Snapchat appears to have turned the corner after a year of flat or negative user growth thanks to a strong Q1 2019 earnings report. It reached 190 million daily active users, up 2 percent from 186 million in Q4 2018 when it plateaued, but still down from 191 million a year ago. Snap added as many users in Q1 as in the past five quarters combined in part thanks to its newly reengineered Android app. Snap saw $320 million in revenue and -$0.10 non-GAAP EPS, beating Zack’s consensus estimates of $306 million and -$0.12 EPS, with revenue up 39 percent year-over-year.
One concern is Snapchat provided guidance of greater losses next quarter, ranging from $125 million to $150 million compared to this quarter’s $123 million. That’s because increased usage triggers higher Amazon AWS and Google Cloud bills for the company. Since Rest of World users only earn an average of $0.97 versus $2.81 for North American users, international growth could cost Snap money until it figures out how to make more off ads there. “If engagement trends continue in a positive direction, we expect to observe higher infrastructure costs despite improving unit costs for the underlying cloud services and user actions,” writes interim CFO Lara Sweet. This could delay Snapchat hitting profitability, which Spiegel had set of goal of reaching by the end of 2019.
The strong beat on earnings led Snap’s share to climb about 10 percent in after-hours trading to around $13.11 in after-hours trading, after closing at $11.99 earlier today. That’s up from a low of $5.07 in December. But the share price dropped back to be up 2 percent to $12.15 by 2:10pm pacific. That’s likely due to the share price more than doubling in recent months. Snap also only guided toward modest revenue growth to $335 million to $360 million in Q2.
Snap managed to add users in all its markets, growing 1 million in North America, 1 million in Europe and 2 million in the developing world, where the Android app is critical. The 25 percent smaller, 20 percent faster Android app generated a 6 percent increase in Snaps sent from low-end Android devices in the first week after they upgraded.
One blemish on an otherwise powerful earnings report was that average revenue per use dropped below its Q3 2018 $0.85 level in Europe to $0.77. That may in part be due to usage increases spreading ad revenue thinner across users. But that’s a lucrative market where Snap will need to do better with advertisers. Snap saw a net loss of $310 million on $320 million in revenue, meaning it’s still deep in the hole and needs to manage how much it’s pouring into employee compensation and augmented reality hardware R&D that could take a decade to pan out.
Snap reiterated a stat shared at its big Partner Summit conference this month, which is that it now reaches 90 percent of all 13 to 24-year-olds and 75 percent of all 13 to 34-year-olds in the U.S. It claims that’s more 13 to 24-year-olds in the U.S. than Instagram. That stat could get advertisers to give Snapchat the time of day even if its total user count isn’t over 1 billion monthlies like Instagram, thanks to its international prominence.
With Android fixed, a product that remains differentiated thanks to ephemeral messaging and Discover, and losses coming under control, Snapchat looks like it may have finally ended its post-IPO slump. And now it finally has a coherent strategy for competing with Facebook’s clones, which I detail in my feature piece “To stop copycats, Snapchat shares itself.” Instead of taking the moral high road, it’s colonizing other apps with its Stories platform and ad network to recruit allies to fight the Zuckerberg empire.
Snap may never be a billion-user company. But if it can keep teens who’ve adopted it as their messaging app entertained with media content while using its best-in-class ephemerality to attract downloads, it could survive until profitability. Then it can start looking to the future again as it prepares to battle the tech giants for the future of augmented reality eyewear.
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