Snap (NYSE:SNAP) seems to have forgotten the No. 1 rule: The customer is always right. Since the day Snap's now infamous redesign got its wide release, users have begged Snap to reverse it. Snap was convinced it knew best; however, its weak earnings report says otherwise.
On the earnings call, Snap executives seemed to justify the disappointing results by reminding investors that it was focusing on long-term growth and that gaining more users was its top priority. But if Snap is so focused on growing users, then why did the company push a redesign on its users that the majority of them overwhelmingly hated?
If the company was hoping the redesign would be the start of a much-needed turnaround, it might want to keep looking.
Snap users lose interest
The majority of Snap's users could all look at the company with pity this week and say, "I told you so."
Back in February, over one million disgruntled users signed a petition on change.org claiming that the new design that separated friends' posts from publishers' posts was frustrating and confusing. Rather than listening to its loyal users, Snap responded to the petition and basically told them why the new design was actually better.
So, it should come as no surprise that Snap missed the mark on its daily active users this past quarter, reporting a year-over-year increase of 15% to 191 million DAUs for the quarter vs. the 194.2 million analysts were expecting.
Unfortunately, this wasn't the worst bit of news. The scariest piece of information was Spiegel's remarks that its March DAUs were lower than its 191 million quarterly average DAUs. That means the month of March was a worse month for DAUs than February, and it implies that users may not be getting used to the new design after all, but instead are coming to the app less often.
That could be why Snap has recently backtracked on a big part of its redesign by working on an updated version that will recombine posts from friends with posts from celebrities, publishers, and influencers. Maybe if Snap had responded to its customer pleas back in early February, these issues could have been avoided.
Snap's advertisers get cold feet
If users don't like your product, then your partners might start to slink away. Earlier this month, SelectAll reported that some publishers on Snapchat saw their traffic plummet after the app's wide release of the redesign on Feb. 6. One source said its overall traffic on Snapchat's Discover page had been cut by more than 50%.
Snap's publishers are crucial for Snap's revenue because their content provides a prime space for Snap to run ads. So, if the loss of user traffic gives publishers cold feet, then advertisers might also get cold feet. The users, publishers, and advertisers' happiness are all inter-connected.
Snap CSO Imran Khan tip-toed around this issue on the earnings call by saying because there has been so much negative press about the redesign, it's natural for some advertisers to pause. He said there was no way to tell the percentage of advertisers that were turned off by the redesign and the negative feedback on it, but he indicated that it had been "a disruption on the selling process."
Khan noted that advertisers should be drawn to Snapchat because the app is still a strong product for millennials, who will be an even bigger driving force of the economy in the upcoming years. The problem is, millennials were the ones asking Snap to do away with the redesign, and Snap said no. Hopefully, Snap learned this quarter that if it wants to keep its large base of millennial users, then it needs to pay more attention to them.
Snap's revenue bomb
As you can probably guess, Snap's revenue for the 2018 first quarter also missed the mark by a long shot with a 54% increase year over year to $230.7 million vs. the $244.5 million analysts were expecting. The stock reacted violently, dropping as low as 20% after Snap reported on May 2.
But that wasn't the worst part about Snap's revenue. The real sinker was when Snap CFO Drew Vollero said the company expected its second-quarter year-over-year revenue growth rate to "decelerate substantially from Q1 levels."
Snap attributed the expected deceleration to lower ad prices. In the first quarter, ad prices were down a stunning 65% year over year. That's mainly a result of Snap replacing its direct ad sales force with its auction-based advertising system called "programmatic," which gives ad spots to the highest bidder.
Vollero noted that Snap's priority is getting as many advertisers on its platform as possible before it starts to give a closer look at pricing. But it's hard to attract advertisers if both users and publishers aren't happy with your product's recent redesign.
The simple, fix-all solution for Snap is a period of explosive user growth that would excite advertisers to spend money on its platform, which would drive its revenue up. But in order to get user growth to spark such a turnaround, Snap needs to refocus on its users and what they want.