Snap Posts Solid Third-Quarter Results but Outlook Disappoints

Snap's (SNAP 1.38%) turnaround continues to take shape: The company reported solid third-quarter earnings results this week, showing continued momentum on the user growth front. Snapchat added 7 million daily active users (DAUs) in Q3 after adding 13 million DAUs in the second quarter. The bulk of those additions -- 5 million -- came from Snap's rest of world segment, while mature markets like North America and Europe saw more modest DAU gains of 1 million each. In other words, Snap's recent Android revamp is resonating in regions where that platform is more popular.

Here's what else happened during the quarter.

Image source: Snap.

Improvement on all fronts

Revenue jumped 50% to $446 million, and Snap's operating loss shrank to $228.8 million. Free cash flow improved to negative $84 million, and operating cash burn also declined to $76.1 million. That all led to a net loss of $227.4 million, or $0.16 per share. On an adjusted basis, Snap lost $0.04 per share, $0.01 better than what analysts were expecting.

Average revenue per user (ARPU) increased across all segments as Snap continues to improve monetization.

Data source: Snap. YOY = year over year.

The company continues to build out its Discover platform, adding more premium short-form video content. Snap says Discover engagement improved, with total daily time spent increasing by 40%. More than 100 Discover channels had monthly audiences of over 10 million viewers during the quarter. Augmented reality (AR) filters continue to be a core feature of the platform, with 15% of daily Snaps leveraging user-created Lenses.

"We have a significant lead in augmented reality due to the camera-first nature of Snapchat, and the frequent usage of our camera, and we believe that smartphone-based augmented reality will be an important driver of our business over the coming years," CEO Evan Spiegel said on a conference call with analysts. "We have been investing heavily in tools like Lens Studio to help creators build augmented reality experiences, and evolving the ways that we distribute Lenses to our community through products like Scan and our AR Bar."

Investors brush aside mushy profit forecast

Snap's outlook for the fourth quarter was mixed. The tech company expects revenue in the range of $540 million to $560 million; the midpoint of that forecast is shy of the $555.4 million in sales that analysts are modeling for. Additionally, CFO Derek Anderson added that Snap expects to add 4 million to 5 million DAUs in Q4, suggesting that user growth is decelerating.  

There is some good news, though: Snap believes that it will be profitable in the fourth quarter on an adjusted EBITDA basis. Adjusted EBITDA is expected to be breakeven to positive $20 million. "With limited capex requirements due to our efficient cloud infrastructure strategy, we believe that the path from adjusted EBITDA profitability to positive free cash flow will be short and direct," Anderson said.

However, given the mushy nature of adjusted EBITDA, it's little wonder that investors are more concerned about the top line.