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Snap Is Suddenly Frugal

By Evan Niu, CFA – Apr 2, 2018 at 7:39PM

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The Snapchat operator has been rather concerned about cost-cutting recently.

Last year, it didn't seem that Snap (SNAP -5.30%) was all too worried about cost discipline. After going public in March, which earned CEO Evan Spiegel a massive $640 million bonus that vested immediately with no ongoing service requirement, the Snapchat operator proceeded to blow more than $400 million over the summer on a handful of questionable acquisitions. Snap had raised approximately $2.6 billion from its IPO after underwriters exercised all options.

Those spendthrift ways are catching up with the company. Snap had four rounds of layoffs through early March, and announced yet another just last week.

Snapchat logo

Image source: Snap.

Snap cut 7% of its workforce last month

Bloomberg first reported the last batch of layoffs, which were largely within Snap's advertising operations and reportedly impacted about 100 employees (in addition to the 120 employees that were laid off earlier in the month). Snap subsequently confirmed the reduction in it workforce in a regulatory filing, as the layoffs were meaningful enough to warrant an official disclosure to investors.

The company ended up cutting about 7% of its global head count in March, mostly in engineering and sales. It had 3,069 total employees at the end of 2017. Snap said the move was in order to "align resources around our top strategic priorities and to reflect structural changes in our business." The company expects to incur $10 million in pre-tax cash expenditures, mostly related to severance costs, although it will save $31 million in stock-based compensation (SBC) expenses through forfeitures. Additionally, Snap estimates that it will save $25 million in 2018 related to salaries and payroll taxes, or $34 million on an annualized basis.

On top of that, Snap is exiting operating leases associated with its corporate offices, as it plans to move its offices from Venice, California, to Santa Monica, California. Snap had long leased various office spaces in Venice, but now wants to consolidate operations into a centralized campus. The company has been putting up much of this real estate for sublease in recent months. At the end of 2017, Snap was still on the hook for $85 million, and will incur losses of $25 million to $45 million from the transition, after factoring in sublease income.

Snap does not believe the charges associated with the layoffs or lease exit will be material to its financial results.

Snap's newfound frugality in recent months is a stark contrast to its spending habits last year, while the company's overall cost structure is still a mess. Spiegel doesn't quite get scalability, as Snap's cost growth continues to outpace revenue growth, and the savings from all those layoffs will barely make a dent in the roughly $2.5 billion remaining out of Snap's spending commitment to its two cloud infrastructure providers.

Evan Niu, CFA has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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