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Snap - Results well ahead of expectations

Nicholas Hyett | 24 April 2019 | A A A
Snap - Results well ahead of expectations

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Snap results came in considerably ahead of market expectations in the first quarter of the year. Daily Active Users (DAUs) rose 2% on last quarter to 190m, with revenue up 39% on last year to $320m.

Operating losses improved by $76m to $316m, with free cash outflows improving by $190m to $78m.

The shares rose 8% in after-market trading.

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Our view

Rather surprisingly, Snap chooses to cast 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 Snapchat messaging app is all important.

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 190m 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 minutes a day on the app.

Millions of millennial eyeballs make Snapchat very attractive to advertisers. As an audience, millennials are harder to reach through conventional mass media like television and newspapers. Facebook has proven how profitable advertising driven social media can be.

The group's investing heavily in improving the quality and duration of user engagement. 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. A revamped Android App is also improving user experience for millions of users.

A larger number of more engaged users should make the platform an easier sell and will have contributed to impressive revenue growth. Average revenue per user reached $1.68 last quarter, a fraction of what Facebook achieves, suggesting advertisers could dig deeper still if offered the right product.

But despite impressive revenue growth, Snap'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. 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 return to growth in user numbers such a relief. Profit still looks some years away and if it's going to attract advertising dollars Snap has to show it can hold onto its current audience.

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First Quarter Results

Snap launched its revamped Android App in the quarter, and it's now available worldwide. The new version is faster and more compact, resulting in a 6% increase in activity on lower-performing devices.

Original content and games are continuing to draw in audiences, with new publishers being added during the quarter. The group has also increased and improved the advertising and analytical tools it offers partners - with some large advertisers reporting very positive results.

Revenues are expected to deliver year-on-year growth of between 28% and 37% next quarter. EBITDA outflows are expected to be between $150m-$125m.

The group finished the year with cash and marketable securities of around $1.2bn.

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