Amid a Flurry of Bad News, Here's What to Look for in Snap's Earnings Release

Check out the latest Snap earnings call transcript.

Snap (SNAP -2.72%) is set to report fourth-quarter results on Feb. 5, and the company now expects revenue and adjusted EBITDA to come in at the high end of guidance. Snap's outlook calls for revenue of $355 million to $380 million, with adjusted EBITDA losses of $75 million to $100 million.

In this segment from Industry Focus: Tech, host Dylan Lewis and Fool.com contributor Evan Niu discuss what else investors should look for in the upcoming report.

A full transcript follows the video.

This video was recorded on Jan. 18, 2019.

Dylan Lewis: In the flurry of the news around this company, what might have gotten lost a little bit is, they're going to be reporting earnings in early February. They did issue a statement around what to expect. They said that they'll be reporting results that are, quote, "slightly favorable to the top end of the previously reported quarterly guidance ranges." If you want to go back and look at what those numbers are, the company guided for $355 million to $380 million in revenue and adjusted losses of somewhere between $75 million and $100 million. Near the top end of that guidance, it's about 30% year-over-year growth. Evan, this is a deceleration from what we've seen from this company over the last couple of quarters.

Evan Niu: Right. They went public so early in their life that they were able to put up these really strong growth numbers, but they're coming off of a small base, so it's kind of misleading how impressive that is. But now that we're seeing growth decelerate, as they're trying to ramp this ad business and they keep struggling -- they've been trying to automate it to scale it up. They're making some progress, but there's no question that the business is slowing down a little bit, in terms of growth.

Lewis: Yeah. And they didn't provide any specific DAU guidance in that quarter before, but they did say that they expected to lose users sequentially from Q3. One of the things that I'm most interested in with this upcoming report is, they're hitting near the top end of what they were expecting in revenue. They'd said that they were expecting to lose users. Is that what's happening? If that's happening, where's the revenue growth coming from? Where's the outsized impact coming from? Is it that they're really putting out more impressions, they're creating more ad opportunities than they thought they were going to? Is it that prices for ads are rebounding? Those are the two big dynamics for an ad-based business.

Niu: Right. Obviously, user metrics will be important, as always for any social media company; and, like you mentioned, pricing. I always like to look at their cost structure. We've also talked about this a lot over the years that we've been covering this company. I still think their cost structure is not very sustainable. Looking at hosting costs per user, comparing that to the average revenue per user, and seeing if they're making any progress with scaling. The way they have the company set up, it's just so difficult to actually scale, which is what most people tend to like about tech companies. [laughs]

Lewis: Yeah. Spreading the fixed costs out over more and more users is what makes the numbers work for so many of these companies. When you have variable costs tied to usage, you just can't do that.

Niu: I think, on the ad side, there have been a lot of anecdotal reports about the quality of the ads on the platform deteriorating, continuing to get worse and worse, which doesn't give you a lot of confidence. If they're not attracting quality advertisers, that's also something to be on the lookout for.

Lewis: Yeah, I've joked with you in the past that I've gotten some very untargeted ads on Snap, ads that are not meant for a 28-year-old man, but maybe a woman. Which is something that speaks to a lot of the results that we see in the digital marketing space. Jason Moser has talked about this on MarketFoolery. I believe it was a Cowen research study they put out to a bunch of ad buyers and said, "If you could choose between putting all of your clients' ad budgets between Instagram Stories or Snap Stories, where are you spending your money?" And 100% of respondents said Instagram Stories. That says all you need to say about where Snap stands in ad budgets. And when you're going up against a Goliath like that, it's really hard to make up ground.

Niu: Yeah. I'm not surprised by that 100% bigger at all. [laughs]

Lewis: [laughs] We might briefly follow up on the results if there's anything surprising in there. I think it's always good to give people a couple of different things to look at as a company is reporting.