Snap Inc. — Q2 2022 Form 10-Q
Business context and reporting period. Snap operates Snapchat, a camera and communications platform, and generates substantially all revenue from advertising. This unaudited quarterly report covers the three and six months ended June 30, 2022; comparisons are with the same 2021 periods. Amounts below are in U.S. dollars.
Key financial and operating metrics
| Metric | Q2 2022 | Q2 2021 |
|---|---|---|
| Revenue | $1.111 billion | $982.1 million |
| Gross profit / gross margin | $664.5 million / 59.8% | $537.1 million / 54.7% |
| Operating loss / operating margin | $(400.9) million / (36.1)% | $(192.5) million / (19.6)% |
| Net loss | $(422.1) million | $(151.7) million |
| Diluted net loss per share | $(0.26) | $(0.10) |
| Adjusted EBITDA | $7.2 million | $117.4 million |
| Cash used in operating activities | $(124.1) million | $(101.1) million |
| Free cash flow | $(147.5) million | $(115.7) million |
| Average daily active users | 347 million | 293 million |
| Average revenue per user | $3.20 | $3.35 |
For the six months ended June 30, revenue was $2.174 billion, up 24%; net loss was $781.7 million versus $438.5 million; operating cash flow was $3.4 million versus $35.8 million; and free cash flow was negative $41.2 million versus positive $10.3 million.
Balance sheet and liquidity. At June 30, cash and cash equivalents were $2.298 billion and marketable securities were $2.574 billion, totaling $4.872 billion. Current assets were $6.015 billion and current liabilities $1.064 billion. Convertible senior notes had a net carrying value of $3.739 billion (approximately $3.773 billion principal). Snap also had a $1.05 billion revolving credit facility, with no borrowings outstanding and $26.6 million in standby letters of credit. Management said available cash was sufficient for at least 12 months.
Material changes versus the prior comparable period
- Q2 revenue grew 13%, while DAUs rose 18%; ARPU declined 4%, indicating user growth outpaced monetization per user.
- Total costs and expenses rose 29% to $1.512 billion. Research and development increased 36%, sales and marketing 73%, and general and administrative 39%; cost of revenue was nearly flat.
- Q2 operating loss more than doubled, and net loss widened by $270.4 million. Adjusted EBITDA fell from $117.4 million to $7.2 million.
- Q2 gross margin improved to approximately 59.8% from 54.7%, despite the wider operating loss, as operating expenses grew substantially faster than revenue.
- Cash and marketable securities increased from $3.693 billion at year-end 2021 to $4.872 billion. The company issued $1.5 billion of 2028 convertible notes in February; six-month financing cash flow included $1.483 billion of net note proceeds.
Outlook, commentary, risks, and unusual items
- Outlook: The filing provides no numerical revenue, earnings, or Q3 guidance. Management cited macroeconomic uncertainty and said actual results may differ materially from expectations. It described its cash balance as adequate for at least 12 months.
- Management commentary: Revenue growth was attributed to advertiser growth, auction-based advertising demand, and optimization efficiencies. Management attributed expense increases mainly to hiring and higher cash- and stock-based compensation, with additional marketing investment.
- Advertising and macro risks: Apple’s App Tracking Transparency changes have impaired ad targeting, measurement, and optimization. Snap also cited inflation, labor and supply-chain pressures, economic uncertainty, competition, and the Ukraine conflict as potential restraints on advertiser spending. Advertising generates substantially all revenue.
- Other key risks: User engagement and monetization may weaken; Snap depends heavily on Google Cloud and AWS and on Apple and Google mobile platforms; privacy and other regulation, cybersecurity events, litigation, and concentrated founder voting control could adversely affect the business.
- Unusual items: Q2 other expense included a $63.9 million unrealized loss on publicly traded securities, partly offset by gains on strategic investments. Revised useful lives for certain customer relationships and trademarks increased Q2 amortization expense by $41.7 million. Stock-based compensation was $318.8 million in Q2, a significant recurring expense excluded from Adjusted EBITDA.
- Commitments and contingencies: Contractual commitments totaled $4.2 billion, primarily due within three years. A securities class action alleges misleading statements concerning the impact of Apple’s tracking framework; Snap says it will defend the case, and the potential loss cannot currently be estimated.
- Post-quarter developments: In July, the board authorized up to $500 million of Class A share repurchases over 12 months. Snap also announced a conditional future special stock dividend of one Class A share for each outstanding common share, tied to specified timing and stock-price conditions, and employment agreements with its CEO and CTO.
Most important facts for investors to verify
- Whether revenue growth and advertiser demand can recover ARPU and sustain monetization amid privacy-related measurement constraints and macroeconomic pressure.
- Whether operating expenses—particularly hiring, stock compensation, and sales and marketing—can be brought into line with revenue growth, and whether cash flow improves.
- The value and liquidity of marketable securities and strategic investments, including the effect of further price declines on reported earnings.
- The terms, potential dilution or cash-settlement implications, and repayment capacity associated with approximately $3.77 billion of convertible note principal and the new revolving facility.
- The timing, conditions, funding impact, and governance implications of the announced repurchase program and conditional stock dividend.
- Developments in the securities litigation, the $4.2 billion of commitments, and the reliability of reported user metrics, which Snap says may be affected by measurement limitations.