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Snap Surges on Q4 Earnings Beat

By Evan Niu, CFA - Feb 7, 2018 at 3:18PM

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Snapchat enjoyed strong user growth in the fourth quarter.

Unlike last quarter's train wreck, Snap (SNAP 3.42%) just posted stellar results for the fourth quarter, sending shares skyrocketing in the process. The Snapchat operator saw revenue jump 72% to $285.7 million, with a non-GAAP net loss per share of $0.13. Both figures easily topped the Street's expectations, and have helped shares recover back above the IPO price of $17.

Perhaps more importantly, Snap put up its strongest daily active user (DAU) gain since 2016, adding 8.9 million DAUs during the quarter and bringing its total to 187 million. That helped dispel investor fears over user growth, which have plagued the company ever since going public nearly a year ago.

Woman wearing Spectacles

Image source: Snap.

What drove user gains

CEO Evan Spiegel attributed the DAU gains to two factors: performance improvements with the Android version and the app redesign.

Snap has historically focused development on iOS, with the Android version of Snapchat suffering from a host of performance issues. As Snap improved the Android version, the retention rate of new Android users jumped 20%, which in turn paved the way for those users to remain engaged and become DAUs. "Additionally, the fourth quarter saw significantly more new Android users as a percentage of net additional users than any other quarter in our history," Spiegel added.

While Snapchat's major redesign had a poor early reception among users, Snapchat's community appears to be warming up to the new interface. In one of the test markets, DAUs viewing publisher content in the Discover section jumped 40% with the new version. The redesign addresses long-standing complaints that Snapchat is hard to use, and Spiegel says the new design has made the app simpler and easier to use, particularly for people over the age of 35. All Snapchatters should get the new design this quarter.

Programmatic gains

Snap has been transitioning toward automated ad auctions in its efforts to scale the business, and made progress on this front in the fourth quarter. Over 90% of ads were purchased programmatically during the quarter, up from 80% in the third quarter. The company intends on shifting its creative tools business to its programmatic platform as well in 2018, which could cause prices to come down.

Chief Strategy Officer Imran Khan said, "I think as our business is becoming more and more programmatic, our sales force is becoming consultant[s] to our clients, and I think that is very important because I think we have still a lot of work to do to educate the market and really teach the market how to create vertical video ad unit[s] that really, really works in mobile environment."

Moderating costs

Snap has a bad habit of spending too much, but the company is now starting to exercise some cost discipline. Snap overshot with hiring over the past two years, adding 2,400 employees in that time frame. There have been several rounds of layoffs, and Spiegel says Snap will now "moderate the growth of our team" going forward. Compared to the third quarter, revenue jumped while total costs ticked down, resulting in meaningful margin expansion.

The company has also introduced a new non-GAAP cost metric, cost of revenue per user (CoRPU), as a way to calculate its adjusted gross margin per user.

Chart comparing ARPU and CoRPU over time

Image source: Snap.

Hosting costs continue to comprise the bulk of cost of revenue, $131 million out of $184 million on a non-GAAP basis, but on a per-user basis hosting costs declined from $0.72 a year ago to $0.70 last quarter. Snap also only burned about half as much cash ($255 million) as it did in the third quarter.

After a string of disappointing quarters, Snap finally delivered a beat for investors. Whether or not the company can sustain that momentum is a different question altogether.

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