Snap (NYSE:SNAP) surprised everyone when it reported its second-quarter results, and its daily active user (DAU) base on Snapchat climbed to 203 million, on average, during the three-month period. That's a 13 million user increase compared to the first quarter, the biggest sequential jump in the company's history since the second quarter of 2016. The increase is especially surprising after the company had seen its user base stagnate over the previous four quarters.
Snap has been hard at work behind the scenes improving its app in order to draw in more users. It completely redesigned the user interface last year. The company:
- rebuilt the Android app, so that it runs more smoothly.
- invested in new Snap Originals for its Discover section.
- developed a gaming platform.
- improved upon its augmented reality lens technology.
All of the above led to more users and greater engagement among those users. But it's worth diving deeper into where Snap's outperformance came from and what it means for the company going forward.
Throughout management's call with analysts and within its reports and presentations, the company emphasized that the user growth it saw last quarter was "broad-based."
Snap saw growth on both iOS and Android. Active users increased by 3 million in North America and Europe, and Snap added 7 million users in the rest of the world. Engagement improved on both the number of snaps and messages sent to friends, as well as time spent in the Discover section.
Management highlighted the fact that 75% of 13- to 34-year-old people in the United States used Snapchat last quarter, more than Facebook (NASDAQ:FB) or Instagram. It didn't mention, however, whether it was showing gains among older users as it described its broad-based growth.
Facebook has notably been a factor in stymieing Snapchat's user growth over the last couple of years since introducing the Stories format in Instagram and its family of apps. The challenge for Snapchat is to attract new users who already use Facebook's Stories products.
Getting to the real source of those users
While users came from every platform and region (although not every age group), management gave insight into two main reasons why those users logged into Snapchat last quarter: new Lenses and the rebuilt Android app.
"We estimate that approximately 7 million to 9 million of the 13 million in sequential DAU growth is attributable to an improvement in user engagement that we observed after launching our new augmented reality Lenses, which brought in new users and re-engaged lapsed users," CFO Derek Andreson said during the company's second quarter earnings call. Despite several follow-up questions on that growth, management wouldn't give details on how many of those users were actually new to the platform versus re-engaged users who simply hadn't logged on as frequently.
Beyond the new Lenses, management attributes the rest of the user growth to improvements in the app -- the redesign and the Android rebuild. Considering the extreme backlash after Snap released the redesign last year, it's likely the Android rebuild had a much bigger impact on user growth. The rebuilt app launched at the start of last quarter. Again, it's unclear whether the rebuilt Android app merely re-engaged a lot of older users who had become frustrated with the experience but never deleted the app or if it actually brought new users to the platform.
If Snap is merely getting its existing users to log on and use the app more often, the user growth isn't sustainable going forward.
What Snap's forecast says
On top of breaking down the sources for user growth last quarter, Andersen also shared his expectations for growth in the third quarter. He expects DAUs to come in between 205 million and 207 million, up 2 million to 4 million. He points to seasonal headwinds in the third quarter to account for the slowdown in user growth and said, "We are cautiously optimistic that the underlying growth trend in user engagement will continue into Q4 and next year."
That forecast shouldn't inspire confidence in investors, though. It points to the idea that most of the user growth last quarter came from re-engaging old users with new Lenses and a better experience on Android. Those are one-off events that won't drive sustainable user growth long term.