Snap Inc quarterly report, Q1 FY2017

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Snap Inc. — Q1 2017 Form 10-Q

Reporting period: Three months ended March 31, 2017; comparisons are primarily with Q1 2016. Snap completed its IPO in March 2017, issuing 160.3 million Class A shares at $17.00 per share and receiving approximately $2.6 billion in net proceeds. Amounts below are in U.S. dollars.

Business context and operating metrics

  • Snap describes itself as a camera company; Snapchat is its flagship product. The company generates substantially all revenue from advertising, with additional revenue from Spectacles.
  • Average daily active users (DAUs) were 166 million, up 36% year over year; average revenue per user (ARPU) was $0.90, versus $0.32 a year earlier.
  • Management reported 3.0 billion-plus Snaps created daily and average daily Snapchat use of more than 30 minutes. User and demographic metrics are internally estimated and have measurement limitations disclosed in the filing.

Financial results and liquidity

  • Revenue: $149.6 million, up $110.9 million, or 286%, year over year. Revenue declined from $165.7 million in Q4 2016; management attributed the sequential decline primarily to advertising seasonality.
  • Costs and margins: Cost of revenue was $163.4 million, exceeding revenue by $13.7 million (approximately negative 9.2% gross margin). Total costs and expenses were $2.36 billion; operating loss was $2.21 billion.
  • Profitability: Net loss was $2.21 billion, or $2.31 per share, compared with a $104.6 million loss, or $0.14 per share, in Q1 2016. Adjusted EBITDA loss, a non-GAAP measure, was $188.2 million versus $93.2 million.
  • Cash flow: Operating cash use was $155.0 million; capital expenditures were $18.0 million; free cash flow, as defined by Snap, was negative $173.0 million. Investing activities used $1.01 billion, largely reflecting purchases of marketable securities; financing activities provided $2.45 billion, principally from the IPO.
  • Liquidity and debt: Cash, cash equivalents, and marketable securities totaled $3.24 billion at quarter-end. Current assets were $3.46 billion and current liabilities $242.3 million. Total liabilities were $306.3 million. No amounts were outstanding under the $1.2 billion revolving credit facility. Management said existing cash was sufficient for at least the next 12 months.

Material changes and unusual items

  • Q1 net loss included $1.99 billion of stock-based compensation. Snap recognized $1.3 billion for pre-2017 RSUs when the IPO registration statement became effective, plus $636.6 million for the CEO’s immediately vested award. This IPO-related compensation was the principal reason the GAAP loss increased sharply from the prior-year quarter.
  • Excluding stock-based compensation and related payroll tax expense, Adjusted EBITDA loss still increased year over year, reflecting higher hosting and partner revenue-share costs and increased headcount and operating expenses.
  • IPO proceeds substantially increased cash and equity; employee tax withholding on vested awards resulted in approximately $206.6 million of cash outflow and stock repurchases.
  • Snap acquired a content-platform company in March for approximately $20.1 million of purchase consideration, plus $20.0 million in RSUs tied to future service.

Outlook, commitments, and risks

  • The filing provides no specific financial guidance. Management noted Q1 advertising seasonality, expected user-growth rates to decline over time, and said future results depend on user engagement and monetization relative to growing costs.
  • Contractual commitments totaled $3.48 billion, including $2.93 billion of hosting commitments. Snap agreed to minimum Google Cloud purchases of $400 million annually under a five-year agreement and committed $1.0 billion to AWS services from 2017 through 2021. Failure to meet annual minimums can require payment of the shortfall.
  • Key risks include competition for users and advertising, ability to retain and grow users, reliance on Google Cloud, significant recurring operating losses, and substantial hosting and lease commitments. The company also identifies privacy, security, regulatory, intellectual-property, and product risks.
  • Two founders held approximately 88.5% of voting power through Class C shares; Class A shares have no voting rights. The filing also flags potential share-price volatility and the July 29, 2017 scheduled expiration of IPO lock-up agreements.
  • Legal matters include a right-of-publicity lawsuit in active discovery and an appeal involving a dismissed claim related to a car accident. Snap said it could not estimate reasonably possible losses for these matters. The company reported disclosure controls effective as of March 31, 2017 and said previously identified internal-control weaknesses had been remediated.

Investor verification priorities

  1. Separate recurring operating performance from the exceptional IPO-related stock compensation; assess the remaining unrecognized compensation costs and their expected timing.
  2. Track DAU growth, engagement, ARPU, advertising demand, and the seasonal pattern in revenue; consider the company’s cautions about metric accuracy and comparability.
  3. Assess whether revenue growth can outpace hosting costs and operating expenses, and how the Google Cloud and AWS minimum-spend commitments affect flexibility and cash needs.
  4. Review cash generation, liquidity, and the availability and terms of the revolving facility; free cash flow was negative despite the large IPO cash balance.
  5. Evaluate the implications of founder voting control, non-voting Class A shares, and the scheduled lock-up expiration for governance and potential share supply.
  6. Monitor the disclosed litigation, privacy and regulatory obligations, and risks relating to reliance on third-party infrastructure.