Snap Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Unaudited results; comparisons are with Q1 2017 unless noted. Snap’s business is primarily advertising on Snapchat.
Key financial and operating metrics
| Metric | Q1 2018 | Prior period / change |
|---|---|---|
| Revenue | $230.7 million | $149.6 million; up 54% |
| Gross profit / margin | $33.9 million / 14.7% | Gross loss of $13.7 million / negative 9.2% |
| Operating loss | $392.5 million | $2.214 billion loss |
| Net loss | $385.8 million | $2.209 billion loss |
| Diluted net loss per share | $0.30 | $2.31 |
| Adjusted EBITDA loss | $217.9 million | $188.2 million loss |
| Cash used in operations | $232.0 million | $155.0 million |
| Free cash flow | Negative $268.3 million | Negative $173.0 million |
| Capital expenditures | $36.3 million | $18.0 million |
| Cash, cash equivalents and marketable securities | $1.821 billion at March 31 | $2.043 billion at December 31, 2017 |
| Total liabilities | $390.2 million | $429.2 million at December 31, 2017 |
Snap had $466.3 million in cash and cash equivalents and $1.355 billion in marketable securities at quarter-end. No borrowings were outstanding under its $1.25 billion revolving credit facility. Accumulated deficit was $5.042 billion. Operating loss and margins remain substantial despite the improved GAAP net loss comparison.
Average daily active users were 191 million, up 15% from 166 million. ARPU was $1.21, up 34% from $0.90 year over year, but down from $1.53 in Q4 2017. North American ARPU was $2.10. Advertising revenue was $229.2 million; Snap-sold revenue was $222.5 million and partner-sold revenue was $6.6 million. Spectacles revenue was not material.
Material changes versus the prior comparable period
- Revenue growth reflected more ads delivered, increased advertiser demand and 15% DAU growth; the company said incremental advertiser spend was primarily through its advertising API.
- Cost of revenue increased 20% to $196.8 million, mainly from higher hosting costs and partner revenue-share payments. Hosting costs rose by $24.0 million, partly reflecting user growth.
- Reported operating and net losses fell sharply from Q1 2017, largely because Q1 2017 included unusually high IPO-related stock-based compensation expense. Stock-based compensation was $133.3 million this quarter versus $2.0 billion a year earlier.
- Adjusted EBITDA loss widened by $29.6 million, as higher hosting and personnel expenses more than offset revenue growth.
- Operating cash outflow rose by $77.0 million and free-cash-flow loss widened by $95.3 million year over year.
- Investing cash flow was positive $319.2 million, primarily reflecting net maturities and sales of marketable securities; Q1 2017 investing cash flow was negative $1.015 billion. Q1 2017 financing cash flow included IPO proceeds, unlike Q1 2018.
Outlook, management commentary and risks
- Product redesign: Snapchat’s redesign rolled out globally in February 2018. Management said it negatively affected DAUs, March average DAUs were below the quarterly average, and the short- and long-term impact was difficult to predict while changes and optimizations continued.
- Guidance: The filing provides no formal financial guidance or projections. Management said existing cash was sufficient for at least the next 12 months and expects Snap Ads to remain a significant driver of future revenue growth. Results may fluctuate, and Q1 performance is not necessarily indicative of full-year results.
- Restructuring and leases: A March reduction in force affected approximately 7% of global headcount, primarily in engineering and sales. Snap recorded $9.9 million of related charges and a $31.5 million stock-compensation forfeiture benefit. It expects $25 million to $45 million of lease-exit losses in 2018, primarily in Q2 and Q3, associated with vacating offices; affected leases had about $68.5 million of remaining obligations.
- Contractual commitments: Total contractual commitments were $2.964 billion, including $2.481 billion for hosting. Google Cloud requires at least $400 million of purchases annually under a five-year agreement; Snap also committed $1 billion to AWS services for 2017–2021. The company relies on Google Cloud for the vast majority of computing, storage and bandwidth.
- Legal matters: Securities class actions related to the IPO, a BlackBerry patent lawsuit filed April 3, 2018, and the Vaporstream patent case remain pending. Trial in the Vaporstream matter was scheduled for August 2018. Snap said outcomes were uncertain and reasonably possible losses could not be estimated.
- Key business risks: Advertising concentration; competition and user retention; redesign-related engagement risk; rising hosting and personnel costs; privacy and regulatory exposure, including GDPR taking effect May 25, 2018; reliance on third-party cloud infrastructure; and continuing losses. The founders held about 96% of voting power at quarter-end, while Class A shares have no voting rights.
Important facts for investors to verify
- Subsequent DAU and engagement trends after the redesign, particularly whether March weakness continued, and the redesign’s effect on advertiser demand and ARPU.
- Whether revenue growth can outpace hosting costs and other expenses, and whether adjusted losses and operating cash outflows improve.
- Progress against the substantial Google Cloud and AWS minimum-spend commitments, and the impact of hosting costs on margins and liquidity.
- Actual timing and amount of lease-exit charges and restructuring savings, compared with the company’s estimates.
- Developments and potential financial exposure in the IPO securities and patent litigation; the filing does not provide a clear estimated loss range.
- Cash and marketable securities, the availability of the undrawn credit facility, and the effect of future equity awards and related tax-withholding needs on dilution and cash use.