Snap's Stock-Based Compensation: Digging Through the $2 Billion Expense

By Motley Fool Staff Markets Fool.com

The largest component drivingSnap's (NYSE: SNAP) massive $2.2 billion net loss in the first quarter was stock-based compensation, and the largest component of that was a CEO award to Evan Spiegel.In this segment from Industry Focus: Tech, Motley Fool analyst Dylan Lewis and senior tech specialist Evan Niu, CFA, discuss the company's stock-based compensation and the grant Spiegel recieved.

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A full transcript follows the video.

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This video was recorded on May 12, 2017.

Dylan Lewis:One of the other things that popped out to me looking at the report was, I mentioned earlier, net loss came in at$2.2 billion. Non-GAAP EBITDA (earnings before interest beforetaxes, depreciation, andamortization), which backs out stock-basedcompensation, came in at just under $200 million loss. I think it's worth emphasizing that EBITDA backs out stock-based compensation, because stock-basedcompensation was huge for Snapin this most recent quarter.

Evan Niu:Yeah. Out of the total net loss of $2.2 billion,$2 billion of that was stock-based compensation. It'snot uncommon forcompanies that go public,because what usually happens is, a lot of the private stock that's beengiven out when the company is private, there's theseperformance conditions that can only get met when thecompany goes public. So,what that does is triggers a ton of vesting and hugeexpenses are now recognized. So,that's what happened here. But,I think in this case, it's a huge number. For context, whenFacebook went public, their firstpublic earnings release, they reported $1.3 billion in stock-based compensation. That's less than what Snapjust reported. And when Facebook wentpublic, it was amassive company already, and they IPO-ed at over a $100 billion market cap, and they had 700 [million]-800 million monthly active users --they were much bigger at that time, and their stock-based comp was less than what Snap just put up.

Lewis:I think one thing that's worthemphasizing with this argument, though, is one grant inparticular ate up one-thirdof that total $2 billion.

Niu:Yeah. That's another red flag to me. As soon as Snap wentpublic, Evan Spiegel got a giant bonusfor taking the company public. Thosebonuses aren't unheard of in themselves. But what's alarming is the magnitude of it. The CEO grant says he gets an extra 3% of shares outstanding once they go public. So, it turned out to be about $625 [million]-$640 million, that Snaprecognized allupfront,immediately after the IPO. Andthat's just for him, which,as you mentioned, is about a third of the $2 billiontotal for the quarter. But,what is so weird about it is this award vestedimmediately, but they pay it out to him inquarterly installments over three years. It's considered anunsecured liability, like,you are an unsecured creditor with this. But then, why did it vest? Because it vested all up front, they ate this giant cost up front. And because it vested up front, there's no service requirements. Obviously, the point of having vesting time frames is to retain employees and make sure they stick around. But they just gave him all this up front, and he could leave the companyright now if he wanted to.

Lewis:Andhe would retain all those shares.

Niu:Yeah,he still gets to keep them, and they just pay them outover three years. But they're vested, they're his.

Lewis:Yeah. Evan, I know you wrote a whole fool.com piece about this. Listeners,if you want to see the numbersbroken down on paper rather than having them told to you,email into the show,industryfocus@fool.com. I'mhappy to send it along. I think the thing thatyou need to remember with this is, thetype of grant that we see here, one, it'snot particularly great for the business, because you'rerecognizing a ton of stock-based compensation at once. Andit's also not particularly great if you're a long-term investor who wants the CEO to stick around and have skin in the game and a vested interest in the long-termoutcome of the business. Like you said, he can walk whenever now.

Niu:Yeah. Idon't understand why they wouldn't have it vest over time. Not only would that spread out the cost of the grant,but it also has retention effects. Not thatI'm a huge fan of Evan Spiegel as a product visionary, per se, to begin with. But,on principle from agovernance perspective, it just doesn't seem right. Combined withall the other governance red flags we've seen with this company, like no voting and things like that,it just doesn't seem like Snap cares about its investors. It seems likethey just want to enrich themselves,particularly Evan Spiegel.

Dylan Lewis owns shares of FB. Evan Niu, CFA owns shares of FB. Evan Niu, CFA has the following options: long January 2019 $20 puts on Snap Inc. and long January 2018 $120 calls on FB. The Motley Fool owns shares of and recommends FB. The Motley Fool has a disclosure policy.