Wall St. to eye Snap’s user data
Post-IPO earnings report may show how much investors care about growth in usage.
Snap Inc.’s first earnings report since joining the New York Stock Exchange is expected to reveal an increase in users and ads on the Snapchat app.
But whether the usage growth is sizable enough to satisfy investors is the biggest question looming over the young Los Angeles company ahead of its Wednesday announcement.
Chatting with friends and watching mini TV shows on Snapchat shouldn’t appeal to just the app’s core demographic of young users in developed countries — it should appeal to everyone, Snap Chief Executive Evan Spiegel has said. But his team cautions that Snapchat isn’t likely to pick up new users at the exceptional pace of the past. His team has suggested that investors judge Snap based on average revenue per user, or its ad income divided by its number of users.
With 158 million daily users at the end of 2016, or 48% more than at the end of 2015, Snap generated about $1.05 in ad sales per individual.
Revenue is expected to increase this year because Snap has a bigger ad sales team, new types of ads and more ways for people to buy ads. Brands as big as McDonald’s and as small as independent wedding plan-
ners can pitch to Snapchat users through videos, animations and graphics.
Financial analysts at stock brokerages expect average revenue per user to double to $2.10 by the end of 2017 and reach five times as high during the following year.
Though investors do desire sales growth, they’ve been conditioned by Snapchat predecessors such as LinkedIn, Facebook and Twitter to pay greater attention to usage data. Keep the users coming and there will be boundless ways to make money off them, the thinking goes.
To such investors, Snap may be worth only its current market capitalization of $27 billion if they’re sure the company will reach 500 million users in the 2020s and eventually, like Facebook, more than 1 billion. And they’re especially concerned about the growth in usage of Snapchat-inspired features on Facebook and its Instagram app.
Skeptical investors view Snap as Facebook’s free research lab, from which the Menlo Park, Calif., social media giant can pick successful ideas and expand at Snapchat’s expense.
Snap has advised about “lumpy” user growth, or quarterly variances, depending on what new features are introduced in Snapchat, William Blair financial analyst Ralph Schackart wrote in a report last week. The company also has avoided actions that could boost usage in new countries or among older consumers, saying it would rather focus on improving the experience for its core users.
“Despite this warning, we believe investors will still focus on quarterly [daily active users], especially with the rate at which Facebook continues to roll out features on its properties that are similar to features Snap offers,” Schackart said.
He estimated that Snap on Wednesday would announce 169 million users, up 39% from last year’s first quarter.
Demand for Snap shares could be limited until more investors buy into the company’s message, especially if user growth is lackluster. Financial analysts say the anxiety is already reflected in Snap shares, which closed Monday at $22.46, below the company’s March 2 debut of $24.
Investors who agree with Snap’s viewpoint say Snapchat could surpass Facebook in average revenue per user and be profitable without ever having as many users. Only a consistent decline in users would force them to rethink their bet.
“This is the microbrewery, not the giant AB InBev, and that’s a trend that is increasingly viable when thinking about younger consumers,” said Andrew Hall, vice president at Snap shareholder Narwhal Capital Management.
Shifting focus away from usage growth from the beginning could benefit Snap.
Online radio service Pandora Media spent many of its initial post-IPO earnings announcements heralding statistics such as active listeners and total listening hours. The data gave the company, which went public in 2011, a scare in 2014 when shares were clipped in half from an all-time high after user growth failed to meet expectations.
After touting growth potential to investors, Twitter likewise tumbled in its first four earnings reports as shareholders zeroed in on disappointing usage data. Pushing other measurements has been difficult for Twitter co-founder Jack Dorsey, who returned to the chief executive role in 2015.
Snap is concentrating on developing features and ads for the world’s top 10 advertising markets. Given Snapchat’s high saturation in those countries already, the company sees average revenue per user as a better signal of its performance.
Still, financial analysts say scrutinizing the number of advertisers and their spending would be even more beneficial than average revenue per user. ARPU, as it’s referred in shorthand, makes sense for subscription companies. But in the first years of this century, media technology companies including Yahoo started using the metric as much as telecommunications firms such as Qwest.
For a company such as Snap, ARPU is akin to valuing a newspaper based on how many words it prints in a given year, Pivotal Research stock analyst Brian Wieser said.
“It might coincidentally turn out to be relevant,” he said. But a better indicator would be what percentage of their budget the biggest advertisers are committing to Snapchat.
Questions about the latest deals with advertisers could come up when Spiegel and other executives address analysts Wednesday afternoon. How Snapchat views the competition from Facebook and whether it has rectified technical issues with its app for Android smartphones may come up too, said Christos Charalambous, senior strategist at Snap shareholder Edge Wealth Management.
In the early stage of its growth cycle, Snap is not going to perfectly deliver on everything, Charalambous said. “But if the ARPU is growing, you give them the benefit of the doubt.”
Signal Sciences gets investment
Signal Sciences, a Venice company developing tools to keep hackers from breaching online apps, received a $15-million investment that was led by Charles River Ventures.
Since launching a year ago, Signal Sciences has signed up about 60 paying customers such as Yelp, Under Armour and WeWork, Chief Executive Andrew Peterson said. The start-up also opened an office in nearby Santa Monica.
It’s now working to make its service compatible with a greater number of technologies, which should lead to a wave of new customers this year.
Peterson said the biggest validation that Signal Sciences is headed in the right direction is that cybersecurity companies including Duo and Tenable, which offer different services, are among its users. Signal Sciences’ competition includes Imperva and Akamai.