The largest component driving Snap's (NYSE:SNAP) massive $2.2 billion net loss in the first quarter was stock-based compensation, and the largest component of that was a CEO award to Evan Spiegel. In this segment from Industry Focus: Tech, Motley Fool analyst Dylan Lewis and senior tech specialist Evan Niu, CFA, discuss the company's stock-based compensation and the grant Spiegel recieved.
A full transcript follows the video.
This video was recorded on May 12, 2017.
Dylan Lewis: One of the other things that popped out to me looking at the report was, I mentioned earlier, net loss came in at $2.2 billion. Non-GAAP EBITDA (earnings before interest before taxes, depreciation, and amortization), which backs out stock-based compensation, came in at just under $200 million loss. I think it's worth emphasizing that EBITDA backs out stock-based compensation, because stock-based compensation was huge for Snap in this most recent quarter.
Evan Niu: Yeah. Out of the total net loss of $2.2 billion, $2 billion of that was stock-based compensation. It's not uncommon for companies that go public, because what usually happens is, a lot of the private stock that's been given out when the company is private, there's these performance conditions that can only get met when the company goes public. So, what that does is triggers a ton of vesting and huge expenses are now recognized. So, that's what happened here. But, I think in this case, it's a huge number. For context, when Facebook went public, their first public earnings release, they reported $1.3 billion in stock-based compensation. That's less than what Snap just reported. And when Facebook went public, it was a massive company already, and they IPO-ed at over a $100 billion market cap, and they had 700 [million]-800 million monthly active users -- they were much bigger at that time, and their stock-based comp was less than what Snap just put up.
Lewis: I think one thing that's worth emphasizing with this argument, though, is one grant in particular ate up one-third of that total $2 billion.
Niu: Yeah. That's another red flag to me. As soon as Snap went public, Evan Spiegel got a giant bonus for taking the company public. Those bonuses aren't unheard of in themselves. But what's alarming is the magnitude of it. The CEO grant says he gets an extra 3% of shares outstanding once they go public. So, it turned out to be about $625 [million]-$640 million, that Snap recognized all upfront, immediately after the IPO. And that's just for him, which, as you mentioned, is about a third of the $2 billion total for the quarter. But, what is so weird about it is this award vested immediately, but they pay it out to him in quarterly installments over three years. It's considered an unsecured liability, like, you are an unsecured creditor with this. But then, why did it vest? Because it vested all up front, they ate this giant cost up front. And because it vested up front, there's no service requirements. Obviously, the point of having vesting time frames is to retain employees and make sure they stick around. But they just gave him all this up front, and he could leave the company right now if he wanted to.
Lewis: And he would retain all those shares.
Niu: Yeah, he still gets to keep them, and they just pay them out over three years. But they're vested, they're his.
Lewis: Yeah. Evan, I know you wrote a whole fool.com piece about this. Listeners, if you want to see the numbers broken down on paper rather than having them told to you, email into the show, firstname.lastname@example.org. I'm happy to send it along. I think the thing that you need to remember with this is, the type of grant that we see here, one, it's not particularly great for the business, because you're recognizing a ton of stock-based compensation at once. And it's also not particularly great if you're a long-term investor who wants the CEO to stick around and have skin in the game and a vested interest in the long-term outcome of the business. Like you said, he can walk whenever now.
Niu: Yeah. I don't understand why they wouldn't have it vest over time. Not only would that spread out the cost of the grant, but it also has retention effects. Not that I'm a huge fan of Evan Spiegel as a product visionary, per se, to begin with. But, on principle from a governance perspective, it just doesn't seem right. Combined with all the other governance red flags we've seen with this company, like no voting and things like that, it just doesn't seem like Snap cares about its investors. It seems like they just want to enrich themselves, particularly Evan Spiegel.
Dylan Lewis owns shares of FB. Evan Niu, CFA owns shares of FB. Evan Niu, CFA has the following options: long January 2019 $20 puts on Snap Inc. and long January 2018 $120 calls on FB. The Motley Fool owns shares of and recommends FB. The Motley Fool has a disclosure policy.