Snap Inc. 10-Q Summary
Business context and reporting period. Snap operates Snapchat, a camera and communications application, and generates substantially all revenue from advertising. This unaudited filing covers the quarter and six months ended June 30, 2019, with comparisons to the same 2018 periods.
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | H1 2019 | H1 2018 |
|---|---|---|---|---|
| Revenue | $388.0m | $262.3m | $708.4m | $492.9m |
| Gross margin | 44.5% | 27.0% | 40.8% | 21.2% |
| Operating loss | $(304.8)m | $(357.8)m | $(620.9)m | $(750.4)m |
| Net loss | $(255.2)m | $(353.3)m | $(565.6)m | $(739.1)m |
| Adjusted EBITDA | $(78.7)m | $(169.0)m | $(202.2)m | $(386.9)m |
| Cash used in operating activities | $(95.8)m | $(199.3)m | $(162.0)m | $(431.3)m |
| Free cash flow | $(103.4)m | $(234.2)m | $(181.4)m | $(502.5)m |
- Q2 revenue grew 48% year over year; H1 revenue grew 44%. Management attributed growth primarily to more ad impressions and advertiser demand.
- Q2 average Daily Active Users (DAUs) were 203 million, versus 188 million a year earlier, and ARPU was $1.91 versus $1.40, up 37%. DAUs rose 13 million from Q1 2019.
- Cash, cash equivalents, and marketable securities totaled $1.185bn at June 30, 2019. Current assets were $1.540bn and total liabilities were $659.3m, including operating lease liabilities.
- No amounts were drawn on the $1.25bn revolving credit facility. Snap said existing cash was sufficient for at least the next 12 months.
- Snap reported no capital expenditure debt; property and equipment purchases were $7.6m in Q2 and $19.4m in H1. The company also disclosed approximately $2.0bn of future minimum hosting commitments and $447.3m of lease payments.
Changes versus the prior comparable period
- Losses narrowed and margins improved as revenue rose faster than costs. Q2 total costs and expenses increased 12%, to $692.8m, while revenue increased 48%.
- Q2 cost of revenue increased 12%, but fell to 56% of revenue from 73%; management cited revenue-share costs and infrastructure costs, partly offset by infrastructure efficiencies.
- Q2 operating loss narrowed 15%, net loss narrowed 28%, and Adjusted EBITDA loss narrowed 53%. H1 net loss narrowed 23% and Adjusted EBITDA loss narrowed 48%.
- Operating cash use and free-cash-flow deficit also narrowed substantially year over year. Lower property and equipment purchases contributed to the improvement.
- Stock-based compensation remained significant: $195.6m in Q2 and $358.1m in H1, versus $156.4m and $289.6m, respectively, in 2018.
Outlook, commentary, risks, and unusual items
- No specific revenue, earnings, or cash-flow guidance is provided. Management cautioned that quarterly results are not necessarily indicative of full-year results.
- Management attributed the Q2 DAU increase partly to popular new augmented-reality lenses and product improvements, including rebuilding the Android application; it cautioned that these effects may not predict future trends.
- Q2 other income included a $39.9m gain on the sale of Placed, LLC. Snap received $77.8m in total cash consideration, of which $66.9m was purchase consideration. The gain improved reported net loss; it is excluded from Adjusted EBITDA.
- Snap remains unprofitable and has an accumulated deficit of $6.5bn. Adjusted EBITDA excludes recurring stock-based compensation and other items, so it should not be treated as a substitute for GAAP results or cash flow.
- Cloud-hosting commitments are substantial: Google Cloud requires at least $400m of purchases per agreement year, and Snap committed to $1.1bn of AWS spending from 2017 through 2022. Shortfalls against annual minimums may require payment.
- Key disclosed risks include dependence on advertising and user engagement, intense competition, reliance on Google Cloud, privacy and regulatory requirements, and legal proceedings. Snap said it could not estimate reasonably possible losses for the identified securities and patent matters, including the IPO-related class actions and patent suits.
- Snap’s DAU and ARPU figures rely on internal measurement systems; the filing notes potential undercounting, multiple accounts, and methodology limits. Class A shares have no voting rights, and founders control approximately 98% of voting power.
Important facts for investors to verify
- Whether user growth and ARPU gains persist and translate into durable advertising revenue.
- How much of the reported improvement in losses reflects operating progress versus the one-time Placed gain, and the continuing impact of stock-based compensation.
- Cash-burn trends, liquidity needs, and the ability to meet long-term hosting and lease commitments.
- Progress toward profitability and positive free cash flow, alongside the limitations of Adjusted EBITDA.
- Developments in the disclosed litigation and privacy regulation, and the implications of the company’s voting-control structure and share-based compensation.