A month has gone by since the last earnings report for Snap (SNAP). Shares have added about 0.4% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Snap due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
Higher User Base, Engagement Levels Aided Snap Q1 Results
Snap Inc. reported first-quarter 2019 loss of 10 cents per share, narrower than the Zacks Consensus Estimate of a loss of 12 cents and the year-ago quarter’s loss of 17 cents.
Revenues increased 38.9% from the year-ago quarter to $320.4 million, surpassing the consensus mark of $306 million. The revenue figure was also better than the guided range of $285-$310 million.
Geographically, revenues from North America (70.4% of revenues) increased 32.4% year over year to $225.7 million. Revenues from Europe (14.8%) increased 45% to $47.45 million. Rest of the World (ROW) revenues were $47.3 million compared with $27.5 million in the year-ago quarter.
Average revenues per user (ARPU) increased 39% year over year but declined 19.6%quarter over quarter to $1.68. On a year-over-year basis, North America, Europe and ROW ARPUs increased 34%, 47% and 68%, respectively.
Daily Active Users (DAU) Details
Snap’s DAU of 190 million in the reported quarter was down 1 million year over year but up 4 million sequentially.
North America DAU was 80 million, down 1 million year over year but up 1 million sequentially. Europe DAU was 61 million, down 1 million year over year but up 1 million sequentially. ROW DAU was 49 million, up 1 million year over year and 2 million sequentially.
Growth in the top line, DAUs and user engagement levels was due to Snap’s innovation strategies.
Notably, the company reached “90% of 13-24-year-olds and 75% of 13-34 year-olds in the United States as of March 2019.”
Total Ad impressions grew 155% year over year and 6% sequentially. Price per ad impression dropped 42% from the year-ago quarter and 22% sequentially. The price drop was the result of abundant supply.
Snap’s ad penetration is improving. The company’s ads reached more users in the 13 to 34 age group in the United States than Facebook’s Instagram.
Additionally, advertisers were able to reach new audience and increase their sales by advertising on Snapchat. Notably, Nestle’s ad for DiGiorno Pizza on the platform boosted sales by 3.3% and resulted in 3.6 times return on ad spend per Nielsen Catalina Solutions.
Moreover, Snap is improving features of a few tools to help advertisers get better results. The company updated its Ads Manager, self-serve tool and enhanced the location categories to France, Canada and the UK. Notably, improved features may allow advertisers to reach more audience and improve their ROI.
For instance, more than 90% of Toyota Motor’s ads, including its Corolla Hatchback ad, were watched by Snap users. Additionally, users “played with Lenses for more than 10 seconds each on average.”
Additionally, Snap continues to boost its brand-focused buying tools, allowing advertisers to purchase ad products based on Reach & Frequency.
Redesign, New Features May Aid Growth
Snap recently rolled out the new Android app for its users. The app was redesigned to improve the performance of the Android version and bring it on par with the iOS app, per Verge.
The company noted that the new app has improved performance (20% faster) and takes up less space (25% smaller). This resulted in increased user engagement on low performing devices. Notably, the number of Snaps sent by users increased 6% in the first week of the new app release.
Additionally, Snap unveiled Snap Games, multi-player live games, on Apr 4. Launched with six titles, the games will feature the company’s original game, Bitmoji Party, and a few other third-party games from the likes of Zynga, ZeptoLab and Spry Fox.
Moreover, Snap launched several augmented reality (AR) features, including Scan, Landmarkers and AR Bar. While Landmarkers allows Snapchat camera to interact with building around the world, Scan can recognize the object it is scanning and suggests similar experiences for the object.
Increasing user engagement with AR features is likely the reason behind Snap’s AR features launch. Notably, on average, users spent more than 250 million minutes every day to experience AR on Snapchat camera, indicating 10% year-over-year increase in playtime /DAU. Additionally, more than “three quarters” of Snap’s DAUs engage with AR on Snapchat on a daily basis.
The company also enhanced Snap Kit features, thereby allowing Snap’s “app partners to utilize the best features in Snapchat.”
Snap Expands Originals Portfolio
Snap renewed its three most popular Snap Original Shows - The Dead Girls Detective Agency, Endless Summer and Deep Creek. Additionally, the company introduced 10 Snap Original Shows that will be available from May this year.
Snap, which currently provides more than 450 premium channels globally, introduced more than 50 new Shows and Publisher Stories in first-quarter 2019 alone. Moreover, the company stated that the number of users accessing content and spending time on Discover is increasing.
This is evident from the fact that about half of Discover viewers accessed it every day of the week in the reported quarter. Notably, Snap Original Shows can be accessed from the Discover tab of Snapchat.
Further, content strength is helping Snap’s partners to reach new unique audience. The company’s partners boosted their monthly mobile audience in the United States by more than 30% on average in March alone, per ComScore.
In first-quarter 2019, reported cost of revenues increased 3.5% year over year to $203.8 million.
Infrastructure cost/DAU in the reported quarter was 72 cents compared with 73 cents in the year-ago period. However, the figure remained flat sequentially.
Additionally, operating expenses were $248 million in the reported quarter, down 4% year over year but up 4% sequentially. As a percentage of revenues, operating expenses were 77% in first-quarter 2019 compared with 112% in the year-ago period.
Adjusted EBITDA loss in the reported quarter was $123.4 million, which improved $94 million year over year.
Balance Sheet and Cash Flow
Snap ended the quarter with cash, cash equivalents and marketable securities of $1.21 billion, down from $1.28 billion as of Dec 31, 2018.
During the quarter, the company used approximately $66.2 million of cash, which marks an improvement of $166 million year over year and $60 million sequentially.
Free cash outflow was $77.9 million, an improvement of $190 million year over year and $71 million sequentially.
For second-quarter 2019, Snap expects revenues between $335 million and $360 million, indicating year-over-year growth of 28-37%.
The Zacks Consensus Estimate for second-quarter revenues is pegged at $350.9 million.
Adjusted EBITDA loss is expected to be between $125 million and $150 million.
Management expects some disturbance in its near-term business owing to reorganization of the sales team. The reorganization is being carried out to fully realize opportunities by addressing specific advertiser needs. Moreover, Snap is anticipated to increase investments in areas including content, sales marketing and engineering.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended downward during the past month. The consensus estimate has shifted -13.17% due to these changes.
At this time, Snap has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with an F. Following the exact same course, the stock was allocated a grade of F on the value side, putting it in the lowest quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Snap has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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