A month has gone by since the last earnings report for Snap (SNAP Quick QuoteSNAP - Free Report) . Shares have lost about 5.5% 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 the most recent earnings report in order to get a better handle on the important drivers.

Snap Incurs Loss in Q2, User Growth Aids Top Line

Snap reported second-quarter 2020 loss of 9 cents per share, which matched the Zacks Consensus Estimate but was wider than the year-ago quarter’s loss of 6 cents.

Revenues increased 17% from the year-ago quarter to $454.2 million, beating the consensus mark by 1.8%.

Daily active users (DAU) at the end of the reported quarter were 238 million. Snap added 35 million DAU on a year-over-year basis and 9 million, sequentially. This growth was broad based with year-over-year and sequential growth in both iOS and Android platforms.

Geographically, revenues from North America (67.5% of revenues) increased 18% year over year to $306.7 million. Revenues from Europe (17.3%) jumped 29.7% to $78.6 million. Rest of the World (ROW) revenues were $68.8 million, up 2.1% year over year.

Average revenue per user (ARPU) remained flat year over year. On a year-over-year basis, North America and Europe ARPUs increased 8.3% and 15.8%, respectively while and ROW declined 25.8%.

Snap’s second-quarter 2020 top-line growth benefited from steady ARPU and user base growth. Increased usage of Snapchat amid global lockdowns was witnessed late in the quarter.

On average, Snapchatters opened Snapchat over 30 times every day in second-quarter 2020.

Nevertheless, given the uncertainties related to the coronavirus pandemic, Snap did not provide its third-quarter guidance for revenues and adjusted EBITDA.

User Engagement Improves in Q2

North America DAU was 90 million, up 7 million year over year and 2 million sequentially. Europe DAU was 71 million, which increased 7 million on a year-over-year basis and 1 million on a sequential basis. ROW DAU was 77 million at the end of the reported quarter, up 21 million year over year and 6 million sequentially.

Snap is benefiting from improved user engagement. Notably, total daily time spent by Snapchatters over the age of 35 watching Discover content surged more than 40% year over year. Daily average number of Snapchatters watching Shows grew more than 45% year over year.

The company added more than 180 new Discover channels during the quarter and launched Happening Now, a dedicated feed on Discover providing real-time, curated news from media partners such as The Washington Post, ESPN, and BuzzFeed.

Additionally, Snap expanded multi-year content partnerships with Disney, ESPN, NBC, ViacomCBS, the NBA, and the NFL in second-quarter 2020.

Notably, digital native companies Wave and Barcroft Studios, top creators of sports and lifestyle content, now reach average monthly audiences of more than 50 million Snapchatters.

Moreover, the company expanded international programming with Channel 4 in the United Kingdom, Le Figaro in France, and Rotana, which now reaches an average of nearly 10 million Snapchatters in the Middle East each month.
Snap added new camera partners, such as PlantSnap, Dog Scanner, and Nutrition Scanner to provide more experiences for to its community.

The company launched Camera Kit for developers and brands to leverage the best of Snapchat’s AR features. Snap also unveiled Voice Scan, which allows Snapchatters to activate AR Lenses with their voice.

Additionally, Snap launched Local Lenses, which enable shared and persistent AR experiences in much larger areas around the world. Moreover, Snap launched music Lenses in Lens Explorer and Dynamic Lenses, which allow developers to bring real-time information from their app into Snapchat Lenses.

On average, over 180 million Snapchatters engaged with augmented reality daily in the second quarter of 2020.

Further, Snap improved Snap Map, which already reaches over 200 million Snapchatters every month, by launching Places, which features Stories, hours, reviews and delivery options for local businesses.

More than 800 apps have been integrated with Snap Kit, and nearly 150 million Snapchatters are engaging with these integrations every month.
Snap’s Gen-Z Reach Drives Ad Growth

Snap is helping advertisers reach millennials and Gen Z audience, who are more active on immersive mobile platforms like Snapchat. This popularity provides the company with a competitive edge over the likes of Facebook, Google and Twitter in attracting ad dollars.

In the United States, Snapchat platform reaches 90% of 13-24 year olds and 75% of 13-34 year olds. Snap is also growing rapidly in other international markets, such as India.

During the quarter, Snap introduced Brand Profiles, which offers a permanent home for brands on Snapchat. Snapchatters can subscribe to some of the world’s largest brands, including Dior, Target, and Universal Pictures.

Additionally, to ensure advertisers can easily reach different audiences through Discover, the company launched content bundles in Snap Select that allow brands to align their message with popular verticals like Sports, Entertainment, and News.

Moreover, the company launched Snap Focus, an online learning portal where advertisers can learn more about Snapchat’s advertising solutions.

Operating Details

In the quarter under review, the cost of revenues on a non-GAAP basis increased 16.8% year over year to $243 million. Infrastructure costs, revenue sharing costs and other expenses increased 11.6%, 40.5% and 12.5%, respectively, on a year-over-year basis.

Infrastructure costs per DAU in the reported quarter were 69 cents, which is the lowest cost per DAU since first-quarter 2017.

Gross margin on a non-GAAP basis expanded to 47% from 46% in the year-ago quarter.

Operating expenses were $307 million, up 19% year over year. Sales and marketing expenses increased 23.5% year over year to $100 million while general and administrative expenses remained flat year over year at $87 million. Research and development expenses rose 31.9% year over year to $120 million

Adjusted EBITDA loss was $95.6 million compared with a loss of $78.7 million in the year-ago quarter.

Balance Sheet and Cash Flow

As of Jun 30, 2020, cash and cash equivalents and marketable securities were $2.8 billion, compared with 2.1 billion as on Mar 31, 2020.

Net cash used in operating activities was $66 million compared with $95.7 million used in the year-ago quarter and $6.3 million cash provided in the previous quarter.

Free cash outflow was $82 million compared with $103 million reported in the year-ago quarter and $4.6 million in the previous quarter.

Guidance

Snap expects DAU between 242 million and 244 million in the third quarter of 2020, implying year-over-year growth of 15% to 16% or 32 to 34 million daily active users.

Moreover, total costs (including cost of revenues and operating expense) are expected to grow at percentage rates in the low to mid 20s year over year.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision flatlined during the past month.

VGM Scores

At this time, Snap has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. However, the stock was allocated a grade of F on the value side, putting it in the bottom 20% 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.

Outlook

Snap has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.