Snap's (SNAP 0.68%) transition to automated bidding for its ads has enabled it to grow active advertisers and ad impressions on Snapchat, but its average ad price has cratered. On the company's second-quarter earnings call in 2017, former Chief Strategy Officer Imran Kahn noted, "Over time though, we expect the auction dynamic and increased demand to drive up pricing levels."
Snap investors had a lot to be happy about in the company's fourth-quarter results, but one more good data point might have been overlooked. Snap's average ad price increased 3% sequentially from the third quarter. This marks the first time the Snapchat operator has seen a sequential increase in ad pricing since it launched programmatic ad bidding.
But Snap's not out of the woods just yet.
Image source: Snap.
A look at Snap's average ad price decline
Snap has been reporting its year-over-year and sequential decline in ad prices since the third quarter of 2017. Here's a look at the history.
|
Metric |
Q3 2017 |
Q4 2017 |
Q1 2018 |
Q2 2018 |
Q3 2018 |
Q4 2018 |
|---|---|---|---|---|---|---|
|
YOY Change |
(60%+) |
(~70%) |
(~65%) |
(52%) |
(61%) |
(48%) |
|
QOQ Change |
(20%+) |
(15%+) |
(~20%) |
(9%) |
(15%) |
3% |
Data sources: Snap quarterly earnings calls. Chart by author. YOY = year over year. QOQ = quarter over quarter.
Some quick math shows that Snap's average ad price in the fourth quarter was around 15% of its average ad price at the end of 2016. The company has been able to quickly grow ad impressions to offset that massive decline and continue increasing revenue. Revenue jumped 36% year over year last quarter and was up 135% from the fourth quarter two years ago.
But Snap can't grow ad impressions forever. That's especially true considering its user base isn't really growing. The number of daily active users was flat sequentially in the fourth quarter, but still down slightly compared to a year earlier.
How Snap is increasing ad prices
There are two ways Snap is able to increase its ad prices.
First, it can increase the number of advertisers on its platform. More marketers bidding for an ad placement naturally leads to higher prices. Chief Business Officer Jeremi Gorman says the company has seen growth in active advertisers every quarter since launching its self-serve platform in 2017.
"Adding advertisers allows our marketplace to show more relevant and engaging ads to our users, which increases ad engagement rates overall," Gorman pointed out on the company's fourth-quarter earnings call. More relevant ads are more valuable ads, which means the average price will increase over time.
Check out all our earnings call transcripts.
There's still a big opportunity to attract more advertisers to the platform, as just 28% of U.S. marketers use Snapchat.
The second way Snap is increasing its average ad price is by introducing higher-value ads. The company introduced commercials last quarter -- non-skippable six-second video ads. There was a lot of pent-up demand for this type of high-value ad. "... [I]f I had a nickel for every time that I had heard that advertisers want unskippable video, I would have a lot of nickels," interim CFO Lara Sweet said on the call.
More premium ads with better engagement and returns will increase marketers' willingness to pay.
A lot of work left to do
Snap's ad prices are still well below where they were even just a year ago. While the trend may be reversing, the company still has a lot of work to do.
Total ad impressions increased 179% year over year in the fourth quarter. Without any user growth, that means the average Snapchat user saw nearly three times as many ads as they did a year ago.
That trend is unsustainable, as evidenced by the rapid slowdown in impression growth over the past year. Impressions grew more than 575% in the fourth quarter of 2017 and 278% in the third quarter of 2018.
Snap's outlook for 24% to 34% year-over-year revenue growth in the first quarter suggests a further slowdown in ad impressions growth. The company has a stretch goal of accelerating revenue growth this year -- which would certainly help the stock fit its valuation -- but the outlook and the challenges facing Snap show it's not quite ready for that yet.
