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Good afternoon, everyone, and welcome to Snap Inc.'s Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to David Ometer, Head of Investor Relations. You may proceed.
Thank you, and good afternoon, everyone. Welcome to Snap's Third Quarter 2025 Earnings Conference Call. With us today are Evan Spiegel, Chief Executive Officer and Co-Founder; and Derek Andersen, 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 2 can be found in today's press release. 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.
Hi, everyone, and welcome to our call. In Q3, we made meaningful progress on our long-term strategy to grow our global community, deliver stronger performance for advertisers and invest in the future of augmented reality. At the core of Snapchat is a mission that has endured since our founding to reinvent the camera to strengthen human connection. Snapchat is built around real communication, helping people share moments and build closer relationships every day.
This clarity of purpose continues to drive durable growth. Our community reached 477 million daily active users, an increase of 34 million or 8% year-over-year and 943 million monthly active users, an increase of 60 million or 7% year-over-year. With this momentum, we have made further progress toward our goal of reaching 1 billion monthly active users around the world. Revenue increased 10% year-over-year to $1.51 billion, driven by improved advertising demand and the rapid expansion of our direct revenue streams.
On the advertising front, continued growth in our small- and medium-sized business customers and improvements in direct response advertising performance drove an acceleration in direct response advertising revenue, which increased 8% year-over-year and 13% quarter-over-quarter. Other revenue, which includes Snapchat+ subscription revenue increased 54% year-over-year to $190 million in Q3, reaching an annualized run rate of more than $750 million. To build on this momentum, we expanded our premium offerings, introducing new storage plans for memories and launched AI-powered experiences in Lens+ and Platinum bundles that we believe will deliver incremental value to our most engaged community members.
We remain disciplined in aligning our investments with our core strategic priorities while driving operating leverage over time. In Q3, we delivered $182 million of adjusted EBITDA and generated $93 million of free cash flow while reducing our net loss by more than 30% year-over-year to $104 million, underscoring our progress towards sustained profitability. With approximately $3 billion in cash and marketable securities on hand, we are well positioned to continue investing confidently in innovation and long-term growth. We also continue to scale differentiated ad formats and offerings such as Sponsored Snaps, Promoted Places and the App Power Pack supported by advances in AI for ranking, creative generation and personalization.
These investments are expected to compound performance over time, unlocking greater advertiser ROI and long-term revenue growth. At the same time, we are improving key components of our service to make Snapchat more reliable and as fast to launch as the native camera, an essential part of ensuring our service remains simple, accessible and enduring. Snapping between friends and family remains the foundation of Snapchat, driving both daily engagement and long-term retention. In Q3, we shared that Snapchatters created over 1 trillion selfie snaps in 2024 demonstrating how deeply our community uses our camera to communicate and feel closer together.
Over the next year, we are prioritizing sharing and conversations through new conversation starters such as status updates, flashbacks and topics, building new ways to play games with friends and making it effortless to share Spotlight videos through stories and chat. Our goal is to spark conversations, strengthen friendships and inspire creativity. This quarter, we rolled out several new features that made communication faster, easier and more expressive. Infinite retention allows users to save chance indefinitely while Homesafe gives friends peace of mind with an automatic check-in after returning home.
We also launched the Snapchat keyboard, extending our sticker library to other apps and introduced Custom Moji, enabling users to generate personalized Bitmoji stickers from text prompts. These updates underscore our commitment to enhancing the Snapchat experience through richer visual communication while fostering deeper community connections. Global time spent watching content and the number of content viewers increased year-over-year in Q3, reflecting our multiyear investment in machine learning and the continued strength of Spotlight. Building on this momentum, we launched our largest content recommendation model to date, improving freshness and relevance across the platform.
We also upgraded our infrastructure to get a step closer to delivering content in near real time, reducing latency and cutting model training cycles from days to just 2 hours. As a result, the share of total Spotlight views from content posted in the last 24 hours increased more than 300% year-over-year in the U.S. as our models now service more topical and original content. In addition, we launched our first unified user model that combines signals from Spotlight, Discover and the camera while advancing work on a trend detection model that identifies emerging creative trends and amplifies their reach.
Snapchat is a platform where any creator can express themselves authentically, grow an audience and build a business. Over the past year, we onboarded thousands of Snap Stars reaching a record level of active creators. We're also seeing established creators and homegrown talent thrives such as Kaylee Rosie, a nursing student and plant enthusiasts who has increased her followers by more than 50 times in the last 6 months by posting Stories and Spotlight content nearly every day. To help creators succeed, we expanded monetization tools and new collaboration formats with brands such as Sponsored First Snaps.
This growing ecosystem has made Snapchat more resilient and diverse driving a nearly 180% year-over-year increase in Snap Star Spotlight posts in North America. More creator activity enhances the relevance and quality of our content inventory strengthening the overall engagement of flywheel for both users and advertisers. While we continue to innovate on our core product experience for our community, including efforts to address ongoing engagement headwinds, we are also navigating a number of evolving factors that we expect will influence community growth and engagement in the near-term. Key focus of our current strategy is improving average revenue per user by more directly monetizing our core product.
This includes the continued growth of Snapchat+, the introduction of Sponsored Snaps and Promoted Places, the launch of Lens+ and the testing of memory storage plans. These initiatives are designed to strengthen our top line performance, but they do involve trade-offs with engagement so we expect some adverse impact on engagement metrics as these experiences are rolled out globally. At the same time, we are recalibrating our investments in community growth and the cost to serve our community in order to improve financial efficiency. This includes testing changes to our infrastructure that will lower costs in regions with less long-term monetization potential, allowing us to better align our resources with the financial opportunity of each geography, but potentially coming at the cost of adverse trade-offs with engagement in these countries.
We are also preparing for the upcoming rollout of platform-level age verification, which will use new signals provided by Apple and soon Google to help us better determine the age of our users and remove those we learn are under 13 or under 16 in certain geographies such as Australia. These actions are an important step in maintaining a safe and compliant platform that we expect they will also adversely affect engagement metrics as implementation progresses. In addition to these internal initiatives, we continue to experience the effects of regulation and government policy actions. Recent examples include Australia's social media minimum age bill, which takes effect in December and government restrictions on access to Internet services in certain countries.
We anticipate that similar regulations in other jurisdictions may take effect or be passed in the near future. These policy developments combined with potential platform level age verification are likely to have negative impacts on user engagement metrics that we cannot currently predict. While we remain committed to our goal of serving 1 billion global monthly active users, we expect overall DAU may decline in Q4 given these internal and external factors. And as noted above, we expect particularly negative impacts in certain jurisdictions.
We believe these are the right actions to strengthen our business for the long-term by improving monetization efficiency, ensuring compliance with evolving regulations and positioning Snap for sustainable growth. Snap continues to be a global leader in augmented reality, engagement and innovation. Every day, Snapchatters use AR lenses more than 8 billion times and more than 350 million Snapchatters engaged with AR experiences daily. Over 400,000 creators from nearly every country have built more than 4 million lenses using our AR tools, making Snapchat one of the most scaled AR platforms globally.
In Q3, we introduced the Imagine lens, our first open prompt image generation lens, allowing Snapchatters to create or reimagine snaps by simply typing a prompt more than 500 million Snapchatters have engaged with Gen AI-powered lenses over 6 billion times, reflecting the growing appeal of AI-driven creativity on our platform. Snapchatters engaged with our AI Face Swap Lens over 1 billion times in Q3, illustrating how generative AI can turn self-expression into shared moments and open up new ways to spark conversations and connections. Our investment in generative AI is designed to make communication more expressive, personal and human.
Realistic style gen delivers lifelike fit, texture, lighting and perspective, unlocking cinematic quality transformations and generating nearly 100 million lens views in Q3. Enhanced face gen enables higher fidelity face effects, generating over 700 million lens views while selfie attachments use 3D asset generation to add realistic context-aware elements like hats and hair styles, generating over 145 million lens views. Coming soon, AI Clips will allow creators to generate short shareable videos from simple prompts, turning AI video creation into a social and collaborative experience. Together, these innovations demonstrate why our leadership in generative AI matters.
They transform how people express themselves, create content and share moments that strengthen their connections on Snapchat every day. We continue to see strong momentum with games. Over 180 million people now play games on Snapchat every month with sharing up more than 100% year-over-year to make these experiences more social, we introduced the Games Chat Drawer, bringing games directly into chat so friends can play together seamlessly. Developers are using new tools in Lens Studio like the character controller, camera controller, input system and Bitmoji suite which make it easier than ever to build personalized interactive experiences.
New features like turn-based game play and enhanced leaderboards are driving innovation across popular titles such as 2-player Mini-Golf and Bitmoji Tower Defense. To support creator monetization, we expanded the Lens Creator Rewards program with Lens+ payouts, enabling developers to earn based on engagement from Lens+ and Snapchat Platinum subscribers. Outside of Snapchat, Camera Kit reached over 68 million monthly active users by the end of Q3 and no longer requires mandatory Snapchat branding, making it a flexible free SDK for brands and developers to deliver immersive AR experiences across apps, the web and AR mirrors.
Together, these updates reinforce our commitment to building the most expressive, scalable and monetizable AR ecosystem in the world. Our long-term vision for AR extends far beyond the smartphone. For over a decade, we have been building towards the future where computing feels more natural, contextual and integrated seamlessly into the world around us. After 5 generations of product development, specs will launch publicly next year, representing a major leap forward in human-centric computing.
In Q3, we introduced Snap OS 2.0, our largest system update yet. It delivers faster performance and a redesigned browser optimized for streaming and productivity, adds full WebXR support and includes a new UI Kit and Mobile Kit to simplify interface and cross-device development. We also added features like travel mode, which keeps AR content stable while in transit and EyeConnect, which enables instant shared experiences simply by looking at another person to co-locate content. Developers and brands are already building with spectacles, including Enklu and Artglass who are redefining live events with location-based lenses.
These projects highlight the vast potential for creativity and commerce on specs. To help developers monetize these experiences, we introduced Commerce Kit, enabling developers to accept payments directly within lenses, unlocking digital goods and premium features in real time. Specs are purpose-built for the age of AR and AI designed to make computing more personal, intuitive and contextually aware. Unlike traditional devices centered around apps and files, specs understand the environment and adapt to user patterns over time.
To support this next generation of computing, we introduced Snap Cloud powered by Supabase, a scalable back-end platform that enables richer and more dynamic AR and AI experiences on Snap OS. Snap Cloud is a key step in building the infrastructure that allows developers to create immersive real-time applications and reflects our long-term commitment to advancing the AR ecosystem through specs. We believe Snap is uniquely positioned to win the next wave of AR computing with Snap OS 2.0, Lens Studio, Snap Cloud and our global developer ecosystem, we are at the forefront with an end-to-end AR stack spanning software developer tools and hardware.
Together, these investments bring us closer to delivering the world's first fully stand-alone human-centered AR glasses. We made significant progress across our advertising platform by focusing on 3 priorities: advancing our AI-driven outperformance, optimizing high-impact ad formats and strengthening our go-to-market execution across SMBs and mid-market customers. Our investments in AI and machine learning are delivering measurable gains for advertisers. We advanced dynamic product ads with large language models that better understand products, driving over 4x higher conversion rates compared to baseline for certain campaigns.
As a result of these and other improvements, purchase-related ad revenue grew 30% year-over-year, reflecting higher attribution accuracy and better campaign performance. For example, Comfrt, a lifestyle and apparel e-commerce brand leverage target cost and Max Bid in their Snap campaign to scale faster and reached an incremental audience that delivered an 85% lift in site visits, a 79% increase in new customers and a more than 3x ROA improvement as measured by WorkMagic since the start of their 2025 campaign. Sponsored Snaps allow brands to join real-time conversations on Snapchat in a way that feels authentic and relevant to users.
Early results showed strong performance with up to 22% higher conversions and up to 19% lower cost per action when including Sponsored Snaps in advertiser campaigns. Advertisers across industries are using Sponsored Snaps to reach audiences where they are most active and engaged. For example, to strengthen share voice and drive user preference, ASICS partnered with Zeno Group to promote its latest running shoe collection through Sponsored Snaps, reaching 2 million unique Snapchatters in the chat inbox and driving a 4-point lift in overall brand awareness and a 16-point lift among Snapchatters aged 35 and older along with stronger return on advertising spend compared to existing media.
In addition, eBay Sponsored Snaps campaign to drive brand awareness was highly effective, achieving nearly 2x incremental unique reach and positive lift in ad awareness and brand association. Sponsored Snaps are also becoming increasingly direct response focused delivering more personalized and contextually relevant experiences. According to a Kantar study, approximately 85% of U.S. Snapchatters say Sponsored Snaps feel relevant and fit naturally within their habits on the platform.
Promoted Places complements this offering by bridging digital engagement with real-world action. The format allows advertisers to highlight nearby store locations directly within the Snapchat map, unlocking new opportunities for performance-driven local marketing. Early testing shows double-digit lifts in visitation, demonstrating its ability to influence real-world outcomes. For example, the fast casual chain Panda Express ran a promoted places campaign that resulted in a 15% incremental lift in visits as measured by our third-party measurement partner in market.
In addition, they saw a 10-point increase in brand favorability and a 6-point increase in action as measured by a brand lift study. Together, Sponsored Snaps and Promoted Places demonstrate how Snap's ad platform can influence the full marketing funnel from discovery and engagement to measurable real-world results while creating new opportunities for revenue growth across our global advertiser base. For app-based advertisers, we introduced the App Power Pack, a unified suite designed to improve performance across both scan and non-scan campaigns. Key features include target cost bidding, new App End Cards that automatically incorporate app store images and playables for interactive game previews.
Early results show that the App Power Pack is driving over 25% lift in iOS app installs. Early adopters are seeing strong returns, reinforcing Snapchat's role as a scalable performance channel for mobile marketers. For example, mobile gaming app Yotta chose Snapchat to reach Gen Z through culturally relevant fast turnaround ads, leveraging target cost bidding, delivering 35x more iOS installs at 84% lower cost per install 60x more purchases at 90% lower cost per purchase and 6x more first-time purchases at 13% lower cost per add to cart since implementing this new strategy. We continue to advance our automation capabilities to the Snap Smart Campaign Solutions suite, smart targeting, which treats targeting inputs of suggestions and uses machine learning to identify incremental high-performing audiences has launched delivering an average 8.8% increase in conversions for adopted ad sets.
Smart budget or automated budgeting solution that optimizes the overall campaign performance has also rolled out across select advertiser objectives and bid strategies. Early results are encouraging with a 5% improvement in median cost per action and a 17% increase in median spend, and we plan to broaden availability early next year. In addition, we have begun testing Smart Ad, which enables advertisers to upload raw creative ad sets and leverage Snap's ML systems to automatically drive performance. SMBs remained our largest contributor to ad revenue growth in Q3, driven by new advertiser onboarding, improved DR tools, streamline go-to-market execution and simplified workflows.
We deepened partnerships with commerce platforms such as WooCommerce, making it easier for small and medium-sized businesses to advertise on Snap and reach incremental audiences efficiently. Looking ahead, we see significant potential in the medium customer segment, where penetration remains low despite strong product market fit. We are realigning sales teams and agency partnerships to realize this opportunity, which we expect to become a meaningful growth lever through 2026. Direct revenue remains one of our fastest-growing opportunities. In Q3, we expanded premium tiers such as Lens+ and Platinum bundles, introducing exclusive AR and AI experiences like the Imagine Lens.
We are also planning to introduce live streaming and launch new tools to help creators build deeper relationships with their audience. In addition, we announced memory storage plans in Q3 and began rolling out this new offering to our community with more than 1 trillion memories already saved. These changes are designed to both enhance the user experience and sustain the infrastructure that supports long-term growth. We took an important step toward building out our AI platform by partnering with Perplexity AI to integrate its conversational search directly into Snapchat.
Starting in early 2026, Perplexity will appear in our chat interface for Snapchatters around the world. Through this integration, Perplexity’s AI-powered answer Engine will let Snapchatters ask questions and get clear conversational answers drawn from verifiable sources, all within Snapchat. Under the agreement, Perplexity will pay Snap $400 million over 1 year through a combination of cash and equity as we achieve global rollout. Revenue from the partnership is expected to begin contributing in 2026. This collaboration makes AI-powered discovery native to Snapchat enhances personalization and position Snap as a leading distribution channel for intelligent agents, laying the groundwork for a broader ecosystem of AI partners to reach our global community.
Now I'd like to turn it over to Derek to share more about our financial progress.
Thank you, Evan. In Q3, total revenue was $1.51 billion, up 10% year-over-year. Advertising revenue reached $1.32 billion in Q3, up 5% year-over-year, driven primarily by growth in DR advertising revenue, which increased 8% year-over-year. The growth in DR advertising revenue was driven by strong demand for our pixel purchase and app purchase optimizations as well as continued strength from the SMB client segment.
Other revenue increased 54% year-over-year to $190 million in Q3, with the largest driver being Snapchat+ subscribers, which increased 35% year-over-year to approach 17 million in Q3. With the exception of our large customer business in North America, our advertising growth remains very strong. From a regional perspective, we saw a significant acceleration in advertising revenue growth in both Europe and Rest of World during Q3. In Europe, advertising revenue grew 12% year-over-year, an acceleration of 6 percentage points over the prior quarter. In Rest of World, advertising revenue grew 13% year-over-year, an acceleration of 10 percentage points compared to the prior quarter.
In contrast, North America growth continued to lag the global business with advertising revenue growing 1% year-over-year in Q3. Within North America, our SMB advertising business grew at a rate of more than 25% in Q3, while our large client solutions business posted a modest decline in the quarter. The North America LCS business accounted for approximately 43% of total global revenue in Q3, decreasing is the share of total revenue by roughly 10 percentage points over the past 2 years, reflecting meaningful diversification of our revenue base as growth accelerates across other regions and customer segments.
While this mix shift demonstrates healthy progress toward a more balanced business, the North America LCS segment remains the primary headwind to our overall revenue growth. Given the strong momentum we are seeing with our ad products and platform and the rapid growth in demand from SMB clients globally, we are redoubling our focus on what we believe is working. At the same time, we are making targeted adjustments to our go-to-market operations in North America to improve performance and reignite growth in our LCS business in this region. Global impression volume grew approximately 22% year-over-year, driven in large part by expanded advertising delivery within Sponsored Snaps and Spotlight.
Total eCPMs were down approximately 13% year-over-year due to the strong growth in impression delivery. While the increased inventory from Sponsored Snaps has initially put downward pressure on platform-wide eCPMs, we are encouraged to see our advertising partners experienced strong advertising performance which is bringing increased demand to the platform. This improved performance has contributed in part to a 3 percentage point acceleration in the rate of year-over-year growth in DR advertising revenue in Q3. Adjusted cost of revenue was $671 million in Q3, up 5% year-over-year. Infrastructure costs are the largest component of adjusted cost of revenue and increased 8% year-over-year in Q3 driven by investments in ML and AI compute as well as an 8% year-over-year increase in global DAU to reach 477 million in Q3. Infrastructure costs per DAU was $0.85 in Q3 up from $0.84 in both the prior quarter and prior year.
The remaining components of adjusted cost of revenue were $266 million in Q3 or 18% of revenue which is below the prior quarter and our full year cost structure guidance range of 19% to 20% due in part to the benefit of a shift in impression mix towards Sponsored Snaps and Spotlight. With the combination of accelerating top line growth and more efficient scaling of adjusted cost of revenue, adjusted gross margin reached 55% in Q3, up from 52% in Q2 and 54% in Q3 of the prior year. Adjusted operating expenses were $654 million in Q3, up 8% year-over-year. Personnel costs increased 12% year-over-year, driven by an 8% increase in headcount.
Our hiring in Q3 was tightly focused on our core strategic priorities of improving advertising performance, enhancing our SMB go-to-market efforts, driving more personalized and fresh content as well as expanding our leadership in AR. Higher legal costs, including litigation and regulatory compliance-related costs were an additional driver of operating expense growth in Q3. The increases in personnel and legal costs were partially offset by lower marketing expenses compared to the prior year due to a combination of cost efficiency initiatives and timing factors on marketing expenses in Q3. Adjusted EBITDA was $182 million in Q3, an improvement of $50 million compared to the prior year.
Adjusted EBITDA flow-through or the percentage of year-over-year revenue growth that flowed through to adjusted EBITDA was 37% in Q3 and contributed to adjusted EBITDA margins expanding 2 percentage points to reach 12% in Q3. Net loss was $104 million in Q3 compared to a net loss of $153 million in Q3 of the prior year. The $50 million year-over-year improvement largely reflects the flow-through of a $50 million increase in adjusted EBITDA, a $32 million increase in other income due primarily to repurchasing convertible notes at below par prices, offset by a $29 million increase in interest expense, reflecting high-yield notes issued earlier this year.
Stock-based compensation and related payroll expenses were $268 million in Q3 or approximately flat year-over-year as progress towards a flatter and leadership structure largely offset the impact of growth in full-time headcount in Q3. Free cash flow was $93 million in Q3, while operating cash flow was $146 million. Over the trailing 12 months, free cash flow was $414 million and operating cash flow was $617 million, as we continue to balance investments with top line growth to deliver sustained positive cash flow. Dilution or the year-over-year growth in our share count was 3.1% in Q3, as share repurchases completed earlier this year partially offset the impact of SBC on share count growth.
We ended Q3 with $3 billion in cash and marketable securities and just $47 million in convertible notes set to mature between now and the end of fiscal 2026. We believe that our robust free cash flow generation and the strength of our balance sheet, ensure that our business has sufficient capital and financial flexibility to invest confidently to drive long-term growth. Our Q4 revenue guidance range is $1.68 billion to $1.71 billion implying year-over-year revenue growth of 8% to 10%. From a cost perspective, we are tracking well against our full year cost structure guidance. For infrastructure, our guidance was for quarterly costs of $0.82 to $0.87 per DAU, and we hit the midpoint of this range in Q3. In Q4, we anticipate that infrastructure cost will post a modest sequential rise to between $420 million and $435 million.
For all other cost of revenue, our full year guidance range was 19% to 21% of revenue. A mix shift in delivery of impressions towards Sponsored Snaps and Spotlight helped to reduce this to 18% in Q3, and we anticipate being in the 18% to 19% range in Q4. For adjusted operating expenses, we provided full year guidance of $2.7 billion to $2.75 billion which we reduced to $2.65 billion to $2.7 billion earlier this year. And we currently estimate we will end the full year nearer the low end of this reduced range. For SBC and related expenses, we guided for a range of $1.13 billion to $1.2 billion for the full year.
We reduced this to $1.1 billion to $1.13 billion earlier this year, and now estimate we will come within a further reduced range of $1.08 billion to $1.1 billion. Given the revenue range above and the progress we have made to optimize our cost structure, we estimate that adjusted EBITDA will be between $280 million and $310 million in Q4. Given the strength of our balance sheet, our progress towards sustained free cash flow generation and our desire to opportunistically manage our count for the benefit of our long-term shareholders. We have authorized a new share repurchase program in the amount of $500 million.
As we look to close out 2025, we are excited by the opportunities ahead of us to accelerate top line growth, further diversify our revenue sources and make meaningful progress towards profitability in the year ahead. Thank you for joining our call today, and we will now take your questions.
[Operator Instructions] The first question comes from Rich Greenfield with LightShed Partners.
I've got a couple. On the Perplexity partnership, which is really interesting that you're going to add it on to Snap AI, is the cash stock split already determined Evan? Or could it actually change based on factors that you can help us understand? And you talk about monetization for the partnership starting in 2026. The Snap ad sales, like will your ad sales team be selling ad units that appear in Perplexity or just help us understand what monetization could look like inside this Perplexity bot that's going to live inside a Snap.
And then just a question for Derek. On a 2-year stack basis, it looks like cost of revenue really came down. You talked about a shift to Spotlight and Sponsored Snaps should we presume that the reason why we're seeing that leverage in cost of revenue is because you're not paying out to content owners the way you do in Discover for those ad units. Just would love to understand those 2 main things.
Rich, thanks so much for the question. We're really excited about the Perplexity partnership. And I think it sort of underscores Snapchat's role as a messaging service and how valuable that is in the age of AI, especially because Snapchat engagement is built around real relationships between friends and family, but also because conversational assistance is very quickly becoming the primary way that people are choosing to interact with information on the Internet. So I think we have a really unique opportunity ahead to help distribute AI agents through our chat interface and launching with Perplexity next year to bring their answer engine to Snapchat really in the default placement in our chat inbox is going to be really valuable to our community and hopefully, very valuable to Perplexity into Snap as well.
And I think Perplexity's focus on trusted and verifiable sources really aligns with our values and makes them a good fit for our community. I think to answer your question from a monetization perspective, we don't expect to recognize any of the 400 million until we begin to roll out the integration likely towards the beginning of next year. And Perplexity will control the responses from their chatbot inside a Snapchat. So we won't be selling advertising against the Perplexity responses.
But I do believe that the placement will help Perplexity drive additional subscribers, which I think is something that will be valuable to their business. I think just looking ahead, one of the things that's really exciting is the opportunity to expand to more partnerships. And advertisers are very focused on leveraging Sponsored Snaps to distribute conversational commerce experiences with their brands. So that's something we'll be experimenting with as we kick off next year.
I start thinking I can take the cost element of that question. As Evan noted in his letter earlier this call, we see a lot of opportunity to expand our gross margins, and we're working across a number of different fronts to achieve this including by improving the top line growth as well as becoming more efficient on cost of sales. So on the revenue front, we're broadly taking steps to better monetize our core product value. So we see Sponsored Snaps and Promoted Places were first steps on that journey.
The ongoing growth of Snapchat+, the introduction of Lens+ and now the recent announcement and testing of memory storage plans are all examples with the latter being a great example of an area where we can flip a cost structure into a revenue-generating business line, the Perplexity deal is yet another example of a new line of revenue generation that helps expand the margins also. On the cost side, we see several dimensions to this, including work to optimize our content programs, recalibrating our investments in community growth and the cost to serve our community to better match the long-term financial potential of each market.
In Q3 specifically, we're seeing the benefit of a mix shift in where impressions are being delivered, in particular to Sponsored Snaps and to a certain extent, Spotlight and as you've noted, these surfaces have higher margins, and this contributed directly to gross margin improvement of 55% in Q3, up from 52% in the prior quarter and 54% in the prior year. So lots of work to do there, but we're excited about the progress and what we saw there in Q3.
Next question comes from Mark Shmulik with AllianceBernstein.
Evan, just a follow-up on that last answer kind of beyond Perplexity. How do you see Snaps are all evolving here as kind of this distribution channel? It sounds like there may be something about kind of brand messaging integrations, but could we potentially see the ad stack open up as well? And then Derek, kind of on the commentary around the Q4 engagement headwinds, if we try to compartmentalize that, is the bulk of that kind of like onetime in nature as we kind of think about some of these regulatory type headwinds and then we kind of rebuild the ramp from there.
Is that the right way to think about it?
Thanks so much for the question. I think as it pertains to opening up the platform further, what we're seeing is a lot of our advertising clients are investing a lot in these conversational experiences, whether they're educational or really designed to improve consideration or folks who are going and developing full-fledged commerce experiences inside their own chatbots. But despite all this investment in building out that customer experience, folks are struggling to find distribution channels for those experiences. And so while there's a lot of development of AI agents right now, I think we're very quickly seeing people shift their focus to try and to develop more distribution.
So I think given Snap's primary engagement around messaging, there's a real opportunity to open up our chat inbox and chat interface to more of these agents and to really to distribute them through our Sponsored Snaps products. So that's an area of investment for us. The work we're doing to support Perplexity and the development of our APIs there will also support other partners over time, and it's certainly something we're excited about. I think it's also a really compelling customer experience given what we're seeing in the way people are shifting their behavior patterns to engage with these chatbots.
So definitely, as a chat service, we're very excited about the evolution in the customer expectation there. I think as it pertains to the overall DAU growth and our efforts. We've been doing a lot to overcome ongoing engagement headwinds to DAU, primarily by introducing new conversation starters. So if you think historically on Snapchat a lot of conversations have been started by folks replying to friends stories.
As we've seen engagement shift from things like friend stories to content posted on Spotlight, for example, we have to migrate that friend story replied behavior to things like sharing Spotlight videos or reposting Spotlight videos or playing games with friends, and we've got some forthcoming product initiatives as well that are oriented around new ways to start conversations and spark conversations with friends. I would say big picture though, in terms of our growth in daily active users. I outlined in my letter, I think that was released back in September, this crucible moment for Snap and really a pivot to more profitable growth during this period.
And we tried to provide a few examples in the earnings release, but we're experimenting with things like changing the way we do prefetching and cashing in certain geographies for our content business changing the candidate size, number of candidates essentially in our ranking and retrieval systems in certain geographies and really trying to line up our infrastructure and marketing investments against the geographies where we see the largest long-term monetization potential. So I do think there will be trade-offs there in terms of engagement. But ultimately, as we focus on more profitable growth, I think those are trade-offs that we're going to want to accept.
And then -- we're also, of course, investing in things like memory storage plans or Lens+. I think those are things that reflect the real in terms of large-scale cloud storage or new AI tools in Lens+, but those also add some friction to the user experience. And then I think perhaps most importantly, we're going to be proactive. We're going to get on the front foot when it comes to rolling out age assurance.
There are new age assurance signals that Apple is providing us. This quarter, we're going to use those signals to detect underage users. I think Google is rolling out a solution as well, perhaps at the beginning of next year. And so as we roll out those age assurance signals that may have an impact on daily active users as well.
But -- but we think that's the right thing to do. It's important for maintaining trust with our community and, of course, as well with regulators, but that could be a headwind to growth as well.
[Operator Instructions] The next question comes from Doug Anmuth with JPMorgan.
This is Maggie on for Doug. We can tell that midsized advertisers are clearly focused for Snap. Could you just expand a bit more on your go-to-market efforts and product road maps to unlock greater spend from this segment?
Yes. We're so excited about the growth we've been seeing with our small and medium-sized customers. We've obviously got very strong product market fit with our app product, lead gen, of course, our web direct response product as well. A lot of what we've been focused on from a product perspective, are things like speeding up signals onboarding or simplifying account setup.
We've also improved partner onboarding as well, which is helping us scale, and we've seen some improvements in the median log in to spend time for that advertiser. cohort. I also just want to recognize the business development team has been doing a great job onboarding more customers. So we'll definitely be investing there as well as we work to further accelerate the growth we're seeing with small and medium customers.
The next question comes from Michael Morris with Guggenheim Securities.
Wanted to ask about direct response advertising. Can you share how much was the 8% growth in the quarter an acceleration from the core trend in the second quarter when we removed the impact of the execution error that you guys had. And then as you look forward, can you return to double-digit growth in direct response advertising. And if so, I know that you have a number of initiatives.
I appreciate all the details. But would you maybe give us the top 2 or 3 contributors that can really impact that growth rate over the next year and I've got just slip one more in. Following the error that you did experience last quarter, could you just provide an update on your comfort and confidence with the stability of the bidding and optimization tools now that -- to kind of ensure that you wouldn't have that happen again.
It's Derek speaking. Thanks for the question. Yes, direct response revenue was up 8% year-over-year in the most recent quarter. It was an acceleration of 3 percentage points over the prior quarter.
So we're pleased with the progress there. What we saw was good strength in our pixel purchase demand as well as the app to optimizations and really broadly across the SMB segment, helping to drive that acceleration in the quarter. When you're looking at ad revenue broadly with direct response being the vast majority of it, we saw really good strength across Europe and rest of world. Europe in particular, grew 12% year-over-year.
That was an acceleration of 6 percentage points. Rest of World grew 13%, which is an acceleration of 10 percentage points in the quarter. So really strong results there, both across LCS and in particular, the SMC market there. As we look at North America, that business still lagged a little bit and so dragged on the rate of acceleration on the overall business as well as in DR specifically.
Within North America, though really pleased with what we're seeing on the SMB segment up to more than 25% year-over-year in Q3. So given the strong momentum that we're seeing in Europe and Rest of World and with the SMB business globally, we're pretty pleased with what we're seeing on both the ad platform and our ad units there in terms of driving improvement on revenue and the business generally. I think as it pertains to our large client segment in North America, we saw a small decline there. We've been really focused on doubling down on what's working in the business, but also making targeted adjustments or go-to-market operations there in order to drive growth.
We don't have recovery in that North America large client segment really baked in Q4, obviously, with the guide, but we expect that the work that we're doing there will help us build momentum over time. And if we can bring the growth in that portion of the business back up to what we're seeing elsewhere than that is the path to further improvement in the overall growth in ads business going forward. So hopefully, that gives you a sense of what's driving the growth and acceleration on DR. And of course, we're watching our ad platform extremely carefully and the road map there and working with our teams to execute well there, and I think it's showing up in the results that we're seeing on the ad platform across the business globally.
Thanks very much.
The following comes from Shweta Khajuria with Wolfe Research.
Okay. I just had a quick 1 on infrastructure costs for next year. I guess, could you please talk to your conviction level on keeping infrastructure costs basically flat next year? And what, in your view, could drive those costs higher? And when would you think you would step in?
It's fair speaking here. There's a number of different drivers here. Obviously, over the last several years, one of the really big drivers of our growth in infrastructure cost has been the rapid growth and investment of ML and AI infrastructure. And we do expect that we're going to be able to deploy capacity there, but we're getting a big focus on capacity utilization improvement.
The other is we've scaled the business, obviously, a lot with the growth in our community and there's an opportunity for us to do work around the efficiency of that cost structure and our cost to serve. So both in terms of the services we're utilizing from our cloud partners, the pricing of those services, but then also just how we're engineering our product and the cost to serve, which Evan talked about a little bit earlier in terms of our ability to calibrate that cost to serve relative to each market and its long-term financial potential. And so we think across each of these vectors that there's a lot of opportunity for us to make progress on the infrastructure costs and make progress towards that specific goal we had stated of working to make infrastructure flat into 2026. Hopefully, that gives you a little more color.
The final question comes from Ross Sandler with Barclays.
Great. Evan, just a question on spectacles. So there have been recent press reports about potential financial partners. And I think some of your peers have done partnerships with these manufacturing or distribution entities.
So what's your latest thinking here? And your AR software stack is fairly advanced versus the field for smart glasses. So how are you thinking about leveraging software versus the hardware side? Just any updated thinking there would be great.
Thanks so much for the question, Ross. We've got a really exciting year ahead here as we prepare for the public release specs. And we've been thinking a lot about ways to accelerate our technical leadership in the space is a form factor, obviously, we've been focused on now for more than a decade. And I think we've been able to really leverage our advantages in terms of lens core huge ecosystem of lenses that have already been built, the amazing developer tools and Lens Studio and obviously, now the Snap operating system that runs on the current developer version of specs.
So one of the things that we have been doing to create more optionality in terms of our ability to accelerate is putting specs into their own stand-alone 100% owned subsidiary. That will give us some options as we think about potential partners to work with to accelerate our leadership here in the space as we prepare for the public rollout. So definitely some great opportunities to partner. We really believe that the killer use case for specs is lenses, and we've seen some incredible lenses that have been created so far almost weekly, it seems like developers are rolling out new and unique experiences.
So if you haven't gotten a chance to check out the latest, I'd highly recommend it. Thanks so much.
This concludes our question-and-answer session as well as Snap Inc.'s Third Quarter 2025 Earnings Conference Call. Thank you for attending today's session. You may now disconnect.