Snap Inc (SNAP) 2017 Q4 法說會逐字稿

Good afternoon, everyone, and welcome to Snap Inc.'s Fourth Quarter and Full Year 2017 Earnings Call. (Operator Instructions) This call will be recorded. Thank you very much. Mr. Arman Panjwani, Investor Relations, you may begin.

Thank you, and good afternoon, everyone. Welcome to Snap Inc.'s Fourth Quarter and Full Year 2017 Earnings Conference Call. With us today are Evan Spiegel, CEO; Imran Khan, Chief Strategy Officer; and Drew Vollero, CFO.

Earlier today, we made a slide presentation available reviewing our key engagement and financial metrics for the fourth quarter and full year 2017, which can be found on our Investor Relations website.

Now I will quickly cover the safe harbor. Today's call is to provide you with information regarding our fourth quarter and full year 2017 performance in addition to our financial outlook. This conference call includes forward-looking statements. Any statement that refers to expectations, projections or other characterizations of future events, including financial projections or future market conditions, is a forward-looking statement based on assumptions 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 forward-looking statements, please refer to the press release we issued today as well as risks described in our prospectus dated March 1, 2017, particularly in the section titled Risk Factors. This information can also be found in our other filings with the SEC when available.

Our commentary today will also include non-GAAP financial measures. We believe that the use of these non-GAAP financial measures provides an additional tool for investors to use in evaluating ongoing operating results and trends. These measures should not be considered in isolation from or as a substitute for financial information prepared in accordance with GAAP. Reconciliations between GAAP and non-GAAP metrics for our reported results can be found in our press release issued today, a copy of which can be found on our website at investor.snap.com.

At times in our prepared comments or in response to questions, we may offer additional metrics to provide greater insight to our business or our quarterly and annual results. This additional detail may be onetime in nature, and we may or may not provide an update in the future on these metrics. Please refer to our filings with the SEC to understand how we calculate our metrics.

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

Hello, everyone, and welcome to the call. Our business really came together towards the end of last year, and I'm very proud of our team for working hard to deliver these results. We executed well on our 2017 plan to improve quality, performance and automation, which removed friction from our advertising business and improved our application for the Snapchat community. This translated into annual revenues that grew 104% from the prior year and 8.9 million daily active users added in the fourth quarter, the highest number of quarterly net adds since the third quarter of 2016.

All this growth came at a lower cost than the previous quarter. Cash burn decreased 49% from the prior quarter, and gross margin increased 1,400 points sequentially to 36%. These are big improvements that show how quickly Snap can scale when our products and our ad business are working well together.

In 2017, we focused on removing friction from our products, our advertising business and our team. Last year, we talked a lot about our investments in Android and the importance of improving our Android application. Our community has benefited significantly from the changes we have made throughout 2017, and we're excited to see the impact of this hard work reflected in our daily active user growth. The retention rate of new Android users increased by nearly 20% when compared to last year, meaning that the people who try Snapchat on Android are much more likely to stick around and become daily active users. Additionally, the fourth quarter saw significantly more new Android users as a percentage of net additional users than any other quarter in our history.

It wasn't just Android that grew because of our efforts. Our growth on iOS continues, and we were honored and excited to end the year with Bitmoji and Snapchat as the #1 and #2 most popular apps of 2017 in the Apple App Store.

Our advertising business changed profoundly over the past year as we migrated the sale of our Snap Ads to an automated auction. Over 90% of Snap Ads were bought programmatically during Q4, which means that the auction transition for Snap Ads is largely behind us. We are learning a lot while operating our automated advertising platform, and we are constantly improving the way we sell and serve advertising. In Q4, our effective price per impression decreased by 25%, while our total advertising revenue grew 38% sequentially. More importantly, we increased advertising impressions by over 4x year-over-year while continuing to grow per user engagement. This demonstrates that our platform can deliver value and efficiency at scale for our advertisers.

Over the past 2 years, we hired over 2,400 people, roughly 100 new team members every month. While it was critical to build our team to keep pace with the growth of our business, it's become clear that we can now unlock substantially more productivity simply by changing the way that we work and by continuing to build an inclusive and creative culture. As such, we plan to moderate the growth of our team over the next year and focus on making sure that we have the right team, leadership and organizational practices in place to support our culture and our mission. We are determined to have a close-knit, hard-working team that is brimming with positive energy, and we will continue to make the necessary changes to ensure that everyone at our company is aligned with our values.

We ended 2017 confident that we can grow our Snapchat community and monetize our products more efficiently than ever before. With our plans for user growth, augmented reality and content in 2018, I've never been more excited about the future of our business. We're going to keep up the hard work and stay focused on the big opportunities ahead.

Improving application performance is just the beginning when it comes to removing friction so that our community can grow and enjoy Snapchat. We have recently launched partnerships with wireless carriers in over a dozen markets to begin reducing cellular bandwidth costs for Snapchatters around the world. We have seen that when data is less expensive, more people are willing to use our data-intensive products. This is important because Snapchat can be more fun to use out in the world rather than at home on WiFi.

We feel strongly that Snapchat should not be confined to our mobile application. The amazing snaps created by our community deserve wider distribution so they can be enjoyed by everyone. We recently rolled out Stories Everywhere so that the whole world can easily view stories on the web. We've also started bringing snaps to bigger screens like stadium jumbotrons at this year's Rose Bowl and Sugar Bowl. Removing friction from the way people use Snapchat and view snaps will help us continue to grow our community over the coming year.

One of the things that makes Snapchat so unique is our camera and how frequently it is used by our community. This is different from many other services where content is uploaded from other sources rather than created in-app. Today, 97% of all the snaps sent on Snapchat are created using our camera. With billions of snaps created every day, we have a unique opportunity to engage our community with augmented reality experiences overlaid on our camera. Every week, on average, more than half of the entire 13- to 34-year-old population of the United States plays with augmented reality lenses in Snapchat.

We recently expanded our Lenses product with the release of Lens Studio, a set of desktop creative tools that make it easy for anyone to create their own augmented reality experiences and distribute them using Snapchat. In just 6 weeks from launch, over 30,000 Lenses were created by our community and viewed over 1 billion times. We are blown away by the ingenuity of our community, and we can't wait to see what they create next. We'll be working hard to expand Lens Studio for years to come.

Our content partners continue to shine on Snapchat, and we're seeing great traction around our new Shows format. In the fourth quarter, more 13- to 34-year-old U.S. viewers watched an average episode of Face Forward by E! on Snapchat than many of the most popular television shows during the same period. Our sports coverage continues to expand. And this season, we entertained more than 30 million football fans in the United States with over 400 NFL Stories. We've built our content business on the belief that sustainable partnerships benefit everyone involved: our partners, our community and our company. This year, we generated over $100 million in revenue for our content partners, and we're excited to deepen these relationships over the coming years.

In addition to our ongoing efforts in user growth, augmented reality and content, we believe that the redesign of our application that we announced on our last call will provide a strong foundation for the evolution of our business. That's because our redesign separates social from media, solving many of the problems that arise when friends are commingled with professional content creators.

While we are still very early in the rollout, we are optimistic about the potential to unlock additional growth with the redesign of our application. As expected, it will take time for our community to get used to the changes. But overall, we are pleased with the initial results, and we'll be making the redesign available to our entire community in Q1. There is a lot of work ahead as we optimize the updated application, but our early observations support the thesis behind the new architecture and the many growth opportunities that it provides.

For example, in one of our first test markets, we saw that the number of daily active users watching Publisher Stories on Discover grew by over 40% when compared to the old design of the application. We also saw gains in ad performance, both in terms of view time and engagement, as well as an overall increase in our average revenue per user when compared to the prior design.

Additionally, we believe that the redesign has also made our application simpler and easier to use, especially for older users. Compared to the old design, core metrics around content consumption and time spent in the redesigned application are disproportionately higher for users over the age of 35, which bodes well for increasing engagement among older users as we continue to grow our business.

Our design and engineering teams are constantly monitoring the rollout of the redesign and making improvements based on what we learn from our community and their usage of Snapchat. These adjustments to our products will continue over the next few quarters as we continue to optimize the application.

Our work during 2017 is proof that we aren't afraid to make big changes for the long-term success of our business. We redesigned the Snapchat application, transitioned our Snap Ad business to an auction model and made changes to our team to improve productivity and collaboration. We entered 2018 energized by the opportunities in front of us and excited to deliver against our plan for user growth, augmented reality and content.

I'll now hand over the call to Imran for a discussion of our business results.

Thank you, Evan, and hi, everyone. We had a great fourth quarter. Total advertising revenue for the quarter was $281 million, an increase of 74% year-over-year and 38% quarter-over-quarter. The investments we have made across our advertising business are starting to pay off, and we're pleased with the results we have seen so far. We remained focused on 3 key areas throughout the year, and I would like to provide an update on each area: one, enhancing our ad product suite; two, developing efficient tools for our advertisers; and three, proving the effectiveness of our advertising.

First, enhancing our ad product suite. We want to offer ad products that are valuable to all advertisers. This means developing and refining solutions that solve a wide variety of business objectives. Not only does this allow us to serve more advertisers, it also helps us become a one-stop shop for those that continue to invest in our platform. Our strategy is paying off.

For example, of the top 100 Ad Age advertisers that started advertising with us in Q1 of 2016 or earlier, each one of them at a parent level also spent with us in 2017, and over 90% of them spent in every quarter of 2017.

In Q4, we launched a new ad format called Promoted Story. Our advertising partners have told us that they want a way to spend more time with their audiences. Promoted Story allows brands to take advantage of the familiar Stories format that we invented 4 years ago. It's been just over a month since launch, and we have seen some amazing stories from advertisers such as State Farm, Domino's, T-Mobile and American Express. More importantly, our community is embracing our new format. On average, users that chose to watch Promoted Stories viewed them for over 10 seconds. In the coming weeks, we plan to make this format available in our self-service tools, making it the first story ad unit buyable within the Snap Ads auction platform.

We have also seen strong growth in our direct response business. In April of last year, we launched the ability to bid for installs in our self-service tools. This allowed advertisers to optimize campaigns for users most likely to install their app. Our ongoing investment in machine learning and our commitment to improving efficiency for advertisers is paying off. We drove 15 times more app installs in December compared to April while continuing to drive increased return on investment. As we doubled our total revenue from app install campaigns since the beginning of Q4, we also significantly decreased cost per installs for our advertisers. One great example of our progress on the direct response front is Etermax, the creators of the mobile trivia game, Trivia Crack. Using our app install ads, they were able to acquire high-value, highly engaged users at scale. They saw that Snapchat users were 25% more likely to still play the game after a week compared to users from other platforms. And overall, Snapchat users played the game for twice as long as users acquired anywhere else. Importantly, they were able to achieve these results at a cost per sign-up and cost per install that was 20% lower than other channels.

The second area of focus is developing efficient tools for our advertisers. We know that in order to truly scale our business, advertising on Snapchat has to be really easy. As Evan mentioned, in Q4, over 90% of Snap Ad impressions were delivered programmatically. In Q4 of 2016, this number was under 10%. So we are really happy about how quickly our advertisers have embraced this transition and continue to do so. In fact, the number of advertisers spending in the auction doubled quarter-over-quarter.

We're also really excited that these self-service tools have allowed us to reach different types of advertisers, not just big brands. Revenue from small- and medium-sized businesses more than doubled quarter-over-quarter. For the first time, revenue in Q4 from advertisers outside of Ad Age's Top 100 exceeded revenue from the Top 100 Advertisers.

The Penny Hoarder is a great example of an SMB that is growing their business on Snapchat. The Penny Hoarder is a website dedicated to personal finance tips. They came to Snapchat with the goal of finding a new audience that couldn't be reached on other platforms. In just a few months' time, their Snap Ads campaigns generated 40% higher returns than other platforms and drove a 51% increase in their revenue. We are thrilled by the results they have seen.

Our self-service tools have also enabled us to quickly scale in international markets. For example, in the Middle East, we made the strategic decision to rely exclusively on our self-serve tools for Snap Ads. Starting on October 1, Snap Ads could only be purchased through Ad Manager, and this decision quickly paid off. In 3 months, we more than tripled the number of advertisers spending in our auction. And out of all our international offices, this region was our top contributor to overall revenue growth in Q4.

Still, we have a lot of opportunity to make it even easier for advertisers. Snap Publisher, our web tool for vertical video creation, was a great milestone on the Snap Ads front. And most recently, we took a big step in helping brands with augmented reality. As Evan mentioned, we launched Lens Studio less than 2 months ago to make it easier for our community and our advertisers to create Lenses. Foot Locker was our first advertiser to leverage Lens Studio to create a Sponsored Lens. They worked with our Lens Studio partner, North Kingdom, on a lens that was incredibly successful and highly engaging. On average, users played with their lens for 45 seconds.

Lastly, proving the effectiveness of our advertising. In Q4, we made a lot of good progress with Snap Pixel. We focused on scaling its usage as well as building out its capabilities. In just 2 months since its launch, some of the most visited websites have installed the Pixel across thousands of domains. Many of these advertisers were previously not spending with us until we had stronger first-party measurement solutions. One out of every 3 advertisers that participated in the Q4 Pixel beta spent their first dollar on Snap after they got access to the Pixel. The Pixel is helping us to unlock dollars, especially from performance budgets. We think this will continue as we build out additional capabilities such as dynamic custom audiences, conversion optimization and secondary objective optimization. We also rolled out Pixel Custom Audiences in December, which allows advertisers to reach audiences based on actions such as visiting their site. It is very early, but we're seeing good results. We still have a lot of work to do here, but we're excited about what this can do, mostly for our mid-market and SMB customers.

Our focus on online to off-line measurement throughout the year helped us capitalize on the holiday season. We know Q4 is a critical time for many of our advertisers, especially retailers, and they want their campaigns to drive store visits and sales. Target partnered with us using Snap Ads and Filters to drive action intent and in-store visitation for holiday shopping. We drove a 16 percentage point lift in action intent to shop at Target for the holidays as measured by Nielsen as well as over 660,000 incremental visitors to their stores as measured by Snap to Store, which is our proprietary solution that measures foot traffic in stores.

We continue to invest in our measurement ecosystem and now have 19 third-party measurement partners. In Q4, we partnered with the National Research Group, a leading data provider in the movie industry, to understand the impact that our ad campaigns have on opening weekend box office. Our ongoing partnership demonstrates that Snapchatters represent 36% of moviegoers and 50% of ticket sales. Additionally, movies that advertise on Snapchat are 22% more likely to be moviegoers' first choice in theaters on the opening weekend, a metric that is highly correlated to opening weekend box office. We are really happy with the progress we've made in 2017. We still have a lot of work to do, but we're excited to keep the momentum going.

Thank you for the time today, and here's Drew to discuss our financial results.

Thanks, Imran, and good afternoon, everyone. Simply put, our fourth quarter results represented a major step forward for Snap, both financially and operationally.

Overall, we saw improvements across our business, but I will comment on 4 specific areas of interest for Q4.

First, revenues increased 72% year-over-year and 37% sequentially, anchored by growing auction traction and holiday brand sales. Revenues for the year more than doubled, up 104%.

Second, gross margin expanded substantially, which continues to validate that our business model can scale profitably. As Evan noted, gross margins were 36%, improving over 2,700 basis points year-over-year and up 1,400 basis points in just 1 quarter.

Third, headcount growth continues to moderate, thanks to productivity gains from our team. Net additions in the quarter were slightly more than 100, 1/3 of the rate of recent quarters.

And fourth, cash burn declined 49% sequentially, driven by more focused capital deployment priorities and thoughtful cash management.

I will now expand on each. First, global revenues grew to $286 million in the fourth quarter. We saw growth in every region, and international markets now represent 23% of our total revenue, up from 12% a year ago and 20% last quarter. As expected, the fastest-growing product in Q4 was Snap Ads and, specifically, Snap Ads sold through the auction. Many of the auction dynamics were consistent with prior quarters, although ad volumes were much higher in Q4. It was very encouraging to see some substantial daily sales volumes flowing through the auction during the quarter.

As expected, revenue gains were driven by growth in ad impressions, partially offset by Snap Ad pricing, which fell sequentially due to the mix shift from managed to programmatic and reserved to bidded ads. Let me share some numbers with you on impressions and pricing.

First, Snap Ad impressions, excluding Promoted Stories, were up 90% sequentially and up over 575% year-over-year.

Second, overall Snap Ad pricing, excluding Promoted Stories, was down more than 15% sequentially and nearly 70% year-over-year.

Third, we ended the quarter with over 90% of our ads served programmatically, up from 80% in the prior quarter.

Over the medium term, we believe that increasing our advertiser count will have a positive impact on our pricing. In the quarter, we saw the percentage of contested auctions increase versus the prior quarter, and auctions that were contested continued to have higher prices than single-bidded auctions.

Now looking at our cost drivers. We're excited to continue to see our economic model gaining traction. Growing revenues, coupled with banded user expenses, fueled gross margin expansion again in Q4.

Please note that when I discuss all of our expense figures, including gross margins, they will exclude stock-based compensation and related payroll taxes as well as depreciation and amortization and nonrecurring charges.

The cost leverage we are seeing is particularly apparent on a per user basis. In Q4, our ARPU increased 46% year-over-year to $1.53, while our costs per user, or CoRPU, only increased 2% to $0.98. We've been able to moderate user cost growth through the successful execution of our multi-cloud strategy. Specifically, hosting costs per user dropped from $0.72 a year ago to $0.70 in the quarter. That's great progress in a year when our sales have more than doubled and engagement metrics have grown substantially.

As a result, worldwide gross margins expanded to 36%. Internal analyses continue to suggest our economic model can scale well as North American gross margins are well above the worldwide average, driven by their higher ARPU, which was $2.75 in the quarter.

Now moving down the income statement. The primary driver for operating expenses remains people cost. In the quarter, our hiring pace slowed substantially. Specifically, net adds were slightly more than 100 as we started to lever our significant early investments in people. Hiring mix remains a priority, and the absolute number of back-office employees declined in Q4. Overall operating expenses were up 17% sequentially, driven by modest hiring, increased sales commissions, legal costs and year-end expenses.

Lastly, we focused on capital deployment priorities and thoughtfully managed our cash position this quarter. CapEx remained modest at $21 million and less than $85 million for the year, driven by our capital-light infrastructure strategy. Our CapEx per user for the year was less than $0.50, which we believe leads the industry. M&A was modest in the quarter, and we adopted a sell-to-cover approach for vested restricted stock units for employees during the quarter, which substantially reduced our cash spend. As a result, we were able to reduce our cash burn by 49% sequentially. We ended 2017 with $2 billion in cash and marketable securities.

As of December 31, 2017, total shares outstanding were 1,222 million and 1,420 million on a fully diluted basis.

Q4 represented a significant step forward for Snap on the key financial metrics. As we move forward, we'll continue to manage our business for the long term. In 2018, there is much to do, and we are focused to deliver on our key priorities.

I want to share some financial thoughts with you for the early part of the year.

First, as we think about revenue growth in Q1 2018, we start with the current momentum in the business. Specifically, we saw strong growth in Q4, and our year-over-year advertising revenue growth rate accelerated to 74%. In Q1, we're planning for our year-over-year revenue growth rate to moderate from the Q4 pace. The majority of our revenue is generated through brand advertising, which seasonally peaks in the fourth quarter. Additionally, we are planning for the transition of the creative tools business to the programmatic platform, which we believe will drive additional impressions at lower prices and result in more modest growth in the first half of 2018. Also note that in Q1 2017, we had $8 million of Spectacles revenue, which we're planning to be substantially down year-over-year and sequentially.

On hosting expenses, we exited the fourth quarter with a slightly higher cost per DAU than the quarterly average of $0.70. The cost impact of our application redesign has yet to be fully determined. That said, we are focused on executing additional cost-saving initiatives in 2018 to continue to offset future cost increases.

With respect to operating expenses, we are planning for continued gains in team productivity and modest hiring. We are planning for operating expense growth to moderate in the first half of 2018 and be up low double digits versus the second half of 2017, primarily driven by more focused hiring in front-of-house functions. Please note that this does not include any potential acquisitions.

Capital expenditures were less than $85 million in 2017, and we are planning for a slight increase in 2018. We're moving many of our headquarter teams to a series of leased facilities in Santa Monica during the first half of the year, although we do expect additional moves to occur later in the year and into 2019 as well.

With that, I will now turn the line back to the operator to open up the call for questions.

(Operator Instructions) That concludes the prepared remarks for today's earnings call, and we will now begin the question-and-answer session. (Operator Instructions) And our first question is from Ross Sandler with Barclays.

Just 2 questions, one for Evan and one for Imran. Evan, you mentioned that Android retention is up 20% quarter-on-quarter. Can you give us some color on what's driving that? And then you also said that engagement in the older cohorts and with Discover is up pretty big following the redesign. So how did the -- with the younger cohorts versus the older cohorts? And then the second question for Imran. We saw some news in the upfront that you guys had secured as much as $70 million in ad revenue for the Winter Olympics. So can you just talk about how much of that will flow through Snap and how that kind of triangulates with the comments about first quarter?

Thanks, Ross. Yes, I think in my comments earlier, I talked about a year-over-year increase in retention. We've been working very hard to provide more value to our users when they sign up, and one of the key ways that we do this is try to make sure that they have a lot of great friends ready for them. So we rolled out Quick Add over this year, and that's made a huge difference on making sure that folks who sign up get the friends they need quickly. I can't provide any detail on cohorts, but we're excited with the progress we've been making on Android.

So on the Olympics side, Ross, let me jump on that one. So we are very excited to have a special event like the Winter Olympics, and we believe Snap community will really enjoy what we have there. We're also excited to be the biggest mobile partner there. Obviously, it's an extension of a successful strong overall partnership we have with NBCUniversal deal, and it builds on the success that we had with the Summer Olympics back in 2016. So as our business is growing, we look to these tentpole events as engagement drivers [and whether] we do financial drivers. And so our core business today is much bigger than it was back in the summer of '16. And we have been working with advertisers. And our ad packages have sold well, so we do expect modest revenue tailwind in Q1. But overall, percentage revenue boost to our sales base, we expect to be less than what it was a couple years ago when we had a smaller business.

And our next question is from Stephen Ju with Crédit Suisse.

Imran, I recall you saying, I think it was 2 quarters ago, that you're looking to evangelize the platform and lure in advertisers with cheaper price inventory. You touched on this to some degree on the prepared remarks around the Pixel, but how are the conversations going now? Do you still feel like you have to sell the benefits of advertising on Snap, especially for the DR guys?

Yes. I think the conversation is going really well, as evidenced by our Q4 result. And I think a couple of things happening. Number one, we are really offering very attractive value to our advertisers on our platform given our size and scale. And you are seeing that more and more advertisers are coming to our platform. A number of advertisers on auction doubled in Q4 quarter-over-quarter. The second thing is, on the direct response side, we are seeing great success on app install and lead generation, and we are aggressively moving into e-commerce customers with the larger Pixel. And early trend looks really good, and we are really excited about that.

And our next question is from Justin Post with Merrill Lynch.

A couple of questions for you. I mean, Imran, the ad impressions were up 575%. Is that all just demand-generated? Or did the company make a decision to open up more ad impressions this year? And, I mean, do you just feel like you have tremendous room still to grow there? And maybe a question for Drew. You touched on it a little bit, but was there any just unusual items in the fourth quarter as far as revenues that we should be thinking about that might not sustain into next year?

With 170 -- 187 million daily active users who are incredibly engaged, we have a lot of inventory on our platform, and we think there are still a lot of room for us to grow.

So -- and, Justin, it's Drew. On the revenue side of the world, we did try to call out a couple of those in my comments. We are a brand business, and we do believe that the brand business seasonally peaks in the fourth quarter, so that was something we wanted to highlight as you think about the early part of the year. Also, as you think about the early part of the year, our Spectacles business was $8 million last year in the first quarter of 2017. We do not expect that business to annualize or even sequentially comp to where it's been.

And our next question is from Mark Mahaney with RBC Capital Markets.

I want to try to get at the question of the sustainability of 2 trends, the DAU trends and the revenue growth trends. And, I guess, I'd like to ask it in the -- first in the DAU trends, in terms of the -- how far you think you are along in terms of kind of "fixing" the Android problems? Are the crash -- where are the crash levels versus where you've had them before? I know in the past, you talked about having that all finalized by Q2 of this year. Do you think you're already there? So is there anything more you need to do with Android in order to get that experience like you wanted? And then on the revenue side, I guess, the one thing I'd add there is it sounds like you're already through all of the auction -- the transition to the auction process. So I would think that this kind of growth rates that we're seeing, leaving aside seasonality, is relatively sustainable, but anything else you'd want to do to caution us on extrapolating growth from here other than the seasonality and the Spectacles?

So on the DAU side, obviously, we've talked a lot in 2017 about Android and how much we've been focused on it. And today, we have some of the lowest ever crash rates that we've seen. But we're still going to be doing a lot of work to rebuild the Android application. There are components of that in the updated Discover functionality and rolling out in the redesign, and so that's great to see. The frame dropping has gone away. The scroll performance is awesome. Streaming is making a huge difference for people who are watching content on our service. So I think that's a great step in the right direction, especially with the redesign, but you'll see a lot more this year. We've been chopping a lot of wood on that for a long time, as you know.

Ross, excuse me, it's Drew here. A couple of thoughts for you on the overall business mark. So in terms of the revenue growth drivers, we did talk about the seasonality. We talked about Spectacles. Spectacles is a smaller piece. Overall, the way that you should think about the business is really that the engine that drove the growth in the fourth quarter, will continue to drive our growth really is the auction platform. That's really where things are heading. There is a smaller piece of our business on the creative tools side. We will be transitioning that in the first half of the year. As we transition that, we do expect to see gains in impressions offset by declines in price. But, really, sort of as you're thinking about big-picture ideas and where our business is going, what the business drivers are, it really is going to be Snap Ads and the auction for the foreseeable future.

And our next question is from Heath Terry with Goldman Sachs.

Evan, how is the experience with the redesign impacting the way that you're planning product development? Where and how has it impacted your priorities? And then, Drew, just a quick one. Given the progress on cash burn, how should we be thinking about your trajectory there going forward?

We decoupled the redesign from a lot of the feature development that we've been working on that, so that's continued, and I'm very excited about the product pipeline for this year. The redesign was really focused on 3 things. We wanted to make the app easier to use, and we wanted to bring your friends together, and we wanted to elevate a lot of the great content that we have in Discover. And so far, I think we've accomplished all 3, and we've tried to be very deliberate. In the rollout, we've learned a lot as we've rolled it out. It's out now about 40 million folks, and we're excited on the progress there. So we'll be working on a lot of that throughout the year and for the years to come, but that's decoupled from the future development process internally.

And, Heath, on the working capital or just general cash burn of the business, obviously, big-picture cash is very important to us. Liquidity is something that we look at all the time. If you think about sort of the uses of cash for the business, we're EBITDA-negative, and investments in business operations continue to be our #1 capital deployment priority. Our second capital deployment priority is M&A. It's opportunistic, as you know. So sometimes we do stuff, sometimes we don't. I do think we can do a better job of thinking about cash versus stock mix as we do that, but I think we're still in the M&A game, and we'll be periodically looking at deals. I do think the big change we made between the third and the fourth quarter was really we stopped buying back employee shares here in the fourth quarter, and that was a big piece of what the change in cash burn was. I also think we did a better job of managing our working capital within the balance sheet, and that's just a maturing business getting better at what it does. So overall, it's really going to be the investment in the business and the M&A or our capital deployments, and those are primary uses of cash.

And our next question is from Lloyd Walmsley with Deutsche Bank.

This is actually Matt Diamond on Lloyd's behalf. The question -- 2 questions, really. One, with the Android developments. Could you talk about where you saw the engagement in (inaudible)? Was it pretty uniform across your geographies? Are there any differences to call out there? And two, for any advertisers who might have been with you that have since left, what were the key challenges that they faced? And have those challenges been addressed, whether that's targeting ROAS, like a measurability, maybe not finding the right demographic? Any color there would be helpful.

So with the advertiser side, I think we make tremendous progress delivering things that advertisers are looking for. We make tremendous progress on app install side, tremendous problem -- or progress on lead generation side. And we also launched Pixel. And I think a lot of advertisers, primarily who are around the e-commerce segment, are looking for Pixel to really understand how we are driving growth. And I think that's one big area that we continue to invest. The other area is that we will continue to remain really focused to buying ad on Snapchat, absolutely easy. And we did make a lot of progress with Snap Publishers, and we're going to continue to do so, and that will also continue to drive growth. But overall, we are very happy with the progress we made, and we're going to continue to do so. In terms of Android geography, it -- we saw improvement across the geographies, so it has no one specific geography to point that out.

Our next question is from Eric Sheridan with UBS.

Maybe 2 on the advertising. The way you guys break out the business and talking about it between managed versus programmatic or reserved versus bidded, is there any chance you can give us color about the skew in terms of percentage of revenue that tilts one way or the other? And also the differences in price between the 2 so we could get a better sense of where we are in the transition on the revenue base and on the pricing mix in the business.

Yes. With regards to breaking down revenue by channel, we don't do that. But I think one thing, I believe Drew pointed out, that programmatic was the fastest-growing segment of the business, as evidenced by a number of impression that is flowing through the programmatic business. With regards to pricing, I think we really focus here to drive return on investment for advertisers. If we drive more return on investment for advertisers, that means more advertisers will come to our platform. We are just getting started. There are 26 million small businesses out there. We want to capture a big chunk of that. So we are less focused on price, more focused on driving value and driving growth. But in general, right, if an advertiser wants to reserve a date that always has high price than bidded pricing, so that's how it usually works.

And our next question is from John Blackledge with Cowen and Company.

So the user growth was better than expected. Just wondering if you have any color on engagement, time spent on the platform how you think -- and how you think about kind of the key engagement drivers in 2018. And then just a quick one on total number of advertisers on the platform.

I don't have any material updates for you on engagement, but I did see yesterday Verizon release some numbers about their customers usage during the Super Bowl. And, I guess, last year, we were #3 in terms of overall usage during the Super Bowl, and this year, we were #1. So we're pretty excited about that directionally, but no specific updates for you today.

In terms of the total number of advertisers on the platform, obviously, it's a key accelerator for our business. We know when we get more competition on the auction, we think it's a real way that we can drive pricing over the medium term. We did double the number of advertisers on the platform. We're still a young business with a lot of room to grow, but we're excited by the progress in the quarter.

Our next question is from Douglas Anmuth with JPMorgan.

I have 2. First, for Drew or Imran. Can you just help us understand how your long-standing kind of existing advertisers are behaving in a reserved media world versus auction, just how their behavior's shifting? And then secondly, Evan, you talked a couple times about removing friction. What are the opportunities that you're thinking about in '18 to continue doing that?

Thanks, Doug. I think if you look at the large advertisers, they have different buckets of budgets, right? So they have always on budgets. They have Activision budget surrounding some events like Super Bowl or they have new initiative budgets. And what we're trying to do is playing to all of those buckets and trying to capture dollar. So with regards to always on budget, that's the money we are getting on to our auction platform, to our self-service platform. But then we also have this incredible ad unit creative tools like Lenses and Filters that's really unique, and no other platform has that at scale like us. And you can see that large advertisers take advantage of those products or take advantage of our premium products like for Shows and for Discover to surrounding some events or deliver some message. They want to do that -- as part of their premium content strategy. Super Bowl, I think, I don't know if you saw that we had a couple of great lenses, and that did really, really well and we're really, really excited about that.

On the removing friction mandate over here, I think one of the key things is all of the new processes we have around quality and performance, that will continue to make a big difference for us and were obviously a big focus of last year. But also, we have some major architectural changes coming to both iOS and Android coming throughout the year, and we're excited about the opportunities there.

And our next question is from Mark May with Citi.

I had 2. I think the first for Drew and then the next one for Evan. Getting back through to the question a lot of people have asked around the outlook for Q1 revenue, we can obviously kind of back out Spectacle impact, and brand, I guess, is seasonal, like you said. So it should be -- the seasonality should reflect it in the year ago. So, I guess, I'm just trying to understand, coming off of a strong Q4 with accelerating trends, the auction dynamics, et cetera, that are benefiting you, why would you -- what is sort of the driver of the "moderating growth" in Q1? Seems like you've got some nice tailwinds on a year-on-year basis, ex Spectacles, going into Q1. And then for Evan, there've been some other players, some other social apps in the space that have kind of admitted that some of the ways that their users are using their apps may not always be deemed good uses of time, right, more around focusing going forward more on quality versus quantity. I wonder if that's something that you think is, in any parts of Snapchat, an issue and anything that you're sort of addressing from that perspective.

So let me comment on the first question. So we did comment on the underlying drivers for the spike-up that we did see in the fourth quarter, and we did share how we're thinking internally about the Q1 dynamics. The largest piece of our revenue for our business in Q4 remains brand sales, and we believe brand revenue seasonally peaks in Q4. And so as the business now has more scale, we believe the year-over-year growth rates are probably the most relevant way to think about our business. We think it neutralizes the brand seasonality, and it's frankly how our team thinks about managing its business. So we're thinking about the year-over-year growth rate, and that's why I try to target that 74% so you got a sense on that. But we did try to do is point out some of the underlying drivers, the seasonality, the change in some of the creative tool platforms that we moved to self-serve and then a little bit, which is a smaller piece of the business on the Spectacles side. So we try to give you some thoughts. Those are the big movers if you think about our business in the first quarter.

And on the product side, from the beginning, we've been really thoughtful about how we approach these issues. It's one of the reasons why we've never had public-facing metrics around followers or likes and why we've always tried to control who distributes content very widely on our platform. And I think if you look at the redesign, the evolution with the redesign, what we're trying to say is that there's a really big difference between talking to your friends on the telephone and broadcasting on a TV channel. And I think our society has noticed that difference for a really long time, and that's why there's different regulations and rules around communicating with your friends and broadcasting media. And so for us, as we evolve the product, I think this allows us to really reinforce the great things about our communications products, bring friends closer to together and, at the same time, provide more distribution to really high-quality content. So I think we're trying to stay way ahead of the curve on this stuff and it's something we care a lot about.

Our next question is from Jason Helfstein with Oppenheimer.

Two questions. You did share a good amount of learnings on the app redesign. Are you getting input from advertisers and agencies? So kind of how deep is the learnings going? And then it does seem like brand will be a lower percent of the mix going forward between brand, DR and then large versus small advertisers. Just any thoughts about how to think about the mix of advertisers going forward and kind of the benefits of creative diversification.

Yes. We are taking feedback from advertisers and agencies, a perfect example of Promoted Stories. Agencies and advertisers always told us that they wanted a new way to tell their stories, and that's why we launched Promoted Stories. And we are thrilled with the success we are seeing and really, really excited about the opportunity. Second question was around mix shift between brand and DR. I think for the first time in company's history, more than 50% of the revenue came from advertisers were outside the Ad Age top 100. As we said, there are 26 million or so large, small businesses out there, and there's a tremendous opportunity to help those advertisers to be successful. And they are looking for ways to reach new users and we can help them. And so we are really dedicated to focus (inaudible). And as we do that, you will see that the mix will change, and that will also mute the seasonality in the business, hopefully, in the long term.

And our next question is from Youssef Squali with SunTrust.

All right. Two questions, please? Starting out with Drew. On the cost side, can you shed some more light into the strength in the gross margin, components of that? And more importantly, as we look into 2018, it looks like 2017 had a lot of noise to it from the gross margin side. How should we be thinking about seasonality on that line? And then, Evan, GDPR requires changes to the consent recommendations around kids 16 and under. I know international is a relatively small percentage of the overall business, but how do you envision this effect in Snap's onboarding process? And just any other potential fallouts from GDPR or not.

So let me speak to some of the winds that are happening on gross margin. You're right, gross margins have been expanding here and have been expanding for a while. We did have a terrific quarter. Gross margins went from 21% sequentially up to 36% and similar expansion on a year-over-year basis. Really, it's -- we have a powerful model when we can get incremental sales here. And so if you think about the marginal cost to serve here, it's not high. And so simply put, sales have been growing a lot faster than our costs on a variable side, which has been terrific. Our cost structure, really, on the variable side is infrastructure costs and rev share, both of which, we've been heading in the right direction. Our infrastructure costs are down from $0.72 last year to $0.70. We're just doing an excellent job of executing on the multi-cloud strategy. We're winning there. And obviously, we're taking the capital out of the business as we do it. So that's really 2 wins that we've been executing on, on the infrastructure side. On the rev share side, as we continue to open up more owned inventory, that goes -- those incremental sales dollars come without a rev share. So that's really been helping manage down the revenue share percentages. It was 14% of sales last year. Now it's 10%, and we've seen good leverage on that all along. So, really, it's a powerful combination of growing revenues, and we've done a pretty good job of flattening the costs in marginal costs. And so you've seen the expansion of the gross margin over the last 6 quarters. It's been nice progress.

On the GDPR front, it's something that we are ready for, and we've been very thoughtful about how we approach privacy in our product. Obviously, things like the right to be forgotten are close to our heart. It's something that we have a very serious focus on.

Our next question is from Rich Greenfield with BTIG.

The first one for Evan. Evan, you were talking about kind of the -- trying to stay a step ahead of everyone else when you think about the product. And I think there's been a lot of questions from investors about the kind of the rationale for the redesign. And how much of it was something you saw that you didn't like in user behavior? Or was it trying to meet advertiser demand? And it seems like you're trying to portray it as this was more of nothing was wrong. We just believe we can be better. And I just want to -- could you maybe just set the record straight and confirm the rationale driving the redesign. And then just a question for Imran and Drew. You obviously exceeded Wall Street expectations for Q4. But as you think forward for a full year 2018, I think if you look back to the IPO, expectations were for roughly $2 billion of revenue in '18. That's now down to, call it, $1.3 billion at least before today's call. And while I know you don't give guidance, wondering how you feel about the level of consensus out there in terms of ability for the company to meet or exceed the way you did in Q4.

Rich, we're always trying to improve the product, and we're pretty relentless about it. We see a huge amount of opportunity, both in the redesign, but also all the other stuff that we're working on. And obviously, it's what we love to do, so we're really excited about our work there.

In terms of the overall thoughts for the year, Rich, I mean, look, the Snap Ads sold through the auction are going to continue to be our main revenue driver in 2018. The auction continues to be new for us, where there's lots of optimizing going behind the scenes every single day on pricing, on targeting, et cetera. But there are a series of new technologies, enablers, accelerators like the Pixel, like targeting improvements, new products, like they should be accelerators for our business, but it's difficult to predict when they're going to be ready. And so as a result, our revenue visibility is really more in the near term. And so that's why we shared some thoughts with you as it relates to the first quarter on the underlying drivers of the business. And so that's the visibility that we have comfort with at this point, and so that's why we shared those thoughts.

Our next question is from Brian Fitzgerald with Jefferies.

I think you guys got asked this before, maybe a couple of quarters ago. Thinking out loud, with the strength that you're seeing in self-serve, have you thought about opening up the auction to third-party DSPs to increase the number of advertisers to get more pricing buoyancy there on the platform?

Yes. I think when you open it up to third-party DSP providers, there are all these risks that some of the user ideas here will leave our platform. And I think we are really, really focused on user privacy, and ultimately, that's a very, very important part of it. So I don't think we are interested doing that. I think what really makes great, that anybody can log onto our platform and buy advertisement. And there are a lot of advertisers who are looking to acquire new customers. And with our strength in the millennials market, right, 70% of 13 to 34 in U.S., U.K., France, on those markets that are on our platform, and so we are really excited about what we can offer it, and I think that's a great way to grow our business without compromising potential privacy issues.

Our next question is from John Egbert with Stifel.

I had a couple questions on Maps. I was wondering how Maps fit into the redesign. Are you seeing increased usage of Maps and/or Stories viewed in Maps for the test users that you're tracking? Is it a priority to make Maps usage more frictionless in this redesign? And then on monetization, it seems like Stories viewed from Maps on the interface are still unmonetized or at least very under-monetized. Should we expect to see that change anytime soon? What type of criteria are you evaluating there?

We're really excited about Maps, and we have over 100 million monthly active users from Maps. And we'll be working on improving the frequency with which people use that product, mostly by trying to provide more value around using the Maps experience. Today, it's hard to know where to go. It's hard to navigate interesting things that are happening. And so as we improve the product, we'll make it easier for you to find the most interesting things that have happened on your Map. So I think a lot of work to do there, of course, and we're happy that we're bubbling it up higher, obviously, in the redesign. On monetization, we're not currently monetizing Maps, and nothing to share on that front.

Our next question is from Ron Josey with JMP Securities.

I wanted to ask about international expansion. I think Imran and Evan, you mentioned about working with carrier partners internationally and then also selling ads through Snap Ads, through Ad Manager in newer markets like the Middle East. So I just wanted to understand if there's maybe a little bit of change in strategy in terms of focusing on the top ad markets globally or just looking at launching everywhere. And then in terms of moderating headcount, just really quick, if you could provide any sort of insight on reducing the friction or improving, I think, productivity gains. You mentioned back-office employees declined. But is there any change in sales structure given the strength in the auction?

Yes. I think as our business is becoming more and more programmatic, our sales force is becoming consultant to our clients, and I think that is very important because I think we have still a lot of work to do to educate the market and really teach the market how to create vertical video ad unit that really, really works in mobile environment. Many of the advertising partners are really winning by creating great ad content and really understanding how to take advantage of our platform. And so we're going to continue to invest on that, and I think there's a tremendous opportunity for us to capture market share by doing so. With regards to international market, look, I think international is a great opportunity. More and more advertisers in the international market wants to use Snapchat to reach their audience, and we continue to be aggressive drilling out to the market, that we think we can generate profitable revenue growth.

I was going to say, Ron, as we've been building up to the 3,000 here, the north star really has been add to the front of house and leverage the back of the house as much as we can. To your point, we saw that in the back of the house in the fourth quarter, but we have been able to move the mix. Front of house with engineering and sales is now over 80% of the people of the company. That's by design. And so, really, those remain our strategic priorities. We're going to be focusing hiring, to your point, as we move forward, but those remain high priorities for us.

This concludes our question-and-answer session as well as Snap Inc.'s Fourth Quarter and Full Year 2017 Earnings Conference Call. Thank you for attending today's session. You may now disconnect.