Snapchat (SNAP) has been one of the less successful tech IPOs in the last decade. To add insult to injury, following the company’s first earnings results the stock tanked over 23% in after-hours trading. There are a lot of reasons why this happened, and each one is a learning experience.
Firstly, let’s talk about revenue. For any big growth company, revenue growth is a main issue for initial investors, and a lack of strong revenue growth can cause a newly IPO’d growth stock to fall. In this case, there was quite a bit of bad news.
Firstly, revenues were $149.6 million despite expectations of $158.3 million. That disappointment itself was one issue, but annual revenue per user (ARPU) fell from over $1.00 in the fourth quarter of last year to $0.90 in the first quarter of 2017. That sequential drop is partly unsurprising in online advertising, but is also worrying for a company that is rapidly expanding monetization, leading to questions of whether growth is actually going to come.
Another key for growth with Snapchat is the growth of actual inventory to sell—meaning getting more people on the platform and having them use it more. Daily active users (DAU) is the metric that Snapchat uses to measure this, and they saw DAUs of 166 million, a tad shy of estimates. DAU growth was a major disappointment and the first question to come up on the earnings call, because this is one of the biggest keys to Snapchat’s future success.
With revenue a problem, the second big issue for Snapchat was its earnings, or lack thereof. Total net loss was $2.2 billion in a single quarter. In other words, the company lost about 15 times its revenue. Losses were 21 times greater than for the same period a year ago. The vast majority of this was compensation costs, and that’s not a good thing. It seems that management and many initial employees are cashing out quickly, which makes investors fret about the future of the company and its long-term viability.
But high compensation costs weren’t the only problem. Operational expenses were also extremely high and grew at a very high rate, much higher than revenue rose. That makes one wonder if the company’s growth can result in profitability soon, or ever. Again, weak earnings are expected in a young company, but this was a shocking development.
Finally, there’s the earnings call. Everyone interested in finance should read this transcript. We have a very immature company dealing with extremely experienced analysts, and the disconnect between the two was extremely clear. One very concerning issue is the lack of guidance, which CFO Drew Vollero explained thus:
“Mark, as it relates to your question on guidance, whether it’s DAUs or peak EBITDA losses, we’re going to run the Company here for the long term. We want the flexibility to make the right decision in the long term. So we’re not going to be short sighted about profit decisions to make a quarter or whatever that would end up being. So at this point, there is not going to be any financial guidance coming from Snap.”
There is a fundamental misunderstanding here about the purpose of quarterly guidance and an implicit insult to the analysts at hand that finance regularly cares about short-term profits, but Snap is different. And the actions of the company’s board belies this long-termism with the massive selling of stock in recent weeks and the high compensation to employees.
Then when another analysts asked about where revenue was going, whether to one or another ad type, we got this extremely defensive non-answer from Imran Khan, the company’s CSO:
“Yes, I think — look, we built the best mobile ad product. I fundamentally believe that. If you look at our Snap Ad product, they are full screen; they play with sound. And if you look at our sponsored Creative Tools — those are the Lenses and Filters — people are actually putting it on their pictures and videos and sharing with their friends. So they are — that actually has very superior ROI that we have seen with many, many advertisers. And both of those sponsored Creative Tools and our Snap Ads are contributing meaningful revenue. We’re not breaking those down at this point. With regards to ad load, look, we’re very, very early days. If you look at — as Evan mentioned, we now have more than 3 billion Snaps get created on our platform. I talked about how we have our average users are spending 30 minutes — more than 30 minutes on our platform. So we’re just scratching the surface in terms of ad load.”
A large part of a company’s success hinges on management skill and professionalism. The first quarter results for Snap demonstrate neither, and the earnings call really brings this home. It’s no surprise that the stock has fallen so steeply. The next question is whether this trend will continue, or if Snap as a company will learn from its mistake and mature. Or if management will cash out and flee as quickly as they legally can.