Snap Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Unaudited consolidated financial statements; amounts below are U.S. dollars. Snap primarily earns revenue from advertising on Snapchat.
Key financial and operating metrics
| Metric | Q3 2018 | Q3 2017 |
|---|---|---|
| Revenue | $297.7 million | $207.9 million |
| Gross profit (revenue less cost of revenue) | $100.1 million; 33.6% margin | $(2.8) million; (1.3)% margin |
| Operating loss | $(323.4) million; (108.6)% margin | $(461.8) million; (222.1)% margin |
| Net loss / diluted loss per share | $(325.1) million / $(0.25) | $(443.2) million / $(0.36) |
| Adjusted EBITDA loss | $(138.4) million | $(178.9) million |
| Cash used in operating activities | $(132.5) million | $(194.0) million |
| Free cash flow (non-GAAP) | $(158.8) million | $(220.0) million |
| Daily active users (DAUs) / ARPU | 186 million / $1.60 | 178 million / $1.17 |
For the first nine months of 2018, revenue was $790.6 million, net loss was $1.064 billion, operating cash use was $563.9 million, and free cash flow was $(661.4) million. Cash, cash equivalents, and marketable securities totaled $1.414 billion at September 30; current assets were $1.725 billion and current liabilities $285.5 million. No amounts were drawn on the $1.25 billion revolving credit facility. The filing does not report outstanding borrowings under that facility; it reports $16.6 million of financing lease obligations.
Changes versus the prior comparable period
- Q3 revenue rose 43% year over year, while DAUs increased 5% and ARPU increased 37%. Management attributed revenue growth primarily to more ads delivered, higher advertiser demand, and increased engagement; incremental Snap Ads spend was primarily programmatic.
- DAUs declined 1% sequentially from Q2 2018, primarily due to fewer Android DAUs. Management cited Android product performance as a focus.
- Q3 cost of revenue fell 6%, principally because Q3 2017 included $39.9 million of Spectacles inventory-related charges; this was partly offset by higher infrastructure costs. Gross margin consequently improved to 33.6% from negative 1.3%.
- Q3 operating loss narrowed 30% and net loss narrowed 27%. Stock-based compensation fell to $126.8 million from $221.7 million, contributing to the lower loss. The nine-month comparison is also strongly affected by unusually high 2017 IPO-related stock compensation, including the CEO award.
- Nine-month free cash flow worsened to $(661.4) million from $(621.9) million, as higher operating cash use and capital expenditures offset the improvement in quarterly cash use.
Outlook, commentary, risks, and unusual items
- Snap said existing cash was sufficient for working capital, investing, and financing needs for at least the next 12 months. The filing provides no specific revenue, earnings, or user-growth guidance; management expects expenses to grow and cautions that profitability may not be achieved.
- Hosting commitments total $2.319 billion, and total contractual commitments are $2.789 billion, including operating leases. The Google Cloud agreement requires at least $400 million of purchases per contract year. An October 2018 AWS amendment raised the commitment to $1.1 billion for 2017–2022; annual minimums include $150 million in 2019 and $349 million in 2022.
- Q3 included $29.3 million of lease-exit charges related primarily to consolidating offices in Santa Monica; $33.3 million was recorded for the first nine months. Management said it had incurred the substantial majority of expected total lease-exit charges. Remaining contractual obligations on leases being exited were approximately $69.5 million.
- Other Q3 unusual items included a $7.0 million investment impairment and foreign-currency transaction losses. A March 2018 workforce reduction affected approximately 7% of global headcount; $9.9 million of related charges was recorded in the first nine months.
- Principal risks include user engagement and Android retention, intense competition, reliance on advertising, privacy and regulatory requirements, and dependence on Google Cloud. The filing notes that user metrics are estimates subject to measurement limitations.
- Material proceedings include IPO-related securities class actions and patent lawsuits brought by BlackBerry and Vaporstream. Snap said outcomes remain uncertain and reasonably possible losses could not be estimated.
- Class A shares are non-voting; the founders controlled approximately 97% of voting power at September 30. The filing also disclosed October appointments of a Chief Business Officer and Chief Strategy Officer, and an aircraft lease from an entity controlled by the CEO at no charge, with Snap responsible for operating costs.
Important facts for investors to verify
- Whether DAU stabilization and planned Android improvements translate into sustained engagement and revenue growth.
- Whether programmatic advertising growth supports ARPU and margins, and whether infrastructure costs rise more slowly than revenue.
- Cash burn, capital expenditures, and capacity to meet the substantial Google Cloud, AWS, and lease commitments.
- The effect of recurring stock-based compensation, share-based dilution, and lease-exit costs on reported and adjusted results.
- Developments in the disclosed securities and patent litigation, privacy regulation, and other contingencies.
- How founder voting control and the non-voting Class A structure affect governance and shareholder rights.