Snap misses on Q3 revenue, and its problem may not be the economy

Snap released its Q3 2022 earnings yesterday: the company generated $1.13BN in revenue in the quarter, which represents 6% growth on a year-over-year basis. Global DAU increased by 19% on the year, with DAU growth in North America of 4%. Notably, Global ARPU decreased by 11%, with a 1% decrease in North America and a 5% decrease in Europe. Snap’s results missed consensus expectations, and the company’s stock traded lower by roughly 25% after hours.

In prepared marks on the earnings call, Jerry Hunter, Snap’s new COO, spoke to Snap’s efforts to improve its advertising platform:

I see significant opportunities for our business in the years ahead. As a business, our primary focus is on driving lower-funnel performance and improving yield of our inventory for advertising partners. We’re working to improve optimization against lower-funnel objectives to drive more conversions and innovating on our advertising formats in order to make them more native and engaging…We’re also working hard to deliver new revenue-generating opportunities, including Spotlight, Augmented Reality advertising, and our Snapchat+ subscription service…Snapchat+ represents an exciting opportunity to diversify our revenue streams outside of advertising, and we have a direct ability to increase subscribers with new product features and by driving awareness of our subscription offering.

In the analyst Q&A, Evan Spiegel, Snap’s CEO, was asked a pointed question about the company’s ability to renovate its ads infrastructure in response to Apple’s App Tracking Transparency (ATT) privacy policy. Spiegel demurred, bringing up the “difficult macro environment” and a general increase in the cost of capital (interest rates) but not mentioning ATT.

The company made mention of macroeconomic weakness multiple times on the call, as well as its investments into direct response advertising infrastructure. Snap also noted on the call that the deceleration of its revenue growth in Q3 took place across both its direct response and brand advertising businesses. When asked an impressively-specific analyst question about SKAdNetwork 4.0, Hunter spoke to the added granularity that the forthcoming privacy framework will provide to campaign attribution:

And SKAN 4.0 is important, the coming changes are definitely need improvements to help advertisers achieve their business goals. And better campaign attribution and more granular reporting should give us even more headroom for improvement. For the ROI part of the question, we are constantly evolving the best way we serve our advertisers.

It’s clear that the company acknowledges the value of investing heavily into its advertising infrastructure, especially to adapt to SKAdNetwork 4.0. But the company is relucant to acknowledge that ATT created its current headwinds, instead insisting that macroeconomic conditions are to blame almost exclusively.

That narrative is difficult to support in light of strong earnings this quarter from companies that reflect consumer discretionary spending and the market for advertising: Netflix, which beat on higher-than-expected subscriber growth, and Omnicom, the large agency holding company, which upgraded its full-year guidance on expectations of a strong Q4. Snap declined to provide guidance for Q4.

As I wrote in Does Netflix’s Q3 earnings beat undermine tech’s macro narrative?, macroeconomic weakness has been used as a convenient explanation of the damage suffered by a very specific type of advertising platform and certain categories of digital advertisers as a result of ATT. But my contention — which I laid out in the above article and using Spotify’s Q2 2022 results — is that ATT’s role in the current period of turmoil for these companies is de-emphasized by them because ATT and other impending privacy restrictions are so systemic and permanent.