Snap Inc. (Snap (SNAP)) shares took a hit Thursday after the company reported first-quarter results and quietly revealed that its much-hyped partnership with AI search startup Perplexity AI had come to an end. Investors, who had been excited about the deal's potential to boost profitability, were left to digest a mixed advertising recovery and softer guidance for the current quarter.

Snap said its second-quarter revenue outlook assumes "no contribution from Perplexity" after the partnership ended amicably in the first quarter. A Wall Street Journal report had previously noted that the relationship with Perplexity had raised investor expectations for improved profitability.

Advertising Recovery Remains a Concern

Snap reported a first-quarter loss of 5 cents per share, beating estimates for a 7-cent loss, while revenue rose 12% year-over-year to $1.53 billion, slightly above estimates of $1.528 billion. But the details were less rosy. The company said large advertisers in North America remained a headwind, and recovery among those advertisers "remains early and uneven."

Snap also cited a $20 million to $25 million impact from geopolitical headwinds in the Middle East, declining ad pricing, and near-term revenue pressure from newer advertising products. North America revenue increased just 2% year over year to $851 million, trailing stronger growth in Europe and the Rest of World.

For the second quarter, Snap projected adjusted EBITDA of $175 million to $200 million, below the first-quarter levels, while warning that operating conditions in the Middle East remain uncertain. On Perplexity, Snap stated, "Our revenue guidance range assumes no contribution from Perplexity as we amicably ended the relationship in first quarter."

Profitability and User Growth Improve

Despite the ad headwinds, Snap showed improving profitability and cash generation. Net loss narrowed to $89 million from $140 million a year earlier, while adjusted EBITDA more than doubled to $233 million. Free cash flow surged 150% year-over-year to $286 million.

The company also reported continued engagement growth, with daily active users rising 5% to 483 million and monthly active users reaching 956 million. Snap highlighted momentum in subscriptions, augmented reality engagement, and its Specs smart glasses platform ahead of a planned launch later this year.

SNAP Price Action: Snap shares were down 1.97% at $5.98 at the time of publication on Thursday, according to market data.