This is Snap’s turnaround plan

Adapt and Overcome

11 Years at Snap Inc. 

It’s hard to recall any point in my lifetime when we have faced so much instability, uncertainty, and change as a society – yet remained so optimistic about the future earnings growth of technology companies… Simultaneously, we are struggling to manage a global pandemic and its consequences, navigating a sea-change in the way that we work, and muddling through one of the most extreme macroeconomic experiments of all time with M2 money supply in the US surging nearly 40% in two years with real risk-free interest rates falling so far they’re negative in the US and many other major economies. With equities, home prices, job openings, and wages in the US at all-time highs amidst all these challenges it’s only appropriate to wonder: what could go wrong?

We saw challenges on the horizon, and hedged our bets accordingly, but still got punched in the face hard by 2022’s new economic reality. Even after making the difficult decision to reduce our cash cost structure by $500 million, including reducing the size of our team by 20%, we have a lot to be grateful for: a large and growing community of nearly 350 million daily active users, a faster revenue growth rate than Pinterest, Twitter, YouTube, and Meta last quarter, and a pipeline of innovative products and features to deliver for our community. We made some good decisions over the past year, including raising $1.5 billion in February to strengthen our balance sheet, but ultimately we failed to accurately predict both the magnitude and speed of the macroeconomic changes. We didn’t anticipate the War in Ukraine, skyrocketing energy and food costs, persistently high inflation, and a more than 45x increase in the fed funds rate since last September. We have decisively entered a new era, and we must adapt and overcome to succeed in this new reality.

So far we’ve failed to deliver on all but one of our five goals for 2022. While the macroeconomic environment certainly contributed to these misses, I believe we can do better.

2022 Year-to-Date Scorecard

Grow our Community:

400 Million Snapchat DAU, 1 Billion AR Platform MAU

Grow our Business:

60% Y0Y Revenue-Growth, $1 Billion Free Cash Flow, Net Income Breakeven

Grow Globally:

S11 Revenue Growth, Big 5 Community Growth, Global Relevance and Resources

Grow our Team:

Develop Strong Teams and Inclusive Leaders, Adapt to Flexible Work, Scale our Culture

Grow Trust:

Protect our Community from Harm, Safeguard Privacy, Promote Health and Well-being

I suppose if we had to choose one goal out of all of them, “Grow Trust” is most important for our long-term success, so I am glad that in the midst of all of our challenges we continued to invest to protect our community and that we didn’t compromise on our values. Nevertheless, our shortcomings this year have had significant consequences, not least of which is a 75% decline in our stock price year-to-date. Before 2022, massive fiscal stimulus and years of ultra-accommodative central bank monetary policy created an environment that rewarded revenue growth at nearly any cost. Today, the cost of capital has increased so dramatically that our business will be valued based on our ability to generate profits. We must adapt our strategy accordingly.

Jerome Powell, Chair of the Board of Governors of the Federal Reserve System was unequivocally clear during his address in Jackson Hole, WY, this year on August 26th.

Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labor market conditions. While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.

Taking a historical perspective, interest rates will have to increase considerably, and/or inflation will have to decrease considerably, before we are able to return to a more normalized economic environment. The current rate of inflation far exceeds the fed funds rate, meaning that monetary policy remains extremely accommodative and the government is still providing stimulus to the economy. Given Chair Powell’s remarks, we should expect the economic environment to deteriorate further due to higher rates and slower growth. The below chart of the historical fed funds rate minus the consumer price index helps to provide additional context:

I will avoid wasting more of your precious time with economic analysis, but it is important for our team to understand that economic volatility is our new normal, at least for 2023, and likely over the medium term. We are planning accordingly. For those interested in additional context, I recommend Sequoia Capital’s deck, Adapting to Endure.

In response to these macroeconomic changes, we have already taken the critical steps to refocus our business on our three strategic priorities (community growth, revenue growth, and augmented reality), reduce our cost structure to improve efficiency, reorganize our leadership team to improve coordination and accountability across product, engineering and sales, reinvest in our team through our top-up program, and help offset incremental dilution with a share buyback. Focusing our business on our three key priorities will help us reaccelerate our revenue growth and increase our profitability, all while investing in the long term future of augmented reality. These changes also create enough flexibility to operate through this uncertain environment because we have conservatively planned to generate cash even with flat or negative revenue growth. That said, our goals are much more ambitious:

2023: Adapt and Overcome

Grow Community and Engagement

• Increase Daily Active Users to 450 Million in Q4 ‘23
• Grow Content Time Spent +10% YoY per DAU per Country
• Increase the % of DAU using the Map to 35% and Spotlight to 30%

Grow Revenue and Earnings

• $6 Billion in Revenue, $1.5+ Billion of Adj. EBITDA, $1+ Billion of Free Cash Flow
• ($5.65 Billion Ads Revenue, $350 million SC+ Revenue with 10+ million subscribers in Q4)
• Increase AR Advertising Revenue to 10% of Total Ad Revenue

Lead in Augmented Reality

• Grow the Utility of our Platform and Scale to 1 Billion AR Platform MAU
• Establish our AR Enterprise Business and Integrate to Deliver Value for at Least 5 Customers
• Expand and Integrate the Capabilities of Lens Studio, Lens Engine, Lens Cloud, and SnapOS with Spectacles

Grow Community and Engagement

Growing our community and engagement is one of our most important inputs to long-term success because it increases our overall revenue opportunity, strengthens our network effects, and improves our products by generating more data for our machine learning models. As we grow our community we also capture more upside from our innovation because we are able to instantly scale our new products and services to even more Snapchatters around the world. With steady progress in 2023, we will end the year with 450 million daily active users in Q4, on track to reach over one billion monthly active users in 2024, a huge milestone for Snapchat.

To reach our goal of 450 million daily active users in Q4 2023, we need to continue our current global growth trajectory while simultaneously increasing our penetration in at least one new large country or demographic. This means we will continue our market development efforts in each of the Big 5 countries (Mexico, Brazil, Italy, Spain, and Japan), while investing in our age-up strategy to onboard more 30-40 year-old Snapchatters. This will require significant coordination and accountability across our communications, marketing, global brand experience, growth, product, and market development teams in addition to many other teams. We will need to be more clear and deliberate about what Snapchat is (a visual messaging app that enhances your relationships with friends, family, and the world) and why people use Snapchat (self expression without fear of judgment). In contrast to social media popularity contests, Snapchat is a refuge where you can express yourself, live in the moment, learn about the world, and have fun together. We have found that consistently delivering our core product value of visual communication with friends and family drives some of our most durable and effective user growth.

Growing our community also requires us to keep our community safe. Safety is critically important to our growth because it is one of the reasons people use our service, with over 90% of Snapchatters saying they feel comfortable, happy, and connected when they use Snapchat. We will rise to the challenge of confronting new threats, making progress against our existing priorities, and innovating to increase enforcement, reduce false-positives, and provide more tools and features for our community to control their Snapchat experience. We will make sure that our efforts to keep our community safe are consistent with our commitment to privacy and the values and principles of our Platform Governance Framework, with interventions that are necessary, proportional, and legitimate. Keeping our community safe also supports our work with governments around the world, as our Policy Team manages the ever-evolving regulatory landscape.

In addition to growing the overall size of our community, we are focused on growing engagement. In particular we are working to grow content time spent +10% year-over-year per user per country to entertain our community and increase our near term monetization opportunity, as well as diversify engagement across the different screens of Snapchat by growing the percentage of daily active users using the Map to 35% and Spotlight to 30%, respectively. Product improvements to Stories and Spotlight, increasing content diversity, and investments in creator success like our mid-roll program provide a path to meaningful content time spent growth. Diversifying engagement across Snapchat, including our Map and Spotlight, helps to make our service more compelling for our community, harder to copy, and more resilient to competition, and increases our monetization opportunity over the longer term.

As we look to the future, the APAC region contains approximately 75% of the total addressable market of 13+ smartphone users who do not yet use Snapchat. While we work to improve and localize our product for new countries, we cannot lose sight of the importance of our investments in India, and we must continue to support and invest in our Indian community. It is my hope that our new regional structure, with Presidents in each of APAC, EMEA and the Americas, will create the necessary focus to accelerate growth in each of our regions.

Grow Revenue and Earnings

In this inflationary environment, we need to adjust the way that we think about our revenue growth. With the U.S. Consumer Price Index at 8.5% growth year-over-year in July, and our Q3 QTD nominal revenue growth rate disclosed on August 31st at 8%, our revenue is growing -0.5% in real terms. In short, if we are growing revenue below the rate of inflation, our business is actually shrinking. Meta’s revenue, in real terms, shrunk by nearly 10% in Q2, while our Q2 revenue grew approximately 4% in real terms. As we think about our revenue goals for next year, we need to consider the rate of inflation and factor it into our ambitions.

Our goal for 2023 is $6 billion in revenue, of which we will generate $5.65 billion of advertising revenue, and $350 million of revenue from Snapchat+. Assuming that $5.65 billion of advertising revenue represents approximately 20% growth year-over-year, and assuming an 8% inflation rate, we would be generating approximately 12% year-over-year inflation-adjusted advertising revenue growth. That’s a far cry from the 50%+ year-over-year average annual revenue growth we’ve generated over the past five years, but we believe it’s an appropriate goal in this environment. If we can generate $6 billion in revenue in 2023, we should be able to generate at least $1.5 billion in Adj. EBITDA and $1 billion of free cash flow.

It won’t be easy to grow our advertising business to $5.65 billion in this environment, but we have a clear plan. Our primary focus is driving lower funnel performance to improve the yield of our inventory. We are working to improve optimization against lower funnel objectives to drive more conversions by delivering high intent clicks and evolving our webview performance and features. We are also innovating on our advertising formats, working to make them more native and engaging, while moving to more click-based interactions rather than swipes so that we can use the swipe gesture for content navigation. As part of these efforts, we will work to gather more signals in a privacy-safe way so that we can provide more personalized and relevant content to our community. This includes 3rd party signals from our Conversions API, as well as mobile measurement partners, especially for app advertisers.

Improving our product and the technical performance of our advertising platform requires tight collaboration and teamwork across sales, product, and engineering. Jerry, our Chief Operating Officer, will be highly focused on creating alignment across our teams to ensure that feedback from clients is rapidly ingested and informs our roadmap, items on our roadmap are clearly prioritized, and that each of our teams is more directly accountable for advertiser success. We will also create vertical product leadership to match product leaders with advertiser verticals to better meet the needs of our clients.

After years of rapid growth in the size of our team, we need to drive improved productivity in our sales organization, and go to market with more clarity about the role that Snapchat plays in the lives of our community and how we can help businesses grow. Rather than taking a product-led approach where we explain our advertising product suite, we need to listen to clients first, clearly understand their challenges and opportunities, and then succinctly demonstrate how Snapchat can play a role in their success. We will work together as a team to better package and market new product improvements to our advertising partners, and use features like Spotlight to show brands how they can experiment with distributing their content for free, and then pay to distribute the highest-performing content across our platform, taking advantage of our advanced performance advertising tools.

In addition to the short term actions we are taking to improve our advertising platform and drive near-term revenue, we need to make progress on our longer term investments to support our revenue growth ambitions into the future. As part of this, we need to better monetize areas of our service that have high levels of engagement but generate low levels of revenue. In 2023, we will grow AR advertising revenue to 10% of our total revenue. With 250 million people engaging with augmented reality on Snapchat every day (that’s more than Twitter’s total mDAUs), we have a huge opportunity to help businesses reach their customers with immersive and engaging augmented reality experiences. We will also dedicate the resources necessary to make progress on our SMB offering. While we can’t invest at the level we wish we could, SMB advertisers are a critical part of our long term success, will help provide more stability to our overall advertising platform by increasing advertiser diversity, and represent an enormous medium-term opportunity for revenue growth.

Last, but certainly not least, we will grow Snapchat+ to 10 million subscribers in Q4, generating $350 million of revenue in 2023. This new revenue stream is not correlated with advertising revenue, and we have the direct ability to increase subscribers with new product features and by driving awareness of our subscription offering. To improve our chances of hitting this revenue goal, it’s important that we accelerate growth of Snapchat+ now, increasing the number of subscribers from over 1 million today, to 4 million subscribers by the end of 2022.

To state the obvious, we will not be investing any additional resources through our Strategic Planning Process. The finance team will work closely with all of our teams across our business to manage our cost structure to deliver as much free cash flow as possible while still making the necessary long term investments in our future – particularly in augmented reality.

Leadership in Augmented Reality

We believe that augmented reality will profoundly transform the way that we experience the world. Augmented reality represents the next major evolution in computing, and it brings the power of computing into the real world, offering shared experiences and interaction paradigms that mimic the way we engage with our physical surroundings. Augmented reality has already transformed self-expression and shopping through the Snapchat camera, and it is in the early stages of supercharging education by making learning experiential on Spectacles. Our CameraKit partners are using augmented reality to grow their businesses, from video creation to virtual try-on. Leadership in augmented reality is important to Snap because it helps us build a durable competitive advantage that comes from investing over the long term, building things that are technically difficult, and growing a platform that is increasingly hard to replicate. It also positions us to benefit from the next major platform shift: mobile to wearables. Leading this shift will be one of our most meaningful contributions to human progress; empowering people to express themselves, live in the moment. learn about the world, and have fun together.

Our augmented reality platform today remains oriented around self-expression on Snapchat. We measure success in terms of views, shares, and posts. This limits how we think about and invest in more utilitarian augmented reality experiences, like playing with a Lens together with your friend, buying a pair of glasses after trying them on, or learning about something new through a Lens experience. Evolving the way we measure success, providing more analytics capabilities to creators, and optimizing for a broader range of augmented reality experiences will be critical to improving the utility of our platform. We will provide CameraKit to partners to help explore new augmented reality use-cases and scale our AR platform, with the goal of eventually reaching 1 billion AR platform MAU. After more than doubling CameraKit MAU since this time last year, we’ve got a long way to go, but we are making progress. We won’t let the scale of our ambition be diminished by the significant challenges new technologies like AR face when met with old laws, such as a number of biometric laws that never contemplated AR and have created fear and confusion among our partners. We will continue to innovate on our products, educate lawmakers, and equip our partners with legally compliant solutions.

We are working to deliver value and generate revenue with our AR Shopping Suite, a set of services that helps commerce partners generate incremental sales and reduce returns by combining AR try-on technology and our 3D asset management service with Fit Finder to help online customers visualize their purchase and find the right size before they buy. Our newly formed AR Enterprise team, led by Jill Popelka, will develop our go-to-market strategy and business model, and integrate with at least 5 paying customers in 2023. The AR Enterprise team will also develop our longer-term AR Enterprise product strategy and roadmap in an effort to identify additional verticals for expansion. As part of these efforts, we will meaningfully improve CameraKit for Web to ensure that our partners are able to reach their customers in the browser of their choice.

Some of our most important investments this year are in Lens Studio, Lens Engine, Lens Cloud, and SnapOS – all of which are necessary to support the next generation of Spectacles. Lens Studio will support more advanced development, Lens Engine will receive sophisticated technical improvements, Lens Cloud will connect to more backend services to power richer experiences, and SnapOS will break ground on new interaction paradigms and systems design to support new, immersive Lens experiences. We will also invest heavily in personalizing the delivery of Lenses, so that we are able to surface the right Lens at the right moment. The more that we understand the context and preferences of someone who opens our camera and the more we can understand about the Lenses on our platform, the better the experience we can provide.

We will continue to invest in Spectacles, making long term bets on new technology and executing against the design for our next generation product. We will help developers confidentially explore the possibilities that are enabled with our next-generation device, and integrate that feedback into SnapOS and Lens Studio. We will work hard to align the work of the Camera Platform team with SnapOS and SnapLab hardware, making sure that we are able to deliver a high-quality product that delights developerswith its ease of use and advanced technical capabilities. 

Conclusion

It might be tempting to focus solely on what we are trying to achieve, and certainly our goals will be difficult to reach, but what makes Snap unique is the way we achieve our goals. Our commitment to being kind, smart, and creative. Our commitment to building a diverse, inclusive, and equitable team where everyone belongs. Our commitment to building products that feel made for the people who use them, regardless of their background. Our commitment to protecting the privacy of our community and to keeping our community safe. We do the right thing even when it’s hard. We will keep this at the forefront of our minds and the center of our hearts as we work towards our goals, and we will invest our resources accordingly.

When times get tough, and uncertainty increases, anxiety and stress can impact the way we live, work, and relate to our fellow teammates. Stress manifests itself in many ways, and we will commit ourselves to managing our stress appropriately. We will avoid taking out our stress on family members, friends, or fellow team members by finding the coping mechanisms that work best for each of us. This includes being particularly mindful of how our behavior is impacting our fellow team members, giving others the benefit of the doubt, working to process stress rather than amplify it, and finding ways to be helpful.

I recently read the book No Ego by Cy Wakeman, who discovered that the average team member spends nearly 2.5 hours per day on drama that creates “emotional waste” at work. Emotional waste includes:

1. Lack of ownership, accountability, commitment
2. Blaming circumstances or other people for lack of results
3. Arguing with non-negotiable circumstances
4. Resistance to change
5. Lack of buy-in to organizational strategies
6. Spreading gossip
7. Projecting (and believing) made up stories instead of focusing on facts
8. Defensiveness to feedback

Instead of engaging in emotionally wasteful behaviors, Wakeman suggests that we ask ourselves some simple questions to ground ourselves and figure out how to improve the situation, rather than feeding the drama. I’ve included a few of my favorites:

• What can I do to help?
• What do I know for sure?
• What would great look like?
• What would add more value right now: my opinion or my action?

We will undoubtedly find ourselves in difficult situations beyond our control, and it’s up to us to determine how we respond and rise to the occasion. As Wakeman writes, people make their own choices about motivation, accountability, commitment, and happiness. We can choose to be a team that adapts and gets stronger, works harder and smarter, and drives better outcomes in difficult circumstances.

I am deeply grateful to have the opportunity to work together with our talented, driven team. This isn’t the first time we’ve been hit hard, and it won’t be the last, but I have the utmost confidence in our ability to pick ourselves up and get back to achieving our goals. Hundreds of millions of Snapchatters around the world are counting on us.