Snap (NYSE: SNAP) shares soared when the "camera" company reported fourth-quarter results well above expectations. Its revenue growth accelerated to 72% from 62% in the third quarter, and its net loss narrowed to $0.13 per share. Both numbers are better than analysts were expecting after three lousy earnings reports.
Even Snap's stellar financials have failed to impress several of my colleagues, who point out that free cash flow and GAAP earnings are still headed in the wrong direction. But the most encouraging results from Snap's fourth quarter aren't in the financials.
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In the company's third-quarter earnings call, CEO Evan Spiegel told analysts, "In order to further scale our user base, we need to accelerate the adoption of our product among Android users, users above the age of 34, and users in the Rest of World markets." Snap showed progress in all three areas in the fourth quarter, providing great encouragement to investors.
More Android users
Last year, Android was a big focus for Snap. The Snapchat app on Android lagged significantly behind the iOS version in terms of quality and stability, prompting Snap to rework the app from the ground up.
The efforts are already starting to pay off. Snap reported its lowest ever crash rates on the new Android app, and the user experience is much smoother. That resulted in a nearly 20% year-over-year increase in the retention rate of new Android users in the fourth quarter. In addition, Android users accounted for a larger percentage of net additional users than in any other quarter in the company's history.
The results are in line with Spiegel's commentary from the third quarter: "Given the distribution of Android devices in the world, I would expect that, over time, we will see more net adds coming from Android." That trend ought to continue as the Android app gets up to par with iOS.
Getting the "old" folks on board
Snapchat is a young person's app. The company boasts of its superb reach among millennials in the United States, but when it comes to users 35 and older, it falls well short of competitors such as Facebook's (NASDAQ: FB) Instagram. That's why the early results from Snap's redesigned app should further encourage investors.
"Core metrics around content consumption and time spent in the redesigned application are disproportionately higher for users over the age of 35," Spiegel told analysts on the earnings call.
Spiegel didn't mention anything about user growth in the demographic, but increased engagement is a good start. Snap previously disclosed that users under 25 spent over 40 minutes per day in the app. Comparatively, users 25 and older spent "over 20 minutes" per day. That's a wide disparity. If Snap wants to scale its ad business, it needs to present advertisers with a broad audience, not just millennials.
Progress in the rest of the world
Snap added about 3 million new users in the rest-of-world market. That compares with 2 million in the third quarter, and 5 million for the full year from the third quarter of 2016 to the third quarter of 2017.
The accelerating growth was probably bolstered by the Android improvements, as the operating system is more popular in the rest of the world compared with the United States and Western Europe.
While these users don't produce the same levels of revenue as their North American counterparts -- $0.56 per user versus $2.75 -- average revenue per user is climbing extremely quickly and nearly comparable to the $0.66 for users in Europe. For reference, Snap brought in just $0.15 per user in the rest-of-world market in the fourth quarter last year.
Still a lot of work to do
Snap's progress in the fourth quarter in its weakest areas is encouraging, but management still has to overcome its biggest challenge: Facebook. As Facebook continues to incorporate Snap's best ideas, like Stories, into its own products and offers advertisers the advantage of Facebook's broad user base and in-depth data, it'll be hard for Snap to persuade advertisers to use its products.
One thing is certain: Snap has almost no chance of competing with Facebook without expanding its users base beyond American millennials on iOS. That's why the most encouraging numbers from Snap's fourth-quarter earnings have nothing to do with its financials, and everything to do with a reacceleration in its user growth -- particularly its weakest areas.
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Adam Levy owns shares of Facebook. The Motley Fool owns shares of and recommends Facebook. The Motley Fool has the following options: short March 2018 $200 calls on Facebook and long March 2018 $170 puts on Facebook. The Motley Fool has a disclosure policy.