A month has gone by since the last earnings report for Snap (SNAP - Free Report) . Shares have added about 7.2% 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 its most recent earnings report in order to get a better handle on the important catalysts.
Snap Incurs Loss in Q1, User Growth Aids Top Line
Snap reported first-quarter 2020 loss of 8 cents per share, wider than the Zacks Consensus Estimate by 14.3% but narrower than the year-ago quarter’s loss of 10 cents.
Revenues surged 44% from the year-ago quarter to $462.5 million, beating the consensus mark by 9.1%. The revenue figure was within the guided range of $450-$470 million.
Daily active users (DAU) at the end of the reported quarter were 229 million. Snap added 39 million DAU on a year-over-year basis and 11 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 (68.3% of revenues) soared 39.9% year over year to $315.7 million. Revenues from Europe (16.5%) jumped 61.2% to $76.5 million. Rest of the World (ROW) revenues were $70.3 million, up 48.8% year over year.
Average revenue per user (ARPU) increased 20.2% year over year to $2.02. On a year-over-year basis, North America, Europe and ROW ARPUs increased 27%, 41.6% and 3.1%, respectively.
Snap’s first-quarter 2020 top-line growth benefited from solid ARPU and user base growth. Increased usage of Snapchat amid global lockdowns to curb the spread of coronavirus was witnessed late in the quarter.
Snap witnessed more than 30% increase in communication among friends in the last week of March from the level seen in the last week of January with more than 50% jump in some of the geographies that were hit hard by the deadly virus.
Further, the company witnessed 30-times increase in the daily downloads of Snap Camera as people increasingly turned to videoconferencing and livestreaming to connect with friends and family during the shutdowns.
Nevertheless, given the uncertainties related to the coronavirus pandemic, Snap didn’t provide its second-quarter guidance for revenues and adjusted EBITDA.
User Engagement Improved in Q1
North America DAU was 88 million, up 8 million year over year and 2 million sequentially. Europe DAU was 70 million, which increased 9 million on a year-over-year basis and 3 million on a sequential basis. ROW DAU was 71 million at the end of the reported quarter, up 22 million year over year and 7 million, sequentially.
Snap is benefiting from improved user engagement. Management stated that on average, more than 4 billion Snaps were created in the first quarter on a daily basis.
Moreover, total daily time spent by Snapchatters watching Discover content, surged more than 35% year over year. Additionally, total daily time spent by Snapchatters watching Shows (includes scripted and unscripted series as well as daily news shows) more than doubled on a year-over-year basis.
Management stated that in excess of 60 Shows (up from 50 shows in fourth-quarter 2019) reached more than 10 million monthly viewers in the reported quarter.
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. By the end of the reported quarter, more than 900,000 Lenses were created by Snapchat members through Lens Studio. Moreover, top-performing Community Lenses got billions of views on Snapchat.
Per the company, almost 75% of its DAU engages with AR on average.
Additionally, Snap launched Ground Transformation Lenses, which use machine learning to understand the geometry of land and transform the ground into lava or water during the reported quarter.
Further, Snap unveiled App Stories, which brings its popular Stories feature to apps created by third-party software developers. The company also introduced five games globally.
Snap also added more than 120 partner app integrations to Snap Kit in the first quarter. Notably, the number of Snapchatters using Snap Kit on a monthly basis grew 75% sequentially.
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, Snap continues to reach more than 90% of the age bracket comprising 13 to 24 year-olds and more than 75% of 13 to 34 year-olds. In the UK, France, Canada and Australia, Snap reaches more than 80% of 13 to 24 year-olds and more than 60% of 13 to 34 year-old age group. Snap is also growing rapidly in other international markets, such as India.
Total impressions doubled nearly doubled year over year in the first quarter. Cost per ad impression declined 23% year over year. However, Snap benefited from growth in user engagement as well as optimizations to its self-serve platform for utilizing inventory more efficiently.
Snap continues to see strong adoption of its ad products including goal-based bidding products, which are perking up demand from direct response advertisers.
During the quarter, Snap launched ROAS bidding. This allows advertisers to bid at Snap’s auction based on their specified return on ad spending. The company also introduced Lens Web Builder, a web-based, AR Lens production tool, which enables advertisers to create AR Lenses easily and instantly.
In the quarter under review, the cost of revenues on a non-GAAP basis increased 25.5% year over year to $246 million. Infrastructure costs, revenue sharing costs and other expenses increased 19.9%, 42.9% and 28%, respectively, on a year-over-year basis.
Infrastructure costs per DAU in the reported quarter were 71 cents, down a penny year over year.
Gross margin on a non-GAAP basis expanded to 47% from 39% in the year-ago quarter.
Operating expenses were $298 million, up 20.2% year over year. Sales and marketing expenses increased 24% year over year to $93 million while general and administrative expenses grew 24.4% year over year to $102 million. Research and development expenses rose 13.2% year over year to $103 million
Adjusted EBITDA loss was $81.3 million compared a loss of $123.4 million in the year-ago quarter.
Balance Sheet and Cash Flow
As of Mar 31, 2020, cash and cash equivalents and marketable securities were $2.1 billion, unchanged from the figure reported on Dec 31, 2019.
Net cash from operating activities was $6.3 million compared with $66.2 million used in the year-ago quarter and $66.8 million used in the previous quarter.
Free cash outflow was $4.6 million against an outflow of $78 million reported in the year-ago quarter and $75.9 million in the previous quarter.
Snap expects DAU of 239 million in the second quarter of 2020, implying year-over-year growth of 18%.
Moreover, total costs (including cost of revenues and operating expense) are expected to grow at the same rate witnessed in the first quarter.
How Have Estimates Been Moving Since Then?
It turns out, estimates review have trended downward during the past month. The consensus estimate has shifted -18.35% due to these changes.
Currently, Snap has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. Charting a somewhat similar path, 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 C. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Snap has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.