Snap, Inc.'s 1st Quarter in 7 Charts
Snap (NYSE: SNAP) made its first-ever earnings report as a publicly traded company last week, and investors were not happy with the first-quarter results. The company missed top-line expectations, and its daily active user count didn't grow as much as expected.
While disappointing, the earnings report gave investors yet another glimpse inside the company that many are still learning about. Here's a breakdown of Snap's first quarter in seven charts.
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Data source: Snap 10-Q and S-1 filings.
More important than even revenue growth right now for Snap is Snapchat's daily active user (DAU) growth. The company saw a stark slowdown in growth over the second half of 2016, and that trend continued into the first quarter this year. DAUs increased just 8 million, concentrated in North America and Europe. Snapchat has added just 1 million users in the rest of the world over the past two quarters. Analysts were expecting Snapchat to add 9 million to 10 million new users.
Daily users still grew 36% year over year, but that's slowing significantly from last year. It did, notably, reaccelerate sequentially from the fourth quarter, when the company added just 5 million users. With a tough comparable quarter coming up, user growth should slow even further in Snap's next report.
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Data source: Snap 10-Q and S-1 filings.
Without robust user growth, ad revenue slowed sequentially from the fourth quarter. While there's certainly some seasonality in the advertising business, Snapchat's in the relative early stages of monetization, and such a significant sequential decline is somewhat surprising.
Comparatively, Facebook's (NASDAQ: FB) revenue declined just 9% from the fourth quarter even while it faces ad load saturation. And while Snap's daily user growth is slowing, it still increased at a slightly faster rate than Facebook on a sequential basis.
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Data source: Snap 10-Q and S-1 filings.
Combining revenue and daily users into one metric gives us average revenue per user (ARPU). It's no surprise that North America continues to outpace Europe and the rest-of-world segment by a wide margin. While Snap managed to increase rest-of-world ARPU sequentially, it decreased in Europe. The two regions are now getting much closer in monetization, which is surprising.
Drawing on the Facebook comparison again, the social-network giant generates more than 2.5 times as much revenue per user in Europe as in Asia-Pacific and more 4 times as much as in the rest-of-world region. While the regions aren't identical, it shows Snapchat is very under-monetized in Europe.
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Data source: Snap Q1 Earnings Report
Unlike Facebook and other large internet companies, Snap doesn't use its own servers to host its app. It relies on a couple of cloud-computing partners, and its costs increase as it attracts more users and they spend more time in the app on average. Hosting expenses are the biggest component of Snap's cost of revenue.
Earlier this year, it signed two long-term agreements with its cloud-computing partners, which helped lower its hosting expenses. That's evident from the 12% sequential drop in hosting costs in the first quarter despite adding more users.
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Data source: Snap Q1 Earnings Report
Snap's research-and-development expense has ballooned over the past year as it hires more engineers. The 250% increase in R&D spending is directly correlated with the 260% increase in Snap's headcount in the division.
Snapchat's ability to innovate is key to growing its user base and revenue. New features, new ad products, and new ways to buy those ads more easily will help Snap rapidly increase revenue growth. The step up in R&D spending comes as Facebook is actively copying Snapchat's best features, putting pressure on the company to come out with something better to attract and retain users.
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Data source: Snap 10-Q and S-1 filings
With Snap spending so much money on hosting costs and R&D, not to mention its other operating expenses, Snap's adjusted EBITDA continues to climb deeper into the red. Snap's losses more than doubled from the year-ago period and losses have grown steeper over the past two quarters, despite posting its two highest quarterly revenue results.
Snap should eventually start to show some operating leverage as revenue continues to climb rapidly, but it could be a long while before it becomes profitable.
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Data source: Snap 10-Q and S-1 filings
As mentioned, Snap signed two big cloud-computing contracts earlier this year to help lower its hosting costs. Both of those add up to $3 million in commitments over the next five years. In addition, Snap has over $400 million in non-cancelable leases for existing office space over the next decade and nearly an additional $50 million in leases to build custom office space.
Importantly, most of these figures are not included in Snap's balance sheet, but it's nonetheless important to be aware of them. If Snap fails to grow as quickly as expected, it's still on the hook for the $3.5 billion it owes in commitments over the next decade or so.
Overall, it was a very disappointing quarter for Snap. It missed both revenue and user growth expectations, and its earnings continues to crater. We'll have to wait and see if Snap can bounce back in the second quarter, or if its tougher comparable quarter will prove too much of a challenge.
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Adam Levy has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Facebook. The Motley Fool has a disclosure policy.