Brief:

• Snap's Q3 revenue grew 50% year-over-year as its image-messaging app Snapchat added users and the company released more software tools to entice advertisers. Snapchat tallied 7 million additional daily active users (DAUs) to end its third straight quarter of growth at 210 million, according to a company announcement.
• Its Q3 revenue of $446 million beat analyst estimates of $435 million while average revenue per user (ARPU) rose 33% to $2.12, the slowest growth since Snap went public in 2017. Snap said it expects a Q4 revenue between $540 million and $560 million, compared with $390 million a year earlier, disappointing analysts that had forecast $555 million.
• Snap doesn't see TikTok, the fast-growing social video app from China's Bytedance, as a key rival. "They're an advertising partner for us and I think most importantly the value they provide their community is very different than the value we provide ours," CEO Evan Spiegel said on the Tuesday earnings call. Snap plans to spend more money developing augmented reality (AR) features that drive engagement, with each of its DAUs interacting with AR nearly 30 times a day on average, he said.

Insight:

Snap's higher revenue growth during Q3 shows that mobile marketers are responding to a sustained expansion in Snapchat's user base and the company's broader selection of advertising tools. The 50% revenue growth and 33% gain in ARPU signal that the company is becoming better at monetizing its user base, which expanded 13% from a year earlier. The company hasn't yet reported a profit since its IPO, but the company is within reach of meeting CEO Spiegel's "stretch goal" of showing positive earnings before interest, taxes, depreciation and amortization, a measure of profitability common among tech companies.

The third quarter was the first full period that included innovations announced at Snap's first partner summit in April, when the company unveiled an updated Snap Kit to integrate its platform with more third-party apps, and introduced an audience network to expand its reach beyond Snapchat. The company also revealed fresh original content and a gaming platform to give users more reasons to spend time in the app. Total viewing time for Discover, Snapchat's section for professionally produced content, climbed 40% in Q3 from a year earlier as the platform expanded to more than 100 channels.

"This was the first year that time spent on mobile surpassed television in the U.S., which means that we have just reached the tipping point of this sea change in content viewing behavior," Spiegel said.

Snap's initial testing of app-based purchases drove 71% more purchases and a 23% lower cost-per-purchase compared with previous ad formats, Jeremi Gorman, chief business officer at Snap, said on the call.

"This translated into 32% higher revenue with only 11% more impressions. This means we simultaneously increased revenue, yield and advertiser ROI," Gorman said.

It's too early to tell whether other features added in Q3 have helped to boost ad sales. Late last month as Q3 ended, Snap introduced Goal-Based Bidding to let advertisers target viewers who watch 15-second videos. Snap also lifted the limit on video ads to three minutes from 10 seconds, giving marketers opportunities to tell longer brand stories in the visual app. In addition, the company changed the six-second commercials that appear in its streamed shows to make them swipeable, letting users interact with a mobile website, long-form video or camera attachment.

It's also too early to judge how Snap's pilot of dynamic advertising is performing as the company prepares for the holiday shopping season. Last week, the company unveiled the customizable ad format to lets marketers create templates to pull in images and product information from a catalog and deliver them to targeted audiences. Early results appear promising, with brands such as Shady Rays, Princess Polly and Vitaly reporting gains.

These additional ad formats may help Snap broaden its appeal among a wider group of advertisers. More than three-quarters (76%) of Madison Avenue executives said they hadn't advertised on Snapchat, investment bank RBC found in a survey. The finding indicates that Snap must boost efforts to educate advertisers about the platform's business value and desirable demographic of young adults and teens. In the U.S., Snapchat reached reached 90% of people ages 13 to 24, and 75% of 13- to 34-year-olds, per the conference call.