Snap cancels $400 million Perplexity AI mega deal amid ad revenue pressure

Snapchat's founder company, Snap, recently took a bold step by ending a $400 million mega-deal with Perplexity AI.

The Snap-Perplexity AI deal, which aimed at offering answers to users' questions within the Snapchat app, was unveiled in November.

The decision came as Snap said on Wednesday its first-quarter advertising revenue was impacted by the ‌conflict in the Middle East and slowing growth in North America, sending its shares 7% lower in extended trading.

Snap's North America revenue growth slows

Advertising revenue rose 3% to $1.24 billion in the quarter, driven by direct response ads, designed to prompt specific actions like app downloads or website visits.

The company said it had an estimated $20 million to $25 million impact from the Middle East conflict during March and that it expects the geopolitical uncertainty to persist.

Squeezed between dominant platforms such as TikTok and Meta's Instagram in a crowded market, Snap has been turning to subscriptions to boost its revenue.

Revenue of $1.53 billion for the first quarter came in line with LSEG-compiled analysts' average estimate.

Snap expects second-quarter revenue of $1.52 billion to $1.55 billion, in line with estimates.

In contrast, rivals Meta, Pinterest, and Reddit reported upbeat first-quarter revenue. Analysts have said smaller platforms remain most exposed to ad budget cuts during geopolitical uncertainty, as spending ‌concentrates on larger platforms such as Meta and Google.

Snap shares lag those of rival social media companies

Snap reported 483 million daily active users in the first quarter, adding 9 million from the prior quarter. But DAUs in North America declined, while revenue growth in the region slowed to 2%.

The company's average revenue per user (ARPU) declined sequentially to $3.17 in the quarter and missed analysts' estimates of $3.21, as it focuses on international markets including the Middle East, North Africa, India, and Asia Pacific.

Snap's daily active user growth slows

Adjusted earnings before interest, taxes, depreciation, and amortization of $233.3 million exceeded estimates of $205.9 million.

"Nearly 70% of advertising spend now uses at least one of our AI-powered automation solutions," Snap said in its letter to shareholders.

Last month, Snap said it would lay off about 1,000 employees after Irenic Capital Management pushed the company to optimize its portfolio and improve performance.

Snap's revenue rises 12% in first quarter

The news came soon after Snapchat's founding platform previously waved off nearly 20% of its staff in the latest AI push.