Snap (SNAP) Q3 2026 Earnings Call: Positive Net Income and Margin Expansion

Key Takeaways

• Q3 2026 revenue increased 14% year over year to $1.72 billion. Advertising revenue grew 4%, while other revenue rose 84%, led by Snapchat+, Memories Storage and Lens+.
• Snap reported net income of $56 million, an improvement of $160 million year over year. Adjusted EBITDA increased by approximately $201 million to $383 million, representing a 22% margin.
• Gross margin reached 62%, expanding by approximately 7 percentage points. Management said about 93% of incremental revenue flowed through to adjusted EBITDA as revenue outpaced 1% growth in the total cost structure.
• Daily active users reached 495 million and monthly active users reached 977 million. Paid subscribers across Snapchat+, Memories Storage and Lens+ surpassed 30 million.
• Direct-response advertising continued to grow, but weaker upper-funnel brand advertising limited total ad revenue growth. Management said direct response now accounts for about 77% of revenue.
• Snap guided Q4 revenue to $1.950 billion-$1.985 billion and adjusted EBITDA to $490 million-$525 million, including planned SPECS investments.

Core Financial Data

Business and Operating Performance

Snapchat’s daily active users rose to 495 million, while monthly active users reached 977 million. Average daily messages sent increased 8% year over year, and the number of users participating in two-way communication grew 6%.

Spotlight delivered strong engagement growth. The number of people posting to Spotlight increased 130% year over year, while daily active viewers rose 40%. Average Spotlight eCPM increased 22%. Management attributed part of the improvement to a greater focus on authentic creator content and the removal of AI-generated or reposted material.

Advertising performance was mixed. App purchase campaign volume more than doubled year over year, average cost per purchase declined approximately 24%, and related revenue grew more than 54%. Web purchase campaigns generated 31% more purchases, with a 15% decline in average cost per purchase and 11% revenue growth.

AI-powered Generative Retrieval and Agentic Recommendations contributed to an increase of more than 2.5% in pixel purchase conversions. Snap also expanded third-party web optimization and unified attribution to align campaign optimization with advertisers’ preferred measurement systems.

Sponsored Snaps revenue increased 56% sequentially. Chat’s share of total revenue rose by approximately 8 percentage points year over year, supported by the introduction of auction-based Sponsored Snaps in Europe and personalized dynamic product ads in Chat.

Promoted Places revenue and advertiser adoption both more than doubled sequentially, and the product expanded to 14 countries. However, upper-funnel brand advertising declined year over year, mainly reflecting lower consumer packaged goods spending amid macro pressures in the U.S. and Middle East.

Other revenue benefited from more than 30 million paid subscribers across Snapchat+, Memories Storage and Lens+. Management said paid subscribers remain a small share of Snapchat’s monthly audience, leaving room for broader adoption and additional premium products.

Snap is also continuing to develop SPECS, combining see-through augmented reality with AI. The Los Angeles pop-up had hosted more than 10,000 demonstrations by the time of the call, and management said shipments were expected to begin later in the fall.

Management Guidance

Snap expects Q4 revenue of $1.950 billion-$1.985 billion and adjusted EBITDA of $490 million-$525 million. The adjusted EBITDA outlook includes planned SPECS investments, which management said will be paced against product, ecosystem and economic milestones.

The company expects Q4 infrastructure costs to grow modestly year over year. Full-year infrastructure costs are now projected at $1.65 billion-$1.66 billion, narrowed from the previous $1.65 billion-$1.70 billion range. Management said Snap increased AI and machine-learning investment without raising its overall infrastructure cost outlook.

All other cost of revenue, excluding infrastructure costs, is expected to equal 16%-17% of full-year revenue.

Following the expected completion of the current repurchase program in Q4, Snap intends to adopt a multiyear dilution-management approach aimed at offsetting future dilution and supporting a stable fully diluted share count in 2027.

Beginning with Q1 2027 results, global monthly active users will become Snap’s primary audience metric. Global MAU-based average revenue per user will become the primary monetization metric, alongside free cash flow per share.

Risks and Areas to Watch

Advertising revenue growth remained below management’s ambitions. Direct-response products generated stronger results, but the decline in brand advertising continued to weigh on total ad growth. Management expects brand initiatives to regain ground during 2027, but this remains a forward-looking objective.

Snap continues to monitor legal and regulatory developments in the U.S. and internationally, including increased scrutiny of youth-related issues. Management said potential outcomes could require product and business-practice changes, raise compliance and legal costs, increase payments for judgments or settlements, and negatively affect user growth and engagement.

Share dilution also remains a focus. Fully diluted shares increased 3.8% year over year, and management emphasized that stronger earnings and cash generation must translate into sustained free cash flow growth on a per-share basis.

Analyst Q&A Highlights

Management described three priorities for accelerating advertising growth: improving advertiser performance through AI, making results easier to measure through third-party tools, and expanding placements across Chat, Spotlight and Snap Map. Evan Spiegel said Snap was seeing some advertising acceleration in Q4 but characterized his view as cautiously optimistic.

On Sponsored Snaps, management pointed to 56% sequential revenue growth, geographic expansion into Europe and dynamic product ads in Chat. The company sees the format as a way to monetize engagement within Snapchat’s core messaging environment.

Regarding the shift from DAU to MAU, management said it does not want to optimize daily app opens through costly user acquisition, excessive notifications or features that fail to create long-term value. The company believes MAU better reflects the scale of its community and long-term monetization opportunity.

Management said direct response has risen to about 77% of revenue and expects it to remain the main near-term advertising growth driver. For brand advertising, Snap is diversifying beyond pressured consumer packaged goods spending and reported encouraging traction in U.S. financial services.

On margins, management cautioned that the 93% incremental adjusted EBITDA flow-through reflected Q3’s revenue mix, seasonality, expense timing and investment levels. Snap’s longer-term objective is sustained free cash flow per share rather than maximizing a single quarter’s margin.

Full Earnings Call Transcript

Complete Earnings Call Transcript

Management Remarks

Operator

Good afternoon, everyone, and welcome to Snap Inc.'s Third Quarter 2026 Earnings Conference Call. [Operator Instructions]

I would now like to turn the call over to David Ometer, Head of Investor Relations.

David Ometer

Thank you, and good afternoon, everyone. Welcome to Snap's Third Quarter 2026 Earnings Conference Call. With us today are Evan Spiegel, Chief Executive Officer and Co-Founder; Ronan Harris, Chief Commercial Officer; and Doug Hott, Chief Financial Officer. Please refer to our Investor Relations website at investor.snap.com to find today's press release, earnings slides and investor letter.

This conference call includes forward-looking statements, which are based on our assumptions as of today. Actual results may differ materially from those expressed in these forward-looking statements, and we make no obligation to update our disclosures. For more information about factors that may cause actual results to differ materially from these forward-looking statements, please refer to the press release we issued today as well as risks described in our most recent Form 10-K or Form 10-Q, particularly in the section titled Risk Factors.

Today's call will include both GAAP and non-GAAP measures. Reconciliations between the two can be found in today's press release and earnings slides available on our IR website. Please note that when we discuss all of our expense figures, they will exclude stock-based compensation and related payroll taxes as well as depreciation and amortization and certain other items. Please refer to our filings with the SEC to understand how we calculate any of the metrics discussed on today's call.

With that, I'd like to turn the call over to Evan.

Evan Spiegel

Thank you for joining us. Q3 demonstrated the growing earnings power of Snap's business. Revenue increased 14% year-over-year to $1.72 billion, and we generated positive net income. Gross margin expanded by approximately 7 percentage points, while net income margin and adjusted EBITDA margin each expanded by approximately 10 percentage points.

Daily active users grew to 495 million and monthly active users grew to 977 million. As I shared in my 15-year letter in September, our priorities are clear: keep our communities safe, grow our advertising business faster and strengthen the relationships at the heart of Snapchat. Communication between friends and family remains the foundation of Snapchat.

In Q3, average daily messages sent increased 8% year-over-year and the number of people engaging in two-way communication increased 6% year-over-year. Our Camera, Spotlight, Map, and Games give people more to share and more reasons to connect.

Spotlight is becoming an increasingly important part of that experience with content that sparks conversations and inspires creativity. Globally, the number of people posting to Spotlight grew 130% year-over-year, while daily active viewers increased 40% year-over-year. We continue to invest in creators and AI-powered recommendations to help Snapchatters discover content they enjoy and want to share with friends.

AI is becoming a meaningful advantage for Snap, helping us improve our products faster, serve our community more effectively and work more efficiently. For example, in Q3, our engineering teams more than doubled the number of merged pull requests year-over-year, while the defect rate per merge pull request declined over 71%. For advertisers, AI search now resolves over 92% of health center sessions, while support cases declined 35% year-over-year.

While advertising revenue growth remains below our ambitions, advertisers are seeing the benefits of our performance improvements. Our focus now is to turn these improvements into broader adoption, more meaningful share of advertiser budgets and more durable growth.

Other revenue grew 84% year-over-year, and we surpassed 30 million paid subscribers across Snapchat+, Memories Storage and Lens+. Innovative AI-powered features have helped Lens++ exceed our expectations, demonstrating how new creative experiences can drive demand for our paid products.

Paid subscribers still represent a small share of our monthly community, giving us room to grow through broader adoption and new premium experiences. We delivered substantial operating leverage with approximately 93% of incremental revenue flowing through to adjusted EBITDA. As revenue grew faster than our cost base, we expanded margins and generated stronger cash flow. This strengthens our ability to invest in our business, offset dilution and create long-term value on a per share basis.

SPECS represent our ambition to bring computing into the world around us. By combining see-through augmented reality with artificial intelligence, we see an opportunity for computers to understand more of what we are experiencing and provide useful information and assistance in the moment. SPECS can help people learn, create and get things done while staying present with those around them.

Our years of investment in Augmented Reality and our developer ecosystem give us a strong foundation to lead this transition. SPECS bring those capabilities together across hardware, software and AI to make computing a more natural part of everyday life. A golfer can receive personalized guidance on their swing through a Lens+ developed with input from PGA professionals, while someone working on the go can edit documents on a virtual display.

Through our enterprise partnerships, we are also exploring how technicians can receive visual guidance from remote experts directly in their field of view while keeping their hands free. We are excited by the positive feedback we have already received as people experience SPECS firsthand. Our SPECS first book pop-up is now open at Westfield Century City in Los Angeles, where visitors are trying SPECS, meeting our team and learning more about augmented reality.

The pop-up gives us an opportunity to learn directly from our community as we refine the experience and bring a more natural human way of computing to life. I'll now turn the call over to Ronan Harris, our Chief Commercial Officer.

Ronan Harris

Thank you, Evan. Snapchat is woven through how our community lives throughout their day. People use the camera to share what's happening, use chat to talk with close friends, they explore the map and discover content about where to go, what to do and what to buy. They come to Snapchat as themselves with the people who matter to them. That is what makes Snapchat different. It's the real you in the real world.

Real relationships, real-world context and authentic self-expression give us a distinctive foundation for advertising. AI can help us build on that understanding while protecting privacy, making recommendations more useful and advertising more effective. Our ambition is to help businesses create demand before people start searching and turn discovery into purchases.

Our priorities are improving advertiser performance, making results easier to measure and expanding the way businesses can reach our community. Across these priorities, our focus is on turning stronger outcomes into greater advertiser demand, larger budgets and sustained revenue growth. In Q3, direct response advertising grew strongly, supported by improved purchase outcomes. However, upper funnel brand advertising declined year-over-year, weighing on our overall growth.

In Q3, purchase volume for campaigns optimized for app purchases more than doubled year-over-year, while average cost per purchase declined approximately 24% and revenue grew over 54%. For web purchase campaigns, purchases increased over 31% year-over-year. Average cost per purchase declined 15% and revenue grew 11%.

For example, skin care brand dermatology used Work Magic to measure Snapchat's incremental impact on sales. The brand scaled its Snapchat investment 6.2x, while improving incremental return on ad spend by 45%, driving 9x incremental revenue. New customers accounted for 73% of incremental orders, up from 54%, highlighting Snapchat's role in efficient customer acquisition.

AI is helping us extend that progress through innovations like dynamic product ads Generative Retrieval and Agentic Recommendations. These capabilities help connect products in an advertiser's catalog with a Snapchatter's interest and activity to identify products they may value. Together with improvements that recognize people's multiple interests, these innovations have already contributed to an over 2.5% increase in pixel purchase conversions.

Ahead of the holiday shopping season, we introduced Commerce Power Pack to help advertisers turn discovery into purchases and optimize for business value. Dynamic product ads for Sponsored Snaps brings personalized catalog ads into chat and is available globally. Third-party web optimization, now in open beta combines Snap signals with third-party measurement signals to optimize towards advertisers' preferred sources of measurement.

For example, after switching to third-party web optimization for its Snapchat campaigns in France, Foot Locker recorded a 53% higher return on ad spend and a 38% lower cost per acquisition measured through its third-party measurement platform. For app advertisers, unified attribution became generally available across Aspire and Adjust in August. extending support to measurement partners, representing over 75% of app advertising revenue. It helps align campaign optimization with purchase outcomes reported by advertisers' mobile measurement partners.

Our third priority is expanding the way businesses can reach our community. Advertising within Chat, Spotlight and the Map connects businesses with the conversations, content and places that matter to Snapchatters. These experiences give advertisers more ways to build awareness, create demand and drive purchases.

Sponsored Snaps revenue grew 56% sequentially with Chat share of total revenue increasing approximately 8 percentage points year-over-year. Our launch of auction-based Sponsored Snaps in Europe is an exciting step in bringing this format to more advertisers, adding personalized product ads through Commerce Power Pack further expands its potential to turn conversations and discovery into action.

Spotlight's growing audience creates more opportunities for brands to reach our community through full-screen vertical video. Average Spotlight eCPM increased 22% year-over-year, and we continue to strengthen the creative buying and measurement capabilities that help advertisers achieve their goals.

Promoted Places brings this opportunity into the real world, helping businesses connect with people exploring where to go and what to do on Snap Map. Revenue and advertiser adoption each more than doubled sequentially in Q3, and we expanded the product to 14 countries. This early momentum demonstrates advertiser interest in reaching our community at moments of discovery with opportunities spanning restaurants, retailers and other local businesses.

Across these priorities, success means helping more advertisers achieve their goals. return to Snapchat and grow their investment. By delivering results they can trust and build upon, we believe we can earn lasting relationships, a larger share of their budgets and sustained advertising revenue growth.

I'll now turn the call over to Doug to discuss our financial results.

Doug Hott

Thank you, Ronan. In Q3, revenue increased 14% year-over-year to $1.72 billion, within our prior guidance range of $1.70 billion to $1.74 billion, while our total cost structure grew just 1% year-over-year. Advertising revenue grew 4% and other revenue grew 84%, led by Snapchat+, Memories Storage and Lens+.

We delivered substantial operating leverage with approximately 93% of incremental revenue flowing through to adjusted EBITDA. Gross margin reached 62%, net income reached $56 million, an improvement of $160 million year-over-year, and adjusted EBITDA increased by approximately $201 million to $383 million year-over-year, representing a margin of 22%.

Margin expansion reflected revenue growth, a greater contribution from direct revenue and efficiencies across our cost base. Our focus is on sustaining disciplined cost growth while investing in the products and capabilities that support revenue growth.

Operating cash flow increased 44% year-over-year to $210 million and free cash flow increased 76% to $164 million. On a trailing 12-month basis, operating cash flow reached $983 million, up 59% and free cash flow reached $777 million, up 88%.

This growth in cash generation strengthens our ability to invest in the business, manage dilution and maintain a strong balance sheet. We ended Q3 with approximately 1.93 billion shares outstanding, including shares underlying stock-based awards, an increase of 3.8% year-over-year.

Managing dilution remains an important part of translating stronger earnings and cash generation into sustained growth in free cash flow per share. We ended the quarter with approximately $2.77 billion in cash, cash equivalents and marketable securities, an increase of approximately $111 million from the end of Q2.

Now turning to our outlook. As we move into Q4, we remain focused on accelerating top line growth, growing our community, deepening engagement and improving financial efficiency. Our guidance range for Q4 revenue is $1.950 billion to $1.985 billion.

We expect infrastructure costs to grow modestly year-over-year in Q4 and now anticipate full year infrastructure costs of $1.65 billion to $1.66 billion compared with our prior guidance of $1.65 billion to $1.70 billion as we have been able to increase our investments in AI and ML without increasing our overall infrastructure costs. We continue to expect all other cost of revenue, excluding infrastructure costs, to represent 16% to 17% of revenue for the full year.

Our guidance range for adjusted EBITDA is $490 million to $525 million in Q4. Our outlook includes our planned investments in SPECS, which we continue to pace against product, ecosystem and economic milestones.

Following the expected completion of our current repurchase program in Q4, we intend to pursue a multiyear approach to dilution management with the goal of offsetting future dilution and supporting a stable fully diluted share count in 2027. Beginning with our Q1 2027 results, global Monthly Active Users, MAU, will become our primary audience metric.

Snapchat is approaching one billion people each month, and we believe MAU provides the most complete view of the community we serve and our revenue opportunity over time. MAU represents the scale of our community, while engagement and monetization metrics reflect the depth and value of our service.

Daily engagement has historically been stable as a percentage of monthly engagement, but we do not intend to optimize Snapchat around daily use at the expense of long-term value for our community. A longer-term horizon better aligns our reported metrics with the product and safety decisions that strengthen relationships, create lasting utility and support broader, more durable audience growth.

Alongside global MAU, we are introducing global MAU-based Average Revenue Per User, ARPU, as our primary monetization metric. Together, global MAU, ARPU and free cash flow per share provide a clear scorecard for Snap, the scale of our community, our progress monetizing that community and our ability to translate that progress into long-term shareholder value.

As discussed last quarter, we continue to monitor the evolving legal and regulatory landscape in the United States and internationally that could materially impact our business and financial results, including increased regulatory scrutiny on youth-related issues.

While outcomes remain uncertain, they may result in significant changes to our products and business practices, increased compliance requirements and legal costs, increased payments for legal judgments and settlements and negative impacts to user growth and engagement. Thank you. We will now take your questions.

Operator

[Operator Instructions]

Your first question comes from the line of Ross Sandler with Barclays.

Question-and-Answer Session

Ross Sandler

Great. One for Ron and one for Evan, please. So Ronan, it looks like brand was once again the culprit in driving weakness in the third quarter. What are you guys doing to address that? And the 4Q guidance assumes a nice reacceleration in growth at the mid or the high end. Can you talk about what you're seeing quarter-to-date in 4Q? And then Evan, any early read on SPECS out of the gate?

Ronan Harris

Ross, thank you for the question. So to talk about brands, it declined mainly because of lower CPG spending driven by macro pressures in the U.S. and also the Middle East. Q2 also benefited, I think, from easier comparisons on World Cup-related spending. So that's part of the sequential deceleration that you see. As we look ahead, we're seeing very positive signs of growth from diversified verticals like financial services in the U.S. So part of our strategy here is to look outside of the pressures in CPG and find traction in these other verticals.

I'm pleased to say we're seeing progress there. So I think that go-to-market shift, together with other work we're doing on inventory, expanding the inventory that we've got available and also the formats, I think, give us confidence that we're going to start to see the brand business regain ground over the course of 2027.

Evan Spiegel

Ross, thanks so much for the question. It's been so exciting to finally have SPECS out in the world, and we opened our first look pop-up in October here in Los Angeles. And it's just been so gratifying to see people try SPECS for the first time. We've had more than 10,000 demos to date at the pop-up.

I think that's really a testament to the excitement around SPECS and what's possible. SPECS represent a totally new computing paradigm. So it's really, really important for people to try them to understand the value. So we're very focused now on all the new opportunities that SPECS create and including things like remote assistance or virtual workstations for on-the-go productivity and of course, all the amazing location-based experiences, places like museums.

So we think we've barely scratched the surface of what's possible with SPECS, and we're really looking forward to beginning to ship SPECS later this fall and really to see what our community will build.

Operator

Your next question comes from the line of Eric Sheridan with Goldman Sachs.

Eric Sheridan

Maybe two, if I could. I want to come back to the audience metric shift towards MAU and understand a little bit better just the thought process around that and how that's the indication you want to leave folks with in terms of measuring the business going forward? And then the second, on Sponsored Snaps, you continue to show a lot of progress there and a lot of growth. How should we be thinking about the learnings and how they're scaling as to what the market opportunity is around Sponsored Snaps?

Doug Hott

Eric, this is Doug. So this goes back to the shift we outlined in 2025 towards more profitable growth. We reduced our investment in community growth marketing globally, with less emphasis on growing daily active users and focused on building our direct revenue business. The changes here to our reporting reflect that strategy. If you remember back in Q2 '25, we introduced Monthly Active Users as a reported metric. As we approach 1 billion people using Snapchat each month, we think MAU gives investors the clearest view of the scale of our community and our long-term revenue opportunity.

So we're focused on three things: how many people we serve, how effectively we monetize that community and how that translates into free cash flow per share. Global MAU, MAU-based ARPU and free cash flow per share give investors a pretty straightforward way to follow that progress.

We also want to give our teams the flexibility to make the right long-term decisions for our community. So daily engagement has historically been stable as a share of monthly engagement. But some decisions that improve the experience on Snap, keep people safe or support long-term retention may actually affect daily active use in the near term. So we want to make those decisions with the long-term health of our community in mind.

We'll continue to report revenue for North America, Europe and Rest of World separately. We think regional revenue is the most direct way to understand financial performance across those markets. So investors will continue to have visibility into where revenue is growing alongside a global view of our audience and monetization.

Ronan Harris

I'll take the question on Sponsored Snaps. So on the platform, clearly, our community is coming and spend a huge amount of time within the chat environment. So when we introduced this, it was a tremendous opportunity to give advertisers more ways to go out and reach people in experiences that they're already using on the platform. So when you look at the numbers, I think it's showing up in the growth.

Sponsored Snaps revenue grew 56% sequentially in Q3. And we've continued to innovate. So we've introduced the auction-based Sponsored Snaps into Europe, so continue to expand geographically. And dynamic product ads are now also available in chat. So these additions, I think, expand the use cases and the advertisers that the format can serve. So we'll continue to see that in the coming quarters.

Operator

Your next question comes from the line of Doug Anmuth with JPMorgan.

Douglas Anmuth

Evan, I know in your annual letter, you kind of talked about the ambitions to ultimately move ad growth toward the mid-teens. I was just hoping you could kind of elaborate on what you think maybe the three kind of most important things you need to do are to really accelerate advertising growth in a material way? And perhaps in conjunction with that, we're obviously seeing lots of benefits across the space in terms of AI tools and driving greater engagement and ad targeting higher conversion rates. If you could give us kind of an update there where you are with AI-driven ad improvements.

Evan Spiegel

Absolutely. Thanks, Doug. Certainly, 4% ad growth is below our ambitions. And I'm cautiously optimistic about the progress we're seeing here in Q4 as we're seeing a bit of acceleration on the ad side. We do continue to see strong growth in direct response, which I think is really the durable underpinning of the business. But the upper funnel brand advertising did decline year-over-year, and that weighed on the overall results. So I think what gives me confidence looking forward is really the progress in advertiser performance.

So if you look at Q3, purchase volume for app purchase campaigns more than doubled. Cost per purchase declined approximately 24% and revenue grew over 54%. When we look at web purchase campaigns, they delivered more purchases at a lower cost with revenue growing 11%. So we're really seeing these better outcomes for advertisers translate into revenue growth. And so we just need to translate that progress in terms of performance into broader adoption and a larger share of advertiser budgets.

I do think AI is a meaningful accelerant there. So as we look into 2027 and beyond, we're continuing to improve performance with better AI-powered recommendations, and we're making it easier for advertisers to measure those results using the tools they already rely on, which we know is really important to their confidence in putting more budget behind Snapchat.

So we'll also be expanding the ways that advertisers can reach our community across Chat, Spotlight and the Map. And Ronan mentioned the progress with Sponsored Snaps, but we're also seeing meaningful progress with Promoted Places where revenue and advertiser adoption both more than doubled sequentially. So I think bringing our performance and measurement capabilities into these new placements and experiences gives us more opportunities to help advertisers turn discovery into purchases.

So I think taking it all together, we've got better tools to deliver results. We've got more ways for advertisers to reach our community. And now Ron and the team are working really hard to get these improved capabilities into advertisers' hands, demonstrate that they really work and drive results and ultimately earn larger and sustained commitments from our advertising partners.

Operator

Your next question comes from the line of Rich Greenfield with LightShed Partners.

Richard Greenfield

I've got two. Evan, the letter talks about how Snap is not going to optimize daily use at the expense of long-term value. I was just wondering, I think everyone would appreciate some examples of something that you're choosing not to do. And what does that mean for time spent and ad revenue going forward?

Like is there a tension between those two? And just how should we think about sort of how you're trying to optimize the company for the long term? And then I guess you've been talking a lot about the sort of the improvements in DR and the pressures on brand advertising. Anything you could give us a sense of like where are we in the transition? Like when do we get to the point where DR performance is a large enough piece of the pie that it actually can overwhelm the pressure, you actually start to see a real accelerate -- a meaningful acceleration in the growth back to what you used to see years ago. Like how small is -- I guess, what size is brand still in terms of the overall company would be really helpful.

Evan Spiegel

Rich, thanks so much for the question. I can speak a little bit to user engagement and then Ronan can share a little bit on his thoughts on brand advertising. I think looking maybe at a couple of examples, one might be the choice to engage in user acquisition or costly user engagement in a geography that we don't currently monetize or don't effectively monetize. Another example might be deciding not to send certain notifications or to add new features to Snapchat that might generate another app open, but don't ultimately lead to long-term value.

So those are the types of examples of actions that can be costly either financially or in the terms of user satisfaction. while they might increase daily active use, they don't actually help us achieve our long-term goals of developing more engaged community or expanding our monetization opportunity. So I think Doug spoke earlier about this shift from DAU to Monthly Active Users. That's really because we want to focus on the lasting utility of Snapchat and durable audience growth, not just daily frequency for its own sake. So it certainly doesn't mean we're trying to reduce time spent or accept lower ad revenue.

On the contrary, I think what this means is that we're focusing on earning engagement through useful experiences and really demonstrating that the stronger, more durable engagement supports the monetization opportunity over time.

Ronan Harris

Rich, thanks for the question. So it's very exciting to see the increased engagement across the platform. So across both Spotlight and Chat. We've already talked about what the chat engagement does in terms of our Sponsored Snaps product. Our increase in Spotlight engagement is also super encouraging. And when you look at that and the advertiser interest, you can see the resulting eCPM increase on Spotlight, which is up 22% year-over-year. Today, we are definitely seeing stronger growth on the direct response side of the business, and it continues to grow as a percentage of our overall business. Direct response is up to about 77% of our revenues at this stage. So that's a substantial increase versus last year, and we think that will continue in the short term as we continue to expand the focus on those direct response products. But we do see the improvements on our brand go-to-market and our brand product innovations, which I talked to earlier, kicking in as we move into 2027.

Operator

Your next question comes from the line of Justin Post with Bank of America.

Justin Post

I'll start with Spotlight. Impressive growth there. What are people doing more of this year than they were? And just how do you feel about the pipeline of additions over the next 12 months? And then just a general question. The Spotlight and Chat metrics look really good, but it doesn't seem like it's translating to U.S. and Europe DAUs. Any reason why that increasing engagement would show up in monthly but maybe not daily?

Evan Spiegel

Thanks so much for the question. We're really excited about the progress with Spotlight. And our strategy has been to focus on what makes Snapchat special, which is this real content made by real creators. And so earlier this year, we really worked hard to remove AI-generated content or reposted content from the service and really focused on our community and the things that they were creating. And what that led to was, I think, a really meaningful growth in the number of Spotlight posters, which has really helped increase inventory overall for Spotlight, which then obviously helps us show the right videos to the right folks on the service.

So we continue to think Spotlight is a really meaningful opportunity. One of the things we're particularly focused on right now is the way that it can strengthen connections and relationships between friends as people share content with each other to start conversations on the service. It will certainly continue to be a priority. We're doing a lot of work right now on the ranking architecture overall and exploring some of the new generative techniques, which may help us leapfrog our current architecture. But overall, I think it's really that focus on what makes Snapchat unique and that authentic content that's helping us drive the growth of Spotlight.

Ronan Harris

Just to take the question on which products and ad formats are resonating most with our advertisers at the moment. So in Q3, I mean, we've talked to the strong results for both Web DR and App DR. So that continues to capture a lot of attention. We are seeing really material increases in return on ad spend and also in reach as people experiment and expand into these new products. We've also been bringing -- really what we're trying to do is to bring more AI in behind making the purchase easier, making the measurement easier and as a result, being able to demonstrate durable performance and then expand budgets over time.

So things like DPA Generative Retrieval and Agentic Recommendations that help match products with those interests of our community beyond keyword matching are really having a big impact. And our new commerce Power Pack is also getting a lot of traction as a way to optimize for purchase value and advertiser preferred measurement. So alongside all of that product work, we're also focusing our teams and partners on adoption and consistent advertiser outcomes. So I think those focus areas will help us to increase that share of wallet over time.

Operator

Your next question comes from the line of Dan Salmon with New Street Research.

Daniel Salmon

I want to follow up on direct response with Ronan as well. As you move to overseeing the global business, I guess I'd like to hear just a little bit more on your high-level views on the state of the DR business. Obviously, lots of updates on the ad stack that you talked about, much stronger growth there lately. But maybe just to come back and talk a little bit more about what Evan spoke to about the sustainability there.

And in particular, I think of things like growing the number of advertisers on the platform. That's always an important metric. I'd love to hear your ambitions on that. And then maybe a little bit -- that's more about small advertisers, maybe a little bit about your largest DR advertisers, how you help move them into really everyday performance budgets that they can continue to lean into and become a bit more sustainable for Snap over time.

Ronan Harris

Thanks for the question. So my focus is on making the performance we deliver easier for advertisers to both see and measure to be able to buy it, so making sure that we've integrated with the right buying platforms and then to be able to scale. So I think if it's easy to buy, they're getting great results that they can rely on, then they're happily going to scale, and we're going to be able to increase our share of wallet. So that's where our teams are focused on both in terms of product innovation and also in terms of our go-to-market.

So I've already mentioned that the introduction of things like PPA Generative Retrieval, Agentic Recommendations, they're really capturing the minds of advertisers in terms of using the power of AI to help match products with the interests of our community. So that's making the purchasing easier. We've also talked about unified attribution and how we're making third-party measurement of performance on Snap, again, much, much easier, much more reliable.

Those two things alone are giving us tremendous traction with the advertiser base. You mentioned the distinction between large and small advertisers. For small advertisers, this is super important. They are typically resource and time constrained. So being able to make it super easy for them to come on to the platform, get that first conversion, measure it and rely on it and for that buying process to be easy is critical. So we're continuing to put a lot of work into that to make sure that they can -- again, they can do it directly on Snap, they can self-serve or they can have a managed experience.

We're also integrating in further with lots of partners to make sure that their clients can use those third-party platforms to buy into Snap as well. So I think those two things are definitely making the buying process for SMBs an awful lot easier. For the larger advertisers, it's about that dependable performance time and time again, making sure that the third-party measurement systems are super reliable and making sure that our performance stays consistent. Again, introducing all of these new signals and AI technologies to help drive that incremental performance is critical to giving them those results. And as you'll have seen in the results we discussed, particularly across Web DR and App DR, that growth is super strong, and we expect that to continue to be positive over the coming quarters.

Operator

Our final question comes from the line of Alice Jesska with Loop Capital.

Unknown Analyst

Alice here on for Rob Sanderson. I was just wondering, you've made significant progress in improving margins and controlling costs throughout 2026, about 93% of incremental EBITDA margins and 7 points of gross margin expansion. Could you provide some color on how much more room there is for cost optimization and if we can expect similar margin improvements in 2027?

Doug Hott

Alex, thanks for the question. This is Doug. Look, Q3 really demonstrates the earning power of Snap when our revenue grows faster than our cost base. Revenue increased 14%, while our total cost structure grew just 1%. Our gross margin, as you noted, reached 62%. That translated into positive net income of $56 million. So really positive results. for the quarter. One thing to call out, the 93% flow-through is a measure of this quarter's year-over-year operating leverage. So the revenue mix, seasonality, timing of expenses and investment levels affect that outcome.

That said, unequivocally, our objective is to translate that earnings progress into sustained free cash flow per share rather than really optimize a single quarter's margin. And we're going to then use that cash against our three priorities. So we're really happy with the flow-through this quarter, but there's obviously timing impacts from our cost base that impact that. But I think if you look at over the last several quarters, we've been able to take all of the savings that we had mentioned in Q1 and roll that through the year. So really happy about the results there.

Operator

Thank you. This concludes our question-and-answer session as well as Snap Inc.'s Third Quarter 2026 Earnings Conference Call. Thank you for attending today's session. You may now disconnect.