Snap (NYSE:SNAP) CEO Evan Spiegel announced plans to roll out a newly redesigned Snapchat app after the company's third-quarter earnings results last year. That redesign started rolling out at the end of last year. While the early reviews were discouraging, Snap says the new app format is driving considerable growth across the board for Snapchat.

Spiegel told analysts the redesign caused a 40% increase in daily users who view content from its Discover section in one of its markets. Additionally, the company saw improved ad performance with view time, engagement, and revenue per user all increasing over the old app design. Most importantly, he says the redesign greatly improves engagement among users over 35.

The redesign is currently rolled out to about 40 million users, but the company expects to complete the transition by the end of the quarter.

Snapchat logo

Image source: Snap.

Putting the worst fears to rest

The biggest fear with the rollout of Snapchat's redesigned app was that it would curb consumption of Discover content. Snapchat is primarily used as a communication tool between friends, and the redesign separates that function from its ancillary function of consuming content from celebrities and publishers. As such, there was a strong possibility that Snap would see a decline in users engaging with public content -- which has the highest potential for monetization -- as they focus on content from friends.

But it turns out, Snap knows what it's doing. The redesign also offers an algorithmically curated feed of Discover content, so that may be what's driving engagement. The hope is that a curated feed will continue to drive engagement in the section, which has drastically underperformed expectations.

Only about 20% of daily users watched Discover content on Snapchat between April and September of last year, according to recently leaked data. That lack of engagement may be tied to a sequential decline in revenue share payments to Discover partners in the third quarter. That number jumped considerably both sequentially and year over year in the fourth quarter, but it accounted for a smaller percentage of total revenue than in the prior year.

That said, Snap will have to keep improving the Discover section to bring it up to par with direct communication. Even a 40% increase in engagement means less than 30% of users will use the feature.

Improving advertising

Getting users to actually watch Snap Ads has been a struggle for Snap since it started monetizing the platform. 69% of users would immediately skip an ad "always" or "often," according to a survey from Fluent published about a year ago. Bringing down that number is the most important step for Snap to take in order to generate a better return on investment for advertisers, which is its biggest roadblock to scaling its ad revenue long term.

Spiegel noted on the conference call that the company is focused on driving return on investment for advertisers, and that improvements in ad pricing will follow from that. Indeed, the auction format has caused ad prices to crater in large part because the return currently isn't there for advertisers at Snap's reserved pricing. Average price per ad impression decreased 25% in the fourth quarter, as nearly all ad purchases came from the auction platform.

Improving the value of ads will improve prices, and the redesign appears to be helping with that.

Keeping older users engaged

There's a big disparity between Snapchat users under 25 and those 25 and older. Specifically, those under 25 spend over 40 minutes per day, on average, using Snapchat. Those 25 and older spend "over 20 minutes per day," according to Spiegel's last update.

Capturing the attention of an older audience is extremely important. Not only can they contribute to daily user growth, but as Snap expands its ad units into more direct response ads from brand ads, they'll become a valuable part of Snap's pitch to advertisers. Brand advertisers often prefer to target young people and make them customers for life, but direct-response advertisers like people with money -- something teenagers generally have to ask mom and dad for.

The early results of the app redesign are encouraging, especially considering the overwhelming negativity surrounding it in third-party reports. That said, Snap still has lots of work to do iterating upon its early success. It's worth paying close attention to how advertisers and publishers respond as Snap completes the rollout later this quarter.

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