4 Important Takeaways From Snap's Annual Report

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Snapchat operator Snap (NYSE: SNAP) reported fourth-quarter earnings earlier this month and has just filed its related annual Form 10-K with the SEC, and it contains much more detailed information regarding the business. Fourth-quarter results were better than expected, but that was merely a reprieve after horrendous third-quarter results.

Here are four important takeaways for investors from the filing.

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Head count growth is slowing

After growing too quickly for a couple years, Snap employees have been hit with numerous rounds of layoffs. CEO Evan Spiegel has acknowledged that Snap hired too aggressively, while certain products underperformed -- most notably Spectacles -- and required layoffs to cut costs. Snap is now focusing on trying to make its existing workforce more productive, although it will still hire as necessary.

On the earnings call earlier this month, CFO Drew Vollero said, "Head count growth continues to moderate, thanks to productivity gains from our team. Net additions in the quarter were slightly more than 100, one-third of the rate of recent quarters." According to the filling, Snap finished 2017 with 3,069 employees.

The rate of headcount growth has indeed slowed.

The redesign is risky

Snap is in the midst of a crisis right now related to the major redesign that is rolling out this quarter. There has been considerable user backlash, including most recently from celebrity Kylie Jenner. At least two Street analysts have downgraded Snapchat shares due to the inherent risk associated with such an ambitious undertaking. The company has now added additional risk factor legalese to acknowledge it:

Once the deployment is complete, investors should pay close attention to Snap's reported user metrics to gauge the overall reception.

Excessive executive compensation

Snap also discloses the total compensation packages for its top execs.

Spiegel's compensation stands out as excessive, which Reuters points out is the third-highest CEO payout ever. But that was already known: Snap gave Spiegel a massive IPO award for taking the company public.

Snap had initially estimated that the stock-based compensation (SBC) expense associated with the award would be about $624.8 million, but I estimated it to be closer to $636.6 million since Spiegel ended up receiving more shares than originally planned because the offering was oversubscribed. That figure is exactly what Snap recognized for Spiegel's SBC expense, with the remaining $1.2 million including a $98,000 salary and $1.1 million in other compensation. That last amount includes "membership fees for a concierge medical service" for Spiegel.

The most disconcerting part of the IPO award was that it vested immediately, requiring Snap to recognize those SBC expenses up front and foregoing any retentive effects.

Spiegel and Murphy maintain their iron grip

In a corporate governance travesty, public Snap shareholders get no votes whatsoever. In addition to some Class B shares (1 vote per share), Spiegel and co-founder Robert Murphy hold supervoting Class C shares (10 votes per share) and wield absolute control over the company. This is also old news, but Snap again details how much voting power the two young executives command.

If shareholders are unhappy with how Snap is run, there's nothing they can do about it other than to sell their shares.

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Evan Niu, CFA has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.