Snap Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; selected fourth-quarter figures are also included. Snap operates Snapchat and related camera products, earning substantially all revenue from advertising.
Financial and operating performance
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Revenue | $824.9 million | $404.5 million |
| Cost of revenue | $717.5 million | $451.7 million |
| Gross profit (margin) | $107.5 million (13.0%) | $(47.2) million (-11.7%) |
| Operating loss | $(3.49) billion | $(520.4) million |
| Net loss | $(3.45) billion | $(514.6) million |
| Adjusted EBITDA loss | $(720.1) million | $(459.2) million |
| Cash used in operating activities | $(734.7) million | $(611.2) million |
| Free cash flow | $(819.2) million | $(677.7) million |
- Revenue grew 104%, driven mainly by more advertising impressions, greater advertiser demand, and increased user engagement. Advertising represented 97% of revenue, up from 96% in 2016.
- In Q4 2017, revenue was $285.7 million versus $165.7 million in Q4 2016. Average daily active users (DAUs) were 187 million versus 158 million; quarterly ARPU was $1.53 versus $1.05.
- FY 2017 cost of revenue was 87% of revenue, producing a 13% gross margin. Hosting costs and partner revenue shares increased; management also cited content and measurement costs.
- Net loss included $2.64 billion of stock-based compensation and related payroll tax expense, principally reflecting IPO-triggered vesting of pre-2017 RSUs and a $636.6 million CEO award expense. Adjusted EBITDA excludes stock-based compensation and other items and is not a substitute for GAAP results.
- Spectacles inventory-related charges were $39.9 million in Q3 2017: $19.5 million for excess inventory, $17.9 million for purchase-commitment cancellations, and $2.5 million for asset impairments.
Liquidity, capital resources and obligations
- Cash, cash equivalents and marketable securities totaled $2.04 billion at year-end, compared with $987.4 million in 2016; working capital was $2.02 billion. Management said existing cash was sufficient for at least the next 12 months.
- Snap had no outstanding borrowings under its revolving credit facility at year-end. The facility was $1.2 billion then and was increased to $1.25 billion in February 2018.
- FY 2017 financing cash flow was $2.27 billion, primarily from $2.66 billion of net IPO proceeds, partly offset by $394.2 million of employee RSU tax-withholding payments. Investing cash outflow was $1.35 billion, including $386.0 million for acquisitions.
- Contractual commitments totaled $3.06 billion, including $2.58 billion of hosting commitments. Google Cloud commitments require at least $400 million of purchases annually over five years; separate AWS commitments total $1.0 billion for 2017–2021.
Changes, outlook and material risks
- Compared with 2016, revenue more than doubled and DAUs grew 18%, but adjusted EBITDA loss and operating cash use increased. Reported GAAP loss rose sharply, largely because IPO-related stock compensation was recognized in 2017.
- Snap provided no financial guidance or projections. It expected expenses to continue increasing and warned that seasonality—stronger advertising in Q4 and generally lower summer engagement—could become more pronounced.
- Management noted a major Snapchat redesign launched in December 2017 and rolled out more broadly in February 2018; press and app-store reviews were negative, and its effects were difficult to predict. The company also said its 2017 shift of most Snap Ads sales to programmatic buying lowered average ad prices.
- Key risks include dependence on advertising and user engagement, competition (including imitation of Stories), Android performance, and reliance on Google Cloud. Other material exposures include privacy and regulatory requirements, the EU GDPR effective May 2018, product and inventory risk in Spectacles, and substantial fixed cloud commitments.
- Founders held approximately 95% of voting power at year-end, while publicly traded Class A shares had no voting rights. The filing also describes securities class actions related to the IPO, a patent suit, and other proceedings; the loss range for the securities actions could not be estimated.
- Snap planned to exit certain office leases in 2018; the leases had approximately $85 million of remaining obligations, and the company expected potentially substantial exit losses, while pursuing subleases to reduce costs. The 2017 Tax Act reduced the corporate rate to 21%; the deferred-tax impact was offset by a valuation-allowance reduction.
Important facts for investors to verify
- Whether DAU growth, engagement and ARPU remained durable after the app redesign, and whether the company’s user metrics are comparable and reliable.
- Whether advertising growth and pricing can outpace hosting and operating-cost growth, and whether margins and cash flow improve.
- How much of the reported loss reflects recurring compensation expense versus the one-time IPO-related awards, and the expected pace of remaining stock compensation recognition.
- Actual cloud-service spending against minimum commitments, including the ability to scale hosting costs with revenue.
- Developments in the securities and patent litigation, lease-exit costs, and compliance with privacy and other regulatory obligations.