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Snap - Users continue to flag, although revenues rise

Nicholas Hyett | 26 October 2018 | A A A
Snap - Users continue to flag, although revenues rise

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Snap Inc USD0.00001 A

Sell: 11.60 | Buy: 11.62 | Change 0.51 (4.59%)
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Daily Active Users (DAUs) fell 1% on the previous quarter to 186m, but the success of new product innovations, such as Product Catalogues, Shows and Snap Pixel, means revenue jumped 43% year-on-year to $298m.

Free cash flow improved, but remained negative at -$159m. Total net cash fell $43m over the quarter.

The shares fell 3.4% in post market trading.

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Our view

Snap is the owner of the Snapchat messaging app. The app famously, or perhaps infamously, lets people send images and videos that disappear after a set timeframe. Filters and lenses allow users to animate and annotate images in various different ways.

It might sound simple, but with 186m people around the world using the app every day, it's also hugely popular. User numbers have slipped recently, but still grew 5% in the last year. Most users are in the valuable 18-34 age group, and typically spend more than 30 mins a day on the app.

Millions of millennial eyeballs makes Snapchat very attractive to advertisers. As an audience, millennials are less likely to enjoy conventional mass media like television and newspapers, and that's made them difficult to reach. Facebook has proven how profitable advertising driven social media can be.

Revenue's jumped 43% since year to $298m a quarter but Snap has so far struggled to turn its legions of fans into profits. That's because it's cost base is similarly huge, with a significant slice coming from R&D expenditure, that's a vital part of staying ahead of the game in consumer tech, so is hardly discretionary.

In our view, the struggle to monetise Snapchat not only explains why the shares find themselves down 59% on their listing price, but also why Snap is seeking to broaden its horizons.

Short form TV content looks to have been a success for the group, ranging from news to dramas. It's still early days, but it's original content seems to be doing well. Think Netflix for those without the attention span to binge watch an entire series.

Rather surprisingly, the group increasingly casts itself as a camera company. That's despite its only camera product being the recently launched Spectacles - which as the group puts it "has not and may not generate significant revenue".

However, the idea of mixing cameras with glasses makes sense (Google glass is a similar concept), and directly connecting that to Snapchat's app is attractive. All in though, we think Spectacles is likely to remain a niche product for now. For all the talk of Snap 'the camera company', the social media business will be key.

There's some good news from the group's most recent quarterly results. Cost of Revenue per User (CoRPU) has been rising, but is only a fraction of the 37% growth in Average Revenue per user (ARPU). As with most digital businesses scale is key. As fixed costs like R&D are spread over a larger number of customers, losses should fall.

That's what makes the slowdown in user growth concerning. Profit still looks some years away and it's going to be more difficult to attract advertisers and new users if it can't hold onto its audience.

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Third quarter results

DAUs are still higher than they were last year, but this is the third successive quarter of declines. However, average revenue per user hit $1.60, up 14% on the second quarter as engagement increased and Snap increased the tools it could offer advertisers.

Content remains a key focus, with 21 'Shows' (Snap's short format TV) achieving a monthly viewership of 10m or more. James Corden's Show recently won two Emmy awards.

Despite ongoing investment in products and content, costs were 7.2% lower this quarter than in the same period last year, at £621m.

The group expects revenue to be between 24% and 33% higher in Q4 than in the same period last year. Earnings before interest, tax, depreciations and amortisation will improve although stay negative (between $100m and -$75m).

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