5 things that popped up in Snap’s Q3 earnings

8 Nov 2017

Snapchat app. Image: MaxyBn/Shutterstock

Snap reported less revenues and fewer users than Wall Street predicted, spooking investors.

“He’s over 30, why is he on Snapchat?” someone sneered in the local pub recently. It garnered a few guffaws but kind of summed up Snap’s predicament. It has a ceiling.

The app, beloved of teens and twentysomethings but confusing as heck for anyone older, has disappointed Wall Street after reporting revenues of close to $208m, around 12pc below what the learned analysts on the street had envisioned.

Not surprisingly, Snap stock fell 18pc in after-hours trading.

So, what have we learned about Snap’s shape with its third disappointing quarterly results after becoming a publicly listed company earlier this year?

User growth is slipping

The company, founded in 2011 at Stanford University by Evan Spiegel, Bobby Murphy and Reggie Brown, also recorded disappointing user growth, with just 4.5m new daily users compared to analyst predictions of 8m. Overall, Snap has 178m total daily users.

Snap’s average revenue per user worldwide grew 11pc from $1.05 to $1.17. However, outside North America, revenue growth per user was pretty flat, growing from $0.29 to $0.30. Within North America, there was a bright spot, with average revenue per user growing at around 10pc.

Snap revealed that 70pc of the 13-34-year-old population in the US, France, UK and Australia now use Snapchat. But, if Snap wants to grow revenues from advertising, it needs to target older users in the developed world.

Snap is plotting a major design overhaul

The thing about Snap is that everyone who is on side with the disappearing photo app saw it as a generational successor to Facebook. Indeed, it is no secret that Facebook and Instagram have been ripping off features of Snap, such as Stories, to stay relevant.

Perhaps realising it has a ceiling in terms of the age of users or that the learning curve skews heavily towards kids born with a smartphone in their hand, Spiegel revealed in the earnings letter to investors that a significant design overhaul is in the works.

“One thing we have heard over the years is that Snapchat is difficult to understand or hard to use, and our team has been working on responding to this feedback.

“As a result, we are currently redesigning our application to make it easier to use. There is a strong likelihood that the redesign of our application will be disruptive to our business in the short term, and we don’t yet know how the behaviour of our community will change when they begin to use our updated application. We’re willing to take that risk for what we believe are substantial long-term benefits to our business.”

Snap is burning through cash

The social photo app is also losing money at a rate that would make the hardiest investor cringe.

The company recorded losses of $443m during the quarter. This included a $40m charge on unsold Spectacles devices, which means they are not quite selling like hotcakes.

Snap also blamed losses on the implementation of an auction-based bidding system from advertisers and a shift away from direct sales. This caused a 60pc drop in the cost per ad impression compared with last year.

Snap wants to create a revenue stream for creators

In its results, Spiegel admitted that Snap had “neglected the creator community on Snapchat that creates and distributes public Stories for the broader Snapchat audience”.

This means turning Snapchat into a lucrative revenue stream for creators in the same way that YouTube allows any user with more than 10,000 channel views to start making money from advertising.

But Snap would need to move fast. With 178m daily active users, this is not quite the same pool to fish in as YouTube or Facebook. By the way, neither Facebook, Twitter or Instagram have a system for creators to derive cash either, but no doubt they would start copying Snapchat if it did create a lucrative revenue stream. Yay for the creators!

Snap is losing its long-time head of engineering

There may be ghosts in the machine, however, as Snap prepares to overhaul its platform to grow its user base.

It emerged that Snap’s senior vice-president of engineering, Tim Sehn, is leaving the company, according to The Information.

Sehn was one of Snap’s highest-paid executives and sold shares worth $27m this year. He will be replaced by Snap’s vice-president of core engineering, Jerry Hunter.

Sehn is Snap’s fourth top executive to depart since the IPO earlier this year.

Snapchat app. Image: MaxyBn/Shutterstock

John Kennedy is a journalist who served as editor of Silicon Republic for 17 years