Snap shares rose 11.6% in aftermarket trading after second quarter revenues and user numbers came in ahead of forecasts. While profits and free cash flow remain negative, both improved significantly on the prior year.
Snap chose to cast itself as a camera company when it IPO'd in March 2017. That was something of a surprise because 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 203m people around the world using the app every day, it's also hugely popular.
Facebook has proven how profitable advertising-driven social media can be, and since most users are in the valuable 18-34 age group, Snapchat is potentially very attractive for advertisers. As an audience, millennials are harder to reach through conventional mass media like television and newspapers.
However, for Snap to follow in Facebook's footsteps, it'll need to prove it's more than just a filter-filled gimmick.
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 required attention span. 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 the impressive revenue growth of late.
But Snap's vast cost base means it's still some way off translating that revenue into profits and dividends. As with most digital businesses scale is key; if its fixed costs can be spread over a larger number of customers, losses should fall. That explains why the return to rising user numbers has been such a relief.
However, since user growth is both important and very difficult to forecast, we fancy Snap will experience more volatility going forwards, at least in the short-term.
Second quarter results
User numbers beat prior market expectations, with Daily Active Users (DAUs) rising 8% to 203m, including a return to growth for the North American and European markets. Elsewhere, Rest of World user numbers continue to rise, improving 21% to 56m.
Engagement improved following the relaunch of the Android App, as well as continued investment in content - improving the experience for users, developers and advertisers.
Snap's average revenue per user rose 37%, and combined with the strong user growth, helped revenue increase 48% to $388m.
A 16.2% increase in R&D spend, to $236m, meant costs rose 11.7% to 693m. However, with revenue increasing faster, operating losses narrowed from $357.8m to $305m.
Free cash flow remains substantially negative, at -$103m this quarter, but that's an improvement on the $234m outflow last year. The group has $1.2bn in cash and marketable securities.
Looking ahead, Snap expects revenues of between $410m and $435m in Q3, a substantial uplift on last year's $298m. Adjusted cash profits (EBITDA) are expected to remain negative, at -$85m to -$60m.
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