Snap restructures ad business amid worst sales growth rate in its history

© Reuters. FILE PHOTO: The Snapchat app logo is seen on a smartphone in this picture illustration taken September 15, 2017. REUTERS/Dado Ruvic/Illustration/File Photo

By Sheila Dang

(Reuters) - Snap Inc (NYSE:SNAP) said on Wednesday revenue growth in the third quarter is running at the slowest rate in the company's history, as high inflation, rising interest rates and a deteriorating economy continues to ravage the advertising industry.

As a result, the parent company of Snapchat said it will cut 20% of all staff, restructure its advertising sales unit and shut down projects including mobile games and novelties like a flying drone camera, in order to focus on improving sales and the number of Snapchat users. Snap had more than 5,600 employees at the end of last year.

Investors have viewed Snap as an early indicator for trends affecting other social media platforms including Facebook (NASDAQ:META) owner Meta Platforms, Pinterest (NYSE:PINS) and Twitter (NYSE:TWTR), as the company is usually first to report quarterly earnings or provide business updates.

Snap's warning in May that it would miss its revenue targets due to worsening economic conditions sparked a selloff of social media stocks.

Shares of Santa Monica, California-based Snap closed down 2.5% at $10 on Tuesday after The Verge first reported Snap's plans for layoffs, and AdAge reported the departure of two top advertising executives.

Revenue growth so far in the third quarter is up 8% over the previous year, which is "well below what we were expecting," Chief Executive Evan Spiegel wrote in a memo to employees that was also released publicly on Wednesday.

If that growth rate holds, it would be the slowest revenue growth Snap has had since becoming a public company in 2017 - a far cry from triple-digit growth rates it has recorded in previous quarters.

Two of Snap's top ad sales executives - Chief Business Officer Jeremi Gorman and Vice President of ad sales Peter Naylor - are leaving to join Netflix (NASDAQ:NFLX) and build the streaming service's ad business.

Gorman, a long-time advertising executive who previously worked at Amazon (NASDAQ:AMZN), was instrumental in building Snap's ad business, said Jasmine Enberg, principal analyst at research firm Insider Intelligence.

Gorman and Naylor's departures come after Snap reported a disappointing second quarter and is facing more competition from TikTok, she said.

"Snap is clearly going through a tough time," Enberg said.

'FACE THE CONSEQUENCES'

Despite reducing spending in some areas, Snap must now "face the consequences of our lower revenue growth and adapt to the market environment," CEO Spiegel wrote in the memo.

Senior vice president of engineering Jerry Hunter will be promoted to chief operating officer and will be responsible for improving coordination between engineering, ad sales and product teams, Spiegel said.

Snap and other social media platforms including Meta have all suffered from privacy updates that Apple (NASDAQ:AAPL) introduced on iPhones last year. These have made it difficult for digital ad sellers and advertisers to target ads to relevant audiences and measure their sales results.

Closer collaboration between engineering and sales could potentially help Snap improve targeting and measurement of its ads.

The restructuring of the ad sales division also includes three new president roles that will oversee the Americas, Europe, Middle East and Africa, and Asia-Pacific regions.

Snap will also discontinue investment in its Pixy flying drone camera, just a few months after debuting in May.