Snap Inc. Form 10-Q Summary
Reporting period: Quarter ended September 30, 2020, with nine-month comparisons to September 30, 2019. Snap’s business is primarily advertising on Snapchat; Spectacles revenue was not material.
Key financial and operating metrics
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $678.7 million | $446.2 million | $1,595.3 million | $1,154.6 million |
| Operating loss | $(167.9) million | $(228.9) million | $(764.8) million | $(849.7) million |
| Net loss | $(199.9) million | $(227.4) million | $(831.7) million | $(793.0) million |
| Adjusted EBITDA | $56.4 million | $(42.4) million | $(120.4) million | $(244.5) million |
| Free cash flow | $(69.6) million | $(84.1) million | $(156.5) million | $(265.5) million |
- Q3 revenue grew 52%; average daily active users (DAUs) rose 18% to 249 million, and average revenue per user (ARPU) increased to $2.73 from $2.12.
- Q3 gross margin was approximately 56.8%, versus 50.0% a year earlier; operating margin was approximately negative 24.7%, versus negative 51.3%. These percentages are calculated from reported revenue and expenses.
- Cash, cash equivalents, and marketable securities totaled $2.7 billion at September 30. Current assets were $3.3 billion and current liabilities $610.1 million.
- Convertible senior notes had $2.265 billion total principal outstanding: $1.0 billion due 2025 and $1.265 billion due 2026. Their combined net carrying value was $1.650 billion. No notes were eligible for conversion at quarter-end. No amounts were drawn on the $1.25 billion revolving credit facility.
- Q3 operating cash use was $54.8 million; capital expenditures were $14.7 million. Nine-month operating cash use was $115.1 million. Free cash flow is a company-defined non-GAAP measure.
- Stock-based compensation was $192.1 million in Q3 and $550.3 million for the nine months. Q3 interest expense was $28.2 million, including $24.5 million from amortization of debt discount and issuance costs.
Changes versus comparable periods
- Q3 revenue growth reflected increased advertiser demand. North America revenue, based on advertiser billing address, rose to $468.5 million from $280.1 million.
- Q3 operating loss narrowed and net loss declined year over year; Adjusted EBITDA improved to positive $56.4 million. For the first nine months, net loss increased year over year, primarily because 2019 included a $39.9 million gain from the Placed divestiture.
- Cost of revenue rose 31% in Q3, mainly from higher infrastructure costs associated with user growth and activity, and increased revenue sharing. Research and development expense rose 34%, primarily due to personnel costs.
- Higher convertible-note-related interest expense weighed on earnings. Q3 other expense included a $5.0 million impairment of a non-marketable investment.
Outlook, risks, and contingencies
- The filing provides no specific quantified revenue or earnings guidance. Management says COVID-19’s effects remain uncertain and may continue to affect the business, advertisers, and partners; near-term engagement or advertising changes may not predict longer-term trends.
- Management believed existing cash was sufficient for working capital, investing, and financing needs for at least the next 12 months. Snap also reported $1.676 billion in contractual commitments, including hosting and lease obligations; hosting commitments account for most of the total.
- Google Cloud and AWS dependence is a material operational risk. The company reported substantial minimum cloud-spending commitments and warned that provider disruption, pricing changes, or inability to meet commitments could harm operations or increase costs.
- A preliminary $187.5 million settlement of IPO securities class actions remained subject to court approval. The BlackBerry patent case dismissal was on appeal; Snap said the outcome of pending matters could not be estimated. The filing also identifies other ordinary-course legal, privacy, regulatory, and intellectual-property risks.
- Other prominent risks include advertising-market dependence, competition, user engagement and measurement uncertainty, privacy and data regulation, COVID-19 impacts, continued losses, and concentrated founder voting control. The founders controlled approximately 99% of voting power; Class A shares are non-voting.
- Management concluded disclosure controls were effective as of September 30, 2020 and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether DAU and ARPU growth and advertiser demand persist, particularly as pandemic-related effects and advertising conditions change.
- How cash use, free cash flow, operating losses, and stock-based compensation evolve relative to revenue growth.
- Convertible-note principal, cash interest, conversion and repayment terms, and potential dilution or cash-settlement requirements.
- Ability to meet cloud-service commitments and the operational and cost implications of reliance on Google Cloud and AWS.
- Final court approval and payment timing for the securities settlement, and developments in other legal proceedings.
- Changes to privacy rules or mobile-platform policies that could affect data use, ad targeting, and measurement; reported user metrics are company estimates and may be undercounted or otherwise inaccurate.