Snap (SNAP) Q2 2026 earnings call transcript

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 www. investor. snap. com to find today's press release, earning 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 10K or Form 10Q, particularly in the section titled Grifts Factors. Today's call will include both gap and non-gap measures. Reconciliations between the two can be found in today's press release and earning 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 SPEX. 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 SPEX, a new kind of computer built into see-through glasses. SPEX 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, SnapMap, 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, strength in 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 are 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 one-third 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, healthcare, 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 Plus, Memory Storage, and Lens Plus help 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 performing 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 increase 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 will spend less time operating them and more time supervising intelligence 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 plus memory storage in our lens plus 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% 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 6 million. We have now generated positive free cash flow for 8 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 plan 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 in 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, discipline, capital allocation, and long-term shareholder value creation. Our goal is to generate enough free cash flow to invest in snaps long-term potential, offset stock-based compensation, and strengthen our balance sheet. We support these objectives by growing revenue faster than costs, investing with discipline, and using our 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 costs of revenue, excluding infrastructure costs, to represent 16 to 17 percent 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 personal 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 EVDA 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 multi-year dilution management program designed to help offset future dilution and support a stable fully diluted share account 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 that are non-gap operating expense based over the medium term. As we scale, the financial benefits of these trends should become increasingly meaningful with continued growth margin improvement, supporting further adjusted EVDA 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.

Hi, 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 have really been working hard on. We are delivering stronger performance, especially for app e-commerce and other lower funnel advertisers. We are making campaigns easier to manage with better automation, optimization, measurement, and attribution. One of the things I am particularly excited about is that all these improvements result in a 56% year-over-year increase in conversions across the platform, including app and pixel purchase goals. We also saw increased spending from existing advertisers alongside broader adoption of newer formats like sponsored but the breadth of the improvement here is what gives us confidence that's being supported by stronger fundamentals.

Hi, Ross. Thanks for the question. I think big picture of what we were really trying to outline was that given the real inflection and free cashflow 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 16th, 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.

Thanks, Dan. Yeah, 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, you know, 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, you know, which may affect the product experiences or our user growth and engagement over time.

Hey, Rich. Thanks so much for the question. Yeah, you know, on specs, we've been overwhelmed at the extent to which, you know, 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, you know, at $21.95. 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 16th, our upcoming launch event will be an important, you know, sort of starting point for that consumer oriented journey.

So certainly a lot of exciting, you know, 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.

Hey, Richard. Thank you. Take a second. Take a second part of your question. Yeah, definitely the World Cup provided, you know, 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 in a more difficult year over year comparison in Q3, following the easier comps we had in Q2 as our platform stabilized last year at the end of Q2 2025. You know, in Q2 this year, we can see constructive trends across the platform, including, you know, large advertising momentum in North America, strength among the small and medium business, small size businesses, and really the broader adoption of our smart campaign solutions and the lower funnel products like app purchase and dynamic product as really added to our, you know, overall year over year growth.

So we're very pleased by that. Thanks.

Hi, Michael. Thanks so much for the question. You know, I think what is very clear to us is that the long term opportunity to develop the next computing platform is absolutely enormous. You know, if you look at what laptops and desktops did to desk jobs, the transformations and productivity and what that enabled for the world over the last couple decades has just been extraordinary. And I think what's so unique about specs is that they bring computing to the real world and to real world jobs and allow you to work hands-free, you know, 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, you know, single digit percentages of smartphone volumes.

I think, you know, 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, you know, everything from our developer platform and tools to our lens core rendering engine to our operating systems and 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, you know, when we started innovating in the social space, we were a late entrant. So, you know, most of the apps at the time, whether it's Facebook or Instagram or Twitter, we're already in existence and we had to really innovate to continue to grow.

And obviously now we're approaching a 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 our strengths as an innovator. It's why we've been able to lead in this category and leverage our, you know, incredible augmented reality platform to win over the long term.

Thanks, James. You know, Doug, you know, look, I think this is an opportunity for us as we've seen the advertising revenue growth, you know, over this quarter and our guide for Q3. One of the things that we want to make sure that we're doing is continuing to invest in our, especially our DR and our, you know, 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, you know, full 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.

Thank you, Mark. Appreciate it. Yeah, 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. You know, 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, you know, we grew revenue 19% year over year and we only grew cost 4%. And that's, you know, we're really proud of that. And I think comes a lot from the restructuring that we did at the beginning of the quarter and can continue forward, you know, as we look to continue to drive that flow through.

You know, then after that flow through the 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. You know, as Evan mentioned in his prepared remarks following the expected completion of our current authorization in Q4, we expect to implement a multi-year 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.

Eric, thanks so much for the question. You know, 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 you know, 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, you know, growing 85 percent year over year. That's been primarily driven by Snapchat plus memory storage. And then a new subscription product we have called Lens Plus, which is really connected to new AI creative tools. And that's a, you know, sort of a, you know, 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. You know, I think, as I noted in my remarks, less than 3 percent of our monthly active users are paying subscribers today. So we do think there's substantial room to increase penetration over time. You know, looking to specs as well, that is a longer opportunity, longer term opportunity for us, but it is, you know, absolutely massive if we can really, you know, help people make this shift to computing based on screens, from computing based on screens to computing in the real world.

Yeah, thanks so much for the question. You know, it's still early days for us on this subscription product. So, you know, it's hard to say specifically. One of the things we did do is just take a look across, you know, the industry and other, you know, typically around 7 to let's call it 12 percent over the long term. So, you know, I do think if we just look across the competitive set, there is, you know, 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 Plus 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.

Thanks so much for the question. As I mentioned, I do think that the real inflection and 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, you know, more contextual, more intelligent, and far less dependent on people operating screens. And I think, you know, 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, you know, right now, we are really approaching this investment with a lot of discipline. And as I mentioned, you know, 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, you know, mass market consumer adoption. And I think, you know, things, for example, like weight and cost are going to have to come down, you know, to see, you know, 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 16th when folks can see all the amazing experiences that are possible with specs.