It's safe to say that the IPO honeymoon is over. In its first earnings release as a public company, Snap (NYSE:SNAP) has immediately disappointed its newfound shareholders.

Revenue in the first quarter totaled $149.6 million, up 286% from a year ago. However, that growth rate is a bit misleading, as sales are coming off a very small revenue base and Snap only started building its ad platform in earnest recently. GAAP net loss came in at a whopping $2.2 billion, or $2.31 per share. Both top- and bottom-line results fell short of the Street's expectations, which called for $158 million in revenue and a net loss of $1.92 per share.

Snap also reported disappointing user figures, one of the most important operating metrics for a social media company. The company added approximately 8 million daily active users (DAUs) during the quarter, up 5% on a sequential basis, to 166 million. The market was expecting 167.3 million DAUs by now.

Snapchat logo

Image source: Snap.

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The vast majority of that loss, $2 billion, is associated with stock-based compensation (SBC) expense that was recognized due to the IPO triggering performance conditions associated with previously awarded restricted stock unit grants. This is not uncommon; Facebook recognized $1.3 billion in SBC in its first public earnings release for the same reason, though Facebook was a much larger company when it went public, both operationally and by market value, with a longer operating history.

But the SBC costs came in much higher than expected. Snap said in its prospectus that it expected to incur roughly $1.7 billion in SBC in the quarter of its IPO, so costs came in $300 million higher than previously disclosed.

Snap is starting to scale, but not well

Unlike most online services and social media companies, Snap does not enjoy particularly strong gross margin. Snap's gross margin was negative 9% last quarter, largely due to the company's unique cloud infrastructure strategy of entirely outsourcing servers and data centers to third-party infrastructure partners -- Alphabet's Google Cloud and's Amazon Web Services (AWS). Cost of revenue, which consists primarily of cloud hosting costs, was $163.4 million.

The silver lining is that Snap is starting to modestly improve its cost structure, specifically around hosting costs. In its earnings presentation, Snap notes that hosting costs declined sequentially from $113 million in the fourth quarter to $99 million in the first quarter, and that's despite the uptick in DAUs and overall engagement. Snap attributed this to "lower contract pricing," as it inked new deals with Google Cloud and AWS during the quarter (which include those massive spending commitments). Given Snap's cloud spending levels, both Google Cloud and AWS are aggressively competing for the business, and naturally Snap is pitting the rivals against each other.

This is how Snap is able to utilize a relatively capital-light model, only spending a mere $18 million in capital expenditures during the quarter. One benefit of this approach is that Google Cloud and AWS are incredibly resilient and powerful, wielding massive computing power that each can deliver to cloud customers. In relying on such powerful cloud infrastructure, Snap can avoid the types of service outages that plagued Twitter in that company's early days (remember the fail whale?). Managing cloud infrastructure directly can be very difficult, particularly in the hyper-growth early days, but it's unclear if Snap's strategy will prove to be financially prudent.

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