Snap Stock

Good afternoon, everyone, and welcome to Snap Inc.'s Third Quarter 2026 Earnings Conference Call. [Operator Instructions]

I would now like to turn the call over to David Ometer, Head of Investor Relations.

Thank you, and good afternoon, everyone. Welcome to Snap's Third Quarter 2026 Earnings Conference Call. With us today are Evan Spiegel, Chief Executive Officer and Co-Founder; Ronan Harris, Chief Commercial Officer; and Doug Hott, Chief Financial Officer. Please refer to our Investor Relations website at investor.snap.com to find today's press release, earnings slides and investor letter.

This conference call includes forward-looking statements, which are based on our assumptions as of today. Actual results may differ materially from those expressed in these forward-looking statements, and we make no obligation to update our disclosures. For more information about factors that may cause actual results to differ materially from these forward-looking statements, please refer to the press release we issued today as well as risks described in our most recent Form 10-K or Form 10-Q, particularly in the section titled Risk Factors.

Today's call will include both GAAP and non-GAAP measures. Reconciliations between the two can be found in today's press release and earnings slides available on our IR website. Please note that when we discuss all of our expense figures, they will exclude stock-based compensation and related payroll taxes as well as depreciation and amortization and certain other items. Please refer to our filings with the SEC to understand how we calculate any of the metrics discussed on today's call.

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

Thank you for joining us. Q3 demonstrated the growing earnings power of Snap's business. Revenue increased 14% year-over-year to $1.72 billion, and we generated positive net income. Gross margin expanded by approximately 7 percentage points, while net income margin and adjusted EBITDA margin each expanded by approximately 10 percentage points.

Daily active users grew to 495 million and monthly active users grew to 977 million. As I shared in my 15-year letter in September, our priorities are clear: keep our communities safe, grow our advertising business faster and strengthen the relationships at the heart of Snapchat. Communication between friends and family remains the foundation of Snapchat.

In Q3, average daily messages sent increased 8% year-over-year and the number of people engaging in two-way communication increased 6% year-over-year. Our Camera, Spotlight, Map, and Games give people more to share and more reasons to connect.

Spotlight is becoming an increasingly important part of that experience with content that sparks conversations and inspires creativity. Globally, the number of people posting to Spotlight grew 130% year-over-year, while daily active viewers increased 40% year-over-year. We continue to invest in creators and AI-powered recommendations to help Snapchatters discover content they enjoy and want to share with friends.

AI is becoming a meaningful advantage for Snap, helping us improve our products faster, serve our community more effectively and work more efficiently. For example, in Q3, our engineering teams more than doubled the number of merged pull requests year-over-year, while the defect rate per merge pull request declined over 71%. For advertisers, AI search now resolves over 92% of health center sessions, while support cases declined 35% year-over-year.

While advertising revenue growth remains below our ambitions, advertisers are seeing the benefits of our performance improvements. Our focus now is to turn these improvements into broader adoption, more meaningful share of advertiser budgets and more durable growth.

Other revenue grew 84% year-over-year, and we surpassed 30 million paid subscribers across Snapchat+, Memories Storage and Lens+. Innovative AI-powered features have helped Lens++ exceed our expectations, demonstrating how new creative experiences can drive demand for our paid products.

Paid subscribers still represent a small share of our monthly community, giving us room to grow through broader adoption and new premium experiences. We delivered substantial operating leverage with approximately 93% of incremental revenue flowing through to adjusted EBITDA. As revenue grew faster than our cost base, we expanded margins and generated stronger cash flow. This strengthens our ability to invest in our business, offset dilution and create long-term value on a per share basis.

SPECS represent our ambition to bring computing into the world around us. By combining see-through augmented reality with artificial intelligence, we see an opportunity for computers to understand more of what we are experiencing and provide useful information and assistance in the moment. SPECS can help people learn, create and get things done while staying present with those around them.

Our years of investment in Augmented Reality and our developer ecosystem give us a strong foundation to lead this transition. SPECS bring those capabilities together across hardware, software and AI to make computing a more natural part of everyday life. A golfer can receive personalized guidance on their swing through a Lens+ developed with input from PGA professionals, while someone working on the go can edit documents on a virtual display.

Through our enterprise partnerships, we are also exploring how technicians can receive visual guidance from remote experts directly in their field of view while keeping their hands free. We are excited by the positive feedback we have already received as people experience SPECS firsthand. Our SPECS first book pop-up is now open at Westfield Century City in Los Angeles, where visitors are trying SPECS, meeting our team and learning more about augmented reality.

The pop-up gives us an opportunity to learn directly from our community as we refine the experience and bring a more natural human way of computing to life. I'll now turn the call over to Ronan Harris, our Chief Commercial Officer.

Thank you, Evan. Snapchat is woven through how our community lives throughout their day. People use the camera to share what's happening, use chat to talk with close friends, they explore the map and discover content about where to go, what to do and what to buy. They come to Snapchat as themselves with the people who matter to them. That is what makes Snapchat different. It's the real you in the real world.

Real relationships, real-world context and authentic self-expression give us a distinctive foundation for advertising. AI can help us build on that understanding while protecting privacy, making recommendations more useful and advertising more effective. Our ambition is to help businesses create demand before people start searching and turn discovery into purchases.

Our priorities are improving advertiser performance, making results easier to measure and expanding the way businesses can reach our community. Across these priorities, our focus is on turning stronger outcomes into greater advertiser demand, larger budgets and sustained revenue growth. In Q3, direct response advertising grew strongly, supported by improved purchase outcomes. However, upper funnel brand advertising declined year-over-year, weighing on our overall growth.

In Q3, purchase volume for campaigns optimized for app purchases more than doubled year-over-year, while average cost per purchase declined approximately 24% and revenue grew over 54%. For web purchase campaigns, purchases increased over 31% year-over-year. Average cost per purchase declined 15% and revenue grew 11%.

For example, skin care brand dermatology used Work Magic to measure Snapchat's incremental impact on sales. The brand scaled its Snapchat investment 6.2x, while improving incremental return on ad spend by 45%, driving 9x incremental revenue. New customers accounted for 73% of incremental orders, up from 54%, highlighting Snapchat's role in efficient customer acquisition.

AI is helping us extend that progress through innovations like dynamic product ads Generative Retrieval and Agentic Recommendations. These capabilities help connect products in an advertiser's catalog with a Snapchatter's interest and activity to identify products they may value. Together with improvements that recognize people's multiple interests, these innovations have already contributed to an over 2.5% increase in pixel purchase conversions.

Ahead of the holiday shopping season, we introduced Commerce Power Pack to help advertisers turn discovery into purchases and optimize for business value. Dynamic product ads for Sponsored Snaps brings personalized catalog ads into chat and is available globally. Third-party web optimization, now in open beta combines Snap signals with third-party measurement signals to optimize towards advertisers' preferred sources of measurement.

For example, after switching to third-party web optimization for its Snapchat campaigns in France, Foot Locker recorded a 53% higher return on ad spend and a 38% lower cost per acquisition measured through its third-party measurement platform. For app advertisers, unified attribution became generally available across Aspire and Adjust in August. extending support to measurement partners, representing over 75% of app advertising revenue. It helps align campaign optimization with purchase outcomes reported by advertisers' mobile measurement partners.

Our third priority is expanding the way businesses can reach our community. Advertising within Chat, Spotlight and the Map connects businesses with the conversations, content and places that matter to Snapchatters. These experiences give advertisers more ways to build awareness, create demand and drive purchases.

Sponsored Snaps revenue grew 56% sequentially with Chat share of total revenue increasing approximately 8 percentage points year-over-year. Our launch of auction-based Sponsored Snaps in Europe is an exciting step in bringing this format to more advertisers, adding personalized product ads through Commerce Power Pack further expands its potential to turn conversations and discovery into action.

Spotlight's growing audience creates more opportunities for brands to reach our community through full-screen vertical video. Average Spotlight eCPM increased 22% year-over-year, and we continue to strengthen the creative buying and measurement capabilities that help advertisers achieve their goals.

Promoted Places brings this opportunity into the real world, helping businesses connect with people exploring where to go and what to do on Snap Map. Revenue and advertiser adoption each more than doubled sequentially in Q3, and we expanded the product to 14 countries. This early momentum demonstrates advertiser interest in reaching our community at moments of discovery with opportunities spanning restaurants, retailers and other local businesses.

Across these priorities, success means helping more advertisers achieve their goals. return to Snapchat and grow their investment. By delivering results they can trust and build upon, we believe we can earn lasting relationships, a larger share of their budgets and sustained advertising revenue growth.

I'll now turn the call over to Doug to discuss our financial results.

Thank you, Ronan. In Q3, revenue increased 14% year-over-year to $1.72 billion, within our prior guidance range of $1.70 billion to $1.74 billion, while our total cost structure grew just 1% year-over-year. Advertising revenue grew 4% and other revenue grew 84%, led by Snapchat+, Memories Storage and Lens+.

We delivered substantial operating leverage with approximately 93% of incremental revenue flowing through to adjusted EBITDA. Gross margin reached 62%, net income reached $56 million, an improvement of $160 million year-over-year, and adjusted EBITDA increased by approximately $201 million to $383 million year-over-year, representing a margin of 22%.

Margin expansion reflected revenue growth, a greater contribution from direct revenue and efficiencies across our cost base. Our focus is on sustaining disciplined cost growth while investing in the products and capabilities that support revenue growth.

Operating cash flow increased 44% year-over-year to $210 million and free cash flow increased 76% to $164 million. On a trailing 12-month basis, operating cash flow reached $983 million, up 59% and free cash flow reached $777 million, up 88%.

This growth in cash generation strengthens our ability to invest in the business, manage dilution and maintain a strong balance sheet. We ended Q3 with approximately 1.93 billion shares outstanding, including shares underlying stock-based awards, an increase of 3.8% year-over-year.

Managing dilution remains an important part of translating stronger earnings and cash generation into sustained growth in free cash flow per share. We ended the quarter with approximately $2.77 billion in cash, cash equivalents and marketable securities, an increase of approximately $111 million from the end of Q2.

Now turning to our outlook. As we move into Q4, we remain focused on accelerating top line growth, growing our community, deepening engagement and improving financial efficiency. Our guidance range for Q4 revenue is $1.950 billion to $1.985 billion.

We expect infrastructure costs to grow modestly year-over-year in Q4 and now anticipate full year infrastructure costs of $1.65 billion to $1.66 billion compared with our prior guidance of $1.65 billion to $1.70 billion as we have been able to increase our investments in AI and ML without increasing our overall infrastructure costs. We continue to expect all other cost of revenue, excluding infrastructure costs, to represent 16% to 17% of revenue for the full year.

Our guidance range for adjusted EBITDA is $490 million to $525 million in Q4. Our outlook includes our planned investments in SPECS, which we continue to pace against product, ecosystem and economic milestones.

Following the expected completion of our current repurchase program in Q4, we intend to pursue a multiyear approach to dilution management with the goal of offsetting future dilution and supporting a stable fully diluted share count in 2027. Beginning with our Q1 2027 results, global Monthly Active Users, MAU, will become our primary audience metric.

Snapchat is approaching one billion people each month, and we believe MAU provides the most complete view of the community we serve and our revenue opportunity over time. MAU represents the scale of our community, while engagement and monetization metrics reflect the depth and value of our service.

Daily engagement has historically been stable as a percentage of monthly engagement, but we do not intend to optimize Snapchat around daily use at the expense of long-term value for our community. A longer-term horizon better aligns our reported metrics with the product and safety decisions that strengthen relationships, create lasting utility and support broader, more durable audience growth.

Alongside global MAU, we are introducing global MAU-based Average Revenue Per User, ARPU, as our primary monetization metric. Together, global MAU, ARPU and free cash flow per share provide a clear scorecard for Snap, the scale of our community, our progress monetizing that community and our ability to translate that progress into long-term shareholder value.

As discussed last quarter, we continue to monitor the evolving legal and regulatory landscape in the United States and internationally that could materially impact our business and financial results, including increased regulatory scrutiny on youth-related issues.

While outcomes remain uncertain, they may result in significant changes to our products and business practices, increased compliance requirements and legal costs, increased payments for legal judgments and settlements and negative impacts to user growth and engagement. Thank you. We will now take your questions.

[Operator Instructions]

Your first question comes from the line of Ross Sandler with Barclays.

Great. One for Ron and one for Evan, please. So Ronan, it looks like brand was once again the culprit in driving weakness in the third quarter. What are you guys doing to address that? And the 4Q guidance assumes a nice reacceleration in growth at the mid or the high end. Can you talk about what you're seeing quarter-to-date in 4Q? And then Evan, any early read on SPECS out of the gate?

Ross, thank you for the question. So to talk about brands, it declined mainly because of lower CPG spending driven by macro pressures in the U.S. and also the Middle East. Q2 also benefited, I think, from easier comparisons on World Cup-related spending. So that's part of the sequential deceleration that you see. As we look ahead, we're seeing very positive signs of growth from diversified verticals like financial services in the U.S. So part of our strategy here is to look outside of the pressures in CPG and find traction in these other verticals.

I'm pleased to say we're seeing progress there. So I think that go-to-market shift, together with other work we're doing on inventory, expanding the inventory that we've got available and also the formats, I think, give us confidence that we're going to start to see the brand business regain ground over the course of 2027.

Ross, thanks so much for the question. It's been so exciting to finally have SPECS out in the world, and we opened our first look pop-up in October here in Los Angeles. And it's just been so gratifying to see people try SPECS for the first time. We've had more than 10,000 demos to date at the pop-up.

I think that's really a testament to the excitement around SPECS and what's possible. SPECS represent a totally new computing paradigm. So it's really, really important for people to try them to understand the value. So we're very focused now on all the new opportunities that SPECS create and including things like remote assistance or virtual workstations for on-the-go productivity and of course, all the amazing location-based experiences, places like museums.

So we think we've barely scratched the surface of what's possible with SPECS, and we're really looking forward to beginning to ship SPECS later this fall and really to see what our community will build.

Your next question comes from the line of Eric Sheridan with Goldman Sachs.

Maybe two, if I could. I want to come back to the audience metric shift towards MAU and understand a little bit better just the thought process around that and how that's the indication you want to leave folks with in terms of measuring the business going forward? And then the second, on Sponsored Snaps, you continue to show a lot of progress there and a lot of growth. How should we be thinking about the learnings and how they're scaling as to what the market opportunity is around Sponsored Snaps?

Eric, this is Doug. So this goes back to the shift we outlined in 2025 towards more profitable growth. We reduced our investment in community growth marketing globally, with less emphasis on growing daily active users and focused on building our direct revenue business. The changes here to our reporting reflect that strategy. If you remember back in Q2 '25, we introduced Monthly Active Users as a reported metric. As we approach 1 billion people using Snapchat each month, we think MAU gives investors the clearest view of the scale of our community and our long-term revenue opportunity.

So we're focused on three things: how many people we serve, how effectively we monetize that community and how that translates into free cash flow per share. Global MAU, MAU-based ARPU and free cash flow per share give investors a pretty straightforward way to follow that progress.

We also want to give our teams the flexibility to make the right long-term decisions for our community. So daily engagement has historically been stable as a share of monthly engagement. But some decisions that improve the experience on Snap, keep people safe or support long-term retention may actually affect daily active use in the near term. So we want to make those decisions with the long-term health of our community in mind.

We'll continue to report revenue for North America, Europe and Rest of World separately. We think regional revenue is the most direct way to understand financial performance across those markets. So investors will continue to have visibility into where revenue is growing alongside a global view of our audience and monetization.

I'll take the question on Sponsored Snaps. So on the platform, clearly, our community is coming and spend a huge amount of time within the chat environment. So when we introduced this, it was a tremendous opportunity to give advertisers more ways to go out and reach people in experiences that they're already using on the platform. So when you look at the numbers, I think it's showing up in the growth.

Sponsored Snaps revenue grew 56% sequentially in Q3. And we've continued to innovate. So we've introduced the auction-based Sponsored Snaps into Europe, so continue to expand geographically. And dynamic product ads are now also available in chat. So these additions, I think, expand the use cases and the advertisers that the format can serve. So we'll continue to see that in the coming quarters.

Your next question comes from the line of Doug Anmuth with JPMorgan.

Evan, I know in your annual letter, you kind of talked about the ambitions to ultimately move ad growth toward the mid-teens. I was just hoping you could kind of elaborate on what you think maybe the three kind of most important things you need to do are to really accelerate advertising growth in a material way? And perhaps in conjunction with that, we're obviously seeing lots of benefits across the space in terms of AI tools and driving greater engagement and ad targeting higher conversion rates. If you could give us kind of an update there where you are with AI-driven ad improvements.

Absolutely. Thanks, Doug. Certainly, 4% ad growth is below our ambitions. And I'm cautiously optimistic about the progress we're seeing here in Q4 as we're seeing a bit of acceleration on the ad side. We do continue to see strong growth in direct response, which I think is really the durable underpinning of the business. But the upper funnel brand advertising did decline year-over-year, and that weighed on the overall results. So I think what gives me confidence looking forward is really the progress in advertiser performance.

So if you look at Q3, purchase volume for app purchase campaigns more than doubled. Cost per purchase declined approximately 24% and revenue grew over 54%. When we look at web purchase campaigns, they delivered more purchases at a lower cost with revenue growing 11%. So we're really seeing these better outcomes for advertisers translate into revenue growth. And so we just need to translate that progress in terms of performance into broader adoption and a larger share of advertiser budgets.

I do think AI is a meaningful accelerant there. So as we look into 2027 and beyond, we're continuing to improve performance with better AI-powered recommendations, and we're making it easier for advertisers to measure those results using the tools they already rely on, which we know is really important to their confidence in putting more budget behind Snapchat.

So we'll also be expanding the ways that advertisers can reach our community across Chat, Spotlight and the Map. And Ronan mentioned the progress with Sponsored Snaps, but we're also seeing meaningful progress with Promoted Places where revenue and advertiser adoption both more than doubled sequentially. So I think bringing our performance and measurement capabilities into these new placements and experiences gives us more opportunities to help advertisers turn discovery into purchases.

So I think taking it all together, we've got better tools to deliver results. We've got more ways for advertisers to reach our community. And now Ron and the team are working really hard to get these improved capabilities into advertisers' hands, demonstrate that they really work and drive results and ultimately earn larger and sustained commitments from our advertising partners.

Your next question comes from the line of Rich Greenfield with LightShed Partners.

I've got two. Evan, the letter talks about how Snap is not going to optimize daily use at the expense of long-term value. I was just wondering, I think everyone would appreciate some examples of something that you're choosing not to do. And what does that mean for time spent and ad revenue going forward?

Like is there a tension between those two? And just how should we think about sort of how you're trying to optimize the company for the long term? And then I guess you've been talking a lot about the sort of the improvements in DR and the pressures on brand advertising. Anything you could give us a sense of like where are we in the transition? Like when do we get to the point where DR performance is a large enough piece of the pie that it actually can overwhelm the pressure, you actually start to see a real accelerate -- a meaningful acceleration in the growth back to what you used to see years ago. Like how small is -- I guess, what size is brand still in terms of the overall company would be really helpful.

Rich, thanks so much for the question. I can speak a little bit to user engagement and then Ronan can share a little bit on his thoughts on brand advertising. I think looking maybe at a couple of examples, one might be the choice to engage in user acquisition or costly user engagement in a geography that we don't currently monetize or don't effectively monetize. Another example might be deciding not to send certain notifications or to add new features to Snapchat that might generate another app open, but don't ultimately lead to long-term value.

So those are the types of examples of actions that can be costly either financially or in the terms of user satisfaction. while they might increase daily active use, they don't actually help us achieve our long-term goals of developing more engaged community or expanding our monetization opportunity. So I think Doug spoke earlier about this shift from DAU to Monthly Active Users. That's really because we want to focus on the lasting utility of Snapchat and durable audience growth, not just daily frequency for its own sake. So it certainly doesn't mean we're trying to reduce time spent or accept lower ad revenue.

On the contrary, I think what this means is that we're focusing on earning engagement through useful experiences and really demonstrating that the stronger, more durable engagement supports the monetization opportunity over time.

Rich, thanks for the question. So it's very exciting to see the increased engagement across the platform. So across both Spotlight and Chat. We've already talked about what the chat engagement does in terms of our Sponsored Snaps product. Our increase in Spotlight engagement is also super encouraging. And when you look at that and the advertiser interest, you can see the resulting eCPM increase on Spotlight, which is up 22% year-over-year. Today, we are definitely seeing stronger growth on the direct response side of the business, and it continues to grow as a percentage of our overall business. Direct response is up to about 77% of our revenues at this stage. So that's a substantial increase versus last year, and we think that will continue in the short term as we continue to expand the focus on those direct response products. But we do see the improvements on our brand go-to-market and our brand product innovations, which I talked to earlier, kicking in as we move into 2027.

Your next question comes from the line of Justin Post with Bank of America.

I'll start with Spotlight. Impressive growth there. What are people doing more of this year than they were? And just how do you feel about the pipeline of additions over the next 12 months? And then just a general question. The Spotlight and Chat metrics look really good, but it doesn't seem like it's translating to U.S. and Europe DAUs. Any reason why that increasing engagement would show up in monthly but maybe not daily?

Thanks so much for the question. We're really excited about the progress with Spotlight. And our strategy has been to focus on what makes Snapchat special, which is this real content made by real creators. And so earlier this year, we really worked hard to remove AI-generated content or reposted content from the service and really focused on our community and the things that they were creating. And what that led to was, I think, a really meaningful growth in the number of Spotlight posters, which has really helped increase inventory overall for Spotlight, which then obviously helps us show the right videos to the right folks on the service.

So we continue to think Spotlight is a really meaningful opportunity. One of the things we're particularly focused on right now is the way that it can strengthen connections and relationships between friends as people share content with each other to start conversations on the service. It will certainly continue to be a priority. We're doing a lot of work right now on the ranking architecture overall and exploring some of the new generative techniques, which may help us leapfrog our current architecture. But overall, I think it's really that focus on what makes Snapchat unique and that authentic content that's helping us drive the growth of Spotlight.

Just to take the question on which products and ad formats are resonating most with our advertisers at the moment. So in Q3, I mean, we've talked to the strong results for both Web DR and App DR. So that continues to capture a lot of attention. We are seeing really material increases in return on ad spend and also in reach as people experiment and expand into these new products. We've also been bringing -- really what we're trying to do is to bring more AI in behind making the purchase easier, making the measurement easier and as a result, being able to demonstrate durable performance and then expand budgets over time.

So things like DPA Generative Retrieval and Agentic Recommendations that help match products with those interests of our community beyond keyword matching are really having a big impact. And our new commerce Power Pack is also getting a lot of traction as a way to optimize for purchase value and advertiser preferred measurement. So alongside all of that product work, we're also focusing our teams and partners on adoption and consistent advertiser outcomes. So I think those focus areas will help us to increase that share of wallet over time.

Your next question comes from the line of Dan Salmon with New Street Research.

I want to follow up on direct response with Ronan as well. As you move to overseeing the global business, I guess I'd like to hear just a little bit more on your high-level views on the state of the DR business. Obviously, lots of updates on the ad stack that you talked about, much stronger growth there lately. But maybe just to come back and talk a little bit more about what Evan spoke to about the sustainability there.

And in particular, I think of things like growing the number of advertisers on the platform. That's always an important metric. I'd love to hear your ambitions on that. And then maybe a little bit -- that's more about small advertisers, maybe a little bit about your largest DR advertisers, how you help move them into really everyday performance budgets that they can continue to lean into and become a bit more sustainable for Snap over time.

Thanks for the question. So my focus is on making the performance we deliver easier for advertisers to both see and measure to be able to buy it, so making sure that we've integrated with the right buying platforms and then to be able to scale. So I think if it's easy to buy, they're getting great results that they can rely on, then they're happily going to scale, and we're going to be able to increase our share of wallet. So that's where our teams are focused on both in terms of product innovation and also in terms of our go-to-market.

So I've already mentioned that the introduction of things like PPA Generative Retrieval, Agentic Recommendations, they're really capturing the minds of advertisers in terms of using the power of AI to help match products with the interests of our community. So that's making the purchasing easier. We've also talked about unified attribution and how we're making third-party measurement of performance on Snap, again, much, much easier, much more reliable.

Those two things alone are giving us tremendous traction with the advertiser base. You mentioned the distinction between large and small advertisers. For small advertisers, this is super important. They are typically resource and time constrained. So being able to make it super easy for them to come on to the platform, get that first conversion, measure it and rely on it and for that buying process to be easy is critical. So we're continuing to put a lot of work into that to make sure that they can -- again, they can do it directly on Snap, they can self-serve or they can have a managed experience.

We're also integrating in further with lots of partners to make sure that their clients can use those third-party platforms to buy into Snap as well. So I think those two things are definitely making the buying process for SMBs an awful lot easier. For the larger advertisers, it's about that dependable performance time and time again, making sure that the third-party measurement systems are super reliable and making sure that our performance stays consistent. Again, introducing all of these new signals and AI technologies to help drive that incremental performance is critical to giving them those results. And as you'll have seen in the results we discussed, particularly across Web DR and App DR, that growth is super strong, and we expect that to continue to be positive over the coming quarters.

Our final question comes from the line of Alice Jesska with Loop Capital.

Alice here on for Rob Sanderson. I was just wondering, you've made significant progress in improving margins and controlling costs throughout 2026, about 93% of incremental EBITDA margins and 7 points of gross margin expansion. Could you provide some color on how much more room there is for cost optimization and if we can expect similar margin improvements in 2027?

Alex, thanks for the question. This is Doug. Look, Q3 really demonstrates the earning power of Snap when our revenue grows faster than our cost base. Revenue increased 14%, while our total cost structure grew just 1%. Our gross margin, as you noted, reached 62%. That translated into positive net income of $56 million. So really positive results. for the quarter. One thing to call out, the 93% flow-through is a measure of this quarter's year-over-year operating leverage. So the revenue mix, seasonality, timing of expenses and investment levels affect that outcome.

That said, unequivocally, our objective is to translate that earnings progress into sustained free cash flow per share rather than really optimize a single quarter's margin. And we're going to then use that cash against our three priorities. So we're really happy with the flow-through this quarter, but there's obviously timing impacts from our cost base that impact that. But I think if you look at over the last several quarters, we've been able to take all of the savings that we had mentioned in Q1 and roll that through the year. So really happy about the results there.

Thank you. This concludes our question-and-answer session as well as Snap Inc.'s Third Quarter 2026 Earnings Conference Call. Thank you for attending today's session. You may now disconnect.

Good afternoon, everyone, and welcome to Snap Inc.'s Second Quarter 2026 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to David Ometer, Head of Investor Relations.

Thank you, and good afternoon, everyone. Welcome to Snap's Second Quarter 2026 Earnings Conference Call. With us today are Evan Spiegel, Chief Executive Officer and Co-Founder; and Doug Hott, Chief Financial Officer. Please refer to our Investor Relations website at investor.snap.com to find today's press release, earnings slides and investor letter. This conference call includes forward-looking statements, which are based on our assumptions as of today. Actual results may differ materially from those expressed in these forward-looking statements, and we make no obligation to update our disclosures.

For more information about factors that may cause actual results to differ materially from these forward-looking statements, please refer to the press release we issued today as well as risks described in our most recent Form 10-K or Form 10-Q, particularly in the section titled Risk Factors. Today's call will include both GAAP and non-GAAP measures. Reconciliations between the two can be found in today's press release and earnings slides available on our IR website.

Please note that when we discuss all of our expense figures, they will exclude stock-based compensation and related payroll taxes as well as depreciation and amortization and certain other items. Please refer to our filings with the SEC to understand how we calculate any of the metrics discussed on today's call. With that, I'd like to turn the call over to Evan.

Hi, everyone, and welcome to our call. Snapchat is now one of the largest Internet communities in the world, approaching 1 billion people using our service every month. Over the past few years, we worked intensely to rebuild our monetization platform and improve our go-to-market strategy, and those efforts are producing stronger results.

Our objective now is to turn our scale into durable growth and stronger cash generation while demonstrating the long-term value of our investment in Specs. We are approaching this work with a more focused AI-enabled operating model. AI is helping us improve our service faster, deepening engagement and improving outcomes for advertisers. That supports revenue growth, margin expansion and free cash flow.

Free cash flow gives us the flexibility to continue investing in long-term opportunities, offset dilution and strengthen our balance sheet. That is why free cash flow per share will be our primary financial objective going forward. Our largest long-term opportunity is Specs, a new kind of computer built into see-through glasses. Specs are designed for a future in which AI does more work on our behalf and people spend less time operating screens. I believe we can pursue that future from a much stronger position by continuing to improve our core business and remaining disciplined about how we invest.

Last fall, I outlined three priorities for Snap, strengthen our community and engagement, accelerate and diversify revenue growth and build a more profitable cash-generative core business. Q2 was a meaningful step forward across all three. Monthly active users grew to 971 million and daily active users reached 493 million. Revenue increased 19% year-over-year to $1.6 billion. Advertising revenue grew 9% to $1.28 billion, while other revenue grew 85% to $316 million. Gross margin reached 58%, net loss was $164 million and operating cash flow was $176 million.

Adjusted EBITDA was $250 million and free cash flow was $121 million. At its core, Snapchat helps close friends and families stay connected. Over time, we have built Spotlight, Snap Map and Augmented reality around that foundation, giving our community more reasons to open Snapchat, discover something new and share it with the people that they care about. I think about this as a simple flywheel that drives the growth of Snapchat. Sharing starts conversations, conversations strengthen friendships and stronger friendships lead to more sharing and creativity.

Spotlight is becoming a more important part of that flywheel. In the United States, the number of people posting to Spotlight grew more than 115% year-over-year, while Spotlight daily active users grew more than 20%. This growth was supported by our investment in creators and AI-powered recommendations. We also saw improving momentum in our advertising business. After several quarters of improving our ad products and go-to-market approach, we saw better momentum with large advertisers in North America and stronger revenue growth internationally.

World Cup-related spending contributed during the quarter alongside continued strength among small- and medium-sized businesses. Smart Campaign Solutions, our suite of AI-powered automation and optimization tools, is making it easier for advertisers to achieve better outcomes with less manual work. Those outcomes continue to improve. For app advertisers, cost per install declined 8% year-over-year. Cost per purchase declined 18% and app purchase volume increased 128%.

Greater adoption by retailers also drove 43% growth in dynamic product ads revenue. Advertisers increased spending across native services such as sponsored Snaps, where roughly 1/3 of the Snapchatters reached were incremental to other services on Snapchat. These results reflect the progress we are making across automation, optimization, measurement and attribution. Our audience in the United States continues to broaden quarter-over-quarter, led by people aged 35 and older.

That is increasing our relevance in categories such as automotive, health care, home goods, financial services, insurance and business-to-business services, while helping us diversify our advertiser base. An independent third-party study from Measured also found that for the brands in their portfolio, Snapchat delivered approximately 19.3% higher incremental return on ad spend than the blended incremental return from their social advertising overall.

Taken together, these results give us confidence that advertisers are seeing more value on Snapchat and increasing their investment as we improve the platform across the full funnel. We have also built a meaningful second revenue stream. Snapchat+, Memory Storage and Lens+ helped drive 85% year-over-year growth in other revenue to $316 million in Q2. Less than 3% of our monthly active users are paying subscribers, and we see substantial room to grow direct revenue over time through premium features, AI-powered creative tools and additional subscription products.

AI is transforming Snapchat and the way Snap operates. It powers better recommendations, more automated and performant advertising campaigns and new creative tools for our community. Internally, it is helping our smaller, more focused team move faster and accomplish more. In Q2, code commits per engineer increased 75% year-over-year, while major reliability issues declined 57%. Our internal AI code reviewer now reviews 90% of pull requests across Snap and has saved an estimated 30,000 hours of code review time.

Our AI-powered support agent answers approximately 3.9 million questions from Snapchatters each month and has reduced support ticket volume by approximately 62% since the start of the year. In advertising, AI increased first pass image review automation from 40% in Q2 2025 to nearly 90% in Q2 2026, resulting in faster approvals for advertisers, stronger content safety and lower operating costs. In addition to leveraging AI to improve how we operate today, we are building toward the future of computing with Specs.

I believe AI will fundamentally change our relationship with computers. We'll spend less time operating them and more time supervising intelligent systems that understand context and complete work on our behalf. Specs are built for that future. Unveiling Specs in June was an important milestone after more than a decade of work. Specs are a new kind of computer built into see-through glasses, more capable than today's limited AI glasses and more wearable than bulky VR headsets.

Specs can understand the world around you and help with work, learning, entertainment and shared experiences without pulling you away from the real world. We are excited to share much more about how Specs work and what they can do at our launch event in Los Angeles on September 16. I'll now hand it over to our Chief Financial Officer, Doug Hott, to discuss our financial results and outlook.

Thank you, Evan. In Q2, revenue increased 19% year-over-year to $1.6 billion, including 9% growth in advertising revenue. This growth reflected progress with large advertisers in North America, broader adoption of our AI-powered smart campaign solutions, continued SMB momentum and 85% growth in other revenue, led by Snapchat+, Memory Storage and our Lens+ subscription.

In early Q2, we restructured our cost base so Snap can scale more efficiently, and those changes are increasingly visible in our results. Our total adjusted cost structure increased just 4% year-over-year as operating efficiencies offset investments in long-term revenue drivers. Gross margin expanded 7 percentage points year-over-year to 58%. Net loss improved by $99 million to $164 million, and adjusted EBITDA increased by $208 million year-over-year to $250 million.

Our focus is to sustain this operating leverage by maintaining disciplined cost growth as we scale revenue, expand margins and increase free cash flow. That operating leverage translates into stronger cash generation. In Q2, operating cash flow was $176 million and free cash flow was $121 million. Over the past 12 months, operating cash flow reached $919 million and free cash flow reached $706 million. We have now generated positive free cash flow for eight consecutive quarters, while limiting fully diluted share count growth to approximately 2% over the past 5 years through our share repurchase program.

Over that period, we repaid more than $2 billion of convertible notes due in 2027 and 2028 as well as the $47 million in convertible notes that were due in August 2026, reducing future debt obligations and strengthening our balance sheet. We ended Q2 with approximately $2.7 billion in cash and marketable securities, giving us the capacity to invest in our core business and long-term opportunities while maintaining a healthy cash balance.

Our planned investment in Specs is included within our existing operating expense outlook. Over time, we intend to pace that investment based on product, ecosystem and economic milestones while preserving the improving profitability and cash generation of our core business and supporting a stable share count. Going forward, our financial objective is free cash flow per share. We believe this is the right objective because it connects operating performance, disciplined capital allocation and long-term shareholder value creation.

Our goal is to generate enough free cash flow to invest in Snap's long-term potential, offset stock-based compensation dilution and strengthen our balance sheet. We support these objectives by growing revenue faster than costs, investing with discipline and using our share repurchase program to offset dilution and compound per share value. As we move into Q3, we remain focused on accelerating top line growth, growing our community, deepening engagement, improving financial efficiency and advancing towards the commercial launch of Specs later this fall.

Our guidance range for Q3 revenue is $1.70 billion to $1.74 billion. We expect infrastructure costs to grow modestly year-over-year in Q3 and now anticipate full year infrastructure costs of $1.65 billion to $1.70 billion, compared with our prior guidance of $1.60 billion to $1.65 billion. The increase primarily reflects additional investment in the AI and machine learning infrastructure needed to support revenue growth. We continue to expect all other cost of revenue, excluding infrastructure costs, to represent 16% to 17% of revenue for the full year.

We also continue to expect full year adjusted operating expenses of approximately $2.75 billion and stock-based compensation of approximately $1.05 billion. The personnel cost savings associated with our recently announced restructuring are expected to be more fully reflected in Q3 and beyond. As a result, we estimate that adjusted EBITDA will be between $300 million and $350 million in Q3. Following the expected completion of our current repurchase program in Q4, we expect to implement a new multiyear dilution management program designed to help offset future dilution and support a stable fully diluted share count in 2027.

The program will be funded primarily through free cash flow while maintaining a healthy cash balance and continuing to invest in our long-term growth. Looking beyond 2026, we believe the stronger near-term outlook reflects durable improvements in the business. We expect direct revenue to continue growing materially faster than the overall business while maintaining disciplined growth in our non-GAAP operating expense base over the medium term. As we scale, the financial benefits of these trends should become increasingly meaningful with continued gross margin improvement supporting further adjusted EBITDA margin expansion and sustained positive net income beginning in 2027.

Lastly, we continue to monitor the evolving legal and regulatory landscape in the United States and internationally that could materially impact our business and financial results, including increased regulatory scrutiny on youth-related issues and several trials scheduled in the United States later this year. While outcomes remain uncertain, they may result in significant changes to our products and business practices, increased compliance requirements and legal costs, increased payments for legal judgments and settlements and negative impacts to user growth and engagement. Thank you, and we will now take your questions.

[Operator Instructions] Your first question comes from the line of Doug Anmuth with JPMorgan.

It seems like you think 2Q was the quarter where you're seeing the work of the last few years paying off. I just wanted to kind of hear more about what gives you the confidence that this kind of growth and performance is really durable going forward?

Doug, thanks for the question. The improvement in Q2 really reflects progress across both the advertising platform and the go-to-market execution, which is something we've really been working hard on. We're delivering stronger performance, especially for app, e-commerce and other lower funnel advertisers, and we're making campaigns easier to manage with better automation, optimization, measurement and attribution.

One of the things I'm particularly excited about is that all these improvements resulted in a 56% year-over-year increase in conversions across the platform, including app and pixel purchase goals. And we also saw increased spending from existing advertisers alongside broader adoption of newer formats like sponsored Snaps and our smart campaign solutions.

So we know we still have more work to do, but the breadth of the improvement here is what gives us confidence that it's being supported by stronger fundamentals.

Your next question comes from the line of Ross Sandler with Barclays.

So there was some language in the letter about Specs and the launch date and your kind of planned pacing of investment. So could you just elaborate a little bit on what we should expect in the second half and into '27 for Specs investment? And then is the idea of setting up Specs as a company outside of Snapchat off the table? Or is that still something that you guys would consider in the future?

Ross, thanks for the question. I think big picture, what we were really trying to outline was that given the real inflection in free cash flow generation in the business that we have the ability to simultaneously invest in the future of Specs, offset dilution, and strengthen our balance sheet. So as we look at Specs specifically, we're very focused right now on product quality, on the customer experience and really the ecosystem development.

And we've gotten some great feedback from developers and businesses after the announcement at AWE in June. I think looking forward, on September 16, we'll be sharing a lot more about all the different ways people can use Specs, how they fit into people's lives. And we're just really excited to get Specs into folks' hands later this year.

Your next question comes from the line of Dan Salmon with New Street Research.

Evan, I'd just like to hear a little bit more on the North America DAU outlook for the rest of the year after it stabilized at 92 million this quarter. You mentioned more usership -- healthier usership in the 35 and older age group in the letter. Could you expand on that? And maybe also give us a little color on users under 35 and whether that figure grew sequentially this quarter.

Thanks, Dan. Yes, we're definitely encouraged by the stabilization in North America DAU on a quarter-over-quarter basis. And we made some progress in strengthening the core communication experience and also giving Snapchatters more reasons to engage with Spotlight and the Snap Map and augmented reality. I would say, in particular, Spotlight is becoming a more important part of that flywheel.

So in the United States, the number of people posting grew more than 115% year-over-year and daily active viewers of Spotlight increased by more than 20%. So I think going forward, we're just very focused on improving activation, retention and engagement.

I would say we are closely monitoring the regulatory environment, including age assurance, privacy and online safety requirements, which may affect the product experiences or user growth and engagement over time.

Your next question comes from the line of Rich Greenfield with LightShed Partners.

First of all, thanks for the shorter prepared remarks. That was really helpful. I appreciate getting questions quickly. Evan, it's been like 7 weeks since you started taking preorders for Specs. Any sense of -- you could give us any sense of like what preorder volumes look like and what that's telling you about demand heading into the launch event in September.

And then two, Doug, you called out in the prepared remarks that there was a Q2 tailwind from the World Cup as well as the large advertiser performance. I would assume the World Cup is carried over at least a little bit into Q3, but any commentary on sort of -- could you size for us like what the World Cup means?

And obviously, you did more -- your revenue growth in Q2 was faster than your guide for Q3. Is that the difference is not having the World Cup or just less World Cup? Just trying to understand what the organic number might look like from that change or that improvement in the large advertiser number that you called out.

Rich, thanks so much for the question. Yes, on Specs, we've been overwhelmed at the extent to which I think our announcement really broke through. And there's just a huge amount of interest. What we're hearing from folks is really that they want to try Specs. It's obviously a high consideration purchase at $2,195. And obviously, developers and folks who are familiar with the platform really understand it and understand the technical leaps we've made with this generation.

I think for the broader public and consumers, it's going to be really important for folks to go hands-on. I think September 16, our upcoming launch event will be an important sort of starting point for that consumer-oriented journey. So certainly, a lot of exciting momentum around Specs, and we're really looking forward to getting these in folks' hands and really so that they can experience the platform for themselves.

This is Doug. Let me take the second part of your question. Yes, definitely, the World Cup provided a benefit during the quarter, but it wasn't the only improvement we saw -- our guidance reflects the expected normalization of World Cup-related spending and a more difficult year-over-year comparison in Q3 following the easier comps we had in Q2 as our ad platform stabilized last year at the end of Q2 2025.

In Q2 this year, we continue to see constructive trends across the platform, including large advertiser momentum in North America, strength among the small and medium business -- small-sized businesses and really the broader adoption of our smart campaign solutions and the lower funnel products like app purchase and dynamic product ads really added to our overall year-over-year growth. So we're very pleased by that.

Your next question comes from the line of Michael Nathanson with MoffettNathanson.

Can I just double-click back on Specs for a second? I guess going to Ross' question, I understand why you're doing it, but the question, I think, is the financial sense of why this will work for a company your size. So walk us through why financially the structure you have here makes sense versus working with a partner?

And then what gives you confidence given that Apple, Meta, Alphabet are all trying to build over time competitive products, what gives you the confidence that you actually can win at this game versus some bigger resource companies?

Michael, thanks so much for the question. I think what is very clear to us is that the long-term opportunity to develop the next computing platform is absolutely enormous. If you look at what laptops and desktops did to desk jobs, the transformations in productivity and what that enabled for the world over the last couple of decades has just been extraordinary.

And I think what's so unique about Specs is that they bring computing to the real world to real-world jobs and allow you to work hands-free with AI assistance and really the incredible power of computing in the world around you. And I think that opportunity is just enormous, even at single-digit percentages of smartphone volumes. I think what some folks maybe don't understand yet, especially because Specs are so new and we're really the first mover in this category is how difficult the product is to execute from a technical perspective, which is why that full stack integration, everything from our developer platform and tools to our Lens Core rendering engine to our operating system to the optical engine itself, all of those things have to work perfectly together to deliver the customer experience that we've provided with Specs.

And I think one thing that's a bit different this time around, when we started innovating in the social space, we were a late entrant. So most of the apps at the time, whether it was Facebook or Instagram or Twitter, were already in existence, and we had to really innovate to continue to grow. And obviously, now we're approaching 1 billion monthly active users.

What's so unique about this opportunity for us is really that we're a first mover, and that really placed to our strengths as an innovator. It's why we've been able to lead in this category and leverage our incredible augmented reality platform to win over the long term.

Your next question comes from the line of James Heaney with Jefferies.

Could you just talk about what's driving the decision to raise the full year infrastructure cost outlook? Just how should we be thinking about the return on that investment, particularly as it relates to the direct response kind of lower funnel advertising business? I appreciate it.

Thanks, James. Yes, this is Doug. Look, I think this is an opportunity for us as we've seen the advertising revenue growth over this quarter and our guide for Q3. One of the things that we want to make sure that we're doing is continue to invest in our -- especially our DR and our ad platform in general.

And so this gives us a little bit of flexibility to make those investments as we see fit through the back half of the year. It doesn't mean we'll have to do that, but we wanted to make sure that we gave full year guidance to reflect the opportunity that we could make those investments and really drive those meaningful short- and medium- and long-term investments in our ad platform.

Your next question comes from the line of Mark Shmulik with Bernstein.

Doug, both you and Evan kind of mentioned prioritizing free cash flow per share in kind of the prepared remarks. And just kind of wondering what's different kind of as you've kind of ramped up in the seat?

And kind of how is your philosophy evolving and you're deploying it across the organization? And if there's any kind of colorful examples in the early days of kind of things you've done around restructuring the cost base would be very helpful.

Thank you, Mark. Appreciate it. Yes, I mean, I think really free cash flow per share connects to three things that we believe are really essential to our long-term shareholder value. So number one, improving the operating performance of the business; number two, investing our capital with discipline and lastly, managing our dilution.

Our first priority is really to grow free cash flow, if you think about the numerator of this, and we really want to grow revenue faster than cost. And if you think about what we did in Q2, we grew revenue 19% year-over-year, and we only grew costs 4%. And that's we're really proud of that, and I think it comes a lot from the restructuring that we did at the beginning of the quarter and can continue forward as we look to continue to drive that flow-through. Then after that flow-through to cash, we want to allocate that cash in a really balanced way.

So investing in our highest return opportunities, maintaining a healthy cash balance and strengthening the balance sheet. And then finally, repurchasing shares to help offset that dilution. As Evan mentioned in his prepared remarks, following the expected completion of our current authorization in Q4, we expect to implement a multiyear program beginning in 2027. And I expect that any new program will be funded primarily through free cash flow and designed to support our stable share count over time.

Your next question comes from the line of Eric Sheridan with Goldman Sachs.

Maybe broadening out the conversation on monetization, just understand better how you're thinking about the evolution of the mix of revenue in the business and some of the signals you're getting from Snap+ as a subscription?

And how do you even think about Specs as an opportunity both across hardware and subscriptions to possibly also diversify the revenue stream as you look out not just through the end of this year, but out over 2027 and beyond.

Eric, thanks so much for the question. I think big picture, it's really exciting that we're becoming a multi-engine revenue business here. I think that does expand the total opportunity for us overall. And I think it also provides a lot more resilience, frankly, as we look at our long-term growth. I think one of the real bright spots for us has been other revenue growing 85% year-over-year.

That's been primarily driven by Snapchat+, memory storage and then a new subscription product we have called Lens+, which is really connected to new AI creative tools. And that's sort of at a higher price point for our community. So we've seen some really nice and exciting growth there, and we believe that continuing to develop new premium features and creative tools will drive growth into the future.

I think, as I noted in my remarks, less than 3% of our monthly active users are paying subscribers today. So we do think there's substantial room to increase penetration over time. Looking to Specs as well, that is a longer opportunity -- longer-term opportunity for us, but it is absolutely massive if we can really help people make this shift to computing based on screens -- from computing based on screens to computing in the real world.

Your next question comes from the line of Shweta Khajuria with Wolfe Research.

I had one on subscribers. So in the letter and in your prepared remarks, you mentioned less than 3% of MAUs is where you are at. Could you please talk about how you view the runway for that 3% to grow?

And where do you think that could grow to, call it, in the near to midterm? And what kind of opportunity you see there? And what gets you there? What are some of the drivers that you feel confident gets you to that penetration level?

Yes. Thanks so much for the question. It's still early days for us on the subscription products. So it's hard to say specifically. One of the things we did do is just take a look across the industry and other app-based subscription products. And it seems like penetration is typically around 7% to, let's call it, 12% over the long term.

So I do think if we just look across the competitive set, there is certainly headroom to continue growing subscribers from here. I think what we've seen work historically is just continuing to add value to our subscription products. And I think Lens+ is going to be an exciting new driver of growth for us there as it allows us to expand into some really powerful AI tools that people have really demonstrated a willingness to pay for.

Our last question comes from the line of Lloyd Walmsley with...

Two, if I can. First one, maybe for Evan. Can you just help us understand how you think about the trade-off between growing the profitability and free cash flow of the company overall and then investing in the future of Specs? And sort of are there any guardrails to think about in terms of how much you might invest -- and sort of any sense for how the product road map looks in terms of when we might really get to see a broader mass market product market fit?

And then I guess the second one, shareholder letter talked about just the strong incremental reach in sponsored Snaps. So wondering if you can give us an update on like how meaningful is that ad unit today in the ad mix? And sort of how could that become a significantly larger portion of the ad mix over time? Anything you could share there would be great.

Thanks so much for the question. As I mentioned, I do think that the real inflection in free cash flow generation is going to allow us to invest in Specs and offset dilution while simultaneously strengthening our balance sheet. I think Specs are just so important because they support our mission of making computing more human.

And we really believe that this next generation of computers is going to be more contextual, more intelligent and far less dependent on people operating screens. And I think really that see-through glasses are a natural form factor for the future because they allow technology to understand the world around you and assist you without pulling you away from it. I think right now, we are really approaching this investment with a lot of discipline. And as I mentioned, in the near term, our focus really is on that the customer experience, the product quality and the ecosystem development.

I think it will be towards the end of the decade before we see mass market consumer adoption. And I think things, for example, like weight and costs are going to have to come down to see unit volumes really meaningfully pick up. But we do have, I think, a real advantage here in that developers have been building on the Specs platform now for several years. They're very familiar with our tools, and we're just so excited to share more on September 16 when folks can see all the amazing experiences that are possible with Specs.

This concludes our question-and-answer session as well as Snap Inc.'s Second Quarter 2026 Earnings Conference Call. Thank you for attending today's session. You may now disconnect.

Good afternoon, everyone, and welcome to Snap Inc.'s 2026 Annual Stockholders Meeting. Erick Wang, you may begin.

Good afternoon. My name is Erick Wang, and I'm an Associate General Counsel at Snap Inc. I'm very happy to welcome you to the Snap Inc. 2026 Annual Stockholders Meeting. We've invited members of our Board and management team who are joining us on our call today. We have also invited holders of our Class A common stock to participate in today's meeting. We have approximately 231,626,943 shares of our Class C common stock present for today's meeting, representing over 99% of the voting power of our capital stock. The meeting will now officially come to order. We will proceed with the business of the meeting as set forth in the information statement we filed with the SEC on July 9, 2026. The only item in today's agenda is to present the results of an action by written consent of certain of our stockholders.

Today, the holders of an aggregate of 231,626,943 shares of our Class C common stock, representing over 99% of the voting power of our capital stock, acted by written consent to elect the following 13 individuals to our Board of Directors. Evan Spiegel, Robert Murphy, Michael Lynton, Kelly Coffey, Joanna Coles, Liz Jenkins, Jim Lanzone, Matthew McGee, Scott Miller, Patrick Spence, Poppy Thorpe, Fidel Vargas and Luke Wood. Each of these individuals will serve until the 2027 Annual Stockholders Meeting and until his or her successor is elected or if sooner until the director's death, resignation or removal.

Additionally, pursuant to this action by written consent, the holders ratified the selection by the Audit Committee of our Board of Directors of Ernst & Young LLP as our independent registered accounting firm for the fiscal year ending December 31, 2026. We expect to report the results of this stockholder written consent in a filing with the SEC within 4 business days.

There is no other business pending before the stockholders. I will now officially adjourn today's meeting. As a reminder, we will be discussing our second quarter 2026 earnings results on Monday, August 3, at 2:00 p.m. Pacific. We invite all stockholders to listen into that discussion via the link on our Investor Relations website at investor.snap.com. We did not receive any questions from our stockholders for the annual meeting. So this concludes today's meeting. Thank you for joining us today.

This concludes Snap Inc.'s 2026 Annual Stockholders Meeting. Thank you for attending today's session. You may now disconnect.

Good everyone, and welcome to Snap Inc.'s First Quarter 2026 Earnings Conference Call. At this time, participants are only mode.

I would now like to turn the call over to David Ometer Head of Investor Relations.

Thank you, and good afternoon, everyone. Welcome to Snap's First Quarter 2026 Earnings Conference Call. With me today are Evan Spiegel, Chief Executive Officer and Co-Founder; and Derek Andersen, Chief Financial Officer. .

Please refer to our Investor Relations website at investor.snap.com to find today's press release, earnings slides and investor letter. This conference call includes forward-looking statements, which are based on our assumptions as of today. Actual results may differ materially from those expressed in these forward-looking statements, and we make no obligation to update our disclosures.

For more information about factors that may cause actual results to differ materially from these forward-looking statements. Please refer to the press release we issued today as well as risks described in our most recent Form 10-K or Form 10-Q, particularly in the section titled Risk Factors. Today's call will include both GAAP and non measures. Reconciliations between the 2 can be found in today's press release. Please note that when we discuss all of our expense figures, they will exclude stock-based compensation and related payroll taxes as well as depreciation and amortization and certain other items. Please refer to our filings with the SEC to understand how we calculate any of the metrics discussed on today's call.

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

Hi, everyone, and welcome to our call. Last fall, we described a crucible moment for Snap and the imperative to grow our community and engagement, reaccelerate revenue growth improved gross margins and establish a clearer path to net income profitability.

We made meaningful progress on each of these priorities in Q1. Q1 marked a return to growth in daily active users reaching $483 million, while monthly active users grew to 956 million. Revenue increased 12% year-over-year to $1.53 billion, including a 3% year-over-year increase in advertising revenue to $1.24 billion and an 87% year-over-year increase in other revenue to $285 million. Net loss improved to $89 million. Operating cash flow was $327 million. Free cash flow was $286 million, and adjusted EBITDA was $233 million.

These results indicate that we are closing the gap between engagement and monetization while converting revenue growth into a more durable path towards GAAP profitability.

As we look ahead, our priorities are clear: first, grow our community and deepen engagement across Snapchat with a focus on highly monetizable geographies; second, accelerate and diversify revenue growth; and third, build a more profitable and cash generative core business while investing with discipline and specs and our long-term opportunity in intelligent eyewear.

Our first priority is growing our community and deepening engagement by making Snapchat the best place to communicate with close friends and family. Engagement on our platform is built around relationships. People use Snapchat to talk to their friends, to express themselves visually to share with their team and to stay connected to what is happening around them. That is why we continue to believe that our communication service is our strongest long-term advantage.

In Q1, we continue to send new conversation starters to make communicating with friends easier and more fun. Topic Chats, which allows Snapchatters to participate in public conversations around trending topics and events gained momentum as we broaden the rollout in Q1. For example, the March Madness topic chat was one of the most active real-time group jets with more than 90,000 messages sent and peak concurrent participation exceeding 40,000 people.

Games are also emerging as a popular conversation starter with new 2-player term-based experiences, creating low friction ways for friends and family to connect. We also added new entry points for games in Q1 to improve discovery contributing to gains reaching 255 million monthly active users. In addition, we enhanced our messaging infrastructure by improving notification, timeliness and relevance and by making it easier for Snapchatters to seamlessly share content into conversations.

Our community is increasingly using content sharing as a conversation starter and spotlight is playing an important role in recommending more shareable content. In Q1 2026, Spotlight shares and reposts grew 62% year-over-year globally and 124% year-over-year in the U.S. Our focus on prioritizing authentic content created using the Snapchat camera and our investments in the creator experience are driving spotlight posts contributing to nearly 74% year-over-year growth in Spotlight posters in the U.S. and over 61% globally. These efforts, combined with continued investment in resulted in higher engagement with total time spent watching Spotlight increasing 11% year-over-year.

Our augmented reality and Lens ecosystem continues to play an important role in enhancing communication and self-expression on Snapchat. More than 75% of Snapchatters are engaging with augmented reality every day on average, and our community uses Lenses in our camera per day on average. AI-powered lens creation is transforming our AR ecosystem with more than 400,000 lenses submitted in Q1, increasing more than 150% year-over-year. The significant growth this quarter was driven primarily by the adoption of new lens creation tools such as Easy Lens, our free tool designed to make lens creation simpler, more fun and more personal.

The Map continues to play a growing role as a way to stay up-to-date with friends and discover new places. With more than 450 million global monthly active users in Q1, we believe that the Snap Map is the world's most personal map continually adapting to highlight the friends, places and real-world experiences that matter most to Snapchatters. As we layer in richer content and local signals, we see Snap Map developing into a powerful platform for connecting our community with places and services in the fiscal world, creating a durable foundation for local commerce and advertising over time.

The innovation we delivered across new conversation starters, content sharing, Lenses and Snap Map all contributed to the growth in our global community in Q1 with global daily active users and monthly active users, both growing 5% year-over-year in Q1.

Advertising execution improved in Q1, led by continued strength with SMBs and better performance across our lower funnel products. Large advertisers in North America remained a headwind, and but we are beginning to see early signs of improvement as performance gains are more fully reflected in third-party measurement systems and as newer inventory in Chat is more widely adopted. Our focus is on 3 priorities: improving performance and measurement across the core platform expanding new inventory and translating those gains into broader advertiser adoption and larger commitments.

First, we continue to make meaningful progress improving performance across our core direct response products, Growth in Q1 was led by lower funnel solutions and by performance-oriented advertisers responding to stronger ROI. Dynamic Product Ads revenue grew more than 30% year-over-year, while adoption among small- and medium-sized customers more than doubled. We also saw strong momentum in app advertising, where gold-based bidding revenue grew 27% year-over-year, and app purchases revenue grew 87% year-over-year. Across Pixel Purchase campaigns, 70 purchases generated per dollar of revenue grew more than 23% year-over-year, which we view as a sign that conversion efficiency is improving.

These gains are being driven by continued progress in AI ranking retrieval and automation across the ad platform. Nearly 70% of advertising spend now use at least one of our AI-powered automation solutions including Smart Audience, Smart Budget or Smart Placement, which gives us confidence that these improvements are benefiting a broad share of the business. In Q1, we launched LLM based user intent understanding for dynamic product ads retrieval, which improved pixel purchase conversions by more than 2% and multimodal similar product retrieval using a vision language model fine-tuned on Snap data, which delivered an additional high single-digit lift in DPA purchase conversions.

We also upgraded our app reengagement model with stronger foundational user beddings and a new multi-task architecture. -- increasing purchase conversions by approximately 2%, while improving CPA by nearly 9%. Together, these changes are making the platform more effective at matching the right advertiser product and creative with the right Snapchatter at the right moment.

Measurement remains a critical priority, particularly for large advertisers and agencies. It is not enough for our internal systems to show better performance. Those games need to be reflected in the third-party measurement tools that advertisers use to evaluate spend and allocate budgets. Over the past year, we have made progress closing long-standing measurement gaps so that external systems more accurately reflect the performance we are delivering. According to Measured, median iROAS on Snapchat grew 104% from the April through September 2025 test period to the October 2025 through March 2026 test period. This matters because larger advertisers typically move budgets only after platform improvements are validated externally.

Second, we are expanding inventory in places where Snapchatters are already taking action. Sponsored Snaps continues to demonstrate the potential of bringing brands into the chat experience in a way that feels native to Snapchat while also creating a meaningful new surface for performance advertising. We are scaling the surface carefully with a focus on preserving the quality and frequency of close friend communication. In Q1, nearly 75% of U.S. that daily active users viewed ads and chat and roughly 1/3 of sponsored Snap's reach was unique to Chat clearly demonstrating that chat is driving meaningful incremental reach.

We are seeing encouraging performance from sponsored snaps. In Q1, per impression click-through rate improved 226% and 7-day conversion volume increased 59%. While this remains an early opportunity, those results suggest that, that can support both scale and measurable performance over time. Building on this momentum, we introduced AI sponsored Snaps, a new format that enables brands to engage Snapchatters through interactive AI-powered conversations in Chat and extends our strategy of delivering more personalized, high-intent advertising experiences.

We are also encouraged by the progress we are seeing with Promoted Places, which helps connect digital discovery on Snapchat with real-world action. Early campaigns generated more than 20 million incremental visits and double-digit growth in foot traffic. For example, Carl's Jr. achieved an 18% lift in incremental visits alongside games and ad awareness and brand favorability. We believe products like sponsored Snaps and Promoted Places can expand our lower funnel footprint over time by adding more differentiated inventory while creating more measurable outcomes for advertisers.

Third, we are continuing to grow and diversify our advertiser base. Over the past 3 years, the number of current SMB advertisers on our platform has nearly tripled. And in Q1, SMBs grew spend by more than 30% year-over-year in North America. SMB has accounted for more than 30% of global ad revenue and remained our largest ad growth driver for the seventh consecutive quarter. This continues to reflect strong product market fit in the segment as well as the improvements we are making in onboarding, automation and advertiser support.

At the same time, large advertisers in North America remained a headwind to advertising growth in Q1. We are not satisfied with that outcome, but we are beginning to see encouraging signs that this part of the business is improving. As measurement systems have time to reflect the performance gains we have delivered and as newer inventory becomes available at greater scale, we are seeing better traction with large customers.

North America upfront commitments for 2026 grew approximately 10% year-over-year which we view as an important sign that agencies and advertisers are increasingly willing to invest as performance and measurement improve. At the same time, we want to be clear that recovery among larger North American advertisers remains early and uneven. These customers typically make planning and investment decisions on quarterly or semiannual cycles, which means revenue often lags underlying improvements in performance.

Overall, Q1 marked important progress in strengthening the foundation of our advertising business. We improved performance across key direct response products, made meaningful progress in measurement and continue to scale new inventory that expands both reach and conversion opportunity. These gains are already driving stronger results with SMBs and performance advertisers, and we are beginning to see early signs that larger advertisers in North America are responding as well. While there is still work to do, we believe the progress we made in Q1 positions us well to drive broader adoption and more durable revenue growth over time.

In Q1, we continued to diversify our top line with other revenue reaching $285 million, up 87% year-over-year and representing a 25 percentage point acceleration over the prior quarter growth rate. Memory storage was an important driver of this acceleration, and we are encouraged to see that a larger than anticipated share of new subscribers acquired through memories are choosing higher ARPU subscription offerings, including Santos. This performance reflects the increasing value of our subscription products as we continue to introduce features that enhance the user experience and create differentiated value for our community.

We view subscriptions as strategically important for 3 reasons: First, they deepen our direct relationship with Snapchatters. Second, they help diversify revenue by adding a business line that is less exposed to the advertising cycle. Third, they can be attractive from a margin and cash generation perspective as we scale. We are strengthening the long-term foundation of our subscription strategy by creating new subscription tiers and offerings, including Lens+, AI-powered Lens interactions or deepening user engagement and increasingly serving as a natural discovery layer for premium AI-powered experiences. Lens+ is emerging as a key extension of this strategy, offering subscribers access to exclusive lenses and AI-powered features. Early traction has been encouraging with Lens+ contributing to higher subscription ARPU and gross margin expansion.

We continue to innovate on additional direct value propositions for our community, including the launch of greater subscriptions in Q1. We believe this offering can deepen creator engagement on Snapchat, strengthen relationships between creators and their audiences and further diversify our revenue streams over time.

We are excited about the upcoming launch of specs and our mission to make computing more human. For more than a decade, we believe that smart glasses will be the most important computing platform transition since the smartphone. Snap is uniquely positioned to shape that future because we bring together a scaled augmented reality platform a large developer ecosystem and a vertically integrated software and hardware stack through Lens Studio, Snap OS and Specs.

Over the past year, we continued to improve our platform with major Snap OS updates, new tools and APIs for developers and new experiences that expand what is possible on Specs across learning, gaming, utility and AI-powered assistance. We are also seeing encouraging momentum in our developer ecosystem with a number of lenses submitted for specs, increasing 28% year-over-year. We are inspired by the range of Lens experiences developers are building for Specs.

Early examples include Fossils from XR company, VyuXR Immersive Studios, an interactive AR learning experience that uses spatial puzzle mechanics to let users uncover and assemble prehistoric Fossils while bringing extinct animals to life. Artel from Yegor Ryabstsov, an AR drawing app that lets users create in 3D space with a wide range of brushes, colors and effects and now includes physics-based interactions that allow drawings to respond to gravity in motion; and the Heist by GrowPile, a co-located AR puzzle game in which players solve changing modules and challenges to disarm an antitheft system, either solo or with others on specs or mobile.

We look forward to sharing more as we get closer to launch, and we hope you will join us at Augmented World Expo on June 16, as we continue our work to make computing more human.

I'd now like to turn over the call to Derek to discuss our financial results. This will be Derek's last earnings call at Snap, and I want to thank him for his leadership and contributions to our team over the past 8 years.

Thank you, Evan. I really appreciate the kind words, and thank you, everybody, for joining our call today. In Q1, we demonstrated substantial financial progress with revenue at the top end of our guidance range, gross margins expanding year-over-year and adjusted EBITDA materially favorable to our prior guidance. More broadly, we believe Q1 provides early evidence that the strategic framework we laid out last fall is beginning to translate into more durable revenue growth, a more efficient cost structure and a clear path to net income profitability. .

Total revenue was $1.53 billion in Q1, up 12% year-over-year. Other revenue increased 87% year-over-year to $285 million in Q1, driven primarily by continued momentum in Snapchat+ subscriptions, strong adoption of our newer offerings such as Memory Storage and early traction from Lens+. Advertising revenue reached $1.24 billion in Q1 up 3% year-over-year, driven primarily by growth in direct response advertising revenue, partially offset by continued headwinds in the North America large client advertising business and an approximately $20 million to $25 million impact from the geopolitical headwinds in the Middle East experienced during March.

Global impression volume increased approximately 17% year-over-year, while total eCPMs has declined approximately 12% year-over-year. These dynamics are driven by the rapid growth in Sponsored Snaps as well as a mix shift in impression delivery towards Spotlight. These factors are driving strong impression growth and improved advertiser performance but have created a near-term headwind as we work to build demand for these newer surfaces and ad units. We believe these dynamics are positive for the longer health of the platform as improved pricing and performance are key inputs to building demand over time.

Adjusted cost of revenue was $662 million in Q1, up 4% year-over-year. Total infrastructure costs were $401 million in Q1, up 7% year-over-year, driven primarily by community growth, strategic investments in AI model training and monetization serving costs. The remaining components of adjusted cost of revenue were $261 million in Q1 or 17% of revenue, which is in line with our full year cost structure guidance range, an improvement of 2 percentage points year-over-year. These operational efficiencies contributed to adjusted gross margin, improving 3 percentage points year-over-year to reach 57% in Q1 and which we believe puts us on track for achieving our goal of 60% or better for fiscal 2026.

Adjusted operating expenses were $633 million in Q1, up 2% year-over-year. The growth was driven primarily by a 7% increase in personnel costs, which was partially offset by reductions in community growth marketing as we continue to calibrate investments in community growth with the long-term monetization potential of each geography.

Adjusted EBITDA was $233 million in Q1, an improvement of $125 million compared to the prior year. Adjusted EBITDA flow-through for the percentage of year-over-year revenue growth that flowed through to adjusted EBITDA was 75% in Q1. We view this elevated flow-through as a clear demonstration of our pivot to profitability becoming evident in our financial results.

Net loss was $89 million in Q1 compared to $140 million in the prior year. The $51 million year-over-year improvement largely reflects the flow-through of the $125 million improvement in adjusted EBITDA, partially offset by a $49 million gain on debt extinguishment recognized in the prior year and a $24 million increase in net interest expense due to the high-yield notes issued in the prior year. Stock-based compensation and related payroll expenses were $263 million in Q1, and which represents a modest decline year-over-year.

We are focused on reducing SBC as a percentage of revenue and limiting dilution through disciplined equity compensation and opportunistic repurchases. We continue to manage our share count carefully with $350 million in share repurchases completed in Q1, which helped limit share count growth to 3.5%. We ended Q1 with approximately $2.8 billion in cash and marketable securities and had $400 million remaining in our previously authorized share repurchase program as of the end of Q1.

Free cash flow was $286 million in Q1, while operating cash flow was $327 million. Over the trailing 12 months, free cash flow was $609 million, and operating cash flow was $831 million, as we continue to execute on translating top line growth into sustained growth in cash flow.

Taken together, we believe our Q1 financial results provide early proof points, the continued revenue diversification and improved cost discipline will support a more durable and profitable business over time. We also recognize that investor expectations are increasingly centered on the pace at which this progress translates into meaningful GAAP rates. In April, we took the difficult but necessary action to make Snap a faster, more focused and more efficient company. As a result, we expect to reduce our annualized cost structure by more than $500 million in the second half of 2026. We believe these actions establish a clearer path to net income profitability while prioritizing investment in the highest conviction opportunities across Snap.

As we move into Q2, we remain focused on accelerating our top line growing our community, deepening engagement, improving financial efficiency and advancing to our commercial launch of Specs later this year. Our guidance range for revenue in Q2 is $1.52 billion to $1.55 billion. Our revenue guidance range assumes no contribution from Perplexity as we amicably ended the relationship in Q1. Our guidance range also assumes that the operating environment in the Middle East region remains consistent relative to the magnitude of the headwinds we have experienced in March and April, but caution that the trajectory of the geopolitical situation in the region is uncertain.

On the cost side, we anticipate that infrastructure costs will grow modestly year-over-year in Q2, while remaining on track toward our full year cost structure guidance. All other cost of revenue is expected to remain in line with our full year cost structure guidance at 16% to 17% of revenue in Q2. From a personnel cost perspective, our recently announced restructuring will have a partial period benefit in Q2. While the reduction in our adjusted operating expenses and SBC will be more fully reflected in Q3 and beyond.

As a result, we estimate that adjusted EBITDA will be between $175 million and $200 million in Q2. We also anticipate that we will incur pretax restructuring charges of between $95 million and $130 million related to our recent restructuring and that the majority of these costs will be incurred in Q2, which will be a headwind to net income in this period.

Lastly, we continue to monitor the evolving legal and regulatory landscape in the United States and internationally. Areas of focus include age assurance, data use, privacy, advertising practices and online safety. While outcomes remain uncertain, these developments may result in changes to our products and business practices, which could increase compliance and legal costs over time and may also impact user growth and engagement.

Thank you, and we will now take your questions.

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

The 2Q revenue guidance has a couple of point acceleration baked in at the high end. Just curious like given what you said about the Middle East, what's driving that potential improving growth rate? Is it the Ad business? Is it Snap+? Any additional color there?

And then, Evan, so I'm sure you guys saw the 70-page activist deck that was released. I'm just curious to get your take on some of the suggestions that were in that around cost improvement, monetization and governance. Just curious your take on that.

Thank Ross, it's Derek speaking. I'll take the first one there on a guide. Probably worthwhile just to take a minute to contextualize the growth rates in Q1 and then what we're expecting in Q2. So in Q1, a couple of different factors there on the growth rate. One is we had about a 2-point FX tailwind and but we also had the impact of the conflict in the Middle East that really impacted the business in March. And those 2 are actually largely washed with the headwind on the Middle East side being similar. So that left us with a 12% growth rate, which was a 2 percentage point acceleration over Q4 and at the very high end of our guidance range, with the strength there driven largely by the subscription business and the momentum we saw there in Q1.

As we move into Q2, there are, again, a few different factors. There are, one, the comps on the growth rate in the prior year are a tailwind into Q2 of approximately 5 points from the prior year, but that's essentially fully offset by, one, what we expect will be a diminished FX tailwind going from about 2% to about 1 points approximately. And then also, we expect that the headwinds that we're seeing from the conflict in the Middle East will be a full quarter impact in Q2 relative to a single month impact in Q1. And so those 2 factors combined offset the comps.

So with those factors set aside, you're really left with a 2-point acceleration at the midpoint of the guide relative to Q1. And that I would attribute to the strength that we are seeing in the North America ads business. So we've been talking for some time about the improvements in pricing and yields that advertisers are enjoying there and the progress we've made with the ad platform and the improving ROEs that folks are seeing there.

And we saw that translate into really improved upfront commitments in Q1, and we talked about that in the letter being up about 10% year-over-year, which is encouraging, and that's starting to show up in the top line, and that gave us the confidence to put that into the guide for Q2 with an acceleration there driven largely by the North America ads business and the guidance there. So hopefully, that gives you good context on what we're seeing there from quarter-to-quarter and what's driving the acceleration.

Ross, it's Evan. Thanks for the question. We're really grateful obviously from input from our shareholders. And I think we've taken some strong actions already to operate with better discipline to improve profitability and sharpen capital allocation. But fundamentally, we think our job is to operate the business in the long-term interest of our shareholders, and we're going to continue to invest against our core long-term opportunity.

The next question comes from Michael Nathanson with MoffettNathanson.

I have 2 for either of you guys. One is, we cover Roku and CTV. And what you've seen happen is, as Roku has added third-party DSPs you've been able to really accelerate ad growth because the walled gardens are hard to compete against. And I wondered, have you thought about it, contemplating the idea of perhaps opening your inventory up for more sellers on the DSP side to encourage more dense auctions? Why or why not?

And then on SnapChat+, it's impressive what you guys are doing. Is there any color you could give us on who these users are where they're coming from and kind of just the pricing dynamics that you've seen in terms of ability to think on frailties to raise price here. So anything you could give us some color on the sustainability of Snapchat be great.

Yes. Thanks so much for the question. I think on the DSP side, we just always believe that the advertiser relationship is very important strategically, especially as we've diversified with small and medium customers and focus more on lower funnel objectives. I do think, to your point, there may be some opportunity around upper funnel video demand that we've been considering, but we have to really carefully think through the channel conflict and how to grow that demand while continuing to build strong direct advertiser relationships. So I do think scaling through partners is important. And as Derek mentioned, we do see some opportunity with agency and by working more closely with them. And so we are pleased to see the growth in those upfront commitments.

On Snapchat+, obviously, the growth is really exciting. I think there are a couple of different ways to look at the long-term opportunity. One is increased tiers of Snapchat+. So we've seen some strong momentum with Lens+, which is really anchored around our AI creative and editing tools in the camera. And that, I think, could be a big opportunity for us long term. It's obviously a higher price offering. And I think there's some real customer value there, obviously, with our strength in the camera and our Lens ecosystem.

So tiering, I think it is certainly one approach. And then we just continue to see growth as we roll out new features. We've got a community that really loves our product that's constantly asking for new and differentiated ways to use Snapchat. And so as we respond to those requests and continue to build out new features, that tends to drive a subscriber growth. And then with the introduction of memories, we have seen overall retention for Snapchat+ improved as well. And so that is helping as we look at just the long-term growth and durability of the subscription products.

The next question comes from Doug Andrus with JPMorgan.

This is Maggie on for Doug. I was wondering if you can just talk a bit more about the broader opportunity you see with AI sponsored Snaps and sort of what you're hearing from advertisers in terms of overall interest and something like this?

Thanks, Maggie. Advertiser feedback has been really positive. I think mostly because sponsored Snaps are showing that chat can be monetized in a way that's really native to Snapchat. And rents are loving this combination of very high reach and high attention especially at such a high frequency behavior on Snapchat throughout the day. So I think what's important for us strategically is that that's not just another inventory pool. It really gives us a differentiated environment where brands can engage users in more direct and more personal way. And AI sponsored Snaps are really an extension of that because they can make those interactions and those conversations more useful and more relevant over time.

So I think just looking forward, the road map is really about just careful expansion of capability improving demand in yield, obviously, it sponsored Snaps, adding more direct response features and then continuing to work with new partners like Experian to evolve the AI sponsored Snap product.

The next question comes from Rich Greenfield with LightShed Partners.

Evan, it looks like your North American ad business was down, call it, about 7% with the growth really -- the overall growth driven by subscription. I'm wondering how much of that downdraft in ad bone is being caused by the drop in North American DAUs versus the transition that you and Derek talked about towards performance advertising? And fundamentally, can you grow North American ad revenue without reversing the trend in users? And I guess related to that, just given the growth that everyone is excited about on the subscription side of the business, how are you balancing your line and focus on the subscription business versus the ad business overall?

Yes. Thanks, Rich. So I think at a high level, just looking at the North America DAU trend, it has been improving over the past 2 quarters after we pulled back on broad-based user acquisition spend. And I think we currently forecast something like a decline of 1 million daily active users in North America in Q2, but we also see a path to flat quarter-over-quarter if we can continue to land product improvement. So I think more interestingly, though, under the hood, monetizable daily active users, meaning users who see an ad or make an in-app purchase or have a subscription, they've actually grown in North America and the U.S. over the past 2 years with a meaningful increase, obviously, with the launch of sponsored Snaps, which really extended ad reach into the messaging surface.

So overall, the monetizable user trends have been improving, while the North America large customer business has struggled and put some downward pressure on the overall ad business. So what has been encouraging to see is that the North America SMB business grew approximately 30% year-over-year in Q1. So there's some nice momentum in the North America SMC business. And we have seen some modest improvement, as Derek said, in the large customer segment. So we're very focused on that large customer segment, especially around upper funnel brand advertising and with new leaders in place with the team working more effectively together we'd really like to see some more progress there as we work through the year.

And then the direct revenue opportunity is a very large opportunity for us just given the frequency of use and the passion that our community really has for Snapchat. So we're continuing to develop the product offering, it's something we love to do. And as I mentioned, creating new tiers as well, which we think can contribute to increasing overall subscription ARPU.

The following comes from Nitin Bansal with Bank of America.

So Snapchat+ subscriber growth and revenue growth has remained quite strong. You mentioned memory and lenses are like the key drivers behind the recent strength. Can you talk about like how sustainable do you believe the current growth trajectory is over the medium term? And whether you see any additional opportunities to deepen monetization and retention as the feature set continues to expand?

Yes. We're really excited about the growth in direct revenue, and we do think the subscription business Internet purchases as well can continue to contribute to our overall revenue growth. I think the importance for us is really just focusing on the user experience, making sure we're really delivering things that folks view as valuable to their overall product experience.

I think recent additions like Creator Subscriptions, for example, both strengthen the content ecosystem by building deeper relationships between users and creators, creating new ways for creators to monetize and obviously contributing to the overall direct revenue business. Lens+, I already mentioned, but I think it's a really meaningful opportunity just given the excitement and momentum we see around AI creative tools and AI editing for images and videos. So we certainly think that, that could help drive ARPU higher over time.

And then the core Snapchat+ offering is really important to us. And I think we've been excited to see that folks who have entered through that memory storage entry point, selecting into Snapchat to get those additional features, and that's also been a tailwind as well.

The next question comes from Mark Shmulik with Bernstein.

Evan, sorry, just another one on direct revenue. But I've kind of always come back to that kind of quote. It may not be the business you set out the cooler, but might be the 1 you're best or to deliver. When you look at kind of the torque and acceleration in that and the imminent kind of launch of Specs, is there a different way to think about what Snapchat looks like 12, 24 months from now that may be quite different than what you were thinking of 6, 12 months ago?

Mark, yes, I think that's a really inspiring question, something we've thought a lot about. Obviously, we worked on Specs for, I think, something like 12 years now. So we really have believed that we can innovate and build awesome products for our community that they want to buy. And I think seeing that reflected in the direct revenue business and then Snapchat+ has really built a lot more confidence in the team because we love to innovate for our community and I think being able to demonstrate that our community is willing to pay for that innovation I think really bodes well for the future of the platform and the future of Specs.

So certainly, a lot of opportunity there. We're really excited to have more diversified revenue. Obviously, the growth has been fantastic. And it should just help us create a much more resilient business over time.

The next question comes from Eric Sheridan with Goldman Sachs.

Maybe building on that answer, Evan, can you talk a little bit about some of the execution pieces that still have to be put in place as you look towards the remainder of this year with respect to the Specs rollout? Can you also talk to the Qualcomm collaboration and how to think about what that means where you want to go as a platform and an ecosystem going forward? And then lastly, just how should we be thinking about agentic AI as sort of an interface for Specs over the maybe in for long term as well?

A lot of great questions in there, and probably I could talk for hours about that. I think just looking ahead to the launch of Specs later this year, it's just all hands on deck to execute, deliver an amazing product experience. We hope folks will join us at AWE on June 16. We'll have more to share on our progress on Specs. Certainly, we are spending a lot of time on the long-term road map there as well. And as you mentioned, the way that people are using their computers is changing really dramatically, and I think that, that's going to be evident in the adoption of wearables and the adoption of Specs over time because people are going to spend less time hunched over their computers or their phones, typing away on keyboards and spend more time supervising agents who are doing that work. on their behalf.

So we actually had a team member who with AI built out a pretty cool Lens called Agent Center, where you can oversee and manage our agents through Specs with the current developer version of the glasses, which is a pretty cool way to stay on top of what your agents are getting done for you without caring your laptop around. So I think a lot of opportunity there and the way that people are using computing is changing so fundamentally in so many ways at this moment. And we're just so excited to get this product out into the world soon.

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

Evan, can we hear maybe a little update on how you and the company are addressing various pieces of legislation and litigation around the world regarding potential restrictions on teen social media and oftentimes mobile phone use as well. Just love to hear a little bit more about age verification work, including with the app stores, how your legal and policy teams are approaching the issue as it evolves in different jurisdictions? And how you and the team are planning for different ranges of potential outcomes?

Thanks so much for the question. It's certainly something we tear a lot about, and we invest deeply in keeping on Snapchat. And thinking a lot about how we continue to evolve the platform. I think one of the biggest challenges we face is that we often get lumped in with social media, even though Snapchat is really different. It's focused on communication, especially between friends and family, and we see that validated in third-party research that continues to show that Snapchat can have a positive impact on well-being and on relationships.

And so we really are proud of the positive impact that we can play in people's lives, and we have to do a lot of work to continue differentiating ourselves for more traditional social media platforms. I think age assurance is certainly an important issue for us. It's something that we're continuing to improve on the platform. We did integrate a new offering. Unfortunately, that offering requires users to essentially agreed to share their age with Snapchat rather than being something that's on by default.

And so that does, in some ways, limit its usefulness. So we are exploring other additional age assurance practices. We've implemented things like facial scanning or ID verification in Australia, and that's something we may roll out more broadly as things progress through the year.

This concludes our question-and-answer session as well as Snap Inc.'s First Quarter 2026 Earnings Conference Call. Thank you for attending today's session. You may now disconnect.

Good afternoon, everyone, and welcome to Snap Inc.'s Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions]

I would now like to turn the call over to David Ometer, Head of Investor Relations.

Thank you, and good afternoon, everyone. Welcome to Snap's Fourth Quarter 2025 Earnings Conference Call.

With us today are Evan Spiegel, Chief Executive Officer and Co-Founder; and Derek Andersen, Chief Financial Officer. Please refer to our Investor Relations website at investor.snap.com to find today's press release, earnings slides and investor letter.

This conference call includes forward-looking statements, which are based on our assumptions as of today. Actual results may differ materially from those expressed in these forward-looking statements, and we make no obligation to update our disclosures. For more information about factors that may cause actual results to differ materially from these forward-looking statements, please refer to the press release we issued today as well as risks described in our most recent Form 10-K or Form 10-Q, particularly in the section titled Risk Factors. Today's call will include both GAAP and non-GAAP measures. Reconciliations between the two can be found in today's press release. Please note that when we discuss all of our expense figures, they will exclude stock-based compensation and related payroll taxes as well as depreciation and amortization and certain other items. Please refer to our filings with the SEC to understand how we calculate any of the metrics discussed on today's call.

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

Hi, everyone, and welcome to our call. Last fall, we embarked on a new chapter for our company with the articulation of the Crucible Moment faced by our business. At that time, we laid out our plans to accelerate and diversify our revenue growth, pivot our business toward more profitable growth and deliver on the commercial launch of specs in 2026. The impact of this strategic direction began to manifest in the operating results of our business in Q4, and we are excited to build on this momentum in the year ahead.

Over the last three years, we have grown monthly active users by more than 150 million, reaching 946 million in the most recent quarter and bringing us within striking distance of our goal to reach 1 billion global monthly active users. We have already achieved immense reach and depth of engagement in many of the world's most attractive advertising geographies, and we believe this affords us a significant opportunity to grow our top line and expand average revenue per user over time. Growing our community in these prosperous geographies remains a priority, and we remain committed to our long-term goal of reaching 1 billion monthly active users. But going forward, we will seek to strike a better balance between the pace of community growth and the rate of top line growth in order to pivot our business to more profitable growth.

For the advertising business, our focus will be on three core initiatives. The first is fostering direct connections between brands and Snapchatters by leveraging our core product capabilities across Snapchat. The second will be making it easier and more performant for advertisers to connect with Snapchatters by leveraging AI tooling and capabilities end-to-end through our ad platform, including creative development, campaign setup and performance optimization. Finally, we plan to grow our advertiser base by scaling and optimizing our go-to-market operations that support the success of small- and medium-sized businesses. Ultimately, we will grade the performance of our advertising business based on the rate of growth in advertising revenue with a focus on gaining share over time.

The other revenue portion of our business has become an outsized source of growth and is playing a critical role in diversifying our top line. In the year ahead, we will focus on growing existing subscription offers, including Snapchat+ and Memories storage plans while innovating to bring compelling new offers to our platform. This momentum is already materializing with subscribers growing 71% year-over-year to reach 24 million in Q4. In the year ahead, growth in subscribers will be a critical input metric to track our progress, and we will ultimately grade our performance based on the growth of the annualized run rate for other revenue.

We are focusing on three significant catalysts for gross margin expansion to drive profitable growth. First, with community growth focused on monetizable markets and with our cost to serve increasingly calibrated to the monetization potential of each market, we expect that our infrastructure costs will pivot from being a source of gross margin pressure to become a margin-accretive investment. Second, as more of our ad revenue is derived from higher-margin placements such as sponsored Snaps and Promoted places, we expect advertising margins to improve. Third, we expect that the growing scale of our subscription business, which is built on a foundation of existing engagement and infrastructure investment will become increasingly accretive to overall gross margins. In the Crucible Moment letter shared last fall, we set a near-term goal to achieve 60% gross margins. We have already made meaningful progress toward that goal by achieving a 59% gross margin in Q4, and we believe there is a clear path to exceed this goal in 2026.

We are excited about our plans to accelerate top line growth, diversify our revenue streams and build a more financially efficient business in the year ahead. Ultimately, we will grade our performance on our progress toward achieving meaningful net income profitability over the medium term. Importantly, we believe we can deliver on this profitable growth path as we continue to invest in the future of augmented reality and support the consumer launch of specs later this year.

For our community, we are focused on strengthening engagement in the world's most developed advertising geographies by building experiences across Snapchat that spark conversations and deepen relationships between Snapchatters. The connections between friends and family are what unify our camera, messaging, Snap Map and content experiences and enable our platform to enrich the lives of Snapchatters around the world. By prioritizing features that encourage creativity, discovery and interaction across these surfaces, we aim to increase the relevance and durability of engagement in ways that support long-term community growth and monetization.

Our camera remains central to how Snapchatters communicate and express themselves and is often the starting point for conversations on Snapchat. We are enhancing our camera with AI-powered capabilities that make creation more intuitive, dynamic and social. Recent breakthroughs in our proprietary models allow us to deliver high-quality generative AI camera experiences efficiently at scale by running our models on device. AI-driven lenses represent a meaningful evolution from traditional lenses, shifting the experience from applying a fixed set of visual overlays to creating images and scenes dynamically through generative AI. Snapchatters can now prompt, explore and co-create personalized content in real time, and this shift is already resonating with our community. More than 700 million Snapchatters have engaged with generative AI lenses more than 17 billion times, often discovering and sharing these lenses through conversations with friends and family.

Our Imagine Lens launched in September has already been engaged with nearly 2 billion times, highlighting strong early traction and repeat usage. This momentum is supported by a global creator and developer ecosystem that is unmatched in scale. More than 450,000 creators from nearly every country have built over 5 million lenses using our industry-leading AR and AI tools, helping ensure that camera experiences remain fresh, relevant and closely aligned with how our community builds relationships.

Sharing Snaps with friends and family remains the foundation of Snapchat and a core driver of engagement, retention and long-term value creation. Our platform is designed around visual communication that enables frequent interactions and helps our community maintain close relationships over time. We continue to see strong momentum in direct communication between friends and family with messaging behaviors reflecting the durability of Snapchat's core value proposition. For example, average daily messages sent increased 5% year-over-year and the number of bidirectional communicators increased 5% year-over-year in Q4. We are investing in product experiences that make it easier to start conversations, sustain them over time and introduce new ways for friends and family to interact. For example, in Q4, we began testing topic chats, a new feature that allows Snapchatters to participate in public conversations around trending topics and events, discover shared interest and explore what's happening visually across our community.

We also began rolling out new two-player turn-based games designed to create playful, low-friction ways for friends and family to connect, such as two-player Player Mini Golf and Magic Jump. In Q4, these experiences contributed to more than 200 million Snapchatters playing games every month on average, representing an increase of 90% year-over-year.

The Snap Map has become an increasingly important driver of engagement by helping Snapchatters stay connected to friends, local communities and places in the real world. Snapchatters use the Snap Map to see where friends are spending time, discover what is happening nearby and engage with local businesses and events. Monthly active Snap Map users reached 435 million in Q4, up 6% year-over-year, creating natural opportunities for both organic engagement and monetization through ad placements such as promoted places.

We have built a differentiated content platform powered by authentic content that is native to Snapchat and that reinforces human connection through content sharing as a conversation starter. Our systems increasingly surface timely, relevant content by identifying emerging trends and original formats across spotlight and stories and matching them to the right audiences. In Q4, enhancements to our ranking and trend detection models contributed to improved content freshness and engagement. For example, the number of Spotlight reposts and shares increased 69% year-over-year in the U.S., reflecting our ability to surface timely content at scale. In addition, Snapchat continues to be a platform where both established and emerging creators can grow an audience and build a sustainable business. For example, Randa Adami, a nail designer and travel creator, grew her follower base by more than 20x over the last six months by consistently posting to Spotlight and leveraging engagement tools such as Q&A and Spotlight comments to strengthen connections with our viewers.

As we continue to innovate across these surfaces, we are seeing the impact of better calibrating our investments in community growth and cost to serve with the long-term monetization potential of each market. In Q4, global monthly active users increased by 3 million quarter-over-quarter to 946 million, while global daily active users declined by 3 million quarter-over-quarter to 474 million. The decline in global DAU in Q4 reflects in part our decision to substantially reduce our community growth marketing investments in order to focus on more profitable growth.

Improving average revenue per user through more direct monetization of our core product remains a key priority, including continued growth in Snapchat+, the expansion of sponsored Snaps and promoted places, the launch of Lens+ and Memories storage plans. While these initiatives involve trade-offs with engagement, they are strengthening top line performance, supporting more stable and retentive subscription-based revenue streams and improving the gross margin profile of our business.

The regulatory environment also presents near-term risk to engagement metrics. In Q4, we implemented platform-level age verification in Australia in accordance with a new law requiring users to be at least 16 years old, resulting in the removal of approximately 400,000 accounts. We have since begun testing new signals from Apple's declared age range API, and we plan to test Google solution once it becomes available. While these actions may adversely affect engagement metrics as implementation progresses, we believe it is the right thing to do to maintain the long-term trust of our community and partners, and we remain committed to our long-term goal of serving more than 1 billion global monthly active users.

Our long-term vision for augmented reality extends beyond the smartphone to a future when computing is more natural, contextual and seamlessly integrated into the real world. For more than a decade, we have invested in building a platform that brings digital experiences closer to how people see, move through and interact with their everyday environments. Specs are central to this vision. After five generations of development and refinement, we plan to launch specs publicly in 2026, which we believe represents a significant step forward in human-centered computing and the evolution of our AR platform.

As we prepare for launch, we have continued to strengthen both the platform and the ecosystem that is designed to support adoption at scale. We began testing Snap Cloud powered by Supabase to make advanced back-end capabilities more accessible within Lens Studio, enabling developers to build richer, more dynamic AR experiences. We also announced that all lenses built today for spectacles will be compatible with specs at launch, providing continuity and scale for developers from day one.

Partners and developers are already building compelling AR experiences that demonstrate the breadth of what is possible on specs. Star Wars: Holocron Histories from ILM is now live on Spectacles, highlighting the power of smart glasses for immersive storytelling with one of the world's most beloved franchises. This experience showcases the studio's continued innovation in technology and platforms through an extension of the Star Wars Galaxy. In addition, developer Harry Banda created Card Master, a multiplayer AR card game that lets players face AI opponents in classic card games with tutorials and achievements, evolving into a broader suite of AR card experiences for specs.

We believe Snap is uniquely positioned to lead the next wave of spatial computing. With Snap OS 2.0, Lens Studio, Snap Cloud and a global developer ecosystem, we have built an end-to-end AR platform spanning software, tools and hardware. Together, these capabilities position us to deliver fully stand-alone human-centered eyewear that expands creative expression and unlocks new ways for people to engage with the world around them.

In Q4, we made meaningful progress executing against the three priorities guiding the evolution of our advertising business, fostering more direct connections between brands and Snapchatters, making advertising on Snapchat easier and more performant through our AI-driven ad platform and expanding our advertiser base by scaling and optimizing our go-to-market operations for small- and medium-sized businesses. Together, these efforts delivered measurable improvements in advertiser performance, positioning us for more durable growth as we enter 2026.

We are focused on fostering more direct connections between brands and Snapchatters by enabling advertisers to participate natively in the experiences our community use every day on Snapchat, including messaging, the Snap Map, our AI-powered camera and creator-led content. These services allow brands to show up in ways that feel timely, relevant and aligned with how our community communicates and discovers the world around them.

High-impact conversation-driven placements are playing an increasingly important role across both upper and lower funnel objectives. Sponsored Snaps continue to gain traction in Q4 as one of our most differentiated ad placements, allowing brands to engage directly with Snapchatters. Sponsored Snaps revenue grew meaningfully quarter-over-quarter, supported by in-app optimizations and early testing of dynamic product ad integrations.

Advertisers are seeing strong results from this placement. In Q4, Sponsored Snaps click-through rates grew 7% and click-through purchases grew 17% from Q3 to Q4, during which numerous format and ranking improvements were introduced. For example, global travel company, Contiki used sponsored Snaps to drive lower funnel bookings, achieving a 283% increase in ROAS and a 72% reduction in cost per purchase, highlighting the format's ability to connect creativity with measurable outcomes. In addition, SHEIN used sponsored Snaps as part of a total takeover campaign to amplify the launch of its 2025 collection, connecting an online to off-line event with high-impact camera-native creative that drove engagement beyond digital impressions. The campaign exceeded impression benchmarks by 20% while delivering CPMs below standard benchmarks, demonstrating strong efficiency, scale and the effectiveness of clear product-led creative with a direct call to action. We're also seeing advertisers amplify lower funnel outcomes by combining complementary ad formats across the Snapchat experience. For example, Saudi QSR brand KUDU, combined creative AR lenses with sponsored Snaps to drive full funnel performance, achieving up to 49.5% lower cost per sign-up, 3.76x more app installs at 76% lower CPI and 38x more purchases at an 84% lower cost per purchase.

Promoted Places further extends this strategy by translating digital engagement into real-world action. Early results from our Promoted Places beta saw an average 65% reduction in cost per incremental visit and an average double-digit visitation lift according to third-party foot traffic measurement by end market.

We continue to leverage AI to make it easier for advertisers to connect with Snapchatters while delivering stronger performance and more consistent returns. By embedding AI across our advertising platform from creative development and campaign setup to delivery and optimization, we are reducing friction for advertisers and improving ROAS at scale, particularly across direct response use cases.

A central focus of our AI strategy is simplifying how advertisers plan, launch and manage campaigns on Snapchat. Our smart campaign solution suite, including smart targeting and smart budget, uses AI to identify incremental high-value audiences and dynamically allocate spend across objectives, reducing the need for manual setup and ongoing optimization. We also began early testing of smart ads, which automatically assemble and iterate creative elements to identify the highest performing combinations. These tools are designed to reduce creative friction, accelerate learning cycles and shorten time to spend.

Improving direct response performance remains a core priority within this effort. In Q4, we delivered meaningful progress across both DPA and app advertising. For DPA, targeted ranking, format and delivery improvements delivered a 55% reduction in cost per action for 70 conversions and 45% reduction in cost per action for 10 conversions amongst all Pixel Purchase GBBs based on cumulative internal testing over the past year. DPA revenue grew 19% year-over-year, supported by expanded adoption among large advertisers and continued migration to higher-performing dynamic solutions. For example, WOLFpak, a North America retail fashion and apparel brand, leveraged dynamic product ads to drive lower funnel performance, delivering 90% higher return on ad spend compared to non-DPA campaigns.

Our app advertising business also accelerated meaningfully in Q4. Revenue from in-app optimizations grew 89% year-over-year, supported by advances in foundational app models, broader adoption of the App Power Pack and new immersive formats such as Playables. For example, our partnership with Triumph Arcade delivered 2.6x more app installs at 37% lower CPI and 94% more purchases at a 15% lower cost per purchase, demonstrating how native formats can drive strong lower funnel outcomes.

We are growing our advertiser base by scaling and optimizing go-to-market operations that support the success of small- and medium-sized businesses. SMBs contributed the majority of advertising revenue growth for the sixth consecutive quarter, underscoring sustained product market fit and the impact of our investments. In Q4, total active advertisers increased 28% year-over-year, driven in part by simplified onboarding, improved campaign workflows and increased performance. We reduced setup friction by enhancing ads manager workflows and expanding integrations across the commerce and measurement ecosystem, enabling advertisers to launch campaigns directly from partner platforms. We also strengthened our SMB offering through new partnerships, including a global integration with Wix, which allows e-commerce businesses to more easily create campaigns, manage catalogs and improve measurement. In addition, we are investing in AI agents designed to accelerate SMB activation through automated recommendations and onboarding optimizations that reduce decision friction and improve performance.

Our Q4 results reinforce our confidence in the strategic direction outlined in our 2026 plan by fostering deeper connections between brands with Snapchatters, improving advertiser performance through AI and expanding our advertiser base with greater discipline, we are building a more resilient and competitive advertising business.

As we move into 2026, we will continue to grade our progress based on growth in conversions, improvements in ROAS, expansion of our active advertiser base and ultimately, the rate of growth in advertising revenue and share over time.

I'll now turn the call over to Derek to discuss our financials.

Thanks, Evan. Q4 was a pivotal quarter for our business as we began to see the impact of our strategic focus on profitable growth translate into further revenue diversification, meaningful gross margin expansion, elevated flow-through of top line growth to adjusted EBITDA, the achievement of net income profitability and substantially improved free cash flow generation.

Total revenue was $1.72 billion in Q4, up 10% year-over-year. Advertising revenue reached $1.48 billion in Q4, up 5% year-over-year, driven primarily by growth in DR advertising revenue. The growth in DR advertising revenue was driven by strong demand for our Pixel Purchase and app purchase optimizations as well as continued strength from the SMB client segment. Other revenue increased 62% year-over-year to reach $232 million in Q4, with subscribers growing 71% year-over-year to reach 24 million in Q4.

Global impression volume increased approximately 14% year-over-year, driven in large part by expanded advertising delivery across sponsored Snaps and Spotlight. Total eCPMs declined approximately 8% year-over-year with the rate of decline moderating by 5 percentage points quarter-over-quarter, driven by growing demand for sponsored Snaps that helped boost yields for this new placement. We are encouraged to see our advertising partners experience strong advertising performance alongside the supply growth and that the improvements in pricing and performance are bringing increased demand to the platform.

Adjusted cost of revenue was $699 million in Q4, up 4% year-over-year, but growing at less than half the rate of our top line. Infrastructure cost per DAU was $0.86 in Q4 and below the top end of our full year cost structure guidance range as we began to experience the initial benefits of better calibrating our cost to serve relative to the long-term monetization potential of the geographies in which we operate.

The remaining components of adjusted cost of revenue were $289 million in Q4 or 17% of revenue, which is below the low end of our full year cost structure guidance range due in large part to the outsized growth of higher-margin ad placements, including sponsored Snaps and Spotlight. With the combination of revenue growth outpacing infrastructure cost growth and a favorable shift in impression delivery mix, adjusted gross margin reached 59% in Q4, up from 55% in Q3 and 57% in Q4 of the prior year.

Adjusted operating expenses were $660 million in Q4, up 8% year-over-year, but growing 2 percentage points slower than revenue. Personnel costs increased 8% year-over-year, driven primarily by a 7% increase in headcount with hiring tightly focused on our core strategic priorities. Higher legal costs, including litigation and regulatory compliance-related costs were an additional driver of operating expense growth in Q4. These factors were partially offset by reductions in community growth marketing spending as we began to execute on our strategic initiative to better calibrate our investments in community growth with the long-term monetization potential of each geography.

Adjusted EBITDA was $358 million in Q4, an improvement of $82 million compared to the prior year. Adjusted EBITDA flow-through or the percentage of year-over-year revenue growth that flowed through to adjusted EBITDA was 51% in Q4 and contributed to adjusted EBITDA margins expanding 9 percentage points to reach 21% in Q4. Importantly, we delivered positive net income of $45 million in Q4, up from $9 million in prior year. The $36 million year-over-year improvement largely reflects the flow-through in adjusted EBITDA, offset by a $31 million increase in interest expense, reflecting the high-yield notes issued earlier in the year.

Stock-based compensation and related payroll expenses were $265 million in Q4 or approximately flat year-over-year as progress towards a flatter and leaner leadership structure helped power the business to net income profitability in Q4.

Free cash flow was $206 million in Q4, while operating cash flow was $270 million. Over the trailing 12 months, free cash flow was $437 million and operating cash flow was $656 million as we continue to execute on translating top line growth into sustained growth in cash flow.

We continue to manage our share count carefully with share repurchases completed throughout 2025, helping limit share count growth to 3% in Q4. We ended Q4 with approximately $2.9 billion in cash and marketable securities and just $47 million in convertible notes set to mature in fiscal 2026. Given the strength of our balance sheet, our progress towards sustained free cash flow generation and our desire to opportunistically manage our share count for the benefit of our long-term shareholders, we have authorized a new share repurchase program in the amount of $500 million.

For the full year, we generated $5.93 billion in revenue, reflecting 11% year-over-year growth, driven by a combination of ongoing strength in our SMB advertising segment as well as the rapid growth in our subscription business. We delivered $689 million in adjusted EBITDA, representing adjusted EBITDA flow-through of 32% in 2025. Importantly, we came within or below our full year cost structure guidance across all key metrics as we managed our investment levels in balance with the rate of revenue growth realized by our business throughout the year.

As we begin 2026, we are focused on accelerating top line growth, further diversifying our revenue streams, expanding gross margins and making meaningful progress towards net income profitability. Our investment plans for 2026 reflect these priorities, and our intention is to calibrate our investments to revenue growth as we move through the year.

Our infrastructure investment levels for 2026 will be driven by our strategic initiative to better align our cost to serve with the long-term monetization potential of each geography in which we operate. As a result, our full year cost structure guidance range for infrastructure costs is $1.6 billion to $1.65 billion, which would represent flat year-over-year infrastructure costs at the low end. We estimate that the remaining components of adjusted cost of revenue will be a combined 16% to 17% of revenue in each quarter of 2026, which would represent a 1 to 2 percentage point improvement over 2025, driven by the benefit of outsized growth and higher-margin ad placements.

Personnel costs are the largest component of adjusted operating expenses, and we expect headcount growth in 2026 to be roughly in line with the 7% headcount growth we experienced in Q4 of 2025, with hiring tightly focused on our core strategic priorities.

We anticipate continued elevated legal and regulatory-related costs, and we plan to make meaningful proactive investments in community safety that will contribute to adjusted operating expense growth. In addition, our adjusted operating expense range for 2026 includes incremental investments in product development and go-to-market support for the consumer launch of specs later this year. These factors will be partially offset by reduced spending on community growth marketing as we adjust these investments to better reflect the long-term monetization potential of each geography. As a result, we estimate that full year adjusted operating expenses will be approximately $3 billion. For SBC and related expenses, we estimate approximately $1.2 billion in 2026.

For Q1 specifically, our guidance range for revenue is $1.5 billion to $1.53 billion. Our Q1 revenue guidance range excludes any potential revenue from the Perplexity integration as we have yet to mutually agree on a path to a broader rollout. Given this revenue range and our investment plans for the year ahead, we estimate that adjusted EBITDA will be between $170 million and $190 million in Q1.

As we begin 2026, we are excited to execute on our pivot towards profitable growth and to make incremental progress toward our medium-term goal of delivering meaningful net income profitability. The impacts of this strategic direction are already evident in our Q4 results, and we are incredibly proud of the work our team is doing to build on this momentum in Q1.

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

[Operator Instructions] The first question comes from Eric Sheridan with Goldman Sachs.

Thanks for all the details in the updates on the quarterly results. I want to talk about one of the forward initiatives, Evan. With Snap specs as one of the key priorities in the next one to two years, can you just go a little bit deeper into what you've built on the platform and the application and use case side and how you think it feeds into where you want to take the hardware side of the business when we think about the next 12 to 18 months and how this fits into your broader strategic priorities for the company and more particularly for spatial computing longer term?

Eric, thanks so much for the question. We're super excited about what's ahead this year with the launch of specs and obviously graduating from the R&D phase of specs to broader consumer adoption. And in preparation of that, we've been working on several prior versions of specs, including most recently the version released in 2024 to developers who can subscribe to specs and start building lens experiences. We've seen some people build really spectacular things, whether it's utilities or new educational tools, for example, like at-home chemistry lab, you can have an augmented reality to even some of the more interesting work we've been doing with the browser and the ability to stream video on a virtual screen grounded in the real world through your glasses.

So it's been really exciting to see all the new use cases that developers are building for specs with the current version released back in 2024. And those will be able to run on the upcoming -- the forthcoming version of specs released later this year. So I think we'll be able to launch with a really wide variety of compelling experiences, which I think is so important for the early success of a product like this.

And we're just really focused on getting the hands of early adopters. We're so fortunate to have this passionate base of developers, hundreds of thousands of developers who have used Lens Studio to build lenses. And I think they're really excited about this forthcoming product. So really trying to engage them and early adopters with specs later this year is super exciting. And I think as we look out to future generations of the product through the end of this decade, we've got a really clear path here to lightweight, affordable and incredibly powerful glasses that can deliver immersive experiences in the real world.

The next question comes from Ross Sandler with Barclays.

High end of the range and -- can you hear me?

We can now go ahead.

Okay. Sorry. Okay. The 1Q guide assumes a pickup in growth at the high end, and you guys mentioned that there's no complexity in there. Could you just talk about what's driving that between DR and brand and how you're kind of expecting trends in 2026 in the ad business to play out?

Thanks for the question. On the ad side, the biggest focus is continuing to generate additional demand by demonstrating the strong performance of the ad platform. So, at the top of that, we're seeing really strong growth in active advertisers. They were up 28% year-over-year in Q4 as we continue to invest and scale our SMB go-to-market operations. And that's something you're going to see us build on into 2026. That's part of the investment plan for the year ahead is to continue to scale that out so that we can build on the momentum we have there.

We've seen especially strong growth in the medium customer segment globally with medium customers in North America, in particular, being the largest contributor to absolute dollar growth there, which is good. So that's the kind of momentum we want to build on in '26. We do continue to face some headwinds in the North America large customer business, but there are some bright spots there, including the U.S. LCS financial services vertical as well as autos. We have new leadership in place over the North America LCS segment. We've got new products to connect brands with Snapchatters, including sponsored Snaps and promoted places to build with there and smart campaign solutions to make it easier for advertisers to leverage the full set of Snapchat placements to make those connections easy and performance. So those will be big themes that we'll be building on in '26 as well.

In terms of the guide for Q1, the macro operating environment has thus far remained relatively stable compared to what we saw in Q4. There's a lot of quarter left to go in Q1, of course, but our guidance range is built on the assumption that the macro environment continues to be stable. I hope that extra color helps a little bit.

The next question comes from Rich Greenfield with LightShed Partners.

A couple of questions. First, the subscription side, which I know, Evan, if I go back to your letter a while ago, you sort of marked the importance of subscription. It seemed like it really accelerated this quarter. And I'm curious, are you marketing it differently? Are there new features that you added? I know you've talked about sort of charging for memories and other things that will add to this. But just in terms of what happened in Q4, it would be great to better understand what's happening inside of that Snap.

And then the other thing, I think two years ago, Evan, you got on this earnings call, and you talked about the fact that you were sort of refocusing user growth efforts from Android developing markets to the bigger markets like the U.S. where the meat of your monetization was. And if I look at sort of where U.S. users -- sorry, North American users have fallen to at 94 million. Do you need to put even more effort into those efforts to sort of drive U.S. users or North American users? Just what's happening in the North American user market would be great to just better understand given your focus there.

Yes. Thanks, Rich. We're definitely excited about what we're seeing on the subscriber side of the business. Certainly, Memories storage plans were a big driver of the subscriber growth that we've seen recently and also have helped improve retention rates overall. So that definitely has been really helpful to the super subscription business. And we've got some other great features on deck coming up this year for the direct pay segment of our business. So really excited about that overall, and I think really helps support our efforts to diversify our revenue in addition to the small and medium customer growth that Derek mentioned. So overall, really excited about the progress on subscriptions and the diversification of our revenue.

As it pertains to user growth, I think if you take a step back and look at the growth overall of the platform, monthly active users now 946 million. So we're pretty close to our goal of 1 billion monthly active users. And I think, as you know, over the past three years, our community growth has really outpaced our revenue growth and ARPU has actually declined while we've simultaneously increased the cost to serve, which has put downward pressure on our margins.

So as we look at this crucible moment and the pivot to profitability, we have immense daily reach and engagement in many of the most valuable advertising markets, including in North America. And we think we can strike a much better balance between pursuing community growth and also growing average revenue per user.

So, in addition to that, obviously, we're working through some of the regulatory landscape and some of the shifting user engagement patterns. as we focus on organic growth. But I think taking that all in totality, we've made some choices to reduce community growth marketing spend to adjust the cost to serve and to roll out additional paid features like the Memories storage plans that we just discussed. And all of those can cause headwinds to user engagement. So those changes actually free up more resources to focus on our most valuable geographies so that we can continue innovating and delivering great customer experiences, which we really believe is the most important driver of long-term growth.

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

Evan, I wanted to just talk a little bit more about, as you called it, the sort of litigation or regulatory risk caused by changes in age verification policies, sort of broader teen smartphone and social media restrictions. You obviously commented on the actions that you took in Australia following the ban going into place there. But what I'm particularly interested to hear a little bit more about is the potential for those types of actions to impact North America. Obviously, a 4 million step down in the DAU this quarter. Curious just maybe to unpack a little bit of what drove that more and what the outlook could be there during the year based on some of those litigation risks or regulatory risks you mentioned?

We're certainly aware of some pending legislation. Obviously, there's quite a bit working its way through the court system right now that would further restrict the use of Snapchat for our community. I think as we look at, for example, global ad revenue from impressions served to users under the age of 18, that revenue is not material. So I think looking at sort of the revenue-generating potential of the business looking forward, we're not overly concerned about the changing regulatory environment.

I will say one of the things that's very interesting is that if you look at the research studies that look at Snapchat specifically as separate from some of the studies that look at social media in totality, I think what we continue to see, which makes us proud of the service we've developed is that Snapchat actually has a positive impact on people's well-being and people's friendships. And that's actually in contrast to other services that don't necessarily have that positive impact.

But I think we have had quite a bit of trouble as we look at the regulators, explaining how different Snapchat is because there is really this moment where people are expressing concern about use of social media. So we have to continue making the case that Snapchat and its orientation around your close friends and your family can have a really positive impact. I think that's backed up by the research. But certainly, it's going to take time to prove that out and especially as these regulations sort of work their way through the court system.

The following comes from Ken Gawrelski with Wells Fargo.

Maybe first, I'll touch on specs. Could you talk about -- maybe, Evan, could you talk about the kind of synergy between specs and Snap services more broadly and the audience and kind of the developer base? And then talk about the right way to capitalize that entity. I mean if there's -- if you have confidence in the end product, how do you think about appropriately capitalizing that? Can it -- does it -- should it happen all within Snap? Should there be outside partners? And how do you accelerate kind of the development and the deployment of specs throughout the ecosystem? I'll stop there.

Yes. Well, I think to just maybe take a step back on why we started working on specs in the first place. When we invented Snap and we worked on things like ephemeral messaging or stories that put content in chronological order or even things like opening to the camera, our vision, our work was really designed to make computing or smartphone feel more human. And we think that's played a really important role in connecting people with their friends and their family. But we also saw a lot of limitations of the smartphone and of computers. And I think today, people are spending something like seven hours a day in front of a screen. And so I think there is, at this moment, a real opportunity to change what the computer is instead of something that you're constantly operating using a keyboard and a mouse, something that now powered by AI can actually get work done for you. And so in that way, it's really a continuation of this vision to try to work to make computing more human for folks.

And so I think now that we are exiting the R&D phase of specs development, there's a couple of important things. One is developing a strong stand-alone brand. I think specs, the product itself, in many ways, appeals to a different audience segment than the core Snapchat audience, and it's going to be really important for us to develop a stand-alone brand identity for specs. And then I think longer term, as we look at the rollout and broader deployment of specs, there may be opportunities to raise additional capital to accelerate, balancing that, obviously, with our own sort of ownership interest and any potential dilution.

So I think right now, given that we're so close to launch, the key here is really just nailing the launch and making sure that we deliver an extraordinary product. And then I think we have a lot of flexibility to think about how we want to capitalize it moving forward.

The next question comes from Justin Patterson with KeyBanc.

Great. I wanted to talk about agentic coding. We've seen more companies see meaningful improvements in engineering productivity from these tools. How is this being deployed at Snap today? And how should we think about potential benefits, whether it's product velocity, more engagement on the platform, more monetization opportunities or expense efficiency?

Yes. There's just so much opportunity here. Obviously, I think now something like 40% of new code at Snap is AI generated. We made a ton of headway with trust and safety and customer service. in terms of automating those workflows. I think there's a lot of opportunity for the sales workflow as well to empower our sales team, but also to automate quite a bit of that. So certainly, we're seeing gains across the board in how we're operating our business today.

I also think this can be a real accelerant for our own creativity. I mean one of the things we love to do is invent new services, and we've got a bunch of ideas for new apps, for example, that we could build using these AI tools and deploy very, very quickly, leveraging, of course, the distribution we have, our friend graph, some of the unique assets we have like folks memories, for example.

So I think there's a lot of opportunity here for us to think about how we accelerate the growth of our business and actually develop new services quickly using these tools. And I think in addition to that, we're just running as fast as we can to roll out new agents across the enterprise, new tools -- and it's especially for a small team like the one we've got at Snap, this is just a massive force multiplier. And I think really will help accelerate a lot of the creative vision we have in terms of turning it into reality.

Our last question comes from Benjamin Black with Deutsche Bank.

Can you talk about the decision to moderate infrastructure spending at a time when others are ramping spend to drive ad performance? Was there sort of slack in the system? Maybe just talk us through that decision.

It's a great question. Thanks for asking it. I think the first thing I would say just for context, the big driver in the ramp of infrastructure investment over the last couple of years has been a really significant growth in our ML and AI investment, and that was to both support the rebuild of the ad platform and the DR advertising business and also to support the content business and ranking and personalization and all of the work that we've done there. And I think I would say, first and foremost, we intend to continue to invest pretty heavily there. And so that's not an area of focus for pulling back.

As it pertains to infrastructure specifically, there are really two big catalysts where we see a lot of opportunity and are already making progress in terms of driving margin efficiency for the business and margin expansion. The first there is just our investments in how we handle cost to serve and getting that in a place where we're calibrating that better relative to the monetization potential of each of the markets in which we're operating. And there's a lot we can do to optimize that. And that's really about the theme that we've been talking about in terms of getting to profitable growth. And so translating that into the growth in infrastructure really being keyed in against the growth in monetization.

The other real opportunity we see here is to take some of the infrastructure things that are cost right now and turn them into revenue-generating investments. And so I think the recent launch of the Memories storage plans is a great example of that, where we can take a cost and not only find ways to make it more efficient, but then also turn it into a revenue-generating source of top line growth, which is going to help with even further margin expansion.

So a lot of this is about efficiency. A lot of it is about being really sensible about our cost to serve relative to monetization potential in markets and then scaling efficiently. But those investments in AI and ML will continue to be really important to the performance of the business on both the ads and the content side. So hopefully, that gives a little bit more context there. Thanks for asking.

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

Good afternoon, everyone, and welcome to Snap Inc.'s Third Quarter 2025 Earnings Conference Call. [Operator Instructions]

I would now like to turn the call over to David Ometer, Head of Investor Relations. You may proceed.

Thank you, and good afternoon, everyone. Welcome to Snap's Third Quarter 2025 Earnings Conference Call. With us today are Evan Spiegel, Chief Executive Officer and Co-Founder; and Derek Andersen, Chief Financial Officer. Please refer to our Investor Relations website at investor.snap.com to find today's press release, earnings slides and investor letter.

This conference call includes forward-looking statements, which are based on our assumptions as of today. Actual results may differ materially from those expressed in these forward-looking statements, and we make no obligation to update our disclosures. For more information about factors that may cause actual results to differ materially from these forward-looking statements, please refer to the press release we issued today as well as risks described in our most recent Form 10-K or Form 10-Q, particularly in the section titled Risk Factors. Today's call will include both GAAP and non-GAAP measures. Reconciliations between the 2 can be found in today's press release. Please note that when we discuss all of our expense figures, they will exclude stock-based compensation and related payroll taxes as well as depreciation and amortization and certain other items. Please refer to our filings with the SEC to understand how we calculate any of the metrics discussed on today's call.

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

Hi, everyone, and welcome to our call. In Q3, we made meaningful progress on our long-term strategy to grow our global community, deliver stronger performance for advertisers and invest in the future of augmented reality. At the core of Snapchat is a mission that has endured since our founding to reinvent the camera to strengthen human connection. Snapchat is built around real communication, helping people share moments and build closer relationships every day. This clarity of purpose continues to drive durable growth. Our community reached 477 million daily active users, an increase of 34 million or 8% year-over-year and 943 million monthly active users, an increase of 60 million or 7% year-over-year. With this momentum, we have made further progress toward our goal of reaching 1 billion monthly active users around the world.

Revenue increased 10% year-over-year to $1.51 billion, driven by improved advertising demand and the rapid expansion of our direct revenue streams. On the advertising front, continued growth in our small- and medium-sized business customers and improvements in direct response advertising performance drove an acceleration in direct response advertising revenue, which increased 8% year-over-year and 13% quarter-over-quarter. Other revenue, which includes Snapchat+ subscription revenue increased 54% year-over-year to $190 million in Q3, reaching an annualized run rate of more than $750 million. To build on this momentum, we expanded our premium offerings, introducing new storage plans for memories and launched AI-powered experiences in Lens+ and Platinum bundles that we believe will deliver incremental value to our most engaged community members.

We remain disciplined in aligning our investments with our core strategic priorities while driving operating leverage over time. In Q3, we delivered $182 million of adjusted EBITDA and generated $93 million of free cash flow while reducing our net loss by more than 30% year-over-year to $104 million, underscoring our progress towards sustained profitability. With approximately $3 billion in cash and marketable securities on hand, we are well positioned to continue investing confidently in innovation and long-term growth. We also continue to scale differentiated ad formats and offerings such as Sponsored Snaps, Promoted Places and the App Power Pack supported by advances in AI for ranking, creative generation and personalization. These investments are expected to compound performance over time, unlocking greater advertiser ROI and long-term revenue growth.

At the same time, we are improving key components of our service to make Snapchat more reliable and as fast to launch as the native camera, an essential part of ensuring our service remains simple, accessible and enduring. Snapping between friends and family remains the foundation of Snapchat, driving both daily engagement and long-term retention. In Q3, we shared that Snapchatters created over 1 trillion selfie snaps in 2024 demonstrating how deeply our community uses our camera to communicate and feel closer together. Over the next year, we are prioritizing sharing and conversations through new conversation starters such as status updates, flashbacks and topics, building new ways to play games with friends and making it effortless to share Spotlight videos through stories and chat.

Our goal is to spark conversations, strengthen friendships and inspire creativity. This quarter, we rolled out several new features that made communication faster, easier and more expressive. Infinite retention allows users to save chance indefinitely while Homesafe gives friends peace of mind with an automatic check-in after returning home. We also launched the Snapchat keyboard, extending our sticker library to other apps and introduced Custom Moji, enabling users to generate personalized Bitmoji stickers from text prompts. These updates underscore our commitment to enhancing the Snapchat experience through richer visual communication while fostering deeper community connections. Global time spent watching content and the number of content viewers increased year-over-year in Q3, reflecting our multiyear investment in machine learning and the continued strength of Spotlight. Building on this momentum, we launched our largest content recommendation model to date, improving freshness and relevance across the platform.

We also upgraded our infrastructure to get a step closer to delivering content in near real time, reducing latency and cutting model training cycles from days to just 2 hours. As a result, the share of total Spotlight views from content posted in the last 24 hours increased more than 300% year-over-year in the U.S. as our models now service more topical and original content. In addition, we launched our first unified user model that combines signals from Spotlight, Discover and the camera while advancing work on a trend detection model that identifies emerging creative trends and amplifies their reach. Snapchat is a platform where any creator can express themselves authentically, grow an audience and build a business. Over the past year, we onboarded thousands of Snap Stars reaching a record level of active creators. We're also seeing established creators and homegrown talent thrives such as Kaylee Rosie, a nursing student and plant enthusiasts who has increased her followers by more than 50 times in the last 6 months by posting Stories and Spotlight content nearly every day.

To help creators succeed, we expanded monetization tools and new collaboration formats with brands such as Sponsored First Snaps. This growing ecosystem has made Snapchat more resilient and diverse driving a nearly 180% year-over-year increase in Snap Star Spotlight posts in North America. More creator activity enhances the relevance and quality of our content inventory strengthening the overall engagement of flywheel for both users and advertisers. While we continue to innovate on our core product experience for our community, including efforts to address ongoing engagement headwinds, we are also navigating a number of evolving factors that we expect will influence community growth and engagement in the near-term. Key focus of our current strategy is improving average revenue per user by more directly monetizing our core product. This includes the continued growth of Snapchat+, the introduction of Sponsored Snaps and Promoted Places, the launch of Lens+ and the testing of memory storage plans.

These initiatives are designed to strengthen our top line performance, but they do involve trade-offs with engagement so we expect some adverse impact on engagement metrics as these experiences are rolled out globally. At the same time, we are recalibrating our investments in community growth and the cost to serve our community in order to improve financial efficiency. This includes testing changes to our infrastructure that will lower costs in regions with less long-term monetization potential, allowing us to better align our resources with the financial opportunity of each geography, but potentially coming at the cost of adverse trade-offs with engagement in these countries.

We are also preparing for the upcoming rollout of platform-level age verification, which will use new signals provided by Apple and soon Google to help us better determine the age of our users and remove those we learn are under 13 or under 16 in certain geographies such as Australia. These actions are an important step in maintaining a safe and compliant platform that we expect they will also adversely affect engagement metrics as implementation progresses.

In addition to these internal initiatives, we continue to experience the effects of regulation and government policy actions. Recent examples include Australia's social media minimum age bill, which takes effect in December and government restrictions on access to Internet services in certain countries. We anticipate that similar regulations in other jurisdictions may take effect or be passed in the near future. These policy developments combined with potential platform level age verification are likely to have negative impacts on user engagement metrics that we cannot currently predict. While we remain committed to our goal of serving 1 billion global monthly active users, we expect overall DAU may decline in Q4 given these internal and external factors. And as noted above, we expect particularly negative impacts in certain jurisdictions.

We believe these are the right actions to strengthen our business for the long-term by improving monetization efficiency, ensuring compliance with evolving regulations and positioning Snap for sustainable growth. Snap continues to be a global leader in augmented reality, engagement and innovation. Every day, Snapchatters use AR lenses more than 8 billion times and more than 350 million Snapchatters engaged with AR experiences daily. Over 400,000 creators from nearly every country have built more than 4 million lenses using our AR tools, making Snapchat one of the most scaled AR platforms globally. In Q3, we introduced the Imagine lens, our first open prompt image generation lens, allowing Snapchatters to create or reimagine snaps by simply typing a prompt more than 500 million Snapchatters have engaged with Gen AI-powered lenses over 6 billion times, reflecting the growing appeal of AI-driven creativity on our platform.

Snapchatters engaged with our AI Face Swap Lens over 1 billion times in Q3, illustrating how generative AI can turn self-expression into shared moments and open up new ways to spark conversations and connections. Our investment in generative AI is designed to make communication more expressive, personal and human. Realistic style gen delivers lifelike fit, texture, lighting and perspective, unlocking cinematic quality transformations and generating nearly 100 million lens views in Q3. Enhanced face gen enables higher fidelity face effects, generating over 700 million lens views while selfie attachments use 3D asset generation to add realistic context-aware elements like hats and hair styles, generating over 145 million lens views. Coming soon, AI Clips will allow creators to generate short shareable videos from simple prompts, turning AI video creation into a social and collaborative experience.

Together, these innovations demonstrate why our leadership in generative AI matters. They transform how people express themselves, create content and share moments that strengthen their connections on Snapchat every day. We continue to see strong momentum with games. Over 180 million people now play games on Snapchat every month with sharing up more than 100% year-over-year to make these experiences more social, we introduced the Games Chat Drawer, bringing games directly into chat so friends can play together seamlessly. Developers are using new tools in Lens Studio like the character controller, camera controller, input system and Bitmoji suite which make it easier than ever to build personalized interactive experiences. New features like turn-based game play and enhanced leaderboards are driving innovation across popular titles such as 2-player Mini-Golf and Bitmoji Tower Defense.

To support creator monetization, we expanded the Lens Creator Rewards program with Lens+ payouts, enabling developers to earn based on engagement from Lens+ and Snapchat Platinum subscribers. Outside of Snapchat, Camera Kit reached over 68 million monthly active users by the end of Q3 and no longer requires mandatory Snapchat branding, making it a flexible free SDK for brands and developers to deliver immersive AR experiences across apps, the web and AR mirrors. Together, these updates reinforce our commitment to building the most expressive, scalable and monetizable AR ecosystem in the world. Our long-term vision for AR extends far beyond the smartphone. For over a decade, we have been building towards the future where computing feels more natural, contextual and integrated seamlessly into the world around us. After 5 generations of product development, specs will launch publicly next year, representing a major leap forward in human-centric computing.

In Q3, we introduced Snap OS 2.0, our largest system update yet. It delivers faster performance and a redesigned browser optimized for streaming and productivity, adds full WebXR support and includes a new UI Kit and Mobile Kit to simplify interface and cross-device development. We also added features like travel mode, which keeps AR content stable while in transit and EyeConnect, which enables instant shared experiences simply by looking at another person to co-locate content. Developers and brands are already building with spectacles, including Enklu and Artglass who are redefining live events with location-based lenses. These projects highlight the vast potential for creativity and commerce on specs. To help developers monetize these experiences, we introduced Commerce Kit, enabling developers to accept payments directly within lenses, unlocking digital goods and premium features in real time.

Specs are purpose-built for the age of AR and AI designed to make computing more personal, intuitive and contextually aware. Unlike traditional devices centered around apps and files, specs understand the environment and adapt to user patterns over time. To support this next generation of computing, we introduced Snap Cloud powered by Supabase, a scalable back-end platform that enables richer and more dynamic AR and AI experiences on Snap OS. Snap Cloud is a key step in building the infrastructure that allows developers to create immersive real-time applications and reflects our long-term commitment to advancing the AR ecosystem through specs. We believe Snap is uniquely positioned to win the next wave of AR computing with Snap OS 2.0, Lens Studio, Snap Cloud and our global developer ecosystem, we are at the forefront with an end-to-end AR stack spanning software developer tools and hardware.

Together, these investments bring us closer to delivering the world's first fully stand-alone human-centered AR glasses. We made significant progress across our advertising platform by focusing on 3 priorities: advancing our AI-driven outperformance, optimizing high-impact ad formats and strengthening our go-to-market execution across SMBs and mid-market customers. Our investments in AI and machine learning are delivering measurable gains for advertisers. We advanced dynamic product ads with large language models that better understand products, driving over 4x higher conversion rates compared to baseline for certain campaigns.

As a result of these and other improvements, purchase-related ad revenue grew 30% year-over-year, reflecting higher attribution accuracy and better campaign performance. For example, Comfrt, a lifestyle and apparel e-commerce brand leverage target cost and Max Bid in their Snap campaign to scale faster and reached an incremental audience that delivered an 85% lift in site visits, a 79% increase in new customers and a more than 3x ROA improvement as measured by WorkMagic since the start of their 2025 campaign.

Sponsored Snaps allow brands to join real-time conversations on Snapchat in a way that feels authentic and relevant to users. Early results showed strong performance with up to 22% higher conversions and up to 19% lower cost per action when including Sponsored Snaps in advertiser campaigns. Advertisers across industries are using Sponsored Snaps to reach audiences where they are most active and engaged. For example, to strengthen share voice and drive user preference, ASICS partnered with Zeno Group to promote its latest running shoe collection through Sponsored Snaps, reaching 2 million unique Snapchatters in the chat inbox and driving a 4-point lift in overall brand awareness and a 16-point lift among Snapchatters aged 35 and older along with stronger return on advertising spend compared to existing media.

In addition, eBay Sponsored Snaps campaign to drive brand awareness was highly effective, achieving nearly 2x incremental unique reach and positive lift in ad awareness and brand association. Sponsored Snaps are also becoming increasingly direct response focused delivering more personalized and contextually relevant experiences. According to a Kantar study, approximately 85% of U.S. Snapchatters say Sponsored Snaps feel relevant and fit naturally within their habits on the platform. Promoted Places complements this offering by bridging digital engagement with real-world action. The format allows advertisers to highlight nearby store locations directly within the Snapchat map, unlocking new opportunities for performance-driven local marketing. Early testing shows double-digit lifts in visitation, demonstrating its ability to influence real-world outcomes. For example, the fast casual chain Panda Express ran a promoted places campaign that resulted in a 15% incremental lift in visits as measured by our third-party measurement partner in market.

In addition, they saw a 10-point increase in brand favorability and a 6-point increase in action as measured by a brand lift study. Together, Sponsored Snaps and Promoted Places demonstrate how Snap's ad platform can influence the full marketing funnel from discovery and engagement to measurable real-world results while creating new opportunities for revenue growth across our global advertiser base. For app-based advertisers, we introduced the App Power Pack, a unified suite designed to improve performance across both scan and non-scan campaigns. Key features include target cost bidding, new App End Cards that automatically incorporate app store images and playables for interactive game previews. Early results show that the App Power Pack is driving over 25% lift in iOS app installs.

Early adopters are seeing strong returns, reinforcing Snapchat's role as a scalable performance channel for mobile marketers. For example, mobile gaming app Yotta chose Snapchat to reach Gen Z through culturally relevant fast turnaround ads, leveraging target cost bidding, delivering 35x more iOS installs at 84% lower cost per install 60x more purchases at 90% lower cost per purchase and 6x more first-time purchases at 13% lower cost per add to cart since implementing this new strategy.

We continue to advance our automation capabilities to the Snap Smart Campaign Solutions suite, smart targeting, which treats targeting inputs of suggestions and uses machine learning to identify incremental high-performing audiences has launched delivering an average 8.8% increase in conversions for adopted ad sets. Smart budget or automated budgeting solution that optimizes the overall campaign performance has also rolled out across select advertiser objectives and bid strategies. Early results are encouraging with a 5% improvement in median cost per action and a 17% increase in median spend, and we plan to broaden availability early next year.

In addition, we have begun testing Smart Ad, which enables advertisers to upload raw creative ad sets and leverage Snap's ML systems to automatically drive performance. SMBs remained our largest contributor to ad revenue growth in Q3, driven by new advertiser onboarding, improved DR tools, streamline go-to-market execution and simplified workflows. We deepened partnerships with commerce platforms such as WooCommerce, making it easier for small and medium-sized businesses to advertise on Snap and reach incremental audiences efficiently.

Looking ahead, we see significant potential in the medium customer segment, where penetration remains low despite strong product market fit. We are realigning sales teams and agency partnerships to realize this opportunity, which we expect to become a meaningful growth lever through 2026. Direct revenue remains one of our fastest-growing opportunities. In Q3, we expanded premium tiers such as Lens+ and Platinum bundles, introducing exclusive AR and AI experiences like the Imagine Lens. We are also planning to introduce live streaming and launch new tools to help creators build deeper relationships with their audience. In addition, we announced memory storage plans in Q3 and began rolling out this new offering to our community with more than 1 trillion memories already saved. These changes are designed to both enhance the user experience and sustain the infrastructure that supports long-term growth.

We took an important step toward building out our AI platform by partnering with Perplexity AI to integrate its conversational search directly into Snapchat. Starting in early 2026, Perplexity will appear in our chat interface for Snapchatters around the world. Through this integration, Perplexity’s AI-powered answer Engine will let Snapchatters ask questions and get clear conversational answers drawn from verifiable sources, all within Snapchat. Under the agreement, Perplexity will pay Snap $400 million over 1 year through a combination of cash and equity as we achieve global rollout. Revenue from the partnership is expected to begin contributing in 2026. This collaboration makes AI-powered discovery native to Snapchat enhances personalization and position Snap as a leading distribution channel for intelligent agents, laying the groundwork for a broader ecosystem of AI partners to reach our global community.

Now I'd like to turn it over to Derek to share more about our financial progress.

Thank you, Evan. In Q3, total revenue was $1.51 billion, up 10% year-over-year. Advertising revenue reached $1.32 billion in Q3, up 5% year-over-year, driven primarily by growth in DR advertising revenue, which increased 8% year-over-year. The growth in DR advertising revenue was driven by strong demand for our pixel purchase and app purchase optimizations as well as continued strength from the SMB client segment. Other revenue increased 54% year-over-year to $190 million in Q3, with the largest driver being Snapchat+ subscribers, which increased 35% year-over-year to approach 17 million in Q3. With the exception of our large customer business in North America, our advertising growth remains very strong. From a regional perspective, we saw a significant acceleration in advertising revenue growth in both Europe and Rest of World during Q3.

In Europe, advertising revenue grew 12% year-over-year, an acceleration of 6 percentage points over the prior quarter. In Rest of World, advertising revenue grew 13% year-over-year, an acceleration of 10 percentage points compared to the prior quarter. In contrast, North America growth continued to lag the global business with advertising revenue growing 1% year-over-year in Q3. Within North America, our SMB advertising business grew at a rate of more than 25% in Q3, while our large client solutions business posted a modest decline in the quarter. The North America LCS business accounted for approximately 43% of total global revenue in Q3, decreasing is the share of total revenue by roughly 10 percentage points over the past 2 years, reflecting meaningful diversification of our revenue base as growth accelerates across other regions and customer segments.

While this mix shift demonstrates healthy progress toward a more balanced business, the North America LCS segment remains the primary headwind to our overall revenue growth. Given the strong momentum we are seeing with our ad products and platform and the rapid growth in demand from SMB clients globally, we are redoubling our focus on what we believe is working. At the same time, we are making targeted adjustments to our go-to-market operations in North America to improve performance and reignite growth in our LCS business in this region. Global impression volume grew approximately 22% year-over-year, driven in large part by expanded advertising delivery within Sponsored Snaps and Spotlight.

Total eCPMs were down approximately 13% year-over-year due to the strong growth in impression delivery. While the increased inventory from Sponsored Snaps has initially put downward pressure on platform-wide eCPMs, we are encouraged to see our advertising partners experienced strong advertising performance which is bringing increased demand to the platform. This improved performance has contributed in part to a 3 percentage point acceleration in the rate of year-over-year growth in DR advertising revenue in Q3.

Adjusted cost of revenue was $671 million in Q3, up 5% year-over-year. Infrastructure costs are the largest component of adjusted cost of revenue and increased 8% year-over-year in Q3 driven by investments in ML and AI compute as well as an 8% year-over-year increase in global DAU to reach 477 million in Q3. Infrastructure costs per DAU was $0.85 in Q3 up from $0.84 in both the prior quarter and prior year. The remaining components of adjusted cost of revenue were $266 million in Q3 or 18% of revenue which is below the prior quarter and our full year cost structure guidance range of 19% to 20% due in part to the benefit of a shift in impression mix towards Sponsored Snaps and Spotlight. With the combination of accelerating top line growth and more efficient scaling of adjusted cost of revenue, adjusted gross margin reached 55% in Q3, up from 52% in Q2 and 54% in Q3 of the prior year.

Adjusted operating expenses were $654 million in Q3, up 8% year-over-year. Personnel costs increased 12% year-over-year, driven by an 8% increase in headcount. Our hiring in Q3 was tightly focused on our core strategic priorities of improving advertising performance, enhancing our SMB go-to-market efforts, driving more personalized and fresh content as well as expanding our leadership in AR. Higher legal costs, including litigation and regulatory compliance-related costs were an additional driver of operating expense growth in Q3. The increases in personnel and legal costs were partially offset by lower marketing expenses compared to the prior year due to a combination of cost efficiency initiatives and timing factors on marketing expenses in Q3.

Adjusted EBITDA was $182 million in Q3, an improvement of $50 million compared to the prior year. Adjusted EBITDA flow-through or the percentage of year-over-year revenue growth that flowed through to adjusted EBITDA was 37% in Q3 and contributed to adjusted EBITDA margins expanding 2 percentage points to reach 12% in Q3. Net loss was $104 million in Q3 compared to a net loss of $153 million in Q3 of the prior year. The $50 million year-over-year improvement largely reflects the flow-through of a $50 million increase in adjusted EBITDA, a $32 million increase in other income due primarily to repurchasing convertible notes at below par prices, offset by a $29 million increase in interest expense, reflecting high-yield notes issued earlier this year. Stock-based compensation and related payroll expenses were $268 million in Q3 or approximately flat year-over-year as progress towards a flatter and leadership structure largely offset the impact of growth in full-time headcount in Q3.

Free cash flow was $93 million in Q3, while operating cash flow was $146 million. Over the trailing 12 months, free cash flow was $414 million and operating cash flow was $617 million, as we continue to balance investments with top line growth to deliver sustained positive cash flow. Dilution or the year-over-year growth in our share count was 3.1% in Q3, as share repurchases completed earlier this year partially offset the impact of SBC on share count growth. We ended Q3 with $3 billion in cash and marketable securities and just $47 million in convertible notes set to mature between now and the end of fiscal 2026.

We believe that our robust free cash flow generation and the strength of our balance sheet, ensure that our business has sufficient capital and financial flexibility to invest confidently to drive long-term growth. Our Q4 revenue guidance range is $1.68 billion to $1.71 billion implying year-over-year revenue growth of 8% to 10%. From a cost perspective, we are tracking well against our full year cost structure guidance. For infrastructure, our guidance was for quarterly costs of $0.82 to $0.87 per DAU, and we hit the midpoint of this range in Q3. In Q4, we anticipate that infrastructure cost will post a modest sequential rise to between $420 million and $435 million. For all other cost of revenue, our full year guidance range was 19% to 21% of revenue. A mix shift in delivery of impressions towards Sponsored Snaps and Spotlight helped to reduce this to 18% in Q3, and we anticipate being in the 18% to 19% range in Q4.

For adjusted operating expenses, we provided full year guidance of $2.7 billion to $2.75 billion which we reduced to $2.65 billion to $2.7 billion earlier this year. And we currently estimate we will end the full year nearer the low end of this reduced range. For SBC and related expenses, we guided for a range of $1.13 billion to $1.2 billion for the full year. We reduced this to $1.1 billion to $1.13 billion earlier this year, and now estimate we will come within a further reduced range of $1.08 billion to $1.1 billion. Given the revenue range above and the progress we have made to optimize our cost structure, we estimate that adjusted EBITDA will be between $280 million and $310 million in Q4. Given the strength of our balance sheet, our progress towards sustained free cash flow generation and our desire to opportunistically manage our count for the benefit of our long-term shareholders.

We have authorized a new share repurchase program in the amount of $500 million. As we look to close out 2025, we are excited by the opportunities ahead of us to accelerate top line growth, further diversify our revenue sources and make meaningful progress towards profitability in the year ahead.

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

[Operator Instructions] The first question comes from Rich Greenfield with LightShed Partners.

I've got a couple. On the Perplexity partnership, which is really interesting that you're going to add it on to Snap AI, is the cash stock split already determined Evan? Or could it actually change based on factors that you can help us understand? And you talk about monetization for the partnership starting in 2026. The Snap ad sales, like will your ad sales team be selling ad units that appear in Perplexity or just help us understand what monetization could look like inside this Perplexity bot that's going to live inside a Snap.

And then just a question for Derek. On a 2-year stack basis, it looks like cost of revenue really came down. You talked about a shift to Spotlight and Sponsored Snaps should we presume that the reason why we're seeing that leverage in cost of revenue is because you're not paying out to content owners the way you do in Discover for those ad units. Just would love to understand those 2 main things.

Rich, thanks so much for the question. We're really excited about the Perplexity partnership. And I think it sort of underscores Snapchat's role as a messaging service and how valuable that is in the age of AI, especially because Snapchat engagement is built around real relationships between friends and family, but also because conversational assistance is very quickly becoming the primary way that people are choosing to interact with information on the Internet. So I think we have a really unique opportunity ahead to help distribute AI agents through our chat interface and launching with Perplexity next year to bring their answer engine to Snapchat really in the default placement in our chat inbox is going to be really valuable to our community and hopefully, very valuable to Perplexity into Snap as well.

And I think Perplexity's focus on trusted and verifiable sources really aligns with our values and makes them a good fit for our community. I think to answer your question from a monetization perspective, we don't expect to recognize any of the 400 million until we begin to roll out the integration likely towards the beginning of next year. And Perplexity will control the responses from their chatbot inside a Snapchat.

So we won't be selling advertising against the Perplexity responses. But I do believe that the placement will help Perplexity drive additional subscribers, which I think is something that will be valuable to their business. I think just looking ahead, one of the things that's really exciting is the opportunity to expand to more partnerships. And advertisers are very focused on leveraging Sponsored Snaps to distribute conversational commerce experiences with their brands. So that's something we'll be experimenting with as we kick off next year.

I start thinking I can take the cost element of that question. As Evan noted in his letter earlier this call, we see a lot of opportunity to expand our gross margins, and we're working across a number of different fronts to achieve this including by improving the top line growth as well as becoming more efficient on cost of sales. So on the revenue front, we're broadly taking steps to better monetize our core product value. So we see Sponsored Snaps and Promoted Places were first steps on that journey. The ongoing growth of Snapchat+, the introduction of Lens+ and now the recent announcement and testing of memory storage plans are all examples with the latter being a great example of an area where we can flip a cost structure into a revenue-generating business line, the Perplexity deal is yet another example of a new line of revenue generation that helps expand the margins also.

On the cost side, we see several dimensions to this, including work to optimize our content programs, recalibrating our investments in community growth and the cost to serve our community to better match the long-term financial potential of each market. In Q3 specifically, we're seeing the benefit of a mix shift in where impressions are being delivered, in particular to Sponsored Snaps and to a certain extent, Spotlight and as you've noted, these surfaces have higher margins, and this contributed directly to gross margin improvement of 55% in Q3, up from 52% in the prior quarter and 54% in the prior year. So lots of work to do there, but we're excited about the progress and what we saw there in Q3.

Next question comes from Mark Shmulik with AllianceBernstein.

Evan, just a follow-up on that last answer kind of beyond Perplexity. How do you see Snaps are all evolving here as kind of this distribution channel? It sounds like there may be something about kind of brand messaging integrations, but could we potentially see the ad stack open up as well?

And then Derek, kind of on the commentary around the Q4 engagement headwinds, if we try to compartmentalize that, is the bulk of that kind of like onetime in nature as we kind of think about some of these regulatory type headwinds and then we kind of rebuild the ramp from there. Is that the right way to think about it?

Thanks so much for the question. I think as it pertains to opening up the platform further, what we're seeing is a lot of our advertising clients are investing a lot in these conversational experiences, whether they're educational or really designed to improve consideration or folks who are going and developing full-fledged commerce experiences inside their own chatbots. But despite all this investment in building out that customer experience, folks are struggling to find distribution channels for those experiences. And so while there's a lot of development of AI agents right now, I think we're very quickly seeing people shift their focus to try and to develop more distribution. So I think given Snap's primary engagement around messaging, there's a real opportunity to open up our chat inbox and chat interface to more of these agents and to really to distribute them through our Sponsored Snaps products.

So that's an area of investment for us. The work we're doing to support Perplexity and the development of our APIs there will also support other partners over time, and it's certainly something we're excited about. I think it's also a really compelling customer experience given what we're seeing in the way people are shifting their behavior patterns to engage with these chatbots. So definitely, as a chat service, we're very excited about the evolution in the customer expectation there.

I think as it pertains to the overall DAU growth and our efforts. We've been doing a lot to overcome ongoing engagement headwinds to DAU, primarily by introducing new conversation starters. So if you think historically on Snapchat a lot of conversations have been started by folks replying to friends stories. As we've seen engagement shift from things like friend stories to content posted on Spotlight, for example, we have to migrate that friend story replied behavior to things like sharing Spotlight videos or reposting Spotlight videos or playing games with friends, and we've got some forthcoming product initiatives as well that are oriented around new ways to start conversations and spark conversations with friends.

I would say big picture though, in terms of our growth in daily active users. I outlined in my letter, I think that was released back in September, this crucible moment for Snap and really a pivot to more profitable growth during this period. And we tried to provide a few examples in the earnings release, but we're experimenting with things like changing the way we do prefetching and cashing in certain geographies for our content business changing the candidate size, number of candidates essentially in our ranking and retrieval systems in certain geographies and really trying to line up our infrastructure and marketing investments against the geographies where we see the largest long-term monetization potential.

So I do think there will be trade-offs there in terms of engagement. But ultimately, as we focus on more profitable growth, I think those are trade-offs that we're going to want to accept. And then -- we're also, of course, investing in things like memory storage plans or Lens+. I think those are things that reflect the real in terms of large-scale cloud storage or new AI tools in Lens+, but those also add some friction to the user experience. And then I think perhaps most importantly, we're going to be proactive. We're going to get on the front foot when it comes to rolling out age assurance. There are new age assurance signals that Apple is providing us. This quarter, we're going to use those signals to detect underage users. I think Google is rolling out a solution as well, perhaps at the beginning of next year. And so as we roll out those age assurance signals that may have an impact on daily active users as well. But -- but we think that's the right thing to do. It's important for maintaining trust with our community and, of course, as well with regulators, but that could be a headwind to growth as well.

[Operator Instructions] The next question comes from Doug Anmuth with JPMorgan.

This is Maggie on for Doug. We can tell that midsized advertisers are clearly focused for Snap. Could you just expand a bit more on your go-to-market efforts and product road maps to unlock greater spend from this segment?

Yes. We're so excited about the growth we've been seeing with our small and medium-sized customers. We've obviously got very strong product market fit with our app product, lead gen, of course, our web direct response product as well. A lot of what we've been focused on from a product perspective, are things like speeding up signals onboarding or simplifying account setup. We've also improved partner onboarding as well, which is helping us scale, and we've seen some improvements in the median log in to spend time for that advertiser. cohort. I also just want to recognize the business development team has been doing a great job onboarding more customers.

So we'll definitely be investing there as well as we work to further accelerate the growth we're seeing with small and medium customers.

The next question comes from Michael Morris with Guggenheim Securities.

Wanted to ask about direct response advertising. Can you share how much was the 8% growth in the quarter an acceleration from the core trend in the second quarter when we removed the impact of the execution error that you guys had. And then as you look forward, can you return to double-digit growth in direct response advertising. And if so, I know that you have a number of initiatives. I appreciate all the details. But would you maybe give us the top 2 or 3 contributors that can really impact that growth rate over the next year and I've got just slip one more in. Following the error that you did experience last quarter, could you just provide an update on your comfort and confidence with the stability of the bidding and optimization tools now that -- to kind of ensure that you wouldn't have that happen again.

It's Derek speaking. Thanks for the question. Yes, direct response revenue was up 8% year-over-year in the most recent quarter. It was an acceleration of 3 percentage points over the prior quarter. So we're pleased with the progress there. What we saw was good strength in our pixel purchase demand as well as the app to optimizations and really broadly across the SMB segment, helping to drive that acceleration in the quarter. When you're looking at ad revenue broadly with direct response being the vast majority of it, we saw really good strength across Europe and rest of world. Europe in particular, grew 12% year-over-year. That was an acceleration of 6 percentage points. Rest of World grew 13%, which is an acceleration of 10 percentage points in the quarter. So really strong results there, both across LCS and in particular, the SMC market there.

As we look at North America, that business still lagged a little bit and so dragged on the rate of acceleration on the overall business as well as in DR specifically. Within North America, though really pleased with what we're seeing on the SMB segment up to more than 25% year-over-year in Q3. So given the strong momentum that we're seeing in Europe and Rest of World and with the SMB business globally, we're pretty pleased with what we're seeing on both the ad platform and our ad units there in terms of driving improvement on revenue and the business generally. I think as it pertains to our large client segment in North America, we saw a small decline there. We've been really focused on doubling down on what's working in the business, but also making targeted adjustments or go-to-market operations there in order to drive growth. We don't have recovery in that North America large client segment really baked in Q4, obviously, with the guide, but we expect that the work that we're doing there will help us build momentum over time.

And if we can bring the growth in that portion of the business back up to what we're seeing elsewhere than that is the path to further improvement in the overall growth in ads business going forward. So hopefully, that gives you a sense of what's driving the growth and acceleration on DR. And of course, we're watching our ad platform extremely carefully and the road map there and working with our teams to execute well there, and I think it's showing up in the results that we're seeing on the ad platform across the business globally. Thanks very much.

The following comes from Shweta Khajuria with Wolfe Research.

Okay. I just had a quick 1 on infrastructure costs for next year. I guess, could you please talk to your conviction level on keeping infrastructure costs basically flat next year? And what, in your view, could drive those costs higher? And when would you think you would step in?

It's fair speaking here. There's a number of different drivers here. Obviously, over the last several years, one of the really big drivers of our growth in infrastructure cost has been the rapid growth and investment of ML and AI infrastructure. And we do expect that we're going to be able to deploy capacity there, but we're getting a big focus on capacity utilization improvement. The other is we've scaled the business, obviously, a lot with the growth in our community and there's an opportunity for us to do work around the efficiency of that cost structure and our cost to serve. So both in terms of the services we're utilizing from our cloud partners, the pricing of those services, but then also just how we're engineering our product and the cost to serve, which Evan talked about a little bit earlier in terms of our ability to calibrate that cost to serve relative to each market and its long-term financial potential.

And so we think across each of these vectors that there's a lot of opportunity for us to make progress on the infrastructure costs and make progress towards that specific goal we had stated of working to make infrastructure flat into 2026. Hopefully, that gives you a little more color.

The final question comes from Ross Sandler with Barclays.

Great. Evan, just a question on spectacles. So there have been recent press reports about potential financial partners. And I think some of your peers have done partnerships with these manufacturing or distribution entities. So what's your latest thinking here? And your AR software stack is fairly advanced versus the field for smart glasses. So how are you thinking about leveraging software versus the hardware side? Just any updated thinking there would be great.

Thanks so much for the question, Ross. We've got a really exciting year ahead here as we prepare for the public release specs. And we've been thinking a lot about ways to accelerate our technical leadership in the space is a form factor, obviously, we've been focused on now for more than a decade. And I think we've been able to really leverage our advantages in terms of lens core huge ecosystem of lenses that have already been built, the amazing developer tools and Lens Studio and obviously, now the Snap operating system that runs on the current developer version of specs. So one of the things that we have been doing to create more optionality in terms of our ability to accelerate is putting specs into their own stand-alone 100% owned subsidiary. That will give us some options as we think about potential partners to work with to accelerate our leadership here in the space as we prepare for the public rollout.

So definitely some great opportunities to partner. We really believe that the killer use case for specs is lenses, and we've seen some incredible lenses that have been created so far almost weekly, it seems like developers are rolling out new and unique experiences. So if you haven't gotten a chance to check out the latest, I'd highly recommend it. Thanks so much.

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