Snapchat's Debut Quarter Turns Ugly -- WSJ

Snap Inc., in its first quarterly report as a public company, showed it struggled to maintain strong user growth at its Snapchat vanishing-messaging app, sending shares tumbling and sparking worries about its ability to challenge social-media titan Facebook Inc.

Snap, whose core business relies on selling advertising on the Snapchat messaging platform, reported 166 million daily users in the past quarter, up 8 million from the previous period and up 44 million from a year earlier -- its slowest year-over-year growth rate in at least two years.

Meanwhile, Facebook's Instagram, a key competitor for Snap, last month said it has 200 million daily users of Instagram Stories, a feature of the photo-sharing app that mimics Snapchat's popular function.

"Everything for Snap starts with daily active users, because the more users Snap has, the more engagement Snap can have," said Ronald Josey, senior internet analyst with JMP Securities, who expected Snap to have faster user growth.

The Venice, Calif.-based company's shares plunged 23% in after-hours trading, hovering just above the $17 threshold at which it went public in March.

"You can't miss out of the gate," said Michael Nathanson, senior research analyst at MoffettNathanson.

Investors have clamored for Snap since its initial public offering, the highest-profile tech listing in years. But the comparisons with Facebook and Twitter Inc. -- its two biggest rivals -- raise questions about whether Snap can elbow its way into a crowded social media market.

Snap's traditional core of users are teens and young adults, a valuable demographic that marketers are eager to reach. Snap has pitched itself as an alternative to traditional forms of media, such as television, rather than a competitor to the bigger social-media networks.

But Facebook has been nibbling away at the features that made Snapchat stand apart. Snap's "Stories" function -- collections of Snaps that play in chronological order, and a critical place for Snap to display ads -- has been imitated by Facebook and its other platforms.

In a survey last month of 3,000 Americans conducted by Goodwater Capital, 25% of respondents said they prefer Stories on one of Facebook's platforms, compared with the 12% of users who said they prefer Snapchat's Stories.

Chief Executive Evan Spiegel defended Snap's position. "I think the bottom line is if you want to be a creative company, you need to be comfortable with people copying your products," he said. "Just because Yahoo has a search box, it doesn't mean they're Google."

Snap on Wednesday posted a net loss of $2.2 billion, compared with $104.6 million a year ago, due to a $2 billion one-time hit from stock-compensation expenses related to its March IPO.

Snap's costly efforts to ramp up advertising deepened its operating loss, which more than doubled to $188 million and surpassed its revenue of $149.6 million. While revenue in the quarter nearly quadrupled from a year earlier, it failed to exceed Snap's fourth quarter revenue of $165.7 million.

Snap's research and development costs jumped to $78 million in the quarter, as it worked on new products such as an ad-buying platform that automates purchases, an approach used by Google and Facebook.

Snap also recently introduced new augmented reality features, part of an effort to keep users engaged for long periods of time, which Snapchat touts as one of its competitive advantages. The average user spent over 30 minutes a day on Snapchat during the quarter, and 3 billion snaps, or disappearing messages, were created every day on its app.

Snap has focused on users in more developed markets with the most ad dollars, leaving global ubiquity to the other social media giants to chase. That increases the pressure to make more money per user. In the first quarter, it rose to 90 cents, from 32 cents during the same period a year ago. As a comparison, Facebook made $4.23 per user globally in the first quarter.

In a sign that it may be broadening its approach, Snap said 30% of new users during the quarter are on Android, Google's operating system that Snap has de-emphasized in favor of iPhones.

In one area, Snap's numbers stand out: stock compensation. Tech companies often have high stock compensation tied to their initial listings because that is when many of the awards are triggered. But Snap's $2 billion payout surpassed its annual revenue by a wide margin. Twitter and Facebook, for example, paid out compensation equal to a fraction of their revenue at the time.

Despite the doubts over its growth, Snap resisted pressure to lift sentiment by pumping up its prospects. Mr. Spiegel said Snap wouldn't resort to "growth hacking" methods of adding users quickly, such as sending push notifications. "We don't think those sorts of techniques are very sustainable over the long-term," he said.

Write to Georgia Wells at

(END) Dow Jones Newswires

May 11, 2017 02:47 ET (06:47 GMT)