Snap Q4 analysis: progress on all fronts but scale remains a problem

Wednesday 7 February 2018 | 13:24 CET | Market Commentary

Snap reported fourth-quarter results well ahead of expectations, both in terms of revenues and users. Is the outlook for the company behind Snapchat improving? At the very least Snap is making progress and met its aims promised in the previous quarter. 

The question remains whether Snap can achieve sufficient scale to fund its business before it runs out of money. An acquisition of the company remains a possibility, by the likes of Facebook (which really doesn't need Snap anymore due to its own services) or other internet majors seeking growth in the communications segment. 

Growth accelerating

Snap's number of daily active users increased by 9 million in the quarter to 187 million, the biggest increase in five quarters. This was equally split across the three regions of North America, Europe and Rest of World. ARPU rose to USD 1.53 from USD 1.05 a year ago.

Revenues jumped 72 percent year-on-year to USD 286 million, with accelerating growth outside North America, not only in Europe (+173%) but elsewhere as well (+359%). The adjusted EBITDA margin achieved a new record of 'only' minus 56 percent. 

On an underlying basis, both of the two main cost posts improved. The cost of revenue (mainly hosting) was just 67 percent of revenues, down from 93 percent a year ago. The other costs (mainly personnel) were still at 159 percent of revenue, worse than the 110 percent a year earlier but better than the 221 percent in Q3 2017. 

The net loss worsened, from 103 to 123 percent of revenue. On an adjusted basis, excluding amoritsation and stock option costs, there was an improvement, with the margin dropping from 96 to 55 percent. Unsurprisingly, the cash position continues to shrink, down by USD 255 million in a quarter to USD 2.04 billion. We also estimate the revenue per employee at USD 92,000, up from USD 89,000 a year ago. 

Promises met, focus on advertisers

At its Q3 results, Snap announced a new strategy. The main points were growing the number of users (especially on Android), content (new formats) and AR (Lenses). Snap showed progress on all three fronts in Q4. It also showed the new version of its app is catching on (40% more users of Publisher Stories), cooperation with mobile operators to curb data usage ("in over a dozen markets") and a move to programmatic advertising with automated auctions (already 90% of ads). Snap wants to serve advertisers better, both with more formats and tools to measure impact.

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