Photo messaging app owner Snap on Tuesday gave weaker third-quarter guidance than analysts had expected as it works to compete with tech giants for advertising dollars, sending its shares down 18 percent.

The company’s Snapchat app has attracted hundreds of millions of users thanks to its lighthearted photo filters and new AI-powered chatbot that can answer questions. But it has struggled to consistently grow revenue and catch up to rivals like Facebook-owner Meta Platforms that reach a much larger audience, prompting questions from analysts and investors about its strategy.

Santa Monica, California-based Snap said it estimates third-quarter revenue will be between $1.07 billion (roughly Rs. 8,769 crore) to $1.13 billion (roughly Rs. 9,264 crore). Analysts were expecting revenue of $1.13 billion (roughly Rs. 9,264 crore), at the top end of the guidance range.

Similarly, Wall Street forecast 406.2 million users in the third quarter, according to IBES data from Refinitiv, but Snap said it expects between 405 million to 406 million daily active users.

Shares of Snap dropped 18 percent to $10.19 (roughly Rs. 835) in after-market trading following the results.

Snap’s weak outlook “highlights concerns that advertising money is not going to the smaller social media networks amid the constrained economic environment,” said Jesse Cohen, senior analyst at Investing.com.

Earlier this year, the company updated its machine learning model to serve more relevant promotions to users, which Snap said in the short term caused a small number of its largest advertisers to see fewer “actions,” such as users tapping on ads than they did previously

Advertisers are beginning to see results from the changes, which led to a more than 30 percent increase in “purchase-related conversions” compared to the first quarter, Snap told investors.

The improvements also helped Snap grow the total number of advertisers on its platform, though it is not yet enough to make up for the lower ad demand from some larger brands, it added.

During a conference call with analysts, Snap’s chief financial officer Derek Andersen said the consumer packaged goods, restaurants, and travel industries were strong, but advertisers in other sectors continued to face economic challenges.

Still, the tech company beat revenue and user estimates for the second quarter.

Revenue for the quarter ending June 30 was $1.07 billion (roughly Rs. 8,769 crore), beating analyst expectations of $1.05 billion (roughly Rs. 8,608 crore), according to Refinitiv data.

Daily active users on Snapchat rose 14 percent year-over-year to 397 million, beating Wall Street expectations of 394.8 million.

More than 150 million people have also sent more than 10 billion messages to My AI, the ChatGPT-powered bot Snap launched in February. Those conversations will help Snap learn more about user interests and lead to more relevant ads, the company said, adding that it is testing sponsored links in My AI’s responses.

Snap’s net loss was $377 million (roughly Rs. 309 crore) during the second quarter, narrowing from a net loss of $422 million (roughly Rs. 345 crore) the previous year.

Several analysts questioned Snap’s plan to spend more on infrastructure, which the company said would cost between 79 cents to 84 cents per daily active user in the third quarter, up from 70 cents in the second quarter. Andersen said the spending aimed to improve its ads platform and grow user engagement with content. 

© Thomson Reuters 2023