Snap earnings call: Flat Q3 so far; committing to CEO Spiegel (NYSE:SNAP)

Snap (NYSE:SNAP) faced a second quarter that was “more challenging than we expected,” the company says – notable as Snap had already worked to lower the bar in May with a warning of a deteriorating economy that ended up shaking the stock market.

Snap stock (SNAP) was 26% lower at the start of its earnings conference call (devoted to questions from analysts), where executives noted that in Q3 so far, user momentum is continuing but revenue is “approximately flat” year-over-year.

With visibility still “challenging,” the company declined to issue guidance for the third quarter, and said it needed to adapt its investment strategy: “We intend to substantially slow our rate of hiring, as well as the rate of operating expense growth. We will reprioritize our investments and drive a renewed focus on productivity.”

The flat Q3 is a notable slowdown from the past 90 days, “but over a longer trajectory here we’ve observed a fairly steady deceleration in demand over the last year,” Chief Financial Officer Derek Andersen says – going back to the key iOS privacy changes from Apple that hit ad stocks.

But the macro environment (including supply-chain issues, war in Ukraine and persistently high inflation) is still the story of 2022, he noted: “In particular, auction-driven direct response advertising is among the very few line items in a company’s cost structure that they can reduce immediately in response to pressure on their top line or their input costs.”

Andersen noted that just as businesses can quickly ramp down ad spending, they can quickly and easily ramp it back up, and the company is taking a three-pronged focus to return to higher growth: investing in product and platform to sustain community growth that’s been “very healthy”; investing in direct-response advertising business (investing in first- and third-party measurement, and improving optimization, ranking and product innovation); and cultivating new sources of revenue to diversify.

Asked about the competitive effects of fast-growing rivals like TikTok (BDNCE), Andersen said it’s hard to “disentangle” all the factors in deceleration, but “as you see that (overall advertising) pie grow at a slower rate and you’ve got lots of folks competing very intensely over it, you’re going to see the competitive factor … be a bigger part of the overall discussion.”

And a bit of a disconnect is showing up in the ad business as major ad holding companies are showing some real upbeat notes vs. companies like Snap warning about the environment. (Omnicom (OMC) is one recent example, having boosted its forecast again, seeing strong demand even against the weak backdrop.)

Pointing to the Cannes Lions ad conference, Snap Chief Business Officer Jeremi Gorman noted that “large agencies as well as brands tend to be heavily represented at Cannes whereas other companies like consumer e-commerce or app install are less represented,” which explains some of that divergence in tone.

The company made news alongside the financial results, setting up $500M in new stock repurchases and saying it will split the stock if it hits $40. It’s also extending employment agreements with its co-founders: CEO Evan Spiegel and Chief Technology Officer Bobby Murphy will serve at least until Jan. 1, 2027, in exchange for a salary of $1 per year and no equity compensation.

Spiegel wasn’t heard from during the call, but hastened on Twitter to say he was “ready and waiting” to jump in as needed.

With the call wrapped up, as of 6 p.m. ET Snap stock was down 26.5% after hours. Other ad-facing social names were also seeing postmarket declines.