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Snap - Users stable and revenues jump

Nicholas Hyett | 6 February 2019 | A A A
Snap - Users stable and revenues jump

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Snap Inc USD0.00001 A

Sell: 50.29 | Buy: 50.30 | Change 1.28 (2.61%)
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Continued product innovation drove a 36% increase in revenues in the final quarter of 2018, hitting $390m. With operating costs falling, that saw quarterly losses shrink 45% to $192m.

Daily active user numbers stabilised at 186m during the fourth quarter.

The shares rose 21.9% in after 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. 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.

Although Snap's been delivering impressive revenue growth recently it's so far struggled to turn its legions of fans into profits. That's because its cost base is similarly huge, although increases in the cost base do seem to have slowed.

In our view, the struggle to monetise Snapchat not only explains why the shares find themselves down 74.5% since they listed, but also why Snap is seeking to broaden its horizons.

Short form TV content looks to have been a success, ranging from news to dramas. It's still early days, but its original content seems to be doing well and creates advertising opportunities. 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. Although its only camera product Spectacles - as the group puts it - "has not and may not generate significant revenue". For all the talk of Snap 'the camera company', the social media business will be key.

There's some good news on that front. Average Revenue Per User (ARPU) was up 37% in the final quarter of the year and as with most digital businesses scale is key. As fixed costs are spread over a larger number of customers, losses should fall.

That's what makes the recent stabilisation in user numbers such a relief. Profit still looks some years away and if it's going to attract advertisers and new users Snap has to hold onto its current audience.

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Trading Update

Q4 results reflect progress made across the year - which saw revenues rise 43% to $1.2bn and operating losses improve by 64% to $1.3bn.

Revenue growth was driven by the launch of new monetisation products, including 6 second non-skippable commercials, new ad formats and better support for advertisers.

Operating costs in the final quarter of the year fell 10%. That was largely thanks to reduced research and development spending, which also provided a significant boost to full year operating costs.

User trends improved in the fourth quarter - after a sustained period of decline. iOS users saw a notable increase in engagement both in terms of number of users and time spent on the app, and the new Android roll-out is underway. The group reached 70% of the 13-34 year old population in the US on a monthly basis.

Snap expects first quarter revenue growth of 24-34% year-on-year, with adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) improving around 30% to a loss of between $165m and $140m.

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