A month has gone by since the last earnings report for Snap (SNAP - Free Report) . Shares have added about 14.9% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Snap due for a pullback? 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 Q4 Loss Narrows, User Base Stabilizes
Snap reported fourth-quarter 2018 loss of 4 cents per share, narrower than both the Zacks Consensus Estimate of a loss of 8 cents and the year-ago quarter’s loss of 13 cents.
Revenues surged 36.4% from the year-ago quarter to $389.8 million, surpassing the consensus mark of $379 million. The revenue figure was also better than management’s guided range of $355-$380 million.
Geographically, revenues from North America (69% of revenues) increased 22.6% year over year to $268.9 million. Revenues from Europe (16%) soared 56.3% to $62.5 million. Rest of the World (ROW) revenues were $58.5 million compared with $26.3 million in the year-ago quarter.
Average revenues per user (ARPU) rallied 37% year over year and 31% quarter over quarter to $2.09. On a year-over-year basis, North America, Europe and ROW ARPUs increased 23%, 57% and 125%, respectively.
Daily Active Users (DAU) Details
Snap’s DAU of 186 million was down 1 million year over year but remained unchanged sequentially. Management had expected DAUs to fall sequentially.
North America DAU was 79 million, down 1 million year over year but remained flat sequentially. Europe DAU was 60 million, flat year over year but up 1 million sequentially. ROW DAU was 47 million, unchanged both year over year and sequentially.
In the reported quarter iOS DAU increased both sequentially and year over year.
User engagement continues to improve as average time spent on the platform was above 30 minutes per day. Average time spent on iOS grew faster during the fourth quarter compared with the year-ago quarter.
Ad Revenue Details
Total Ad impressions grew 179% year over year and 31% sequentially. Price per ad impression dropped 48% from the year-ago quarter but increased 3% sequentially.
Ad revenues from premium content doubled on year-over-year basis. This was driven by strong performance of commercials, Snaps’ 6-second non-skippable video ads. Moreover, higher user engagement with the Discover product benefited ad revenues.
Further, collection Ads, which enable a business to showcase four products in a single Snap, were responsible for the increase in ad spending that benefited ad revenues.
Snap’s penetration is improving. The company’s premium mobile video ads reached more than 70% of the total 13 to 34 year-old U.S. population on a monthly basis.
Moreover, popularity of Snap’s Lens product continues to increase. On average, more than 70% of users played with or viewed a Lens every day during the reported quarter. Management stated that users played with or viewed Lenses 700 million times on New Year’s Eve, up nearly 40% year over year.
By the end of 2018, more than 300,000 Lenses had been created by Snapchat community through Lens Studio. Those Lenses were viewed more than 35 billion times.
Furthermore, Snap launched Lens Challenges. Users can participate in challenges in Lens Explorer by creating a Snap with a Lens that is themed on a particular song, dance, holiday or event.
Redesign, Product Improvements, New Features Aid Growth
Snap’s Publisher Stories and Shows are now watched by 30% more people every day compared to last year. Moreover, consumption of Stories per day on average is increasing, according to management.
Further, Dead Girls Detective Agency, a Snap Original Show produced in collaboration with Comcast division NBCUniversal, garnered 14 million unique viewers. Notably, more than 40% of the users, who completed the first episode, went on to watch the entire season.
The content strength is helping Snap’s partners to reach new unique audience. NBC News announced that two thirds of the 25 to 35 million Snapchatters watching its Stay Tuned show represented a net new audience for them. More than 60% of ESPN’s “SportsCenter” audience tuned in three or more times per week in the reported quarter.
Further, BitmojiStories, a new cartoon starring Snapchatters and their friends, reached more than 40 million viewers in December 2018.
Snap strengthened its international footprint by partnering Filter Copy in India and Layalina in the Middle East. These will help the company offer local and culturally relevant content.
New Product Details
Snap has started rolling out its new Android application. Early test results are promising particularly on low-end devices, which are now taking 20% less time on average to open Snapchat.
Snap expanded its augmented reality platform and launched Snap Camera, which lets people use their favorite Lenses when creating or streaming video on desktop and laptop computers.
Snap introduced Friendship Profiles, a collection of images, videos, messages, links, and more that users and friends have saved in Chat. This new solution makes it easy to find favorite Memories and the important things that are saved over time in one place.
Snap launched Product Catalogs that help ecommerce businesses to easily create Snap Ads through their websites.
Additionally, Snap Pixel grew rapidly with more than 600 million purchase events in the reported quarter, up from 230 million in third-quarter 2018.
Snap also improved its machine learning models for installing app and lower-funnel bidding events, which contributed to higher always-on revenues.
In fourth-quarter 2018, reported cost of revenues increased 11.3% year over year to $212.9 million. Adjusted cost of revenues (excluding stock-based compensation and related payroll tax expenses, depreciation & amortization and certain other non-cash non-recurring items) increased 10% year over year and 6% on a sequential basis to $202 million.
The growth can be attributed to higher revenue share cost and other cost. Infrastructure cost (66.3% of cost of revenues) increased 2.3% year over year but declined 4.3% sequentially.
Adjusted operating expenses declined 9% year over year and 3% sequentially to $238 million. Adjusted operating expenses, as percentage of revenues, were 61% compared with 91% in the year-ago quarter and 82% in the previous quarter.
Adjusted EBITDA loss narrowed to $50 million from loss of $159 million in the year-ago quarter and loss of $138 million in the previous quarter.
Balance Sheet and Cash Flow
Snap ended the quarter with cash, cash equivalents and marketable securities of $1.28 billion, down from $1.41 billion as of Sep 30, 2018.
During the quarter, the company used approximately $126.1 million of cash, which is an improvement of $50 million year over year and $6 million sequentially. Free cash outflow was $148.8 million, which improved by $49 million year over year and $10 million sequentially.
For first-quarter 2019, Snap expects revenues between $285 million and $310 million, reflecting growth of 24-34%. Top-line growth is expected to be hurt by the lack of Olympic related revenues that contributed modestly to the year-ago quarter’s revenue growth.
Adjusted EBITDA loss is expected to be between $165 million and $140 million compared with loss of $218 million reported in the year-ago quarter.
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 10.33% due to these changes.
At this time, Snap has a subpar Growth Score of D, however its Momentum Score is doing a lot better with a B. 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 F. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly 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.