Please ensure Javascript is enabled for purposes of website accessibility

Is Snap Putting Together a Turnaround?

By Evan Niu, CFA – Updated Apr 12, 2019 at 10:23PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The Snapchat parent reported better-than-expected results in the fourth quarter as its user base stabilized.

Following a string of horrendous quarters, Snap (SNAP -3.51%) has finally put up an earnings release that has impressed investors. The company has started to roll out a new version of the Android Snapchat app, addressing long-standing criticisms regarding the performance on that platform. That's helped stabilize the user base. Snap isn't adding users, but it isn't losing them anymore, either.

Here's what investors need to know.

Using Lenses in Snapchat

Image source: Snap.

Most metrics improved meaningfully

Revenue in the fourth quarter jumped 36% to $389.8 million, ahead of the Snapchat parent's guidance, which had called for sales of $355 million to $380 million. The company has been working to cut costs, with total expenses declining 10%. That helped Snap narrow its operating and net losses, which came in at $194.7 million and $191.7 million, respectively. That red ink was a considerable improvement from a year ago.

Adjusted EBITDA improved from negative $158.9 million a year ago to negative $50.4 million, also much better than Snap had initially forecast. Free cash flow also improved but was still in the red at negative $149 million. That's despite the company's capital-light model, where it pays for third-party cloud infrastructure services instead of investing in its own data centers.

Investors were particularly relieved that Snapchat has seemingly stopped bleeding daily active users (DAUs), after peaking in early 2018 (around the same time that Snap rolled out its controversial redesign). DAUs were roughly flat on a sequential basis at 186 million.

Chart showing Snap DAUs

Data source: SEC filings. Chart by author.

Snap continues to make progress with monetization, its primary growth lever in the absence of user growth. Average revenue per user (ARPU) hit a new record of $2.09 in the fourth quarter, up 37% from a year ago. At the same time, gross margin has been expanding as Snap tries to keep costs in check, reaching 48% on a non-GAAP basis. Total cost of revenue increased 10% -- much slower than revenue growth -- and infrastructure costs (the biggest component of cost of sales) only increased modestly to $134 million.

Check out the latest Snap earnings call transcript.

A turnaround in the making?

CEO Evan Spiegel said that Snap is focusing its engineering efforts on the Android version of Snapchat, which has long suffered from dramatically worse performance compared to the iOS version. That discrepancy had been hurting Snapchat's DAU figures on Android, which is the largest mobile platform in the world. Furthermore, management does not "foresee a sequential decline in daily active users in Q1 2019."

Snapchat still remains incredibly popular with younger demographics, specifically the 13- to 34-year-old group in the U.S. Snap estimates that it displayed ads to 70% of that group in the fourth quarter. Spiegel believes that the company has an opportunity to continue growing engagement in that demographic, while adding international users in that age range by leveraging Android. Here's Spiegel on yesterday's earnings call:

First and foremost, 13 to 34 in the U.S. and Europe, which is a really strong core market for us, we're thinking a lot about deepening engagement in that. Has to do a lot with some of the content stuff we talked about today. I think the second area of focus will be international 13 to 34 and even 13 to 24, which is a massive opportunity, primarily on Android.

This was an important quarter for Snap, as the company made noticeable progress on numerous fronts. It's even possible that the company is putting together a turnaround.

Evan Niu, CFA has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.