A month has gone by since the last earnings report for Snap (SNAP). Shares have lost about 8.4% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Snap due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
Snap Q2 Loss Narrower Than Estimates, Revenues Up Y/Y
Snap reported second-quarter 2019 loss of 6 cents per share, narrower than the Zacks Consensus Estimate of a loss of 10 cents and the year-ago quarter’s loss of 14 cents.
Revenues surged 48% from the year-ago quarter to $388 million, surpassing the consensus mark of $356 million. The revenue figure was also better than the company’s guided range of $335-$360 million.
Geographically, revenues from North America (67% of revenues) soared 46.6% year over year to $260 million. Revenues from Europe (15.6%) jumped 50.7% to $60.6 million. Rest of the World (ROW) revenues were $67.4 million, up 51% year over year.
Average revenues per user (ARPU) increased 36.4% year over year and 14% sequentially to $1.91. On a year-over-year basis, North America, Europe and ROW ARPUs increased 42.1%, 43.9% and 25%, respectively.
User Engagement Improved in Q2
Daily Active Users (DAUs) at the end of the reported quarter were 203 million. Snap added 15 million DAUs on a year-to-date basis and 13 million sequentially. The growth was broad based, with year-over-year and sequential growth in both iOS and Android platforms.
North America DAU was 83 million, up 3 million both year over year and sequentially. Europe DAU was 64 million, which also increased 3 million both on a year over year and sequential basis.
ROW DAU was 56 million at the end of the reported quarter, up 9 million year over year and 7 million sequentially.
Snap stated that almost 7-9 million of the 13 million sequential DAU growth was driven by the launch of new Augmented Reality (AR) Lenses. Rest of the growth benefited from the improvements the company had been making to its application over the past 18 months.
Notably, the new AR Lenses use deep neural networks to modify a person’s appearance in real time. More than 200 million Snapchatters played with these new Lenses in the first two weeks of availability.
Moreover, the number of Snapchatters submitting new Lenses through Lens Studio every month grew more than 20% on a sequential basis. By the end of the reported quarter, more than 500,000 Lenses had been created by Snapchat members through Lens Studio.
Notably, the company launched Lens Studio 2.0 that introduced Landmarkers, a new tool for overlaying AR on the world, and a variety of other features.
Snap stated that it witnessed more user engagement with Lenses in the second quarter than 2018.
Moreover, retention rate is improving. The company witnessed 10% increase in the retention rate of first-time Snapchat users in the reported quarter. Additionally, Snapchatters using the redesigned version are now sending 7% more Snaps compared to the older version. The company sees this as a way to retain users over the long term.
Further, the average number of Snaps created every day grew to more than 3.5 billion. Moreover, average time spent per user was more than 30 minutes per day.
Snap stated that more than 75% of 13-34 year olds in the United States are active on Snapchat, making it a larger platform than Facebook, Instagram and Twitter among this demography.
Premium Content Drives Ad Impressions
Impressions per DAU were up 122% from the year-ago quarter, driven by growth in user engagement. While the growing engagement with Premium content played a significant role, improvement in sell-through rate was also witnessed.
Price per ad impression declined 34% year over year and 3% sequentially.
Snap expects continuing strong demand for its new ad products. The company noted that revenues from Commercials grew more than 60% sequentially, reflecting strong demand. Additionally, the launch of Snap Select is a growth driver for Commercials ad product.
Notably, in the reported quarter, Snap’s audience watching content on Discover every day grew more than 35% year over year. Additionally, total daily time spent by Snapchatters on Discover increased more than 60% on a year-over year basis.
Further, total daily time spent by Snapchatters watching Shows — Snap’s 3-5-minute premium episodes that are vertically shot and quickly paced — more than tripled on a year-over-year basis.
Snap stated that 90% of Snapchatters who completed the first season of “Endless Summer,” which is a Snap Original produced by Bunim/Murray Productions, went on to watch season two in its first month of release.
The company also launched Snap games in the reported quarter. The company along with its partners released seven new made-for-Snapchat games, including three that allow users to play as their Bitmoji, during the quarter.
In second-quarter 2019, cost of revenues increased 12.5% year over year to $215.5 million.
Infrastructure costs per DAU in the reported quarter were 72 cents, flat both year over year and sequentially.
Gross margin increased to 46% compared with 30% in the year-ago quarter.
Operating expenses were $259 million, up 5% year over year and 4% sequentially. The growth was primarily attributed to investments related to development, support sales organization and partnerships. Higher marketing expenses to support advertiser and community growth also increased operating expenses.
Adjusted EBITDA loss was $78.7 million compared with a loss of $169 million in the year-ago quarter.
Balance Sheet and Cash Flow
As of Jun 30, 2019, cash and cash equivalents and marketable securities were $1.18 billion, down from $1.21 billion as of Mar 31, 2019.
Net cash used from operating activities were $95.8 million compared with $199.3 million used in the year-ago quarter.
Free cash outflow was $103.4 million compared with outflow of $234.2 million reported in the year-ago quarter.
For the third quarter of 2019, Snap expects revenues between $410 million and $435 million compared with $298 million reported in the year-ago quarter.
Snap expects investments related to development of new products and improvement of its advertising platform to increase in the near term. The company expects to hire aggressively in the second half of 2019.
Adjusted EBITDA loss is expected to be between $85 million and $60 million compared with a loss of $138 million in the year-ago quarter.
DAUs are expected to grow between 205 million and 207 million, up 10-11% year over year and better than 8% growth reported in the second quarter. Snap is “cautiously optimistic” about the growth trend in user engagement and expects the same to continue in the fourth quarter and 2020.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted 6.86% due to these changes.
At this time, Snap has an average Growth Score of C, however its Momentum Score is doing a lot better with an A. However, the stock was allocated a grade of F on the value side, putting it in the lowest quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Snap has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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