Snap, Inc. Doesn't Think Its Massive Losses Are Meaningful

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Snap (NYSE: SNAP) reported its second earnings release as a public company on Thursday. It wasn't pretty.

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Revenue in the second quarter rose 153% to $181.7 million, and the company added just 7 million daily active users (DAUs), bringing its total DAU base to 173 million. That was shy of the 175 million DAUs that the Street was expecting. Of those 7 million new DAUs, only 4 million were within North America, Snap's most profitable geographical segment. The rest came from Snap's Europe and rest of world segments, which includes certain markets that CEO Evan Spiegel considers "poor countries" and do not contribute as much in terms of monetization.

Massive losses? Not meaningful

One thing that stuck out to me was that Snap chose not to report the year-over-year change in its net losses, deeming them "NM," or not meaningful. Typically, you see NM applied when a given metric is coming off a relatively small base (or a negative base), in which case you might see extremely high percentage changes (or negative percentage changes) that can potentially be misleading. But the thing is that Snap's net losses are widening dramatically, and off a reasonable base.

Snap posted a net loss of $443.1 million in the second quarter, more red ink than the $115.9 million in losses a year ago. Nearly $116 million in net losses in Q2 2016 is not an insignificant sum. Since Snap won't do the basic math, I'll do it for you: That loss is 282% greater than Q2 2016. That's pretty meaningful if you ask me.

Furthermore, CFO Drew Vollero pointed out that gross margin improved by "5,100 basis points" during the quarter compared to a year ago. A 51-percentage-point improvement sounds really impressive! But that comparison is coming off a negative base, as Snap posted a GAAP gross margin of negative 32% in Q2 2016. Comparing against negative numbers is basically the definition of "not meaningful." Public Snap investors get no votes though, so it's not like Snap really cares what you think.

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Spiegel won't sell any more shares for four more months

With all the concerns surrounding lock-up expirations, Spiegel attempted to reassure investors by saying that neither he nor co-founder Bobby Murphy will sell any shares through the rest of 2017. But that commitment doesn't really matter considering the fact that most of the shares that are about to be freed belong to early investors and employees.

Spiegel and Murphy hold nearly 216 million supervoting Class C shares combined (89% of total voting power), but that's about 18% of total shares outstanding. There are several lock-up expirations coming in the weeks ahead, and by year's end all of those shares will be free to sell. With shares continuing to trend lower, those early investors and employees may be eager to cash out, too. Besides, that commitment is only good for another four months.

A superstar is born?

It wasn't all bad. Snap is making undeniable progress with improving monetization while bringing variable costs down. Average revenue per user increased sequentially to $1.05, while hosting costs per DAU was relatively flat at $0.61. That translates into gross margin expansion.

Additionally, Snap made meaningful progress with improving international monetization:

After cashing out hundreds of millions of dollars during the IPO, Spiegel seems to be enjoying his newfound superstar status, recently taking a "bro trip" while investors fret over share losses. But the real superstar? On the call, Spiegel noted, "Our Dancing Hot Dog is most likely the world's first augmented reality superstar."

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Evan Niu, CFA has the following options: long January 2019 $20 puts on Snap Inc. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.