The revamped version of Snapchat's Android app is officially a hit in emerging markets. Snap (NYSE:SNAP) reported second-quarter earnings results yesterday evening, and the company easily crushed analyst estimates, sending shares soaring this morning. In no uncertain terms, Snap is very much in turnaround mode. Stifel's upgrade yesterday ahead of the release sure worked out well.

Snapchat added the most daily active users (DAUs) in three years.

Three examples of Snapchat Lens Explorer interface

Image source: Snap.

Android and AR

Revenue in the second quarter jumped 48% to $388 million, trouncing the market's expectations of $360.5 million in sales, as well as the high end of Snap's own guidance ($360 million). Snap added a strong 13 million DAUs -- the most it has added since Q2 2016 -- bringing its total DAU base to 203 million. Analysts had been modeling for around 192 million DAUs.

Chart showing DAUs added each quarter

Data source: Snap. Chart by author. QOQ = quarter over quarter.

Most of those DAU gains (7 million) were in Snap's "Rest of World" segment, which includes emerging markets that are dominated by Android users. Additionally, the new augmented reality (AR) Lenses that Snap has been rolling out, such as its viral gender-swap filter, have both attracted users and kept them engaged with the platform. CFO Derek Anderson estimated that 7 million to 9 million of the DAUs added in the quarter were attributable to the new AR features.

"The popularity of these Lenses drew millions of people into our rebuilt Android application, where they experienced the new and improved Snapchat that led to increased engagement," CEO Evan Spiegel said on the conference call. "The enhancements we have made to our advertising business and self-serve platform meant that we were better able to monetize this increased engagement, leading to accelerating revenue growth."

Snap's operating loss shrank to $304.8 million in the second quarter, and adjusted EBITDA similarly improved to negative $78.7 million, significantly better than the company's forecast of negative $125 million to negative $150 million. That all subsequently translated into an adjusted net loss of $82.2 million, or $0.06 per share.

Maintaining momentum 

Snap also provided rosy guidance for the third quarter. The Snapchat operator expects revenue in the quarter ending in September to be in the range of $410 million to $435 million, while the Street's consensus estimate is currently perched at $402.9 million in revenue. Adjusted EBITDA should be negative $60 million to negative $85 million.

The company believes that it can continue to build on its DAU momentum in the back half of the year, even though the third quarter is typically tough due to seasonal factors. Anderson said:

We expect that the underlying growth we've experienced year to date will continue in Q3, and therefore, offset these seasonal headwinds. As a result, our financial guidance assumes DAU of 205 million to 207 million in Q3, representing 10% to 11% year-over-year growth, which would be a sequential acceleration from 8% in Q2. We are cautiously optimistic that the underlying growth trend in user engagement will continue into Q4 and next year.

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