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Snap - positive surprise for market expecting advertising slump

Nicholas Hyett, Equity Analyst | 22 April 2020 | A A A
Snap - positive surprise for market expecting advertising slump

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Snap Inc USD0.00001 A

Sell: 18.25 | Buy: 18.26 | Change 1.25 (7.35%)
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Snap reported a strong set of first quarter numbers, with revenues up 44% on last year at $462m and ahead of market expectations. Daily active users rose 20% (DAUs) year-on-year, averaging 229m in the quarter, with average revenue per user of $2.02 compared to $1.68 this time last year.

Despite the significant revenue growth net income remained negative, at -$306m, improving by just 1.4% compared to last year.

The shares rose 20.5% in after-market trading.

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Our view

The market came into these results expecting growth to struggle as the coronavirus outbreak sees marketing budgets cut. The decision not to issue guidance for the coming quarter clearly indicates that the immediate future remains very uncertain - but Snap has fared much better than many, ourselves included, feared it might.

User numbers are growing as the group invests in an increasingly wide range of unique short form content and, together with improved tools for marketing teams, that's drawing advertising spend. The group has also seen engagement increase significantly as lockdowns start to take effect, even if ad. spending suffered later in the quarter.

We still have underlying gripes though. Free cash flow is improved but still negative, and that's before you take account of the huge stock based compensation costs which hit $686m last year. Issuing shares to employees may not be a drain on cash, but it's still a cost to investors and as a result net income is substantially negative.

A sizeable cash pile means the group should be able to manage a period of lower revenue. If it can attract new users and increase engagement as the lockdown progresses that might give it the marketing appeal it needs to turn losses into profits once this is all over.

However, we worry the group will struggle to maintain its position against the likes of Facebook's Instagram and TikTok without pouring ever more cash into product development. An uncertain competitive edge, negative free cash flow and a higher price to sales ratio than rival US social media groups all mean we remain pretty cautious.

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First Quarter Results

DAUs rose across the US, Europe and Rest of World, with particularly strong revenue per user growth in Europe. The group saw an increase in engagement from customers as lockdowns took hold, although revenue growth slowed.

However, higher interest costs and a $172m stock based compensation bill meant overall profits remained in the red. Looking at adjusted cash profits, a number which excludes certain expenses the group considers to be unreflective of underlying performance, losses narrowed - improving 34% year-on-year and broadly in line with what analysts had expected.

Free cash flow remained negative, but at just $4.6m in the quarter was significantly improved compared to the $78m outflow in the same period last year. The group finished the quarter with net cash of $1.2bn.

Given the disruption from the ongoing coronavirus outbreak the group has not issued any guidance for the coming quarter.

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