The I/O Fund discussed Apple’s privacy changes many times and it’s the reason we closed some positions last quarter (PINS, U). Not only have I been covering the deprecation of the IDFA for two years since Advertising Week New York 2019 (see below), but I also made it the central topic of a 1-Hour LTBH Webinar in May. I took it even further and released an editorial about two weeks ago. I obsessively covered this topic because I remember the last time Big Tech giants changed the rules to how the ad ecosystem worked, and frankly, it took some strong ad-tech companies out of business (Millennial Media).
So, why didn’t we trim Snap going into earnings? For two reasons. The first is they are a publisher with first-party data, which means they own the audience. They do not have a third-party data ad platform (even Twitter does with MoPub). Owning the audience provides some protection during changes to the ad ecosystem. Publishers don’t typically see long-term issues with revenue from ad ecosystem changes like this. Secondly, the advertisers on Snap can’t go anywhere else to find that audience, except maybe TikTok. It’s a rising (or lowering) of all boat situation. The apps where Millennials are found on mobile will be affected similarly in terms of tracking and measurement. Snap’s advertisers don’t have many places they can go to reach Millennials.
According to management, the effectiveness of their ads remained intact, rather it’s a tooling issue to where advertisers must now use two tools – Apple’s SKAdNetwork and Snap’s proprietary Advanced Conversions tool for measurement. In their words, “And that process, adopting SKAdnetwork, adopting advanced conversions, running incrementality testing, and really building trust in these new solutions after the tooling you've been using for a decade has essentially gone away. That just takes time and is really challenging …. And when we look at incrementality testing, when we look at first-party data like on platform swipes or installs, things like that, we see that those conversions are still happening at similar rates that they did in the past. So, I think we can work through the tooling issues; it will take time because they're new. But the underlying performance of the advertising platform is still very strong.”So, I think we can work through the tooling issues; it will take time because they're new. But the underlying performance of the advertising platform is still very strong.”
When pressed to say if this was a Q4 issue or a longer-term headwind, management repeatedly came back to Q4 and avoided saying it was a longer-term issue when responding to two questions that tried to nail down if this was headwind that would take “a year,” “12 months,” “quarters,” etcetera. They also mentioned they already have 50% uptake on their Advanced Conversion tool. The company also did not lower long-term guidance and rather said twice that the fundamentals in the business are intact.
There are a few ways to tell if management is giving us a clear picture and what we can expect long-term. The first is ARPU which was up 28% to $3.49. The other audience growth, which even with high Covid comps on user growth, Snap has been doing very well here with 23% growth or 306 million users and this is tied for the second highest in 4 years with last quarter. The iOS15 issues caused Snap to come in $3 million below their previous guidance for this quarter and to lower estimates for next quarter. The forward guidance of 30% at the midpoint was much lower than the previous guide of 49%. However, we don’t have the other ad-tech reports yet to compare. Without that, it’s impossible to say if Snap is weathering iOS changes quite well or worse than its peers. That’s a key thing to understand – Snap has a disadvantage in terms of the market’s reaction because they reported first. I need to see Facebook, Pinterest, Twitter, and some ad exchanges like The Trade Desk and Unity.
This particular statement foreshadows what is to come for those who do not have their own tools (or first party data):
Adoption of our new measurement solutions, such as advanced conversions is ongoing but will take time to be fully adopted. In addition, the ecosystem for measuring advertising returns is continuing to shift, with more changes anticipated as part of IOS 15, that are expected to further reduce the availability of certain signals that are currently used broadly as tools for optimization and measurement. Continuing to evolve and adapt our measurement solutions amid the rapidly shifting operating environment is a top priority as we seek to deliver attractive returns on advertising spent for our advertising partners over the long term. The ongoing growth of our community, and strong engagement in areas of our application that we have not yet begun to monetize, provide confidence in the value of our inventory and platform over the long-term, as we continue to navigate these changes.with more changes anticipated as part of IOS 15, that are expected to further reduce the availability of certain signals that are currently used broadly as tools for optimization and measurement. Continuing to evolve and adapt our measurement solutions amid the rapidly shifting operating environment is a top priority as we seek to deliver attractive returns on advertising spent for our advertising partners over the long term. The ongoing growth of our community, and strong engagement in areas of our application that we have not yet begun to monetize, provide confidence in the value of our inventory and platform over the long-term, as we continue to navigate these changes.
What Snap is saying is that their tool will help hedge the ongoing changes that Apple has planned. What they need to solve for is the adoption of that tool. Q4 is especially challenging because supply chain issues has led to lower motivation by advertisers to adopt those tools.
I can see how the near-term headwinds concerns investors yet the company is doing all the right things – the audience growth, the ARPU growth, the first-party ad measurement tool (Advanced Conversions) and they discussed other tools coming out in Q4 to increase ROI. Plus, you’ve got AR/VR brand ads as a major catalyst. my 1-Hour LTBH Webinar on Snap, my thesis for Snap centers around on-platform and off-platform AR/VR.
The shock of lowering guidance by 19% is stronger than usual because there was no heads up. If it’s only a quarter, then Snap has too strong of a long-term story to stay down for long. I’m confident institutions will agree because of the audience growth and that AR/VR catalyst. At this point, what I don’t know is if this is industry-wide for all iOS mobile inventory or only for direct response. Snap won’t be able to help us there because app install ads isn’t their main format, etc. Snap is obviously all mobile, but again, the issues really should be transitory due to owning the data and being able to use proprietary tools. I’ll follow up when we get a few more ad-tech earnings.
The point of the LTBH portfolio is to not get shaken out of quality stories and products. This is a good example of that. I would let you know if I saw something that was out of the ordinary. I don't want to miss the AR/VR catalyst as it outweighs any temporary weakness.
More on IDFA:
I would recommend the LTBH 1-hour webinar as the starting point because it’s when I was really beginning to position us in the portfolio for iOS 15 changes. I’m also getting a lot of questions about Magnite and Roku and I cover that in the webinar. Also, Twilio’s LTBH 1-Hour Webinar and this on analysis on Magnite also talked about what our plan has been.