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Snap (SNAP) Q3 Loss Widens Y/Y, Revenues Miss Estimates


Snap Inc. SNAP reported loss per share of 14 cents, in line with the Zacks Consensus Estimate but wider than the year-ago quarter’s loss of 13 cents.

The company reported revenues of $207.9 million, which missed the Zacks Consensus Estimate of $233.1 million but grew 62% year over year. Though revenues increased, the growth rate has come down significantly when compared with the past quarters. Reportedly, in the first and second quarters of 2017, the company’s revenues had registered 286% and 153% year-over-year increase, respectively.

Notably, shares of Snap have lost 38.3% of their value since its listing date of Mar 2, 2017 against 18.9% growth of its industry.

Quarter in Detail

Ad revenues of $204 million in the quarter grew 59% year over year and 16% sequentially. Revenues from other sources contributed therest.

The company’s daily active users (DAU) and average revenue per user (ARPU) witnessed year-over-year improvement. DAU jumped 17% year over year to 178 million, while ARPU improved 39% to $1.17.

Notably, on a sequential basis,DAU increased a meagre 2.9%, down from 4.2% increase in the secondquarter and 5% in the first quarter.

The company’s main cost, hosting costs per DAU, was 68 cents, compared with the year-ago quarter figure of 64 cents and the previous quarter figure of 61 cents.

Moreover, in the quarter, the company recorded $39.9 million of charges for excess inventory for Spectacles.

Snap’s cost of revenues increased 64.9% to $210.7 million on a year-over-year basis. The company noted that its operating expenses for the quarter decreased2% sequentially to $223.1 million, mainly due to a decline in employee expenses and legal costs.

Gross margin of 21% increased 2,000 basis points (bps) from 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, cash equivalents and marketable securities of $2.3 billion, down from $2.8 billion as of Jun 30, 2017. During the quarter, Snap used approximately $194 million of cash for operational activities. Free cash outflow was nearly $220 million.

Our Take

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

The company’s transition to programmatic auction resulted in over 60% year-over-year decline in CPM, which impacted revenues. We believe it will take time for the benefits of such an auctioning model to materialize for the company.

Stiff competition from the likes of Alphabet GOOGL, Facebook FB and Twitter TWTR in the digital ad market remains an area of major concern. The total addressable market (TAM) of these companies is much larger compared to Snapchat.

Facebook not only introduced Snapchat-inspired features on Instagram but made it more popular than Snapchat. Per Piper Jaffray’s report, Snapchat doesn’t enjoy a “unique user base” as 90% of the users also use Instagram

In our opinion, advertisers are more likely to opt for Instagram whose TAM is thrice that of Snap's. Facebook and Instagram boast over 6 million and 2 million advertisers, respectively. Both platforms also have very high daily active users (Facebook has 1.37 billion DAUs and Instagram has 500 million DAUs).

To put it simply, it’s unlikely for advertisers to pay for Snap’s services as its reach is comparatively limited.

However, per management, the launch of 3D Bitmojis in September resulted in a 20% increase in the usage of world lenses. We believe Snap is tryingto combat all odds by adding a number of new features on its platform to boost engagement and user growth going ahead.

The company’s decision to redesign the application taking into account the technical glitches is expected to boost its popularity among Android users. Moreover, the company’s initiatives to improve its service in the international markets are also a positive.

Currently, Snap carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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