cautiously optimistic that the partners who utilize these lower funnel GBBs will benefit from the more holistic and timely measurement of results that our first-party measurement solutions afford as they build confidence in them over time. We believe that our continued focus on driving measurable returns on advertising for our partners will be critical to the long-term success of our advertising partners, the best we have ever reported for this metric as a public company, down from $0.62 in the prior year and $0.66 in the prior quarter. With global ARPU growing at 17% year-over-year and infrastructure cost per DAU declining by 6% over the same period, efficient scaling of our cloud infrastructure was the largest driver of expanding gross margins.

We have now completed new multiyear agreements with both of our large infrastructure partners, and the lower pricing from these agreements drove the majority of the sequential improvement in cost per DAU. We believe that the progress we have made in driving down our unit costs over time, especially in an inflationary environment, provides powerful validation for our asset-light infrastructure model, which has, in turn, allowed us to hold CapEx investment at less than 2% of revenue over the trailing 12 months. The growing scale of our cloud partners and their resulting efficiency are flowing through to our pricing. At the same time, our multi-cloud approach and the growing scale of our community and our improving operational excellence in managing our unit costs have worked together to expand our adjusted gross margin by 22 percentage points over the last 3 years. The operating leverage we have realized from scaling our infrastructure costs efficiently, is a key input towards our ability to invest in the long-term growth of our business, while making continued progress towards sustaining positive free cash flow generation.

Adjusted operating expenses were $586 million in Q1, up 60% year-over-year, reflecting a combination of our ongoing rate of investment in the business as well as several factors that are further elevating our adjusted operating expense growth rate in the near-term. As expected, our rate of hiring stepped up in Q1, while our rate of attrition remains low. Total personnel costs were up 52% year-over-year, driven by a 52% increase in full-time head count. This reflects ongoing investments in our team as well as the integration of acquisitions completed over the last year, which contributed approximately 9 percentage points of the year-over-year growth in full-time headcount in Q1.

Marketing was the next largest driver of year-over-year adjusted operating expense growth. with total marketing spending more than doubling year-over-year in Q1, due in part to the timing of marketing campaigns and events relative to the prior year. We estimate the timing of marketing expenses elevated our overall adjusted operating expense growth rate by approximately 4 percentage points in Q1. In addition, we continue to see costs return to our cost structure that were otherwise diminished during the pandemic period, including travel, events and certain operations costs, which collectively contributed approximately 3 percentage points to the year-over-year growth rate in Q1. Finally, we incurred approximately $5 million in cost to support our team members impacted by the war in Ukraine during Q1, which further contributed to the elevated year-over-year growth in adjusted operating expenses.

Adjusted EBITDA was $64 million in Q1, an improvement of $66 million year-over-year. We delivered adjusted EBITDA leverage of 23% in Q1 as we continue to invest in the future of our business while making progress towards sustained profitability and positive free cash flow. Net income was negative $360 million in Q1 compared to a loss of $287 million in Q1 of the prior year. The current quarter results include a $100 million year-over-year decline in other income, driven primarily by a $92 million unrealized loss on investment that became public in the second half of 2021.

Excluding the impact of mark-to-market losses on this investment, net income would have improved by $19 million or 7% year-over-year to reach negative $267 million, which is due primarily to the flow-through of the $66 million improvement in adjusted EBITDA, partially offset by $19 million in higher stock-based compensation, $15 million higher depreciation and amortization, $7 million in higher taxes, and $6 million in other net expenses.

While we have continued to grow our team and leverage stock-based compensation strategically to fostering ownership culture and drive long-term retention, we have remained focused on managing these programs responsibly. Total fully diluted shares grew 4.8% year-over-year in Q1, with the vast majority of this growth driven by $1.1 billion of early conversions of our outstanding convertible notes completed in 2021. Excluding dilution related to convertible notes, the rate of growth was 1.3% in Q1 compared with 1.2% in the prior quarter and 2.6% in the prior year. While we are pleased with the progress we have made on this metric, it is important to note that the dilution rate, in particular as it relates to SBC, tends to move inversely with our stock price. And thus can be subject to market forces over time.

Free cash flow for Q1 was positive $106 million, and we ended the quarter with $5 billion in cash and marketable securities, up from $2.6 billion in the prior year, with the increase reflecting the proceeds of convertible notes and cash we have generated from operations. As we look forward to Q2, we are pleased with the momentum we have observed in our community, and our guidance for the quarter assumes DAU will be approximately 343 million to 345 million in Q2.

On the revenue side, forward-looking visibility is as difficult today or perhaps more difficult than at any point in recent memory. While the 116% revenue growth we experienced in Q2 of the prior year makes the comparisons more difficult this quarter, we believe the bigger challenge to forward-looking visibility is the uncertain operating environment. The macro headwinds we observed in Q1, including supply chain disruptions, labor shortages, inflationary pressures, and the impact of rising interest rates on the overall economic environment, remains challenged as we enter Q2. We believe the impact of the war in Ukraine on input cost, marketing budgets and overall economic confidence has been significant and that it is difficult to predict its impact on a forward-looking basis.

Given the uncertainty caused by these challenging circumstances, we have opted to share that our growth rate thus far in Q2 is approximately 30% year-over-year or just below the approximately 32% growth rate we observed following the invasion of Ukraine in Q1. That said, we are concerned that the operating environment ahead could be even more challenging, leading to further campaign pauses or advertiser budget reductions. As I noted earlier, our prior year comparisons are more difficult in Q2 than in Q1.

Given this, we believe that revenue guidance of 20% to 25% year-over-year revenue growth in Q2 is reasonable. Given the abundance of opportunities we see to invest productively in our business, we continue to expect that 2022 will be a significant investment year. When the impact of new investments in 2022 are combined with the full year impact of investments made in 2021, we expect that a smaller share of incremental revenue will flow through to adjusted EBITDA and net income in 2022.

While the operating environment is currently challenging, we believe that the progress we have made to deliver positive free cash flow over the trailing 12 months and the strength of our balance sheet with $5 billion in cash and marketable securities on hand have positioned us well to invest through the current environment. Continuing to invest through the current headwinds will allow us to build on the momentum we have established in our business in order to ensure we capture the immense long-term upside we see in the future of augmented reality. And we believe we can do so responsibly as we continue to thoughtfully prioritize our investments. Given our revenue guidance and our planned level of investment, we expect adjusted EBITDA to be between breakeven and $50 million in Q2.

Thank you for joining our call today, and we will now take your questions.

[Operator]

That concludes the prepared remarks for today’s earnings call and we will now begin the question-and-answer session. [Operator Instructions] The first question comes from Ross Sandler with Barclays. Please go ahead.

[Ross Sandler, Barclays]

Hey, guys. Just one question on the 2Q outlook and then one question on fingerprinting. So the first one, it sounds like your run rate is 30%, but you’re expecting it to drop off as we progress through the quarter. So can you maybe just unpack a little more on what you’re seeing or hearing out there in the industry that kind of explains that further reduction as we move through the quarter? I know it’s kind of tough with the macro right now, but any additional color there would be helpful? And then the second one is, I think some folks on this call are just worried about another potential revenue hit from fingerprinting later this year. So can you maybe help us better understand how you’ve reworked the measurement and targeting on your platform in a privacy-centric manner, as Jeremi mentioned, and whether or not you see that as a risk? Thanks a lot.

[Derek Andersen, Chief Financial Officer]

Hi, Ross, it’s Derek speaking. I’ll take the first part of your question, and then I’ll hand it over to Jeremi to help with the second part. So, at a high level on what we’re seeing as we look forward to Q2, the operating environment remains challenging and forward-looking visibility, as I noted earlier, is more difficult than probably at any point in recent memory. We have shared that our business has grown at a rate of approximately 30% quarter-over-quarter to-date, but we’re concerned that the operating environment could be even more challenging going forward. More specifically, the headwinds that impacted our business in Q1 have persisted into Q2, and we believe the impact of the war on Ukraine has been significant, and this impact is particularly difficult to predict going forward. As a result, we are concerned we could see additional campaign positives or advertiser budget reductions in the future. The comparisons, as I noted are also getting tougher. As a reminder, our top line growth accelerated by 50 percentage points in Q2 of last year to reach 115%. So, all of these factors together have informed our guide of 20% to 25% year-over-year in Q2. Importantly, though, I’d say the fundamentals of our business remain intact. We’re pleased with what we’re seeing and the strong growth in DAU. We continue to have deep penetration of hard-to-reach demos in the most important advertising markets. And of course, we’ve got a sophisticated ad platform that delivers measurable returns and results. So we are focused on investing in our teams and our products and delivering measurable return on advertising investment to our advertising partners. So hopefully, that gives you some background and context on how we’re seeing the outlook going forward and what uncertainty – what’s uncertain about that. I’ll turn it over to Jeremi to take the second part there.

[Jeremi Gorman, Chief Business Officer]

Hi, Ross, thank you for the question. So just to be specific around finger printing, for opt-out users, we do not meaningfully identify any user, who’s opted out of tracking, and we do not fingerprint. There is no personally identifiable information that is directly linked to the customer. But given the platform changes, we have experienced signal loss, including IDSA and some IP addresses, and we expect that trend to continue. But if we take a step back, there are two different types of users. There is the opt-in ones and the opt-out users as well. For the opt-out users, we have deterministic measurement solutions that allow us to definitively match the conversion that’s taken place, and that forms the basis of our measurement. Our privacy preserving measurement solutions, though, are built to adapt to signal loss like this which is a combination of opt-in user data and models estimated conversions to provide advertisers with a fidelity that they need to make decisions to grow their business. These changes, though, are – they are long. They take time. They put a serious onus on advertisers to adapt and reset their advertising campaigns across not just Snap, but all platforms. We empathize with them. We are working with them through these changes, and we expect to continue to do that with relentless focus on delivering ROI.

[Operator]

Our next question comes from Brian Nowak with Morgan Stanley. Please go ahead.

[Brian Nowak, Morgan Stanley]

Great. Thanks for taking my questions. I have two. Maybe Derek, I appreciate the quarter-to-date color on the business. Could you help us understand a little more how fast is the North America ad business growing quarter-to-date? And as part of the guide, are you assuming that the North America business gets worse? And are you hearing that from advertisers yet? That’s part one. And then part two, I may have missed it, but what was the impression versus pricing growth in the quarter just so we can sort of put together those two factors? Thanks.

[Derek Andersen, Chief Financial Officer]

Brian, it’s Derek speaking. So, on the first question, when we looked at the pre and post period in Q1, where we saw the decel in the revenue growth rate post the invasion in Ukraine, we look at that across a number of different cuts. And as I said in my prepared remarks, we saw that deceleration of the DR and the brand side of our business regions as well as across or our different advertising partner verticals. So, it’s relatively broad-based. So, I am not – I don’t have any additional color to break down what we have seen quarter-to-date, but as I said earlier, what we saw was pretty broad-based when we saw the initial slowdown there. So, it probably gives you a little bit of context. So, then in terms of breaking down pricing and impression growth, we did see CPMs rise in the current quarter of Q1. We are up around 40%, 41%. I believe quarter-over-quarter. So, we have seen most of the revenue growth translated through on the pricing side as we continue to focus on the experience for the community. So hopefully, that gives you a little bit of perspective of both of those factors. Thank you for the question.

[Operator]

Our next question comes from Rich Greenfield with LightShed Partners. Please go ahead.

[Rich Greenfield, LightShed Partners]

Hi. First question for Evan. The use of 3D Bitmoji avatars in the prepared remarks, the commentary that I think you have all made on Maps today, it just feels quite clear that Maps plays a central role in the future of Snapchat. I was just hoping you could take a minute and get out of the minutia of the quarter and kind of step up to 50,000 feet and give us sort of the Evan or Snapchat vision for 5 years from now, in success, what does Maps look like? And then maybe just a follow-on for Jeremi to tie to this, assuming Evan and team can execute broadly on this Map’s vision, where do brands and advertisers fit in? And what are they asking you for vis-à-vis the Map right now?

[Evan Spiegel, Chief Executive Officer and Co-Founder]

Hi Rich. Thanks so much for the question. And I always love to talk about the long-term. So, we are really excited about the Map opportunity, especially because our Map represents a totally different way to explore the world. Maps historically have been built for transportation to help people get from A to B. And our map is really designed to see what your friends are up to. To answer the question, where is somebody, when are they going to be home, what are my friends doing and of course, to help people explore the world through near real-time content on our Map around the world and now with places to learn more about all sorts of interesting popular and trending places around them. We are so excited that we just recently rolled out a new Ticketmaster layer that also helps people see upcoming events at venues nearby and even share those with friends and buy tickets. So, the way that our Map is transforming the way that our community is understanding the world around them and connecting with friends is super exciting and a huge opportunity over the long-term. And of course, we love the role that Bitmoji plays in all this and our action mojis on the Map that show when people are flying or driving. So, you can see where your friend is in transit. So, definitely a big and exciting opportunity for us long-term. I think as it pertains to the way that businesses participate on the Map, a lot of our recent focus has been around places. So, bringing businesses onto the Map, allowing chains, for example, to claim their businesses and actually, now we are testing just at the very, very early stages of testing folks running advertising against those places to drive people to locations nearby. So, that will be an interesting experiment. And then of course, our layers are also a way that businesses can interact with the Snap Map, and that will be an exciting place for us to invest going forward.

[Operator]

Our next question comes from Mark Shmulik with Bernstein. Please go ahead.

[Mark Shmulik, Bernstein]

Yes. Hi. Thanks. A couple of questions. The first for Evan, so the user guide is strong and I think you mentioned the magic words like product market fit in markets internationally. We know India is one of those markets, but are there any other stories or markets you could share where you have historically been underpenetrated that you are excited about the progress that you are seeing? And then second question for Jeremi. You talked last quarter about some of the re-org taking place and the push to expand kind of to more verticals, both here and abroad. I know you shared it kind at the top of the call, you are seeing some success in financials and streaming. But are there any other – is there any other traction you are seeing in perhaps non-traditional verticals either kind of here or abroad, would be great? Thank you.

[Evan Spiegel, Chief Executive Officer and Co-Founder]

Yes. So, on the user growth side, certainly a ton of opportunity around the world, especially in the rest of world region and in Europe. And what we are really excited about is this value that Snapchat has in connecting close friends and family through visual communication just continues to be really strong. People love sharing what they are up to visually. It’s much more expressive. It’s obviously much faster than text messaging. And so as we have done a lot of this work to localize our application to improve its performance, we are really unlocking that core product value for our community around the world. So, lots of great progress there. Hard to call out one country, in particular. Certainly, India has been a great success story for us. But that’s been a big focus of ours, and we have now really organized our teams in our processes around scaling that growth around the world.

[Jeremi Gorman, Chief Business Officer]

I can take the second part of the question. So, you have mentioned that we have talked about financial services and streaming being particularly strong categories. We believe that, that is true largely because their success isn’t predicated on external factors, like supply chain as much or labor shortages or labor disruptions and these kinds of things. So, let me unpack that a little bit more for you. Globally when we take a look at just entertainment more broadly, you are starting to look at an ecosystem where things are being released in the theater and then also on streaming, creating two separate and distinct marketing budgets, from each of the studios that used to have on either theatrical only or during the pandemic, streaming only. And so that opens up a wide variety of budgets for it globally, as a lot of these movies like we saw with the Batman and the Spider Man films, are coming back to theaters and drove the snapshot generation certainly is interested in them. And then when it comes to the financial services, you mentioned traditional category, that is true with financial services that even more broadly, when you come – when it comes to things like apps for financial services and these kinds of things. Despite the overall conditions regarding app downloads, when it comes to platform changes in general, those are picking up steam as well. So, we are seeing all of those trends globally, and we think we are going to continue to see those trends globally and are continuing to invest in those categories, and we are really excited about it.

[Operator]

Our next question comes from Eric Sheridan with Goldman Sachs. Please go ahead.

[Eric Sheridan, Goldman Sachs]

Thanks so much for taking the question. Evan, not to front run the Partner Summit next week, but can you give us a little sense of what you are most excited about on the product initiatives side with respect to commerce and how you think broadly and philosophically about commerce rather than media consumption as being the future of Snap and how that might even insulate you from future policy changes on some of the mobile platforms that we have talked about already? Thanks so much.

[Evan Spiegel, Chief Executive Officer and Co-Founder]

Yes. I think what we are most excited about, and of course, I will have to wait for our Partners Summit next week for specifics, but what we are most excited about is really this intersection between augmented reality and commerce. So, what we found as we have been growing our AR business over the years, that people use all sorts of accessories and fashion items to express themselves through augmented reality. And we found that by partnering with retailers and fashion brands, that if we can actually use their real products in augmented reality, it dramatically improves conversion for those businesses, and so it can lead to higher sales. And we have also done some work on fit and size to try and help people find the right size, which we found can really improve the rate of returns for merchants as well. And so we have the strategy really to use augmented reality to both improve the top and bottom line for retailers and, of course, radically improve the customer experience. I mean the idea that you can try on all these different looks and styles without ever changing your clothes is really transformational. I am really hoping it will make an impact in our household for sure. So, that I think has been a really exciting place for us to invest, and you have to wait until next week for the specifics.

[Operator]

Our next question comes from Brent Thill with Jefferies. Please go ahead.

[Unidentified Analyst]

Great. This is James on for Brent. Thanks for taking my questions. Last quarter, you called out lower story posting as a headwind to your growth. Did you see a noticeable uptick in posting activity coming out of Omicron? Curious if this had any meaningful impact on your advertising revenue this quarter and just what you are assuming for Q2? And then the second part of my question is just around your headcount growth, it’s been accelerating every quarter. Could you just talk about where you are allocating most of those new employees, any particular geographies or products that are gaining the bulk of those new heads? Thanks.

[Derek Andersen, Chief Financial Officer]

Derek speaking. I can take those. I will start with the headcount growth one. We have seen the rate of hiring accelerate, as you noted, and I mentioned in the prepared remarks, while our attrition rate has remained very low, and this has driven the growth in personnel costs that you saw in Q1. Total personnel costs curve about 52% in Q1 driven by a 52% increase in headcount sort of in lock set there. I would note that the growth in personnel costs and headcount includes the impact of acquisitions integrated over the past year, many of which were completed in the second half of last year, which contributed approximately 9% points on the year-over-year growth rate in the current quarter. So, we have been hiring against a number of priorities. We have mentioned in our previous quarters that we have accelerated our investment in our sales and sales support in our priority monetization markets where we already have deep penetration of hard-to-reach demographics. In addition, we have been investing heavily in our engineering and product teams to build on the momentum we have established our community and our business, which have helped to drive a rapid pace of innovation on our platform and we look forward to sharing more of that at our Partner Summit, which was just mentioned, which is coming out soon. And then last, but definitely not least, we have been investing aggressively in building the future of augmented reality in order to capture, we believe that the immense long-term upside there in the future of this new computing platform. As you will note from our investor deck, many of the acquisitions we have integrated in recent years have been in service of pulling forward our AR roadmaps among other roadmaps for the benefit of our community, and our advertising partners. So anyway, hopefully, that mixture of factors gives you a little better sense of what’s happening with the growth there in as well as the cost base. And then in terms of your second question, on the story posting question specifically, the number of story posters grew year-over-year in Q1. But as it relates to the revenue outlook looking forward, the primary factor here by far is what we are seeing on the demand side and the challenges we are seeing in the operating environment and how those factors may impact demand going forward in Q2. So, that’s the primary influence on the guide. I talked about that in some detail earlier, so I won’t repeat that there, but hopefully, that gives you a better sense of the mix of what’s impacting the forward-looking revenue into Q2.

[Operator]

Our next question comes from Lloyd Walmsley with UBS. Please go ahead.

[Lloyd Walmsley, UBS]

Thanks. A couple of questions, if I can. First, just following up on Ross’ question on the outlook for 2Q. If we look specifically, April sounds like it was, at least to-date is pretty solid. If we look to May and June, do comps actually get harder relative to April from here? And then second one, you mentioned, I think 70% of AR revenue is now delivered via the self-serve platform with a growing mix of DR advertisers. Can you kind of help us contextualize the magnitude? Is AR advertising, is it 5% of revenue, is it 15%, like ballpark, how meaningful is it? And ultimately, are we at a place where it’s resonating enough on the DR side that it can really scale up and move the overall needle this year or next year? Anything you can share there would be helpful. Thanks.

[Derek Andersen, Chief Financial Officer]

Thanks Eric. I will take the first part, and then I will turn it over to Jeremi to talk about the second part. Just in terms of the guide, yes, look, the quarter-to-date number being approximately 30% year-over-year is a reasonably good start to the quarter, relatively consistent with what we have seen in the back half of Q1. In terms of the comps, obviously, the 50 percentage point acceleration in the prior year means the comps throughout this quarter are very difficult. And of course, we continue growing our business the way we have. The comps get tougher in general. Over time, we have to be able to grow the business sequentially throughout the year. So, it is tough throughout the quarter. Obviously, our guide reflects our concerns about the operating environment and some of the factors that I mentioned earlier that caused us to be concerned that the operating environment could become even more difficult as we move through the quarter going forward. So, hopefully, that gives you a sense of how we thought about that and some of the texture in the quarter. I will turn it over to Jeremi for the second part of your question.

[Jeremi Gorman, Chief Business Officer]

Yes. As you heard from Evan earlier in that call, we are extremely excited about the long-term opportunity that AR and AR advertising have for our business. We see AR as a consumer-centric shift to our community in shopping and experiencing new products. When you look at things like virtual trial that are being utilized by our community, people are really wanting to visualize how things look on them, not just on a website or on a model or something like that, and AR provides them that opportunity. In general, we have 250 million people engaging with AR every single day. And when you start to see consumer trends lead like that, it’s really just a matter of time until advertising dollars follow, although that will continue to take time and work and effort. So, we believe it’s our biggest opportunity for the long-term. We are really excited about it. And as brands are starting to build their always on AR strategies, it’s even more important. We continue to invest heavily in building the tools to make that easier for them. Making it easier to create AR, to manage AR, and deploy the AR experiences, and then give them places like Public Profiles for those AR experiences to live evergreen. You start to see businesses, we mentioned last quarter like MAC and Ulta, makeup brands that are already finding incredible success by leveraging our Lens web builder tool. And we know that, that AR as a utility is going to be something that’s incredibly important for businesses going forward. We talked about Nike in the prepared remarks as well. We believe that AR represents this shift, as I mentioned, which I think is really important. And then it will help to increase conversion for retailers, which is really important as well. We are getting the products into the proverbial hands of the customers and then converting that into a sale, hopefully reducing returns, impacting a lot of really great metrics from the retailer side. And we believe that this shift towards e-commerce is a long-term secular shift. So, the way that – any way that we can help improve conversions and/or the shopping experience for the Snapchat community, we are all in and couldn’t be more excited about the AR advertising opportunity ahead of us.

[Operator]

Our next question comes from Mark Mahaney with ISI. Please go ahead.

[Mark Mahaney, ISI]

Thanks. I will just ask one question about Spotlight monetization, and it sounded like you have recently started to introduce mid-roll ads in there. Just talk about the traction you are seeing. The path to, I don’t know, what is full monetization? Are there particular – are those kind of ads bringing in a new type of advertiser to the platform? So, just talk about what the traction you have seen so far? And any expectations for how long it will take to fully monetize? Thank you.

[Evan Spiegel, Chief Executive Officer and Co-Founder]

Hey Mark, thanks so much for the question. Yes, we have definitely begun testing advertising in Spotlight, although that testing is still quite limited. We have rolled out mid-roll ads in stories for creators. And we have actually seen something, a really exciting sort of phenomenon take off on Snapchat, where Creators are using Spotlight and posting videos to Spotlight to try to get more distribution and attract more subscribers to their story, and then they posted their story to build a deeper relationship with their subscribers and share revenue with us on mid-roll advertising inserted within that story. So, I think this is going to be another great way that we can really serve creators and continue to deepen the content experience on Snapchat. And as we mentioned, we are really excited about the momentum and growth of Spotlight and all the incredible original content that’s being created by our community. So, we will continue to be investing there and of course, testing advertising on Spotlight, because we think it’s going to be a great place for advertisers. Unfortunately, the Spotlight format is full-screen vertical video, which is a format that we pioneered and that advertisers all over the world have adopted. So, it does make it quite seamless to transfer those advertisements over to the Spotlight platform.

[Operator]

And our last question comes from Maria Ripps with Canaccord. Please go ahead.

[Maria Ripps, Canaccord]

Great. Thanks so much for squeezing me in. I just wanted to ask about your privacy changes. Can you maybe just talk about improving – well you talked about improving first-party solutions and working towards broader utilization. Can you just talk about where you are in the adoption curve among your advertiser base? And from a technical standpoint, what does it take to implement those solutions?

[Jeremi Gorman, Chief Business Officer]

Yes. Hi Maria, I can take that one. This is Jeremi. Thank you for the question. So, I want to take a step back here and talk about measurement and optimization, which is an ongoing process. As you have probably heard me say in each of the last calls, this has been our relentless focus and our priorities since we launched our performance-driven self-serve ad platform. We have been constantly working to improve ROI for advertisers with new products, new solutions, better targeting, better optimization, and better measurement. And this is something that will continue. The reality is that our work here is truly never done. We are again, relentlessly focused on ensuring that this measurement and optimization continues to deliver the best ROI for advertisers. We know that when we do deliver that ROI, it’s the most retentive that we – behavior that we can do to make sure that we get more advertisers on the platform that we develop a reputation for being a performance platform and, therefore, attract more advertisers. We have more than not only quality, but quantity of advertisements to show to our community. So, they get more relevant ads. It performs better, and so the flywheel continues. We are pleased with the progress that we are making. Prior to the invasion of Ukraine, our direct response business was growing at nearly 50% year-over-year and the full quarter was 43% year-over-year. But when you talk about progress, it’s a three-step journey. So first, we need to enable the solution, which makes it possible to use these tools. Then we have to – then advertisers have to actively utilize them. And then the third step in that journey is to build trust and confidence in those solutions. The first-party solutions have been enabled for advertisers that represent 90% of our VR revenue. And then lastly, I just realized that earlier – in an earlier answer, I flipped the opt-in and opt-out information. So, I just wanted to clarify one of my earlier answers, which is that we have deterministic solutions for opt-out users. I meant to say opt-in, but hopefully that helps to clarify my earlier remarks, and thank you for the question.

[Operator]

This concludes our question-and-answer session as well as Snap Inc.’s first quarter 2022 earnings conference call. Thank you for attending today’s session. You may now disconnect.