Snap Inc (SNAP) 2018 Q3 法說會逐字稿

Good afternoon, everyone, and welcome to Snap Inc.'s Third Quarter 2018 Earnings Call.

(Operator Instructions) This call is being recorded.

Thank you very much.

Ms. Kristin Southey of Investor Relations, you may begin.

Thank you, and good afternoon, everyone.

Welcome to Snap's Third Quarter 2018 Earnings Conference Call.

With us today are Evan Spiegel, CEO and Co-Founder; and Tim Stone, CFO.

Earlier today, we made a slide presentation available that provides an overview of our user and financial metrics for the third quarter of 2018, which can be found on our Investor Relations website.

Now I will cover the safe harbor.

Today's call is to provide you with information regarding our third quarter 2018 performance in addition to our financial outlook.

This conference call includes forward-looking statements.

Any statement that refers to expectations, projections, guidance 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 quarterly report on Form 10-Q for the quarter ended June 30, 2018, particularly in the section titled Risk Factors.

This information can be found in our other filings with the SEC, when available.

Our commentary today will also include non-GAAP financial measures, and 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.

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 nonrecurring charges.

At times in our prepared remarks or in response to questions, we may offer additional metrics to provide greater insight into 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.

Hi, everyone, and welcome to our quarterly earnings call.

We recently celebrated our seventh anniversary, and I wanted to share some highlights of where we are today and how we plan to drive growth and profitability in the future.

Through the hard work, dedication and innovation of our team, today, we have one of the largest and most engaged mobile communities in the world.

We have grown our community and engagement because we are different.

We're the fastest way to visually communicate with close friends and family.

We built Snapchat from the ground up to empower people to express themselves instantly through our camera, resulting in over 3 billion Snaps created every day.

We're a fun place to learn about the world on our Discover content platform.

We have built a premium mobile content experience that complements content created by your friends.

And we are built for mobile.

We believe that mobile devices present unique opportunities, like communicating visually, and we're excited about the future of innovation on mobile platforms.

We have attracted a large and loyal community because our core visual communication product is built to support people's close friendships.

Over 60% of our daily active users create Snaps every day because they use our service to talk with their close friends and family.

Every product we have is built around our core communications product.

We have been successful in launching new products and features by expanding the use of our personal communications product into other areas like Memories or Discover that increase engagement and drive our advertising business.

Over the past 2 years, we have transformed our advertising model to self-service, and we are now beginning to see the results.

Trailing 12-month revenue has grown over 50% and now exceeds $1 billion as we continue to scale our business and deliver value to advertisers.

I'm incredibly proud of our team and what we have accomplished in such a short time.

We're excited about the future, and we have just scratched the surface with respect to our long-term growth opportunities.

As we enter our next phase of growth and scale for the long term, I'm happy to share that 2 new leaders are joining our team.

Jeremi Gorman will be starting mid-November as Chief Business Officer, with responsibilities including global business solutions, online sales and customer operations.

She spent the last 6 years at Amazon, where she was most recently Head of Global Advertising Sales.

Jared Grusd will be starting in early November as Chief Strategy Officer, with responsibilities including partnerships, content and business development.

He was most recently CEO of HuffPost and Global Head of News and Information at Oath, where he has been for more than 3 years and previously was General Counsel and Head of Corporate Development at Spotify for 4 years.

Today, we are focusing our time and resources to expand our community, increase engagement and improve monetization.

We have a significant opportunity to grow and broaden our global community over the long term.

While we have incredible reach among our core demographic of 13- to 34-year-olds in the U.S. and Europe, there are billions of people worldwide who do not yet use Snapchat.

Continuing to improve our user experience and creating awareness about our value proposition are key drivers in growing our community.

This quarter, our daily active users grew 5% over the prior year and were down 1% sequentially.

The decline was primarily among Android users.

We have been developing a completely new version of our Android application to be lightweight, modular and performant.

The Android community represents a global growth opportunity for us, and we're making good progress testing the application in select markets.

We look forward to rolling it out when it's ready.

In addition to building our community, we're focused on increasing engagement across our products to drive growth.

Our community continues to spend more than 30 minutes per day on average on Snapchat, and we are working to provide even more value to our Snapchat community.

We recently surpassed a major milestone with Snapchatters saving more than 200 billion Memories.

And Tic-Tac-Toe, one of our new Snappables, a shared augmented reality experience with friends, had over 80 million unique users in Q3.

Since we launched our redesign earlier this year, there are more people watching premium content than ever before.

Our new layout for Discover allows us to invest in both the quality and quantity of content available on our platform.

Shows continue to attract more viewers.

And in Q3, 21 unique shows in Discover reached a monthly active audience of over 10 million viewers.

On October 10, we announced a new slate of 12 Snap Original Shows in a wide range of genres.

Our content is tailor-made for mobile.

It's vertical and fast-paced in an effort to draw you in quickly, with most shows running 5 minutes or less.

Our media platform, Discover, allows us the opportunity to increase engagement, expand our content library and increase our premium offerings, all of which should benefit our advertising partners.

We continue to improve monetization as we scale our advertising business, and our results demonstrate meaningful progress.

Third quarter revenue grew 43% year-over-year and 14% sequentially, driven by traction in our global online sales business, which includes small- and medium-sized businesses and sales partners, and increased adoption of our self-service platform by performance-oriented advertisers.

Our growth is being driven by improving ROI, onboarding additional advertisers and expanding our suite of advertising products and tools.

In the third quarter, over 85% of our advertising revenue on Snapchat was transacted via self-service, up from 35% 1 year ago.

The transition to self-service has allowed us to scale our sales efforts to smaller advertisers that we couldn't initially reach like FabFitFun, a subscription company, which improved their cost per acquisition by 36% this past quarter, utilizing our new conversion optimization tools and subsequently increased their lead generation budget by 7x.

We continue to see opportunities in improving our measurement, relevance and optimization to drive growth.

Our first-party measurement is helping advertisers quickly understand their return on investment, which helps unlock additional spend.

The Snap Pixel continued to see impressive growth with over 230 million purchase events in Q3, up from 70 million in Q2.

When we launched Ad Manager a year ago, we had one optimization goal: swipes.

Since then, we've added brand objectives such as video views; consideration objectives, such as website visits and app installs; and conversion objectives, such as in-app purchases.

These additions help increase performance, improve relevance and allow us to start to build an always-on business where we consistently deliver ROI for our partners.

In Q3, we expanded our ad product offerings to address new customers with the launch of Collection Ads.

Collection Ads allow commerce advertisers to showcase up to 4 products on a standard Snap Ad.

Wish, eBay and Guess, who are part of the test group, saw significantly higher engagement rates compared to typical Snap Ads.

eBay's engagement rate, for example, was 5x higher with our Collection Ad than their typical Snap Ad.

We believe Snapchat represents the best place for brand advertising on mobile, particularly for our young, highly engaged audience.

For instance, Wrigley’s Starburst used Snapchat to create brand ambassadors for their All Pink campaign.

The campaign successfully drove an over 3% increase in market penetration, with 91% coming from new buyers.

With the recent announcement of 12 Snap Original Shows, we are increasing inventory for premium commercials, our new 6-second nonskippable ad format.

A variety of brands, such as Chick-fil-A, Boost Mobile and major studios like Warner Bros., Fox and Universal have been using the format, and we have been pleased with their initial results.

Today, we are delivering meaningful return on investment for businesses of all sizes.

Looking ahead, we have significant opportunity to grow the number of active advertisers, increase the average spend per advertiser and increase our inventory.

For the past 7 years, we have been a leader in visual communication, ephemerality, vertical video, augmented reality, stories and much more.

We are in this for the long term, and we're just getting started.

We offer uniquely different user experience, and we're excited about the many opportunities we have to drive growth.

Thank you, and I will now turn the call over to Tim.

Thanks, Evan.

Our third quarter financial results reflect our focus on driving growth and operational efficiencies.

This quarter, we delivered strong financial performance compared to the prior year and the prior quarter.

We generated significant growth and record results on the top line.

We also had strong improvements in gross margin, adjusted EBITDA, adjusted EBITDA margin and free cash flow.

Our Q3 operating cash flow improved $61 million to negative $133 million compared with Q3 2017 and improved $67 million compared to Q2 2018.

The year-over-year change in operating cash flow is driven by a $41 million improvement in adjusted EBITDA and by changes in the timing of working capital.

Similarly, the sequential change in operating cash flow is driven by a $31 million improvement in adjusted EBITDA and changes in the timing of working capital.

Our capital expenditures, which are nominal, are mainly associated with building out our office facilities.

Q3 capital expenditures were $26 million, flat from Q3 2017 and $9 million lower than the prior quarter.

Q3 free cash flow improved $61 million to negative $159 million compared with Q3 2017 and improved $75 million compared with Q2 2018.

Our current infrastructure model does not require capital investment, which results in strong adjusted EBITDA to free cash flow conversion as we continue to scale.

Common shares outstanding, plus shares underlying stock-based awards outstanding, totaled 1,476,000,000 on September 30, 2018, compared with 1,441,000,000 a year ago.

We ended the quarter with $1.4 billion of cash and marketable securities.

Our change in cash for the quarter was negative $156 million.

The change in cash was $344 million better than the prior year and improved $96 million versus the prior quarter as we continue to make progress toward generating free cash flow.

We have a number of drivers of revenue growth in our model.

For the quarter, we generated record revenue of $298 million, an increase of 43% year-over-year and 14% sequentially.

And our trailing 12-month revenue was $1.1 billion, up 53% year-over-year.

Our community grew 5% over the prior year to 186 million daily active users and was down 1% from the prior quarter.

Average revenue per user increased to $1.60, an improvement of 37% year-over-year and 14% sequentially.

Countries outside of North America represented 30% of total revenue compared with 20% in Q3 2017 and 32% in Q2 2018.

In the quarter, North America had strong growth, and there were an absence of onetime events in rest of world such as Ramadan and World Cup compared to Q2 2018.

In terms of monetization, this quarter, we increased the number of active advertisers on our platform and expanded our product suite.

Advertisers are achieving a high return on advertising spend, driving strong revenue growth.

Total impressions were up 278% year-over-year and 37% sequentially, while pricing was down 61% year-over-year and 15% sequentially.

We have now successfully transitioned to a self-service advertising model that can serve brand, direct response and always-on advertisers.

We will continue to improve our measurement capabilities, increase our advertiser partners and build out our Discover media platform with new and exciting content, including our own premium content.

Q3 cost of revenue was $191 million, an increase of 17% year-over-year and an increase of 3% sequentially.

Cost of revenue increased at a slower rate than revenue growth of 43% year-over-year and 14% sequentially.

Infrastructure costs were $140 million, an increase of 15% year-over-year and an increase of 3% sequentially.

This quarter, unit cost improvements and engineering operating efficiencies were more than offset by higher community activity over the prior quarter.

Cost of revenue as a percentage of revenue declined meaningfully year-over-year from 79% to 64% and sequentially from 70% to 64%.

Gross profit and gross margin expanded substantially, which continues to demonstrate that our business model can scale profitably.

Q3 gross margins were 36%, improving over 1,450 basis points year-over-year and over 630 basis points sequentially.

We're focused on driving operational efficiencies and improving the unit economics of our multicloud environment as we scale over time.

Additionally, our model benefits from our cloud partners' continuous investments in technology innovation and cost efficiencies, which are typically passed along to customers over time.

The costs for infrastructure model are included in adjusted EBITDA as opposed to capital expenditures, which are excluded from adjusted EBITDA.

This should result in higher EBITDA to free cash flow conversion over time.

Over the long term, we will remain focused on operating efficiencies and unit cost economics.

Operating expenses in the quarter were $246 million, up 10% year-over-year and down 1% sequentially compared to strong revenue growth of 43% year-over-year and 14% sequentially.

We continue to focus on driving operating cost productivity across our business.

Our operating expenses are primarily driven by employee-related costs, which represent about 2/3 of our operating expenses.

We saw fixed cost leverage in employee-related costs, which grew 11% year-over-year and slightly declined sequentially.

Operating expenses as a percentage of revenue also continued to decline meaningfully as compared to the prior year and sequentially.

Our total cost structure, which includes cost of revenue and operating expenses, was $436 million, an increase of 13% year-over-year and an increase of 1% sequentially, again, well below our revenue growth in both periods.

Q3 adjusted EBITDA increased $41 million to negative $138 million over the prior year and increased $31 million over the prior quarter.

This was the second consecutive quarter that we had an improvement in adjusted EBITDA, both year-over-year and sequentially.

Adjusted EBITDA margin for Q3 improved significantly to negative 46% compared with negative 86% in Q3 2017 and negative 64% in Q2 2018.

Adjusted EBITDA leverage was 45% in the quarter, up versus 31% in the prior quarter.

Finally, Q3 operating loss improved $138 million over the prior year to negative $323 million and improved $35 million over the prior quarter.

Within operating loss this quarter, we recorded a lease exit charge of $29 million, primarily in connection with our relocation to Santa Monica.

We have now incurred the majority of these lease exit charges mentioned in Q1.

With respect to the fourth quarter, we expect our financial momentum to continue.

These forward-looking statements reflect our expectations as of October 25 and are subject to substantial uncertainty.

As mentioned at the start of the call, our results are inherently unpredictable and may be materially affected by many factors.

We expect Q4 will be a record quarter.

Revenue is expected to reach a new high of between $355 million and $380 million or grow between 24% and 33% year-over-year.

Adjusted EBITDA is expected to be between negative $100 million and negative $75 million compared to negative $159 million in Q4 2017.

Our internal stretch output goal was breakeven in Q4, and the stretch goal helped get us closer than we would have been otherwise.

We expect that Q4 will mark our third consecutive quarter of accelerating improvement in adjusted EBITDA.

This guidance assumes among other things that no business acquisitions, investments, restructurings or legal settlements are concluded in the quarter.

Similar to last quarter, we're not giving specific DAU guidance, although our outlook assumes that Q4 DAUs will decline sequentially.

Looking forward to 2019, our internal stretch output goal will be an acceleration of revenue growth and full year free cash flow and profitability.

Bear in mind that an internal stretch goal is not a forecast and it's not guidance.

That said, our 2018 internal stretch goal helped us achieve strong results this quarter and will ultimately move us closer to full year free cash flow and profitability.

We're currently in the middle of our multiyear planning process and prioritizing our opportunities and areas of investment.

As a team of owners, we are focused on creating long-term shareholder value and are optimistic about the long-term potential for scale and leverage in our business.

We are investing in innovation for our community, which we believe will enhance user experience and engagement as well as drive revenue growth.

At the same time, we are executing on operating cost efficiency initiatives as we drive toward free cash flow generation and operating profitability over time.

We feel good about our cash position as we move forward and scale our business.

With that, let's open up the line to questions.

(Operator Instructions) And the first questioner today will be Ross Sandler with Barclays.

This is Mario Lu on for Ross.

I was just wondering if you could give us an update on the new Android rewrite called Mushroom that's being tested in a handful of markets.

Anything you see that would suggest that the goal rollout of this rewrite could potentially reverse the trend that Android has had thus far on DAU growth?

And just to piggyback on that, Evan, in your internal letter to employees last month, you mentioned that you expect DAUs to grow in 2019.

What factors give you the confidence that it will grow, whether it being the Android rewrite or other factors?

Thanks for the question.

We're really excited about what we're seeing on the project codename Mushroom.

We still have a bunch of work to do there.

I think quality takes time.

I mean, we really want to make sure that we have the right foundation for the application going forward because that will also help us innovate quickly as well.

So excited about what we're seeing there, and we're going to wait till we get it right before we roll that out broadly.

As we look at DAU growth going forward, I think the best way to think about it is really expanding from our core of 13 to 34 in the U.S. and Europe.

And so in order to expand from that core, we basically have to do 2 things.

We have to grow up 34-plus in those markets, which we think is more of a marketing and communications challenge around our core value proposition of being a fast way to communicate visually and with close friends, and then also providing our core product value in rest of world markets.

And that, we view, especially for the 13 to 34 audience, which in many developing markets, their demographics actually skew young.

So that should help us.

But what we're seeing there is that's a technical challenge.

And so I think the redesign -- or sorry, the rebuild of Android will help with that significantly.

And then beyond that, we're continuing to make performance improvements, reduce the amount of bandwidth that our service uses.

And that's how we're thinking about DAU growth going forward.

And our next questioner today will be Lloyd Walmsley with Deutsche Bank.

This is Greg Vlahakis on for Lloyd.

I was just wondering, last 3Q, you all had mentioned that users create over 3.5 billion Snaps per day.

But last quarter and now this quarter, you all are saying that users create 3 billion Snaps per day, and the community's growing 5% year-over-year.

So I was just wondering why this phenomenon is happening.

Is it the redesign?

Or are people just watching more shows and not really creating content, they're more consuming content?

And then the second question is just do you all feel that you can grow advertising count and spend without necessarily growing your user base a lot?

Thanks, Greg.

Yes, so I think as we look at the Snap create number, that's something that was ramping pretty significantly into the redesign and then fell with the redesign.

And I think as we explained previously, the redesign did hurt our core communications product.

I think on iOS, in particular, we're happy with what we're seeing after the redesign.

We're making progress there, and we're going to bring those changes that we've made over to Android when we release the rebuild widely.

So that's sort of how I think about our progress.

And I think we also mentioned, at least in the remarks, that over 60% of our user base is creating Snaps every day.

So we're excited about the creation we're seeing on the service, but of course, there are lots of opportunities around Shows and the other content products.

And I think what's really exciting is that the creation on our platform drives that content experience.

So we're focused on both.

And then as it regards to advertisers, there's a ton of room to onboard more advertisers.

As I think you've seen over the past 1.5 year is we thought about programmatic.

We really wanted to expand our ad products to all sorts of people all over the world.

And the only way to do that was to move to self-serve in our programmatic infrastructure.

So we've been really focused on expanding the base of advertisers and tons of room there.

And our next questioner today will be Mark Mahaney with RBC Capital Markets.

It's Mark Mahaney on for Mark Mahaney.

Two questions have to do with, one, the decline in DAUs just -- I'm sorry, why will DAUs decline sequentially in Q4?

And then this goal of acceleration, just go through with -- I know it's not guidance, but what would be the factors that would actually cause acceleration in revenue growth in 2019 just theoretically?

Sure.

Thanks, Mark, and I'm glad to see you on for you.

So as it relates to DAU, we're not giving any further commentary beyond what was already said.

We do expect DAUs to decline sequentially, but we are excited about the opportunity to grow the community over time.

Growing and broadening the community, we think, comes from, as Evan mentioned earlier, improving the app, the user experience with Android and increasing awareness of the value proposition not just with 13- to 34-year-olds in developing markets, but also 35-plus in developed markets.

So I think there is opportunity for us to grow DAU over time, and we're excited to continue to build Snap Ad for our users.

As it relates to 2019, I do want to just emphasize, as I'm sure you're aware of -- you're aware by the nature of your question, that internal goals are just that.

They're internal goals.

They're not a plan.

They're not a forecast or an expectation, and they're certainly not guidance.

We had an internal stretch goal for 2018, for example, that talked about breaking even in 2018.

And as a result of that stretch goal, we were able to produce the results that you've seen in Q2 and Q3 this year with improvement in EBITDA year-over-year and strong revenue growth and a forecast for Q4 that suggests a continuation of the same with EBITDA momentum accelerating and a third consecutive quarter of EBITDA improvement as we drive toward operating profitability and free cash flow generation.

On the growth front, what would cause growth to accelerate in our internal stretch goal scenario would be the things we've been talking about: expanding the community, increasing engagement and then also improving monetization.

So with advertisers, for example, more -- better measurement, more optimization and better relevance as we continue to innovate on the formats for advertisers.

On the engagement side, we talked about our premium content and how the site redesign has resulted in more users than ever before engaging in our premium content.

And the quantity and quality content of Discover make it a more relevant to users all the time with Snap Originals and 21 unique shows over 10 million monthly viewers.

And then again, on the community side, opportunity to expand that community over time.

So those are some of the things we'd factor into revenue growth acceleration, and we'll have to wait and see how things play out over time.

And the next questioner today will be Justin Post with Bank of America.

This is Ryan Goodman on for Justin.

A couple questions.

One, so just as you focus the app back to core speed of communications functionality, can you talk about the strategy to monetize that time spent and then, longer term, just how you envision communications evolving as a driver to total revenue?

And then second one, just a quick one, the premium ads, you mentioned it briefly in the prepared comments.

It sounds like advertisers are responding favorably.

Nonskippable is still relatively new to Snapchat.

So is there just any sense as to how, if at all, that's impacting user engagement with the underlying content?

So I think, at a high level, when we talk about the communications product, it's important to understand that, that communications product is what really drives that high-frequency engagement and growth of the service as friends communicate with one another.

And then what we've done is basically built other platforms around that core communication.

So whether that's our content, business, whether that's our Maps product or even Memories, we continue to innovate on the platform and use that communication to drive the growth of other revenue-generating products.

So while we do monetize communication with our creative tools and augmented reality, we also see a huge opportunity to build other businesses around that core communication flow.

And so I think it's just important to understand that the communication flow is what creates these other opportunities for our business.

And then I think when it comes to non-skippable, the most important thing for us was really having a high-quality content and a lean-back content experience because that's what allows nonskippable to work really well.

So that's why we've been focused on creating shows, on creating high-quality content, onboarding more creators.

And I think once we saw that lean-back behavior emerge with Shows, which is something we're really excited about, we thought that was a great opportunity to introduce the commercials ad unit.

And so really, really happy to see how that's performing, and I think that will be great for us going forward.

And the next questioner today will be Jason Helfstein with Oppenheimer.

I'll ask 2. So besides performance issues that specifically relate to Android that presumably get addressed in Mushroom, are there any other product issues that you feel need to be addressed in the near term that could be impacting DAU?

And then, I mean I guess in the last question you kind of touched on it, but was wanting to get more thoughts on the importance of curated versus user content and kind of what you've learned over the last few months on the curated content side.

On the product side specifically, I think one thing I mentioned a little bit earlier, we do see a lot of room to improve our bandwidth consumption.

One of the things we hear from customers today is that we use a huge amount of bandwidth as they communicate visually.

And I think we've identified a bunch of opportunities over the next year to reduce that bandwidth consumption, which we think could make a difference for the product.

So that's one thing that we're seeing on the product side in addition to Mushroom.

And then as it pertains to curated versus user content, we've seen a huge opportunity in premium content.

One of the ways for us to think about content, at least, is how exclusive it is to the platform.

And so for us, that content created by friends for small group of friends is exclusive to Snap inherently because that content isn't seeking a broader audience.

And premium content is also exclusive to Snap.

And then I think there's a lot of room to invest in both.

And then in the middle, you have, I think, influencer content, which is also important to our business and a part of that mix.

And I think we're still trying to figure out the best tools to build.

We've announced, I think, in a very limited group some analytics tools for those types of creators.

And going forward, we're going to be building more tools to help them create content.

So I think those are sort of the 3 buckets, and we're working on making sure they all integrate well together because different people like watching different things.

The next questioner today will be John Egbert with Stifel.

The redesign obviously brought some challenges, but it sounds like there were some tangible benefits from the change as well.

Is there any way to quantify the impact to premium content viewing in terms of either audience traction or time spent with publisher content?

And I was also wondering if this is having a meaningful impact on available advertising inventory.

Yes, we're really excited about the opportunities that the redesign has created, kind of similarly to the way that our programmatic change was difficult at first but, ultimately, the right thing for the long term.

We see the redesign the same way, and we're investing for the future of our content business.

So I don't -- I can't quantify that specifically for you.

I think, earlier in the remarks, we mentioned that more people are watching more premium content, and that's something we're excited about.

Maybe we can quantify that for you in the future.

But certainly, there's a lot of opportunity there, and there's just huge demand for premium mobile content.

I think one of the things we're specifically excited about is how much we've innovated and iterated on the narrative format of mobile content.

A lot of people have been trying to figure out what mobile video really works.

And now with Shows, we're seeing a bunch of engagement because I think the narrative structure is made for mobile in a way that resonates totally differently than videos made either for the Internet or for television.

The next questioner today will be Rich Greenfield with BTIG.

I guess, a few things when you think about the product.

Evan, you mentioned that you think your main issue in growing users, it sounds like, is a marketing communications challenge and not a product problem.

But when -- in the leaked memo that came out, it sounded like you were going to be making some pretty meaningful product changes.

I'm just wondering how you square those 2 things.

Two, when we look at Discover, I still remember you being very focused when it initially launched with kind of the beauty and elegance and simplicity of Discover.

And now so much of Discover -- and I realize you're separating out shows or series, but most of Discover seems very much kind of racy, click-baity content focused around kind of who can promote the most T&A to drive a click.

I'm wondering, like from a user standpoint, does that make it harder to grow more mature users on the platform?

And how did advertisers react to that type of click-bait content that they're seeing throughout the platform?

And do you have to change that in terms of product changes over the coming year to drive advertising and users further?

And then just a quick housekeeping comment.

Tim, I think on the last call, you had mentioned over 100 million MAUs.

It was the first time you ever broke it out for North America.

Is that number up or down this quarter?

I don't see any disclosure in your prepared remarks or in the release.

Yes.

So I think as I mentioned earlier on the call, we're really thinking about DAU growth in 2 ways.

The first obviously is broadening our 13 to 34 base in the U.S. and Europe to include 34-plus users, which as you mentioned, is a marketing and comms challenge.

But then we're also thinking about all the people outside of the U.S. and Europe who are predominantly on Android devices, oftentimes in low-connectivity environments and how we can improve the product to better serve those customers.

And of course, we're handling that with the Mushroom rebuild.

We're also working on that, as I mentioned, on the bandwidth consumption issues.

So I think there are a bunch of product improvements that we can make, especially for the 13 to 34 market outside of the U.S. and Europe.

And that may involve changing some features as well or otherwise changing the application.

Obviously, we want to make sure that we're doing our best to serve Snapchatters.

So yes.

And then I think as it pertains to Discover, as you mentioned, I think there's a lot of opportunity to continue improving that product.

We're trying to get the right mix of content.

There's a lot of demand for premium content.

There still remains a lot of demand for popular Stories, for influencer content, for what we call official accounts.

And so right now, those different types of Stories are all bundled together in a personalized-for-you feed.

And I think there are opportunities to improve that layout and potentially separate out that content in a way that makes sense for users.

And I think one of the problems that you identified is that cold-start experience, so what does it look like when you first come into the service and how does it get personalized for you over time.

And that's definitely a problem that we're working on.

But we just released the redesign this year, so I view this as just the beginning of really improving our content business.

But I think, unequivocally, it's created really terrific opportunities to expand into premium content but also popular Stories.

And Rich, it's Tim.

On the MAU question, that was a spot metric we shared last quarter.

It's not something we intend to share on a regular basis.

And in the U.S. and Canada, as you said, we shared that over 100 million -- made over 100 million MAU, and that remains the case.

And our next questioner today will be Brent Thill with Jefferies.

This is John Streppa on for Brent.

You noted in your prepared remarks that you crossed 85% of revenue being transacted through self-service.

Just curious about when you think that might start to plateau as a percentage of revenue.

And then also following up on that, you noted pricing down 15% sequentially after being down 9% last quarter.

Could you maybe walk us through what you're seeing in the auction dynamics in terms of competitiveness of those auctions and, as you get more advertisers, how you expect that to change over time?

So I think when we talk about that transition to programmatic, I think we're effectively there.

We'll continue to transition a little bit over the next couple quarters, but at 85%, we feel like we're pretty much there, which is really exciting for us.

And then as you mentioned, pricing coming down, a lot of that has to do with how we're optimizing.

We're doing a much better job now helping people bid against conversion events and all sorts of important objectives.

So I think, as we get better at optimization over time, hopefully, we'll continue to be able to drive pricing down even further for those advertisers while still increasing revenue overall.

And the next questioner today will be Mark Kelley with Nomura.

We've heard some positive feedback from advertisers in terms of the ROI they're getting when they use the SDK.

I'm just curious if you think advertisers using Pixel see similar results given that it's not as tailored to their needs.

And then second, do you have any early thoughts on the EU copyright directives that are kind of in the works right now, especially on the cost side of things?

As we look at the Pixel, we're really focused right now in the early stages of Pixel, which is really just about getting it adopted widely.

We're making great progress there.

And then over time, we'll be able to do a better job bidding against those conversion events that the Pixel observes.

And then over time, we should see a lower cost per outcome for advertisers using the Pixel.

And then no thoughts at this time on the EU directive.

And our last questioner for today will be Brian Wieser with Pivotal Research.

I was wondering if you could talk a bit about churn trends and to the extent you can provide any characterization on gross additions versus net additions.

Is that a factor?

Or just wondering if you could give us any color on how that might be trending.

I couldn't tell if that was about users or advertisers, but we're not able to give any guidance on churn.

And this will conclude our question-and-answer session as well as Snap Inc.'s Third Quarter 2018 Earnings Conference Call.

Thank you for attending today's session, and you may now disconnect your lines.