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Snap Is Laying Off Even More Employees

Evan Niu, CFA, The Motley Fool

Things aren't going well for Snapchat operator Snap (NYSE: SNAP). The company has now laid off approximately 18 employees, mostly within recruiting, according to Business Insider. Snap is reportedly even considering additional head count reductions in other departments as well, as Snap is in the process of implementing a better system for reviewing employee performance.

Thus far, Snap's processes and procedures for performance reviews are inconsistent, according to the report. Business Insider also adds that Snap has told employees in an internal email that it would slow its hiring rate in 2018, and some managers may have to make "hard decisions" regarding underperforming employees.

Snapchat bot banner on the side of a building

Image source: Snap.

The news comes just a month after Snap restructured its hardware team, which was presumably done so that the "camera company" could reallocate development resources toward creating its latest and greatest hardware product: an $80 Halloween costume of its popular augmented reality (AR) dancing hot dog.

Just growing pains?

It's not entirely uncommon for young companies to overshoot when it comes to head count growth, which is often done in pursuit of top-line growth. If the company overestimates its growth opportunities, it may need to walk back head count growth as it recalibrates. You can reasonably just attribute it to growing pains.

This is undoubtedly what is happening at Snap, as its total head count has more than quadrupled since the end of 2015 -- less than two years ago -- when it had 600 employees. As of the end of last quarter, the company had approximately 2,600 employees.

Chart showing headcount growth since 2015

Data source: SEC filings and earnings calls. Chart by author.

Some of the head count growth has been attributable to acquisitions, and Snap has been particularly active on that front. The company spent over $400 million on three acquisitions over the summer. Zenly reportedly had about 45 employees, and Placed had a little over 100 employees. Zenly closed in the second quarter, but Placed didn't close until the third quarter.

But at what cost (savings)?

Head count growth is also the primary driver of operating expense growth. Total costs and expenses were $630.7 million in the second quarter, up nearly 240% from $187.7 million a year ago. That outpaced the 200% revenue growth, pinching the bottom line.

Snap does not break down its total head count, but it does disclose how much each department's head count has grown.

Head Count Growth (Q2)

Year-Over-Year Change

R&D

190%

Sales and marketing

160%

General and administrative

110%

Data source: 10-Q.

Unfortunately for investors, Snap does not provide any type of financial guidance. So not only do investors have no idea what to expect in terms of operating expense outlook going forward, but even if Snap were to formally announce a restructuring plan, it would be hard to fully quantify how meaningful those cost savings would be.

CEO Evan Spiegel recently admitted that he needs to communicate with investors better, and providing operating expense guidance would be a good starting point.

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Evan Niu, CFA has the following options: long April 2018 $17 puts on Snap Inc. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.