By Sheila Dang

(Reuters) -Photo messaging app-owner Snap Inc on Tuesday gave weaker third quarter guidance than analysts had expected as it works to compete with tech giants for advertising dollars, sending its shares down 17%.

Snap, which owns the Snapchat app, has attracted hundreds of millions of users thanks to its lighthearted photo filters and new AI-powered chatbot that can answer questions. But it has struggled to consistently grow revenue and catch up to rivals like Facebook-owner Meta Platforms, prompting questions from analysts and investors about its strategy.

The Santa Monica, California-based company said it estimates third quarter revenue will be between $1.07 billion to $1.13 billion. Analysts were expecting revenue of $1.13 billion, at the top end of the guidance range.

Similarly, Wall Street forecast 406.2 million users in the third quarter, but Snap said it expects between 405 million to 406 million daily active users.

Shares of Snap dropped 17% to $10.37 in after-market trading following the results.

Earlier this year, the company updated its machine learning model to serve more relevant promotions to users, which Snap said in the short term caused a small number of its largest advertisers to see fewer "actions," such as users tapping on ads, than they did previously

Advertisers are beginning to see results from the changes, which led to a more than 30% increase in "purchase-related conversions" compared to the first quarter, Snap said its Tuesday letter to investors.

The improvements also helped Snap grow the total number of advertisers on its platform, though it is not yet enough to make up for the lower ad demand from some larger brands, it added.

Still, the tech company beat revenue and user estimates for the second quarter.

Revenue for the quarter ending June 30 was $1.07 billion, beating analyst expectations of $1.05 billion, according to IBES data from Refinitiv.

Daily active users on Snapchat rose 14% year-over-year to 397 million, beating Wall Street expectations of 394.8 million. More than 150 million people have also sent more than 10 billion messages to My AI, a ChatGPT-powered bot launched in February.

Conversations with My AI will help Snap learn more about user interests and lead to more relevant ads, the company said, adding it is beginning to test sponsored links in My AI's responses.

Snap's net loss was $377 million during the second quarter, narrowing from a net loss of $422 million the previous year.

(Reporting by Sheila Dang in Dallas; editing by Susan Heavey)