Please ensure Javascript is enabled for purposes of website accessibility

4 Important Takeaways From Snap's Annual Report

By Evan Niu, CFA - Updated Feb 23, 2018 at 3:55PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The Snapchat parent shares more granular details with investors.

Snapchat operator Snap (SNAP -5.70%) reported fourth-quarter earnings earlier this month and has just filed its related annual Form 10-K with the SEC, and it contains much more detailed information regarding the business. Fourth-quarter results were better than expected, but that was merely a reprieve after horrendous third-quarter results.

Here are four important takeaways for investors from the filing.

Man wearing Spectacles and holding his arm out

Image source: Snap.

Head count growth is slowing

After growing too quickly for a couple years, Snap employees have been hit with numerous rounds of layoffs. CEO Evan Spiegel has acknowledged that Snap hired too aggressively, while certain products underperformed -- most notably Spectacles -- and required layoffs to cut costs. Snap is now focusing on trying to make its existing workforce more productive, although it will still hire as necessary.

On the earnings call earlier this month, CFO Drew Vollero said, "Head count growth continues to moderate, thanks to productivity gains from our team. Net additions in the quarter were slightly more than 100, one-third of the rate of recent quarters." According to the filling, Snap finished 2017 with 3,069 employees.

Chart showing Snap head count

Data source: SEC filings and earnings conference calls. Chart by author.

The rate of headcount growth has indeed slowed.

The redesign is risky

Snap is in the midst of a crisis right now related to the major redesign that is rolling out this quarter. There has been considerable user backlash, including most recently from celebrity Kylie Jenner. At least two Street analysts have downgraded Snapchat shares due to the inherent risk associated with such an ambitious undertaking. The company has now added additional risk factor legalese to acknowledge it:

Additionally, we introduced a major redesign of the Snapchat application in December 2017 that rolled out more broadly in February 2018, which has received negative attention in the press and in app store reviews. The short- and long-term impact of any major change, like our recent redesign, is particularly difficult to predict. If new or enhanced products fail to engage our users, advertisers, or partners, we may fail to attract or retain users or to generate sufficient revenue, operating margin, or other value to justify our investments, any of which may seriously harm our business in the short term, long term, or both. 

Once the deployment is complete, investors should pay close attention to Snap's reported user metrics to gauge the overall reception.

Excessive executive compensation

Snap also discloses the total compensation packages for its top execs. 

Name

Title

2017 Total Compensation

Evan Spiegel

CEO

$637.8 million

Imran Khan

Chief strategy officer

$100.6 million

Michael Sullivan

General counsel

$16.8 million

 Data source: 10-K.

Spiegel's compensation stands out as excessive, which Reuters points out is the third-highest CEO payout ever. But that was already known: Snap gave Spiegel a massive IPO award for taking the company public.

Snap had initially estimated that the stock-based compensation (SBC) expense associated with the award would be about $624.8 million, but I estimated it to be closer to $636.6 million since Spiegel ended up receiving more shares than originally planned because the offering was oversubscribed. That figure is exactly what Snap recognized for Spiegel's SBC expense, with the remaining $1.2 million including a $98,000 salary and $1.1 million in other compensation. That last amount includes "membership fees for a concierge medical service" for Spiegel.

The most disconcerting part of the IPO award was that it vested immediately, requiring Snap to recognize those SBC expenses up front and foregoing any retentive effects.

Spiegel and Murphy maintain their iron grip

In a corporate governance travesty, public Snap shareholders get no votes whatsoever. In addition to some Class B shares (1 vote per share), Spiegel and co-founder Robert Murphy hold supervoting Class C shares (10 votes per share) and wield absolute control over the company. This is also old news, but Snap again details how much voting power the two young executives command.

Executive

Voting Power

Evan Spiegel

48.4%

Robert Murphy

47.4%

Total

95.8%

Data source: 10-K.

If shareholders are unhappy with how Snap is run, there's nothing they can do about it other than to sell their shares.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Snap Inc. Stock Quote
Snap Inc.
SNAP
$13.73 (-5.70%) $0.83

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
332%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/28/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.