Snap (NYSE:SNAP) isn't known for giving guidance, so investors listen up when it does. And this quarter's guidance... wasn't great.
In this clip from Industry Focus: Tech, host Dylan Lewis and Fool.com contributor Evan Niu explain what this substantial deceleration means for Snap's growth, why it's even worse than it might initially sound, how this relates to recent changes in Snap's ad model, and more.
A full transcript follows the video.
This video was recorded on May 4, 2018.
Dylan Lewis: Another thing that really spooked the market was a forward-looking comment from CFO Andrew Vollero. Snap is not a company that's known for giving guidance, so when we do get anything that's forward-looking from management, I think people's ears perk up. On the call, the CFO said, "As we think about year over year revenue growth rates, we are planning for our Q2 growth rate to decelerate substantially from our Q1 levels." To help paint a picture of what growth has looked like for Snap over the past few quarters, we just said before, 54% year over year growth in Q1 of 2018. Q4, 72%. Q3 of 2017, 63%. So, for them to be saying that we're going to have a meaningful deceleration as a cue to analysts, they must be expecting a pretty decent drop, somewhere in the low 40s or perhaps even lower.
Evan Niu: Right. I think the broader context of these relatively strong historical growth rates is, remember, as we mentioned, this ad business is so young that they're coming off of a really small base. These growth numbers look really good, but you would expect them to keep maintaining these high levels of growth -- which are, by the way, being priced into the stock, at least they were before the earnings release.
But, you have these high growth rate as you're growing off these really small bases, so some deceleration is expected. But, when they're expecting a big drop-off even when they should still be in the process of ramping, that is a pretty big concern for investors.
Lewis: And they point out that this deceleration comes as there's a lot of growth in ad impressions, which are being offset by pricing for Snap ads. I think, to a certain extent, this dynamic is bound to happen. With the switch-over from these direct-sold ads to programmatic, where you have software being used to buy ads rather than having contact and salespeople, there are a lot more fluctuations with ad prices. The flip of that is, it opens the door to a lot of new advertisers to come in. This is a move that, we've talked about in the past, Snap really had to make, especially in order to bring smaller advertisers into the fold. But this is the problem with making that switch, is that you can have some pretty big hits to your financials if you're wholly reliant on ads.
Niu: Right. And Chief Strategy Officer Imran Khan had an interesting comment, too, about, as this redesign relates to ad buyers specifically, there's been so much negative press about this redesign that he said that's probably causing some delays or pauses in purchase decisions -- which is probably true, but it's also like, you're blaming it on media. The point is, this redesign is not being well-received from the user base, and yeah, that's going to manifest in the ad business, too.