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Snap - strong revenue and user growth, cash profits in Q4

Nicholas Hyett | 23 October 2019 | A A A
Snap - strong revenue and user growth, cash profits in Q4

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Snap's third quarter revenue rose 50% year-on-year, to $446m, with underlying cash profits still negative but improving substantially. Both numbers were ahead of market expectations.

Revenue guidance for the fourth quarter is a little disappointing, coming in a bit shy of what was hoped. However, the group now expected to post its first ever profitable quarter in the final part of the year.

The shares fell 3.4% in aftermarket trading.

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Our view

Despite casting itself as a camera company when it IPO'd in March 2017, Snap's really a social media group.

The Snapchat app famously, or perhaps infamously, lets people send images and videos that disappear after a set timeframe. More recently launched filters and lenses allow users to animate and annotate images. It might sound simple, but with 210m 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 marketing teams. 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 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.

Cash profits are expected to turn positive for the first time next quarter. But that ignores a share based remuneration policy that has seen the group issue $519m of new shares in the first nine months of this year alone. It might not be a drag on the balance sheet, but that's still a very real cost for shareholders.

Include that cost and Snap's still some way off translating revenue growth into bottom line profits and dividends. As with most digital businesses scale is key; if its largely 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.

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Third Quarter Trading Results

Snap saw a 7m increase in daily active users (DAUs) during the quarter, faster than had been expected and putting the group at 210m DAUs for the quarter as a whole. DAU growth was spread across all regions on both iOS and Android.

Average quarterly revenue per user rose 33% year-on-year to $2.12. That was driven by a strong result in North America, up 43%, where the group generates around $3.75 per user on average.

Underlying cash profits, as measured by earnings before interest, tax, depreciation and amortisation (EBITDA), rose 69% compared to last year - although remains negative at -$42.4m. The group expects EBITDA next quarter to be between $0 and $20m. However, this number excludes share based payments to staff - worth $161.2m this quarter alone.

The group continues to invest heavily in content, developer tools and advertiser services. More than 100 Discover channels reached a monthly audience of over 10m, with 50 new channels launched around the world.

Free cash flow was a little short of expectation with the group finishing the quarter with net cash of $1.4bn.

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This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.