Unpacking Snap’s grim Q2 results and the difficult road ahead

Snap reported disappointing Q2 2022 earnings results yesterday: the company missed analyst expectations on both topline revenue and profit, $1.11BN in revenue for the quarter for a year-over-year growth rate of 13%. Snap stated in its investor letter that Q3 revenue is currently flat on a year-over-year basis but declined to provide guidance for the quarter, claiming that “forward-looking visibility remains incredibly challenging.” The company’s stock plunged by more than 25% in after-hours trading, with contagion in the social media space also bringing Meta’s stock price down by 5%, Twitter’s down by 3%, and Pinterest’s down by 6%.

Snap’s guidance for Q2 when it reported last quarter was for year-over-year revenue growth of between 20 to 25% and Adjusted EBITDA between breakeven and $50MM. Snap subsequently updated that guidance in May, just one month after reporting Q1 earnings, indicating that the company would likely miss both its revenue and Adjusted EBITDA guidance, which it did.

As I’ve articulated in my Mobile Marketing Winter series (part three is coming next week), the mobile advertising market — and, by extension, the general digital advertising market, since the majority of digital ad spend is deployed on mobile devices — is facing a unique, disastrous combination of deranging factors at the moment:

  • App Tracking Transparency (ATT), the depredations of which are even more severe than any expert analysis would have suggested. In an early analysis of the impact of ATT on Meta (then Facebook) revenue from January 2021, I predicted that a worst-case ATT impact scenario for the company would see a 13% headwind on revenues in the first applicable quarter. The actual impact has been quantifiably worse than that for Meta and by extension, other display platforms that ingested an “events stream” of data from advertiser properties in order to build user-level targeting profiles. This events stream was wholly disrupted by ATT; Apple’s measurement substitute, SKAdNetwork, is dysfunctional to the point of providing no utility (although a substantially improved version is coming); and ad platforms have struggled to retain the signal needed for adequate ad measurement in this new environment;
  • A COVID overhang, which has left advertiser with recoup / ROAS models that no longer reflect reality and must be tuned to new consumer behaviors after two years of a lockdown-induced boost in engagement for digital products;
  • General macroeconomic weakness, inclusive of a distressing level of inflation in the US economy, that has adversely impacted consumer spending.

I walk through each of these factors in more detail in the first part of the Mobile Marketing Winter series. Furthermore, I address why ATT — which was introduced in iOS 14.5 in April of last year — is causing so much acute distress now in this interview with Ben Thompson on Stratechery.

In combination, these forces engender considerable headwinds for the entirety of the digital advertising ecosystem, which is corroborated by Snap’s team in its earnings call. From Derek Anderson, Snap’s CFO:

The deceleration began with the platform policy changes implemented in Q3 of last year. Those policy changes upended a decade of advertising industry standards, and in turn, the model is used to drive the direct response to advertising business as well as the tools used to measure the returns from that direct response advertising…And then beginning — later in Q4 and certainly through the first half of this year…we’ve seen the impact of persistently high inflation, then rising interest rates and rising geopolitical risks associated with the war in Ukraine. Those macro headwinds have disrupted many of the industry segments that have been most critical to the growing demand for advertising solutions over prior years…And to put a finer point on that, we’ve, over time, worked very hard to make it very easy for our clients to turn on advertising and to ramp their advertising. And that’s been particularly good for our business as budgets have grown over time. But in a period where we’re seeing headwinds, it’s also very easy to turn off and very quick to turn off. 

I’d emphasize a different aspect of the last point: a general flight to quality in the face of economic weakness and eroded consumer spending that likely disproportionately impairs Snap. As I discuss in the second part of the Mobile Marketing Winter series, a flight to quality encompasses both marketing efforts and channel budget allocation: faced with uncertainty, advertisers not only shift budget from brand to direct response strategies, but they also shift budget to the platforms with the most scale and the most sophisticated tools.

But shifting budget from a brand to direct response strategy in light of a softening economy is obviously less in the post-ATT environment, when direct response advertising efficacy has been degraded. And while Snap’s executives were reluctant to attribute weight to the three factors above in terms of their impact on the company’s performance, my sense is that ATT’s influence relative to the other two is outsized (I’m especially skeptical of claims that the ongoing war in Ukraine serves as a meaningful drag on advertising revenue growth).

It’s understandable that advertising platforms would not want to emphasize the role that ATT has played in anemic revenue growth: ATT is a fundamental change to the advertising landscape that can’t easily be overcome. Economic cycles resolve, but the advertising ecosystem changes wrought by ATT (which will be reinforced by future policy changes from Google and various regulatory and legislative efforts, eg. the DSA in Europe) completely and irreversibly alter the operating environment for ad platforms and advertisers. There is no good news on the near-term horizon: the ad platforms can scratch around the edges of the existing model to find incremental signal, but ultimately, ad platforms must retool completely to embrace the new privacy landscape. As I wrote in Unpacking ATT’s impact on Facebook revenue, which followed Meta’s Q3 2021 earnings release:

The effort Sandberg describes in the Meta earnings call is a long-term rehabilitation of Meta’s advertising business: not an exercise in updating cabinets and replacing carpet with wood flooring, but rather a tear-down and build anew scenario. Meta’s advertising infrastructure must be replaced completely as a result of ATT and other privacy initiatives that are imminent. The company has foreshadowed this rebuilding effort through public proposals, and those are impressive and, in some cases, very elegant. But they are long-term projects.

Many of the technologies that need to be brought to bear on new measurement and targeting models are exploratory; the complete rehabilitation of these systems require a significant amount of development and implementation time. And not only that: the systems need to be tested, rolled out to all advertisers, and tuned. And the arc of this transformation is measured in years, not quarters.