(Feb 1): Last year was the toughest on record for companies that depend on digital advertising. Snap Inc says the pain is levelling off.
“It seems like advertising demand hasn’t really improved, but it hasn’t gotten significantly worse either,” chief executive officer Evan Spiegel said on a call with analysts on Tuesday (Jan 31). “Our partners are just managing their spend very cautiously so they can react quickly to any changes in the environment.”
The maker of the Snapchat social media app, alongside digital ad giants like Meta Platforms Inc and Alphabet Inc, spent 2022 dealing with the fallout of a shaky economy, which made marketers reduce budgets. At the same time, a change in Apple Inc’s privacy policies made marketing on iPhones less effective. The shares of Snap, Meta and Alphabet tumbled last year, and all three cut staff and adjusted priorities to help make up for the loss in sales.
Snap was the first of the bunch to report results for the fourth quarter, which includes the holiday shopping season. The company said revenue of US$1.3 billion was flat compared to a year earlier — its first-ever flat quarter. Snap fell 16% in extended trading, dragging down Facebook parent Meta and Pinterest Inc.
Because it often reports earnings first, Snap has become a bellwether for other digital advertising companies. Last year, it was the first to raise concerns about the slowdown in marketer spending online and to fire a significant number of employees — 20% of its workforce — to cut costs in the face of falling revenue.
The Santa Monica, California company has spent the last two quarters refocusing, cutting projects that don’t contribute to user and revenue growth, or bolster its work in artificial intelligence.
“These challenges are affecting all of the social media platforms, and I do not think it is wrong to be worried about the state of social media advertising right now,” Jasmine Enberg, analyst at Insider Intelligence, said in an interview on Bloomberg TV. “We have to be ready for a period of more modest growth in social media in general.”
With the expectation that the ad market may be bad-but-not-worse this quarter, Snap is choosing to make a flurry of changes to its ad products that may be “disruptive” to the business, it said. With these changes in the current quarter, revenue is projected to drop 2% to 10% from a year earlier, the company said in a statement. Analysts had been estimating growth of 1.5%.
Snapchat is making changes to its direct-response business — ads that prompt users to take an immediate action like buying a product or signing up for an email list. That’s been a key piece of the company’s money-making operation, especially in recent quarters when economic uncertainty has led marketers to cut back on spending.
While it’s hurting the business intentionally in the near term, the company says these moves are necessary in the long run. Others have also had to make substantial changes to the way their ads work; Meta, the owner of Facebook, said it is relying more heavily on artificial intelligence to improve the effectiveness of its ads after Apple’s changes.
So far in the current period, Snap has seen a 7% decline in revenue compared to last year, according to a letter to investors.
For the fourth quarter, the company posted a net loss of US$288.5 million, or 18 cents a share, including US$34 million in charges from its workforce restructuring. That compared to a profit of US$23 million, or one cent, a year earlier.
Snapchat’s user growth has been one bright spot, ending the fourth quarter with 375 million daily users, for a 17% increase. In the first three months of the year the company estimates 382 million to 384 million people will use its platform daily. More than two million of those users are now paying for access to exclusive features through its subscription offering, Snapchat+.
Investors will get additional information about the state of the digital ad market when Meta and Alphabet, Google’s parent company, report earnings later this week.