Snap Inc. released its Q1 earnings this week.
Details and Implications:
Snap’s share price fell significantly after its Q1 2018 earnings disappointed investors, suggesting that its growth spurt last quarter may not have been the beginning of a trend but instead an anomaly. Though revenue increased nearly 50% to $230.7m in Q1 2018 (vs $149.6m in Q1 2017) it was well below analysts’ expectations of $244.5m and a decrease of 19% on last quarter’s revenues. This was blamed on seasonality and a redesign of the Snapchat app.
Daily Active Users (DAU), the magic measure of how a digital platform is really faring, grew from 166 million in Q1 2017 to 191 million in Q1 2018, an increase of 15% year-on year but below estimates of 194 million. Revenue per user rose 34% year-on year to $1.21 but less than analyst expectations of $1.25 and down 21% on last quarter. The cost of revenue per users also increased 5% year-on-year to $1.03 and up 1% on last quarter. Snap’s adjusted EBITDA loss was $217.9m in Q1 2018, an increase of 16% year-on-year and 37% sequentially. Snap made several rounds of layoffs in the last year in an effort to curtail some of its losses but so far this move hasn’t made the impact intended.
Despite the gloom there were also positive highlights, as total advertising revenue for the quarter was $229m, an increase of 62% year-over-year but down 6% sequentially. Consistent with previous quarters, the fastest growing product in Q1 was Snap Ads and specifically Snap Ads sold programmatically. Chief financial officer Drew Vollero said that “sales growth continues to outpace cost growth”.
Snap acknowledged that the much maligned new design of Snapchat hurt results but confirmed it was sticking with its plan to keep content from friends separate from other publishers. It did however disclose that it was now focused on optimizing the redesign based on ongoing experimentation and learning: “The redesign lays the foundation for the future of both our communication products and our media platform and we look forward to doubling down on both,” Chief Executive Evan Spiegel said during an analyst call.
Spiegel also said that time spent with the App remained more than 30 minutes per day on average following the redesign.
In order to manage future expectations COO Imran Khan warned that the company was planning for its Q2 growth rate to decelerate substantially from Q1 levels but said that he was excited about the second half of this year because of “the progress we are making in our three focus areas: enhancing our ad product suite, developing efficient tools for our advertisers and proving the effectiveness of our advertising.”
Snap has challenges ahead with slow user growth rate, declining revenues per user, increased losses and warnings that Q2 growth will decelerate too. The share price has taken a hammering this week with a 20% drop on the news. Whether the focus on optimizing the redesign and enhancing its ad product suite can help it bring back users and return to growth remains to be seen.