Shares of Snap tumbled 19% in after-market trading.
The Santa Monica, California-based company, which owns photo messaging app Snapchat, has long been known to jumpstart new trends in social media that have been copied by larger rivals, but has faced investor questions about whether it can turn its investments in new technology like augmented reality (AR) into revenue growth.
While Snap said it was not providing formal financial guidance, its internal revenue forecast for the second quarter is $1.04 billion, which would be a 6% decline year-over-year. The internal forecast is below analyst expectations of $1.13 billion, according to IBES data from Refinitiv.
In a letter to investors, Snap said it was taking steps to improve the relevance of ads shown to users and simplify how people can interact with Snapchat ads.
As a result of the changes, a small number of Snap's largest advertisers are seeing fewer "actions," such as users tapping on ads, than they did previously, Snap said.
The company said it would take time for its advertising systems to adjust to the updates and result in better performing ads.
"We are optimistic that our ad platform improvements are laying the foundation for future growth," said Snap Chief Executive Evan Spiegel, during an earnings conference call with analysts.
In contrast, Alphabet (GOOGL.O) and Meta Platforms (META.O), the two largest digital ad platforms in the world, posted upbeat first quarter results this week, as brands turned to the companies for their vast reach among consumers and well-developed ad tools.
Snap's revenue for the first quarter ended March 31 was $989 million, down from $1.06 billion in the same period last year, and missing analyst expectations for $1.04 billion.
Snap's revenue decline "is a signal of deep challenges at the company," said Insider Intelligence principal analyst Jasmine Enberg.
"Snapchat users primarily use the app for messaging, and messaging apps are notoriously difficult to monetize," she said.
Snap's net loss was $329 million during the quarter, narrowing from a net loss of $360 million the previous year.
Along with AR, Snap has deepened its investment in artificial intelligence and recently expanded its chatbot called My AI to all Snapchat users globally.
At an annual gathering for content creators, advertisers and other partners last week, Snap also announced My AI will be able to respond to user messages with a fully AI-generated image.
Spiegel said on Thursday the company is in the early stages of experimenting with sponsored links in text generated by My AI.
Daily active users on Snapchat rose 15% year-over-year to 383 million, in line with Wall Street expectations.
Snap said it expects between 394 million and 395 million daily active users in the second quarter.
Snap and Pinterest lost more than $4 billion in combined stock market value on Thursday following their results.
