Snap's Q3 2025 Earnings Call: Contradictions in Perplexity Monetization, Sponsored Snaps, Advertising Strategy, and User Engagement

Business Commentary:

* User Growth and Engagement: - Snapchat's daily active users reached 477 million, an increase of 34 million or 8% year-over-year. - Monthly active users increased to 943 million, a 60 million rise or 7% year-over-year. - This growth is driven by Snapchat's core mission of reinventing the camera for communication, with a focus on real communication and strengthening human connections.

• Revenue Expansion and Advertising Performance:
• Revenue increased 10% year-over-year to $1.51 billion, driven by improved advertising demand and the rapid expansion of direct revenue streams.
• Direct response advertising revenue grew 8% year-over-year and 13% quarter-over-quarter.

• Growth was supported by increased activity from small and medium-sized business customers and improvements in direct response advertising performance.

• Premium Offerings and Monetization:

• Other revenue grew 54% year-over-year to $190 million, with Snapchat+ subscriber growth contributing significantly.
• The annualized run rate for Snapchat+ subscription revenue surpassed $750 million.

• This rise is attributed to expanded premium offerings and new AI-powered experiences, designed to enhance user experiences and sustain long-term growth.

• Infrastructure Cost Management and Financial Efficiency:

• Infrastructure costs increased 8% year-over-year, reflecting investments in ML and AI compute, but infrastructure cost per DAU remained flat at $0.85.
• Adjusted gross margin reached 55% in Q3, an improvement from 52% in Q2 and 54% in the prior year.
• Efficiencies were achieved through a mix shift in ad delivery towards higher-margin formats like Sponsored Snaps, and by recalibrating investments in community growth and cost to serve.
  

Contradiction Point 1

Perplexity Partnership and Monetization

It involves the strategic partnership with Perplexity and the expected monetization model, which could impact investor expectations regarding revenue and future growth.

Is the cash stock split already determined for the Perplexity partnership? How will monetization work for Perplexity? - Richard Greenfield(LightShed Partners, LLC)

2025Q3: Monetization won't involve Snap selling ads against Perplexity responses, but it will help drive Perplexity's subscriber growth. Future partnerships may include conversational commerce experiences. - Evan Spiegel(CEO)

Can you discuss growth in brand advertising and how Snap's AR approach differs from competitors? - Richard Scott Greenfield(LightShed Partners, LLC)

2025Q2: We're integrating our ARCS API with Snap's platform to help the team develop AR experiences that run on Snap's AR glasses and deliver amazing [...], has an option to monetize those AR experiences by using our API, [...], via ads or content commerce. - Evan T. Spiegel(CEO)

Contradiction Point 2

Sponsored Snaps and Ad Revenue Growth

It concerns the impact of Sponsored Snaps on ad revenue growth, which directly affects investor expectations regarding the company's financial performance.

What's driving the increase in cost of revenue, specifically for Sponsored Snaps? - Richard Greenfield(LightShed Partners, LLC)

2025Q3: Sponsored Snaps and Spotlight have higher margins, helping gross margin improve. - Derek Andersen(CFO)

Can you share early results and the long-term vision for Sponsored Snaps? What were the auction pricing challenges in the quarter? - Ross Adam Sandler(Barclays Bank PLC)

2025Q2: Sponsored Snaps have shown significant growth in reach and conversion rates. Users engage more with Sponsored Snaps, showing a 2x increase in conversion and 5x in click-to-convert ratios. - Evan T. Spiegel(CEO)

Contradiction Point 3

Snap's Advertising Strategy and Focus

It involves Snap's strategy and focus on direct response (DR) advertising, which is a significant part of their revenue model and has implications for investor expectations.

How is direct response advertising performing, and what initiatives drive its growth? - Michael Morris (Guggenheim Securities, LLC, Research Division)

2025Q3: DR revenue grew 8% year-over-year. Growth is driven by pixel purchase demand and app optimizations. - Derek Andersen(CFO)

What will it take for DR advertising to achieve 20%+ growth, and what is the impact of the de minimis exemption on your business? - Rich Greenfield (LightShed Partners)

2025Q1: DR revenue grew 12% year-over-year. Growth is driven by pixel purchase demand and app optimizations in North America, Europe, and APAC. - Derek Andersen(CFO)

Contradiction Point 4

Snap's Engagement and User Base Trends

It highlights changes in Snap's user engagement and trends, which are crucial for understanding the company's growth trajectory and market positioning.

What are the updates on Spectacles and potential financial partnerships? - Ross Sandler (Barclays Bank PLC, Research Division)

2025Q3: We expect no further DAU declines in North America. - Evan Spiegel(CEO)

What factors are driving North American DAU trends, and what supports optimism about a positive reversal? - Benjamin Black (Deutsche Bank)

2025Q1: We expect North American DAU to remain flat to slightly down sequentially, with no DAU decline year-over-year. - Derek Andersen(CFO)