Snap Inc. 2020 Q2 Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2020; unaudited. Snap primarily generates revenue from advertising on Snapchat. The company reported 238 million average daily active users (DAUs) in Q2.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Change |
|---|---|---|---|
| Revenue | $454.2 million | $388.0 million | +17% |
| Gross profit | $203.7 million | $172.5 million | +18% |
| Gross margin | 44.8% | 44.5% | +0.4 percentage points |
| Operating loss | $(310.6) million | $(304.8) million | Loss widened $5.8 million |
| Net loss | $(326.0) million | $(255.2) million | Loss widened 28% |
| Diluted loss per share | $(0.23) | $(0.19) | Worsened $0.04 |
| Adjusted EBITDA | $(95.6) million | $(78.7) million | Loss widened 21% |
| Operating cash flow | $(66.6) million | $(95.8) million | Cash use improved |
| Free cash flow | $(82.3) million | $(103.4) million | Cash use improved |
For the first half of 2020, revenue was $916.6 million, up 29%; net loss was $631.9 million versus $565.6 million; operating cash used was $60.3 million versus $162.0 million; and free cash flow was $(86.9) million versus $(181.4) million.
At June 30, cash and cash equivalents were $1.252 billion and marketable securities were $1.578 billion, totaling approximately $2.83 billion. Current assets were $3.26 billion and current liabilities $543.6 million. Total assets were $4.70 billion. Convertible notes had a net carrying amount of $1.626 billion; principal outstanding totaled $2.265 billion across the 2025 and 2026 notes. No amounts were drawn on the $1.25 billion revolving credit facility.
Changes versus prior comparable period
- DAUs increased 17% to 238 million from 203 million. ARPU was flat year over year at $1.91, although down from $2.02 in Q1 2020.
- Revenue grew, but total costs and expenses increased 10% to $764.8 million. Operating loss widened slightly; gross margin improved modestly.
- Net loss increased partly because Q2 2019 included a $39.9 million gain on the Placed divestiture. Q2 2020 also included higher interest expense from convertible notes, including $20.4 million of debt discount and issuance-cost amortization.
- Adjusted EBITDA deteriorated in Q2, while the first-half Adjusted EBITDA loss narrowed to $176.8 million from $202.2 million.
- Snap issued $1.0 billion of 0.25% convertible notes due 2025 in April, receiving $888.6 million net of issuance costs and capped-call costs. The capped calls cost $100 million.
Outlook, commentary, risks and unusual items
- Management said COVID-19 had affected revenue growth and could continue to adversely affect advertising demand, advertisers, partners, operations and forecasting. No quantitative revenue or earnings guidance is provided in the supplied filing text.
- Management attributed revenue growth to increased advertiser demand, tempered by the pandemic, and continued optimization of its self-serve advertising platform. The platform can help advertisers use inventory more efficiently and reach users at lower prices.
- Snap reported a $10.5 million impairment of non-marketable investments in the first half of 2020. Q2 other income primarily reflected gains on non-marketable investments.
- Cloud and other contractual commitments totaled approximately $1.84 billion, including $1.36 billion in hosting commitments. Google Cloud and AWS commitments create ongoing minimum-spend obligations.
- Legal matters include a preliminary $187.5 million settlement of IPO securities class actions, for which $100 million of legal expense, net of insurance, had been recorded in 2019; the Vaporstream case was settled and dismissed after a $10 million expense was recorded in Q1 2020. BlackBerry appealed a patent ruling; the filing says a reasonably possible loss range for the described pending matters could not be estimated.
- Significant risks include dependence on advertising revenue, competition and user engagement, COVID-19 uncertainty, privacy and data regulation, reliance on Google Cloud and AWS, continued operating losses, and potential cash requirements to service or settle convertible debt. Co-founders controlled approximately 99% of voting power; Class A shares are non-voting.
- Stock-based compensation was $186.2 million in Q2 and $358.2 million in the first half. The company reported $1.7 billion of unrecognized compensation cost related to post-2017 RSUs and RSAs.
- Management stated existing cash was sufficient for at least the next 12 months. It also reported effective disclosure controls as of June 30, 2020.
Important facts for investors to verify
- Whether DAU growth translates into improved monetization, given flat year-over-year ARPU and its sequential decline.
- How advertising demand and receivable collections evolve as COVID-19 and economic uncertainty continue.
- Whether operating cash use and Adjusted EBITDA improve, and how recurring stock-based compensation affects dilution and reported results.
- The cash, dilution and refinancing implications of $2.265 billion principal amount of convertible notes, including conversion terms and capped-call limits.
- Whether hosting commitments and infrastructure costs remain manageable as usage grows, and whether minimum-spend obligations are met.
- Developments in the securities settlement, BlackBerry appeal and other legal, privacy or regulatory matters.
- Reported user metrics are internally calculated estimates; Snap cautions that data limitations and changes in methodology can affect accuracy and comparability.