Snap (NYSE:SNAP) reported its quarterly earnings last week, and the call was littered with such bad signs as unfortunate growth numbers, ominous guidance, and complete lack of clarity on the Spectacles business.

In this clip from Industry Focus: Tech, host Dylan Lewis and contributor Evan Niu share their main takeaways from the report. Find out why management's comments aren't as heartening as they might initially seem, how this compares to the troubles that Facebook (NASDAQ:FB) went through shortly after it went public, why even the bull case for Snap comes with a big asterisk, and more.

A full transcript follows the video.

This video was recorded on May 4, 2018.

Dylan Lewis: Looking broad at this business and what we learned from this conference call and this earnings release, I think so much of what Snap's management is saying sounds right at first glance. The move to programmatic was absolutely the right decision for the business, and management, to compensate for this deceleration of revenue, has talked about this narrative of, "We're not playing the pricing game to maximize short-term revenues." And that sounds like long-term thinking that we normally love. I don't know that it holds a lot of water. I think, in some ways, it's more window dressing than, maybe, how they really feel about their business.

I went back and looked at Facebook's early calls, just as a reminder of what happens when these companies go public, what is the scrutiny that they go under, and what are people focusing on. The two things I was curious with, Evan, was ad dynamics and growth rates. Generally speaking, with Facebook -- I know the monetization timeline was a little bit different for these two businesses -- ad prices were up and to the right even early on for Facebook. And there were times where they intentionally did things to lower ad prices. They lowered the price floor in some developing markets to make ad buys a little bit more accessible to advertisers. But even when they did that, the company posted overall price growth because demand was so strong in North America.

So, I think that's something to keep in mind when they're saying that this is a reflection of programmatic. Yes, it is, but if we don't find a floor for this fairly quickly, I think it's a broader reflection of how interested people are in reaching people on Snap and the ROI that they get on advertising on that platform.

Evan Niu: Right. And another example, to your point about them saying stuff that sounds like it should be right, but in reality, isn't really what's going on, I want to point out something in their earnings slides. We've talked about their cost structure quite a bit on the show. They had this line saying, "modest capital expenditures result in stronger free cash flow conversion over time." That is technically a true statement, [laughs] but in the context of Snap, it comes off as a parody or a satire because it's just a joke. Their capital expenditures are so low because they outsource all infrastructure and cloud hosting to third-party providers, which, as we mentioned, is a really short-term strategy.

But, it was really hilarious. That line is always in their slides, but this quarter in particular, it was pretty hilarious, because their free cash flow dipped to the worst level it's ever been. And when you see that line below this chart that shows free cash flow just falling off a cliff, it's just like, "What are you even talking about?" Free cash flow is deteriorating. It was negative $268 million this quarter, and that's largely because operating cash flow is getting worse, too. Operating cash flow was negative $230 million or so, compared to about negative $150 million a year ago. So, these numbers are getting worse and worse, and then they have this line that, again, sounds right, [laughs] but when you look at the numbers, it just doesn't apply to them.

Lewis: Yeah. And I know this is a business that we've been pretty bearish on throughout the time that we've covered it. I think, to paint a somewhat rosy picture, or give the alternate side of things, going back to this Facebook example I had before, there are plenty of times early on where Facebook had year over year revenue growth decelerate quarter to quarter, and then the company found growth and reaccelerated. And that happened because they had user growth, they had growth in their ad inventory, and ad prices continued to climb. Which is to say, it's not doom and gloom for Snap, necessarily, if you're only looking at what's going on with revenue rates.

But, when the other metrics aren't also trending in the right direction, I think it doesn't look very good. The idea that user growth on a sequential basis is as low as it's ever been, that's problematic. I think, the possibility that, within the quarter, they had their lowest user counts in the most recent month is not a particularly great sign, either. And you talk about the social and pop culture elements that they have to overcome with getting advertisers on the platform, there just seems to be a lot of obstacles in front of this business right now.

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