What happened
Shares of Snapchat's parent company, Snap (SNAP 27.63%), got smashed on Friday after the company reported financial results for the first quarter of 2022. At 11:15 a.m. ET, Snap stock was down 19%.
So what
Let's start with the good for Snap. In Q1, Snap had 383 million daily active users, which was an encouraging 15% year-over-year increase. Moreover, the company generated cash from operations of $151 million and free cash flow of $103 million.
Now for the bad. Snap generates revenue from ads. In Q1, impressions were up 10% -- these are the amount of times users were shown ads. And with 15% user growth, this increase to impressions makes sense. Unfortunately, the revenue that Snap gets for these ad impressions went down 18% from the same quarter last year -- this is measured with effective cost per mille (eCPM).
The drop in eCPM for Snap led to a 7% drop in revenue compared to the prior-year quarter. And this led to a decline in profitability as well, which is something the market doesn't like.
Now what
In Snap's press release, it didn't give formal guidance for the second quarter. However, in its letter to shareholders, management said it has an internal forecast of $1.04 billion in revenue, implying a 6% year-over-year drop. And with revenue dropping, profitability is expected to continue to fall. Snap's internal forecast for adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) is negative $75 million.
Snap is a promising company when it comes to augmented reality applications. And its subscription service, Snapchat+, has already reached 3 million subscribers, even though it was launched less than a year ago. Therefore, this business does show some promise.
That said, with revenue and profits down, it's not a surprise to see Snap stock fall today. And it will likely struggle to beat the market until it can show better consistency at producing something on the bottom line.
