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Snap's Redesign Just Wrecked First-Quarter Results

By Evan Niu, CFA - Updated May 3, 2018 at 8:16AM

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The Snapchat operator posted the slowest sequential user growth in its history.

There were already plenty of indications that Snap's (SNAP 5.45%) ambitious redesign of Snapchat wasn't going over well with users. Early user reviews were negative, celebrity users bashed it, a social media hoax promising to bring back the old version went viral, and some Snapchat enthusiasts even started a change.org petition begging for a reversion. CEO Evan Spiegel initially stood behind the new interface, saying the criticisms "really validate those changes."  

It's clear now that the backlash is manifesting in the company's financial results, and shares tapped all-time lows Wednesday in response.

Snapchat logo

Image source: Snap.

DAU growth just fell off a cliff

Revenue in the first quarter came in at $230.7 million, which resulted in a non-GAAP net loss of $0.17 per share. Average revenue per user (ARPU) was $1.21, but adjusted gross margin declined on a sequential basis to 17%. A full $1 of that ARPU was eaten up by costs, most notably hosting costs, which represented $0.73 per user.

Daily active user (DAU) growth was an anemic 2% on a sequential basis. Investors were thrilled last time around when Snapchat enjoyed strong user growth in the fourth quarter, but Spiegel now admits that the redesign "created some headwinds in our revenue this quarter by disrupting user behavior and creating some apprehension among our advertising partners."

Chart showing DAU growth decelerating over time

Data source: SEC filings. Chart by author.

Chief Strategy Officer Imran Khan said the company had "learned a lot based on how our users reacted to the redesign" during the quarter, potentially referring to the new versions that are currently being tested out. While Snap is still trying to tweak the new approach, it remains committed to the overarching notion that social content from friends should be segregated from professional content from media publishers.

What's next?

While Snap does not provide detailed guidance, Khan rattled investors when he predicted that revenue in the second quarter would "decelerate substantially" from the first quarter. Operating expenses in the first half of 2018 are expected to grow by "low double digits."

Capital expenditures rose modestly to $36 million, mostly due to the company's ongoing move to Santa Monica. The company points out that this spending is "below industry peers," but that comparison is specious since Snap's peers invest in their own cloud infrastructure while Snap instead outsources all hosting to third-party cloud infrastructure platforms. The difference is that after Snap spends $3 billion in hosting costs through 2021, it will have nothing to show for it.

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