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Did Snap Reverse User Losses in the 3rd Quarter?

By Rich Duprey - Oct 24, 2018 at 8:34PM

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It needs to get users to re-engage if it wants to keep advertisers happy.

Life for Snap (SNAP -0.95%) hasn't been easy since it went public in early 2017, as it seems one debacle after another weighed on its performance. As the vanishing-message app turned camera company (and now a streaming video publisher) heads into its third-quarter earnings report on Oct. 25, the big question on everyone's mind is whether Snap can reverse last quarter's decline in the number of users.

Although Snap beat earnings expectations last quarter, the news that it lost 3 million subscribers in the period, a 2% drop and the first time it ever saw a decline, rattled investors. So halting that slide, or better yet, getting back to growth, is the key achievement many are looking for. But it probably won't happen.

An inevitable outcome

Growth in daily active users of Snapchat has been slowing for years. No one expected Snap to maintain the torrid, triple-digit rates it posted early on -- especially after attaining a critical mass of users that number in the hundreds of millions -- so slowing growth was not a surprise.

Snap daily average user growth chart

Data source: Snap quarterly SEC filings.

Competition has been heating up and Snap now particularly faces a challenge from Facebook's (META -0.39%) Instagram, which often co-opts many of the best features of Snapchat and ends up doing them better. That Instagram continues to grow while Snap contracts is worrisome.

The main reason for concern is that Snap's money may dry up as a result. Snap relies on advertising for its revenue and if engagement doesn't expand, advertisers will either balk at paying even the discounted rates Snap is charging or they'll leave the platform altogether.

Snap users are also spending less time on the platform, and there is plenty of anecdotal evidence advertisers are less than pleased, though Snap has made numerous changes to the platform to try to keep users engaged. The ability to buy their own ad space through programmatic channels, which now accounts for 75% of ad revenue, has helped ease advertiser concerns some, and Snap continues to develop new ways for it and advertisers to engage its community.

Change for the sake of change

Most recently, it rolled out new video programming designed exclusively for Snapchat and even in some instances financially backed by the company. Snap Originals is a series of episodic programs aimed at teens that run for about 5 minutes and feature two or three unskippable ads. How they'll be received remains to be seen, but it shows Snap is striving to innovate.

Yet it also risks confusing people about what they should expect from Snap. As noted earlier, Snap was originally a vanishing-message social media platform until it decided it no longer was and you should think of it instead as a camera company.

Couple taking selfie

Image source: Getty Images.

Because the app's camera is the focal point of so much that goes on with the app as users post content, an argument could be made for Snap's repositioning except that it has led to the company going off on tangents, like also trying to become a hardware company and buying drone makers.

Now it's entering into content creation and video programming, which is a whole new avenue to pursue. While it may all be related to its attempt to stanch the loss of users, so many shifting gears and new projects and priorities can be confusing. It can be detrimental, too, because trying to reverse the slide is why Snap made the mistake of releasing its app redesign without appropriate testing. That was the main reason for the exodus of users, which caused its poor results in the first and second quarters. 

No clear focus on the future

In a memo to employees, CEO Evan Spiegel said he wants Snap to be considered the fastest way to communicate. It's a goal without meaning, however, because it can't easily be quantified and offers little practical reason to engage with the app, so it sets the company up for failure once again.

Spiegel also says he's looking for Snap to become break-even in the fourth quarter and then turn profitable sometime in 2019. That may be hard to achieve since analysts are beginning to think Snap will actually run out of cash next year and will be forced to raise cash. Free cash flow also has been negative through the first six months of the year to the tune of $500 million, some $100 million worse than last year.

Snap won't achieve any of its goals if it can't attract more users, but since that trend has always been one of diminishing rates of growth, it seems safe to assume that now, having crossed the threshold into negative territory, it will stay there. A confusing image, a willy-nilly approach to stemming losses, and no clear picture of how to grow should lead to Snap spiraling.

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