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Snap Refuses to Give Up on Its Spectacles Fantasy

By Evan Niu, CFA - Nov 20, 2018 at 2:45PM

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The Snapchat parent has a new version of Spectacles in the works.

It's only been a couple months since Snap (SNAP 8.01%) released its latest style of Spectacles, a refreshed version of the second-generation models released in April. It's been clear for a long time -- to everyone other than Snap -- that Spectacles are a flop. Engagement is terrible, most users stop using the camera-equipped sunglasses after about a month, and unit volumes are low. Snap also ordered way too many units from suppliers, resulting in a $40 million writedown. Shortly after Snap went public early last year, I estimated that Spectacles contributed a mere 0.002% of all Snaps created in Q1 2017, based on CEO Evan Spiegel's comments.

Despite these setbacks, Snap continues to push forward with hardware.

Man and woman wearing new Spectacles

Refreshed second-generation Spectacles. Image source: Snap.

New Spectacles are in the pipeline

Cheddar reports that Snap has a third-generation model in development that could launch by the end of the year. The updated models will include two cameras and be priced at $350 -- a significant price increase compared to the most recent versions that sell for $200. The first-generation Spectacles had originally cost $130, and the second-generation Spectacles were priced at $150.

Dubbed "Newport," the third-generation Spectacles will feature higher-end materials and will be able to add augmented reality (AR) filters to videos. Snap had established itself as a first mover in AR, but it has since been overshadowed by giant tech companies aggressively expanding into AR. The Snapchat parent is desperately trying to remain relevant in AR, and it sees hardware as key to its strategy.

The report also includes insight into how many units Snap has ordered from suppliers. The company is planning to order around 24,000 units, compared to the 35,000 units of second-generation Spectacles it had produced and 52,000 units of the tweaked second-generation model. Snap had previously sold "over 150,000" units of the first-generation Spectacles, but had ordered 800,000 units from suppliers, leading to the aforementioned $40 million writedown. In other words, Spiegel lied to investors when he said a year ago that Spectacles unit sales exceeded the company's internal expectations.

Snap also hopes that its hardware operations will reach breakeven in 2020, according to the report.

Snap needs to give up on hardware

As Snap continues to hemorrhage cash -- free cash flow was negative $158 million last quarter -- investors are rightfully concerned about the company's direction. The ad business is still young, and Snap should be focusing on growing that core segment. Snap is still spending extravagantly, with R&D expenses alone representing nearly 70% of revenue in the third quarter (almost half of R&D expenditures is stock-based compensation). It's unclear how much of that spending is related to hardware development.

The idea that Spectacles will somehow become a hit product that drives a corporate turnaround is complete fantasy that Snap should give up on. Too bad Spiegel won't.

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