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Snap (SNAP) Q2 Loss Widens, Revenues Miss, Stock Plunges


Shares of Snap Inc. SNAP were down more than 16.7% in the after-market trading session as the company reported dismal second-quarter 2017 results. Investors look worried about the company’s long-term prospects as the results clearly depict a slowdown in user base and revenue growth rate.

For the quarter, Snap reported loss per share of 36 cents, much wider than the Zacks Consensus Estimate of 29 cents and the year-ago quarter’s loss of 14 cents.

Since Mar 2, the company’s shares have declined 43.8% against the industry’s gain of 7%. Shares are now trading at around $12, much below the company’s IPO price of $19.

Quarter in Detail

For the quarter, messaging app Snapchat’s parent company reported revenues of $181.7 million, which missed the Zacks Consensus Estimate of $186.9 million. It did register a 153% year over year. However, in the first quarter of 2017, revenues had registered 286% year-over-year jump.

On a sequential basis, revenues were up 21% driven by strong ad revenue growth. Ad revenues grew 146% year over year and 25% sequentially.

However, revenues from other sources, which include spectacles, were just $5.4 million, compared with $8.3 million reported in the first quarter of 2017. Revenues fell despite Snap starting to sell spectacles in Europe as well on Amazon AMZN.

Furthermore, the company’s daily active users (DAU) and average revenue per user (ARPU) witnessed year-over-year improvement. DAU jumped 21% year over year to 173 million, while ARPU improved to $1.05 from 50 cents recorded in second-quarter 2016.

Snap Inc. Price, Consensus and EPS Surprise

Snap Inc. Price, Consensus and EPS Surprise | Snap Inc. Quote

However, on a sequential basis, DAU increased a meagre 4%, while ARPU saw a 16% increase from 90 cents recorded in first-quarter 2017.

Region wise, revenues from North America grew 126% to $147.6 million while international revenues grew 9% to $34.1 million. Sequentially, revenues grew 15% and 14% respectively.

The company’s main cost, hosting costs per DAU, was somewhat steady. It was 61 cents for the quarter, compared with the year-ago quarter figure of 55 cents, and the previous quarter figure of 60 cents. Engineering saving initiatives almost offset the growth witnessed in user engagement, time spend, snaps created and other metrics, per the management.

Snap’s cost of revenues increased 60.6% to $152.2 million on a year-over-year basis. The company noted that its operating expenses for the quarter increased 17% sequentially to $228.7 million, mainly due to continued investments to acquire engineering talent.

Gross margin was 19% compared with 13.9% reported in the year-ago quarter, driven mainly by ad revenues as well as cost leverage on revenue share expenses.

The company ended the quarter with cash and marketable securities of $2.8 billion, up from $987.4 million as of Dec 31, 2016. During the quarter, Snap used approximately $209.6 million of cash for operational activities. Free cash outflow was $229 million.

Our Take

Snap’s slowing user base and revenue growth rates might dampen its growth opportunities. User growth holds the key in attracting advertisers, which is the primary source of revenues for Snap. A slowdown in user base growth rate may look unattractive to advertisers.

Interestingly, analysts have related the slowdown in Snapchat’s user growth to the popularity of Instagram Stories, a blatant rip-off of the former’s hallmark feature.

In August last year, Facebook FB added the “Stories” feature – a slideshow of photos and videos that vanishes after 24 hours – to Instagram. “Stories” proved to be a massive hit, with 200 million daily actives by Apr 2017. Moreover, in the next two months Stories added another 50 million daily actives, taking the total count to 250 million actives by June. In contrast, Snapchat’s total DAUs are a little more than173 million.

Facebook has also added the same on WhatsApp, Messenger as well as on its main platform. Not just Stories, the company has also added a lot more features that are eerily similar to Snapchat.These include augmented reality (AR) filters, hashtag stickers, and direct messaging features (enabling users to send text and disappearing photos and videos in the chat section).

According to analysts, this is a brilliant case of a copycat improvising better than the original. Facebook not only introduced Snapchat-inspired features but made it more popular than Snapchat.

However, Snap has been trying to combat all odds by adding a number of new features to boost engagement and user growth in the last quarter. These include Stories in Search, 3D World Lens, Custom Stories, Snap Maps and Geofilters. In addition, to boost engagement levels over the long term, the company has been focused on boosting TV-style content on its platform. In the second quarter, it inked a $100 million content deal with Time Warner Inc TWX to create 10 shows for its platform across various genres.

It rolled out its self-service ad platform in June. Also, in order to woo advertisers, the company acquired Placed (in June), a startup specializing in measuring success of digital ad campaigns.

It remains to be seen whether these factors help to drive user growth

The stock currently carries a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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