Apple’s iOS 14.5 Takes a Bite Out of Snap’s Q3 2021 Revenue

The third quarter of 2021 marked the first full quarter in which Apple's App Tracking Transparency framework, introduced as part of its iOS 14.5 operating system, impacted the entire period, as iOS 14.5 began rolling out April 26. Snap Inc. was the first domino to fall, reporting its financial results for the three months ending Sept. 30 after market close Thursday, but it will likely not be the last. Although revenue at Snapchat’s parent company rose 57% versus the third quarter of 2020, to $1.067 billion—topping the $1 billion mark in a quarter for the first time—that figure fell $3 million short of the low end of the company’s revenue guidance for the period. Snap cited unexpected difficulties with the measurement results from Apple’s SKAdNetwork, with chief business officer Jeremi Gorman explaining in her prepared remarks, “The initial results we observed using SKAN were generally aligned with prior industry standard solutions, and we were among the first platforms to lean into this solution and push for widespread industry adoption. However, over time, we saw SKAN measurement results diverge meaningfully from the results we observed on other first- and third-party measurement solutions, making SKAN unreliable as a standalone measurement solution.” Gorman added that Snap’s advertising partners expressed similar concerns, noting that while every advertiser has its own optimal parameters to measure return on investment, SKAN shoehorns them into Apple's fixed definitions of advertiser success. She said real-time campaign and creative management has been affected by extended reporting delays, and advertisers are unable to target based on whether or not people have already installed their application. Gorman said Snap continues to see strong, consistent performance on its ads platform based on first-party data and conversion lift studies, and the company is working to develop flexible first-party tooling and measurement solutions of its own. Looking ahead, Gorman said, “Separate from these iOS-related issues, we have heard from advertising partners across a wide variety of industries and geographies that they are facing headwinds in their business related to disruptions in global supply chains, as well as labor shortages and increasing costs. In turn, we expect this to impact advertising demand in the fourth quarter in particular as, in many cases, their businesses do not have the inventory or operational capacity to support incremental demand. We expect that some of these clients may opt to slow their marketing spend, given the diminished need to drive incremental demand at a time when their supply chains are not able to operate at peak capacity.: Snap cut its net loss 64% year over year, to $72 million, and it posted adjusted EBITDA (earnings before interest, taxes, debt and amortization) of $174 million, up $118 million from the third quarter of 2020. Gorman said, “We crossed $1 billion in quarterly revenue for the first time, and we remain focused on our long-term opportunity to support our community and advertising partners, which we believe will be driven by three key priorities. First, driving ROI through measurement, ranking and optimization. Second, investing in our sales and marketing functions by continuing to train, hire and build for scale. Third, building innovative ad experiences around video and augmented reality, with a focus on commerce. Additionally, we reach a valuable and hard-to-find audience, which continues to grow around the world. Together, we believe that over the long term, these factors will allow us to drive performance at scale for businesses around the world.” Snapchat now has 306 million daily active users, up 23% year over year, marking the fourth consecutive quarter of DAU grown of at least 20% year over year. CEO Evan Spiegel said in his prepared remarks, “We grew sequentially in North America and Europe, which represent our largest monetization opportunities in the near- and medium-term, and we continue to build on our momentum in the rest of world geographies, where we see massive long term potential.” He added, “Many of the mixed engagement trends we observed during the pandemic and that we discussed on our last earnings call have continued through the third quarter. On one hand, while total content viewership and time spent have grown year over year, user-generated Stories continue to see year-over-year declines in overall time spent. On the other hand, we are seeing quarter-over-quarter improvements in engagement with the Snap Map, Story posting, new friend connections and bidirectional communication, and we are cautiously optimistic about the ongoing reductions in pandemic-related restrictions worldwide.” Submissions to user-generated content destination Snapchat Spotlight more than doubled compared with the second quarter, and chief financial officer Derek Andersen said in his prepared remarks, “On the content side, we continued to invest in Spotlight, and this contributed to year-over-year growth in cost of revenue, but the level of investment declined sequentially, reflecting a full quarter of the new structure for this program to promote more content diversity across categories and regions.” He added, “We continue to be highly encouraged by the early returns from our investments in Spotlight, with daily Spotlight submissions more than doubling compared to the prior quarter, and ongoing quarter-over-quarter growth in both DAUs of Spotlight and daily time spent per user. While it is still very early for this new platform, we are excited about the potential for Spotlight to further expand our monetization opportunity in the future. We are particularly pleased that we have been able to continue to invest in Spotlight and Discover while expanding our gross margins year-over-year, which reflects our overall approach of scaling our operations efficiently, while making investments in the future of our business.” Spiegel added, “In recent months, we have focused on building the tools and infrastructure to help creators of all kinds thrive on Spotlight. We have re-engineered the Spotlight incentive program to reach more creators who are publishing a greater diversity of content in more markets. We are committed to making Spotlight a platform on which professional creators can grow an audience and build a business, and both Gifting and the Creator Marketplace for Spotlight are now live.” During the quarter, 15 different Discover partners each topped 50 million unique Snapchatters. Andersen shared some guidance for the current period, saying, “As we look forward to the fourth quarter, we face a variety of challenges in the operating environment, including the iOS platform changes, as well as macro uncertainty driven by supply chain disruption and labor shortages. The fact that these challenges are largely exogenous makes the provision of guidance particularly challenging and complex.” Spiegel concluded in a statement, “Snap celebrated its 10th anniversary this quarter, and we are excited about the long-term opportunity and potential for our business, as we grew our community to 306 million DAUs and grew our revenue 57% year-over-year to reach $1.067 billion for the quarter. We’re now operating at the scale necessary to navigate significant headwinds, including changes to the iOS platform that impact the way advertising is targeted, measured and optimized, as well as global supply chain issues and labor shortages impacting our partners. We will continue to focus on delivering strong results for our advertising partners and innovating to expand the capabilities of our platform and better serve our community.”