Categories Earnings Call Transcripts, Other Industries

Snap Inc. (SNAP) Q1 2022 Earnings Call Transcript

SNAP Earnings Call - Final Transcript

Snap Inc.  (NYSE: SNAP) Q1 2022 earnings call dated Apr. 21, 2022

Corporate Participants:

David Ometer — Strategic Finance and Investor Relations

Evan Spiegel — Chief Executive Officer

Jeremi Gorman — Chief Business Officer

Derek Andersen — Chief Financial Officer


Ross Sandler — Barclays PLC — Analyst

Brian Nowak — Morgan Stanley & Co. LLC — Analyst

Richard Greenfield — LightShed Partners — Analyst

Mark Shmulik — Sanford C. Bernstein & Co., LLC — Analyst

Eric Sheridan — Goldman Sachs Group, Inc. — Analyst

James Heaney — Jefferies LLC — Analyst

Lloyd Walmsley — Deutsche Bank AG — Analyst

Mark Mahaney — Evercore ISI — Analyst

Maria Ripps — Canaccord Genuity, Inc. — Analyst



Good afternoon, everyone, and welcome to Snap, Inc.’s First Quarter 2022 Earnings Conference Call. [Operator Instructions]

Thank you very much. David Ometer, Head of Investor Relations. You may begin.

David Ometer — Strategic Finance and 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 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 nonrecurring 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

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 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, the 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 every day, 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 VoiceML 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’ve 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 Friends 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 a 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 six 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, a 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’re pleased with the engagement we’re 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 3.5 times 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 opened 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’ve 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 collaborate in groups toward their workout goals.

We’re 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’ll 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 demand.

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’ve 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’ve 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 brand, 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 platforms. After integrating CAPI for Web and App, the multi-product integration resulted in a 6 times 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 integrations, 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 two weeks leading up to the Super Bowl across several established Sportsbook states and observed a 10.8% lift in App Installs and 188% lift in first time deposits for Males 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 from product catalogs, we’re 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’re 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 and the most relevant ads for our community. These features reduce set-up time, increase delivery efficiency, and expand advertisers’ addressable audience. We are seeing strong adoption of our automated offerings and 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 strategies. 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 used 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 LA, 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 Snapchatter’s hand.

We have seen 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 Ads 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 a Snapchatter sees in the 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 signups. The multi-cell campaign resulted in an increase in signups, 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 ecommerce 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 saw 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 that 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 costs per outcome. For example, Electronic Arts ran a campaign for its Madden NFL ’22 video game franchise, which included Commercials, Snap Ads, Lenses, Filters, and Story Ads, where each of these products saw significant lift in higher and lower-funnel metrics. For Snapchatters that were exposed to all three ad products, we saw even higher lifts. 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, their 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 for local creator communities.

Total revenue for Q1 was $1.063 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 23rd. 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 in 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, continue 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 [Technical Issues] 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 three years. The operating leverage we have realized from scaling our infrastructure costs efficiently is a key input toward our ability to invest in the long-term growth of our business while making continued progress toward sustained 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 remained low. Total personnel costs were up 52% year-over-year, driven by a 52% increase in full-time headcount. 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, event, 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 costs 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 toward 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 an 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 in 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 foster an 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, remain challenges as we enter Q2. We believe the impact of the war in Ukraine on input costs, 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.

Questions and Answers:


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

Ross Sandler — Barclays PLC — Analyst

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 explains that further reduction as we move through the quarter? I know it’s 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 there, Ross. It’s Derek speaking. I’ll take the first part of your question. 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 at probably 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’re concerned we could see additional campaign pauses 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 116%. 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 on 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’re 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’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 fingerprinting, for opt-out users, we do not uniquely 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 IDFA 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’s 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, and they use a combination of opt-in user data and models estimated conversions to provide advertisers with the fidelity that they need to make decisions to grow their business. These changes, though, 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 and with relentless focus on delivering ROI.


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

Brian Nowak — Morgan Stanley & Co. LLC — Analyst

Great. Thanks for taking my questions. I have two. Maybe, Derek, 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 put together those two factors? Thanks.

Derek Andersen — Chief Financial Officer

Hey there, 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 looked at that across a number of different cuts. And as I said in my prepared remarks, we saw that deceleration across the DR and the brand side of our business, regions as well as across our different advertising partner verticals. So it was relatively broad based. So I’m not — I don’t have any additional color to break down what we’ve 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 eCPMs rise in the current quarter of Q1. We’re 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’ve continued to focus on the experience for the community. So hopefully that gives you a little bit of perspective of both of those factors. Thanks for the questions.


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

Richard Greenfield — LightShed Partners — Analyst

Hi. First question for Evan. The use of 3D Bitmoji avatars in the prepared remarks, the commentary that I think you’ve 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 minutiae of the quarter and step up to 50,000 feet and give us the Evan or Snapchat vision for five 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 Maps vision. Where do brands and advertisers fit in and what are they asking you for vis-a-vis the map right now?

Evan Spiegel — Chief Executive Officer

Hey, Rich. Thanks so much for the question and you know I always love to talk about the long term. So we’re 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’re 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 emojis 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’re testing, just at the very, very early stages, 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.


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

Mark Shmulik — Sanford C. Bernstein & Co., LLC — Analyst

Yes, hi. Thanks. A couple questions. The first for Evan. The user growth is strong and I think you mentioned the magic words like product-market fit in markets internationally, and we know India is one of those markets. But are there any other stories or markets you could share where you’ve historically been underpenetrated that you’re excited about the progress that you’re seeing?

And then second question for Jeremi. You talked last quarter about some of the reorg taking place in the push to expand to more verticals, both here and abroad. I know you shared at the top of the call you’re seeing some success in financials and streaming. But are there any other — is there any other traction you’re seeing in perhaps nontraditional verticals, either here or abroad would be great? Thank you.

Evan Spiegel — Chief Executive Officer

Yeah. So on the user growth side, certainly a ton of opportunity around the world, especially in the rest of the world region and in Europe. And what we’re 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’re up to visually. It’s much more expressive. It’s obviously much faster than text messaging. And so as we’ve done a lot of this work to localize our application to improve its performance, we’re 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’ve now really organized our teams and our processes around scaling that growth around the world.

Jeremi Gorman — Chief Business Officer

Yeah. And I can take the second part of the question. So you mentioned that we’ve 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 if I unpack that a little bit more for you, globally, when we take a look at just entertainment more broadly, you’re 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 one, either a theatrical-only or during the pandemic streaming-only. So that opens up a wide variety of budgets for us globally as a lot of these movies like we saw with the Batman and the Spiderman films are coming back to theaters in droves and the Snapchat generation is certainly interested in them.

And then when it comes to the financial services, you mentioned traditional category, that is true with financial services, but 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’re seeing all of those trends globally, and we think we’re going to continue to see those trends globally and are continuing to invest in those categories and are really excited about it.


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

Eric Sheridan — Goldman Sachs Group, Inc. — Analyst

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’re most excited about on the product initiative 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’ve talked about already? Thanks so much.

Evan Spiegel — Chief Executive Officer

Yeah. I think what we’re most excited about and, of course, I’ll have to wait for our Partner Summit next week for specifics, but what we’re most excited about is really this intersection between augmented reality and commerce. So what we found, as we’ve been growing our AR business over the years, the 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 can lead to higher sales. And we’ve also done some work on fit in 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 this strategy really to use augmented reality to both improve the top and bottom line for retailers and, of course, radically improve the customer experience. The idea that you can try on all these different looks and styles without ever changing your clothes is really transformational. I’m really hoping it’ll 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 specifics.


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

James Heaney — Jefferies LLC — 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’re 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’re 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

Hey, there. It’s Derek speaking. I can take those. I’ll start with the headcount growth one. We’ve seen the rate of hiring accelerate, as you noted and mentioned on prepared remarks, while our attrition rate has remained very low and this has driven the growth in personnel costs. We saw Q1 total personnel costs grew about 52% in Q1 driven by a 52% increase in headcount, sort of in lockstep 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 percentage points to the year-over-year growth rate in the current quarter.

So we’ve been hiring against a number of priorities. We’ve mentioned in previous quarters that we’ve accelerated our investment in our sales and sales support and our priority monetization markets where we already have deep penetration of hard-to-reach demographics. In addition, we’ve been investing heavily in our engineering and product teams to build on the momentum we’ve established our community and our business, which have helped to drive the 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 up soon.

And then last but definitely not least, we’ve been investing aggressively in building the future of augmented reality in order to capture what we believe is the immense long-term upside there and the future of this new computing platform. As you’ll know 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 partner. So anyway, hopefully, that mixture of factors gives you a little better sense of what’s happening with the growth there in the headcount 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 factors here by far as what we’re seeing on the demand side and the challenges we’re 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 look on revenue into Q2.


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

Lloyd Walmsley — Deutsche Bank AG — Analyst

Thanks. A couple questions if I can. First, just following up on Ross’s 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? 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. I’ll take the first part of that, and then I’ll turn it over to Jeremi to talk about the second part. Just in terms of the guide, yeah, look, the quarter-to-date number at being approximately 30% year over year is a reasonably good start to the quarter, relatively consistent with what we’ve seen in the back half of Q1. In terms of the comps, obviously the 50 percentage points acceleration in the prior year means the comps throughout this quarter are very difficult. And, of course, to continue growing our business at the rate 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 of the quarter. I’ll turn it over to Jeremi for the second part of your question.

Jeremi Gorman — Chief Business Officer

Yeah. As you heard from Evan earlier in the 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 how our community is shopping and experiencing new products. When you look at things like virtual try-on 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’re 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 the shift, as I mentioned, which I think is really important, and then it will help increased conversions for retailers, which is really important as well. We’re 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 ecommerce 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.


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

Mark Mahaney — Evercore ISI — Analyst

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

Evan Spiegel — Chief Executive Officer

Hey, Mark, thanks so much for the question. Yeah, we’ve definitely begun testing advertising and in Spotlight, although that testing is still quite limited. We’ve rolled out mid-roll ads in Stories for creators, and we’ve actually seen some really exciting 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 post 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’re really excited about the momentum and growth of Spotlight and all the incredible original content that’s being created by our community. So we’ll 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. And fortunately, the Spotlight format is full screen vertical video, which is a format that we’ve 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.


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

Maria Ripps — Canaccord Genuity, Inc. — Analyst

Great. Thanks so much for squeezing me in. I just wanted to ask about your privacy changes. Can we maybe just talk about improving — well, you talk 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

Yeah. Hi, Maria. I can take that one. This is Jeremi. Thank you for the question. So I wanted to take a step back here and talk about measurement and optimization, which is an ongoing process. As you’ve probably heard me say in each of the last calls, this has been our relentless focus and our priority since we launched our performance-driven self-serve ad platform. We’ve 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 we’ll continue. The reality is, is 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 behaviors 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’re pleased with the progress that we’re making. Prior to the invasion of Ukraine, our Direct Response business was growing at nearly 50% year over year, and the full quarter with 43% year over year. But when you talk about progress, it’s a three-step journey. So first, we need to enable the solutions, 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 DR revenue. And then lastly, I just realized that 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 clarify my earlier remarks, and thank you for the question.


[Operator Closing Remarks]


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