Snap shares fall on weak re­sults

Slow­ing user growth and dis­ap­point­ing rev­enue send shares of Snapchat maker down about 13%.

Los Angeles Times - - BUSINESS - By Paresh Dave

Snapchat picked up fewer users and less rev­enue in the sec­ond quar­ter than an­a­lysts had ex­pected, send­ing shares of owner Snap Inc. plum­met­ing Thurs­day af­ter­noon.

The Los An­ge­les tech com­pany has suf­fered through a treach­er­ous run on Wall Street since a block­buster ini­tial pub­lic of­fer­ing five months ago. Hype about Snap’s po­ten­tial to take on Face­book and Google as a ma­jor player in on­line ad­ver­tis­ing sales fu­eled one of the largest IPOs in tech his­tory, and the largest ever for South­ern Cal­i­for­nia.

But Snap hasn’t de­liv­ered promis­ing re­sults in its first two earn­ings re­ports. It has frus­trated fi­nan­cial an­a­lysts and in­vestors by adding new fea­tures for ad­ver­tis­ers too slowly and miss­ing on es­ti­mates for daily us­age.

Shares fell 21% af­ter the first earn­ings re­port and about 13% on Thurs­day, when the lat­est re­sults emerged af­ter the close of mar­kets. The slump­ing stock lessens the chance of a big sell-off when em­ploy­ees who hold shares be­come el­i­gi­ble to sell for the first time Mon­day, be­cause many would lose money on the deal.

Growth in us­age of Snapchat, the so­cial me­dia app that turned self-de­struc­t­ing photo mes­sages into a pop­u­lar form of ex­pres­sion, has de­clined in four straight quar­ters.

Laura Martin, man­ag­ing di­rec­tor of eq­uity re­search at Need­ham & Co., said she was sur­prised that Snap added only 7 mil­lion users dur­ing the sec­ond quar­ter. Face­book and Snap use dif­fer­ent mea­sure­ments to count daily users, but an­a­lysts have held the two in sim­i­lar re­gard.

“How can Face­book be adding 50 mil­lion this quar­ter de­spite reach­ing 1.3 bil­lion daily ac­tive users, and Snap [at 173 mil­lion daily ac­tive users] can’t add 8 to 10 mil­lion,” she said in an email. “That is why the shares are down — and they should be!”

Snap also has en­dured four straight quar­ters of

slow­ing growth in av­er­age rev­enue per user. Though a slow­down from boom­ing growth a cou­ple of years ago had been ex­pected, the drop-off has been more than hoped. Worse yet, com­pany ex­ec­u­tives warned that sales growth could take a hit in the cur­rent quar­ter be­cause ad sales re­ceived no­table boosts last year from com­mer­cials tied to the Summer Olympics and the U.S. pres­i­den­tial elec­tion.

Snap Chief Ex­ec­u­tive Evan Spiegel, 27, told an­a­lysts Thurs­day that the com­pany had “made great progress” and that daily us­age “re­mained solid.”

He rat­tled off achieve­ments: Users are tun­ing in to mes­sages, mini-TV shows and other con­tent on Snapchat more fre­quently and for longer spans than ever be­fore. Users 25 and older spend about 20 min­utes a day on av­er­age in­side the Snapchat app, and users 24 and younger browsed Snapchat for 40 min­utes a day on av­er­age.

Spiegel re­it­er­ated a longheld po­si­tion that in­vestors shouldn’t fo­cus on daily us­age growth as a proxy for Snap’s po­ten­tial. But he added new color to his con­tention, say­ing that Snap’s growth in ex­penses would out­pace sales in­creases if it tried to at­tract users in de­vel­op­ing mar­kets. The com­pany isn’t in a po­si­tion to ab­sorb those costs, he said, which ex­plains why it’s con­cen­trat­ing on show­ing more ads to ex­ist­ing users.

Face­book, and its hold­ings In­sta­gram and What­sApp, might be grow­ing fast around the world as they em­u­late key Snapchat fea­tures. But Spiegel said Snapchat would be able to catch up when it de­cides to fo­cus on parts of the world be­yond North Amer­ica, Europe, Aus­tralia and the Mid­dle East.

As far as gen­er­at­ing more rev­enue off users, Snap ex­ec­u­tives said their month­sold ef­fort to draw ad pur­chases from small and medium-size busi­nesses is off to a good start. As that pro­gram picks up, ad sales could in­crease dra­mat­i­cally. But sell­ing to such ad­ver­tis­ers has brought down prices for Snapchat ads.

Over­all for the sec­ond quar­ter, Snap re­ported $182 mil­lion in sales, up 153% from $71.8 mil­lion in last year’s sec­ond quar­ter. Snap’s loss widened to $443 mil­lion, com­pared with $115.9 mil­lion in the same pe­riod last year. About half of the losses rep­re­sent costs re­lated to pay­ing em­ploy­ees in com­pany stock.

The com­pany be­gan sell­ing Spec­ta­cles, its video-film­ing sun­glasses, in Europe dur­ing the quar­ter. But ex­panded avail­abil­ity didn’t boost de­mand, with sales fall­ing to $5.4 mil­lion from $8 mil­lion.

Shares fell nearly 17% to be­low $11.50 in af­ter-hours trad­ing af­ter clos­ing at $13.77, up 21 cents on the day. They de­buted on the mar­ket at $17. Snap shares al­ready had fallen more than 40% since the com­pany is­sued its first earn­ings re­port.

An­a­lysts at­trib­uted most of the summer slump to con­cerns about Snap los­ing users and ad­ver­tis­ers to In­sta­gram. But also weigh­ing on shares is the end of a six­month pe­riod in which em­ployee-share­hold­ers could not sell their stock. Spiegel said he and co-founder Bobby Murphy do not plan to sell shares this year.

The an­a­lysts fol­low­ing the com­pany had es­ti­mated Snap would see a mod­est in­crease in sales and sim­i­lar us­age growth when com­pared with the first quar­ter.

Snap doesn’t pro­vide guid­ance about its ex­pected per­for­mance. But Spiegel teased up­com­ing fea­tures more than he typ­i­cally does in pub­lic fo­rums. He said more than 250 mil­lion Snapchat posts are saved each day in a digital file locker in the app. That vol­ume of ac­tiv­ity was cre­at­ing a foun­da­tion for fea­tures that help peo­ple reminisce, he said.

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