‘Volatile’ brand advertising on Snap spooks investors despite SMB progress
Snap executives were repeatedly questioned by investors over the volatility of brand adverting spend on Snapchat in the company’s Q2 earnings call.
The tech company grew revenue by 16% year on year to $1.24bn in Q2 and narrowed its net loss from $377m last year to $249m. Adjusted Ebitda, Snap’s measure of profit, was $55m in Q2 compared with a loss of $38m in Q2 2023.
Meanwhile, daily active users grew 9% to 432m, 80% of whom were described as over the age of 18. Monthly active users surpassed 850m.
However, shares of Snap plunged over 20% in early market trading after the company outlined Q3 growth below analyst estimates and CEO Evan Spiegel described a volatile ad market.
Snap’s ad segment grew an estimated 10% year on year — relatively lower than competitors such as Meta (22%), Pinterest (21%) and Amazon (20%). This was largely driven by weak growth in brand advertising, especially in North America. Brand advertising declined 1% compared with a year earlier and a significant slowdown from Q1 brand advertising growth of 12%.
Analysis: Lack of ‘stickiness’ with advertisers
Spiegel attributed the “weaker brand advertising environment” to a lack of investment from “certain consumer discretionary verticals” including retail, tech and entertainment, as well as holiday spend shifting to later in the year.
Chief financial officer Derek Andersen added that brand advertising on the platform becomes volatile in moments of economic uncertainty, when advertisers “start moving down the funnel with their marketing investments”.
Asked by an analyst how Snap could improve the “stickiness” with advertisers, Spiegel added that Snap needs to work more closely with advertising partners in H2 “to make sure they’re leveraging our full-funnel offering and our performance brand solutions”.
In past conversations with The Media Leader, buyers at multiple agencies have described Snapchat’s competitors — namely Meta’s platforms and TikTok — as the base of social media plans, thanks in part to their scale, whereas the likes of Snapchat are less consistent buys that are often dependent on client goals. Snapchat’s AR Lenses have often been cited as especially interesting brand activations, but do not fit with all campaigns.
“‘What’s the overlap with Meta?’ is really what it comes down to,” Jellyfish vice-president of paid social Eb Adeyeri previously told The Media Leader.
DR investment
Some on the earnings call also expressed scepticism that, given Snap has invested heavily in its direct-response (DR) advertising segment and worked to become more appealing to small and medium-sized businesses (SMBs), DR growth remained underwhelming. Andersen revealed that DR ad revenue was up 16%, “roughly in line” with the 17% growth observed in Q1.
Rich Greenfield, an analyst from tech and media research firm LightShed Partners, asked: “I guess the question everyone who’s listening to this call was wondering is, given all the progress you’ve made and how much focus you put, why is DR not exploding? Why is it growing mid-teens? Why isn’t it scaling dramatically?”
Andersen suggested that Snap has a “pretty solid road map on the DR side” and the company was likely to keep pace with its earnings results from the prior year in the next quarter.
SMB growth remains priority
Still, Snap has made impressive inroads with SMBs in the past year, many of which are investing in lower-funnel ad campaigns.
The company revealed it had doubled the number of advertisers that purchased an ad on Snap, in part thanks to developments in automation that, in Spiegel’s words, “can really reduce the friction in terms of getting started and then ultimately growing spend on Snap”.
He continued: “I think if you look at some of the enhancements we’ve made for SMB advertisers, we’re getting better at inferring SMB advertiser objectives when they sign up for an account on Snapchat and then we direct those customers to preconfigured campaign set-ups. And that can be really helpful for getting folks started. We also offer tools like codeless signal set-up, for example, that are very useful.”
The strategy is comparable to larger competitors like Meta, whose own developments in AI were cited as a core reason for its 22% increase in revenue. According to Meta CEO Mark Zuckerberg, the company wants to develop AI to the point where Meta can do the vast majority of the legwork for advertisers on its platforms.
SMBs, which tend to buy media directly rather than through agencies, make up the majority of ad revenue for Big Tech companies and Snap’s executives have previously stated their intention to make it easier for them to purchase ads on the platform. On this quarter’s earnings call, Spiegel stated that increased SMB expenditure will help provide “much more resilient revenue from a diversified customer base” in the long term.
Revenue diversification
Broadening Snapchat’s clientele is not the only attempt at diversification. Unlike many of its direct competitors, Snap is no longer purely reliant on ad revenue.
It has developed what has become a growing subscription business in Snapchat+, a premium offering that gives users access to additional in-app features like pinning friends to the top of one’s message list and seeing additional data on how often friends view one’s stories.
Snap’s “other” revenue, which includes all non-advertising revenue, more than doubled (+151%), thanks to growth in Snapchat+, which Spiegel revealed now has over 11m subscribers.
He added that a “personal goal” is to “have our revenue resilience match the engagement resilience we see on our platform”.