Snap Inc. Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2019; year-over-year comparisons are to the same periods in 2018. Snap’s flagship product is Snapchat, and substantially all revenue comes from advertising.
Financial and Operating Performance
| Metric | Q3 2019 | Q3 2018 | Change |
|---|---|---|---|
| Revenue | $446.2 million | $297.7 million | +50% |
| Gross margin | 50.0% | 33.6% | +16.4 percentage points |
| Operating loss | $(228.9) million | $(323.4) million | Loss narrowed |
| Net loss | $(227.4) million | $(325.1) million | Loss narrowed 30% |
| Adjusted EBITDA | $(42.4) million | $(138.4) million | Loss narrowed 69% |
| Operating cash flow | $(76.1) million | $(132.5) million | Cash use declined |
| Free cash flow | $(84.1) million | $(158.8) million | Cash use declined |
- Average daily active users (DAUs) were 210 million, up from 186 million a year earlier and 7 million sequentially. Average revenue per user (ARPU) rose 33% to $2.12 from $1.60.
- For the first nine months, revenue was $1.155 billion, up 46%; net loss was $793.0 million versus $1.064 billion; operating cash use was $238.1 million versus $563.9 million; and free cash flow was $(265.5) million versus $(661.4) million.
- At September 30, cash and cash equivalents were $728.8 million and marketable securities were $1.532 billion, totaling approximately $2.261 billion. Total assets were $3.864 billion and stockholders’ equity was $2.324 billion.
- Snap issued $1.265 billion principal amount of 0.75% convertible senior notes due 2026. Net proceeds after issuance costs and capped-call costs were approximately $1.15 billion. The notes’ net balance-sheet carrying amount was $880.4 million, reflecting the accounting allocation to an equity component and unamortized discounts and costs. No amounts were drawn on the $1.25 billion revolving credit facility.
Changes, Drivers, and Management Commentary
- Revenue growth reflected higher advertising demand and impressions. Snap said improvements to its self-serve advertising platform made inventory more accessible to advertisers, including at lower prices than in the prior period.
- Cost of revenue rose 13%, slower than revenue growth; it increased due to revenue sharing, user-related infrastructure use, and advertising measurement costs, partly offset by infrastructure efficiencies. Marketing expense rose 26%, primarily from increased marketing investment.
- Operating expenses were $675.1 million, or 151% of revenue, versus $621.1 million, or 209%, a year earlier. Results benefited from the absence of prior-year lease-exit charges; higher stock-based compensation partly offset that benefit. Q3 stock-based compensation was $161.2 million, up from $126.8 million.
- Nine-month other income included a $39.9 million gain on the June divestiture of Placed. The gain is not representative of recurring operating performance.
- Management stated that existing cash was sufficient for working capital, investing, and financing needs for at least the next 12 months. The filing does not provide specific revenue, earnings, or cash-flow guidance.
Liquidity, Commitments, and Risks
- Snap reported $1.858 billion of future minimum hosting commitments as of September 30, 2019; its broader contractual commitments table totaled $2.283 billion, including hosting, lease, and other commitments. Google Cloud and AWS are significant providers, and minimum-spend obligations may require payment for shortfalls.
- Operating lease liabilities totaled $334.5 million on a present-value basis. The company also disclosed $14.2 million of facility leases not yet commenced.
- Key risks include ongoing losses and negative operating cash flow, dependence on advertising and user engagement, competition, reliance on Google Cloud, privacy and regulatory changes (including California’s privacy law effective January 2020), and potential service, security, and metric-measurement issues. Class A shares are non-voting; the founders control approximately 99% of voting power.
- Pending matters include securities class actions related to the IPO and patent litigation involving BlackBerry and Vaporstream. The Vaporstream case had a trial set for early 2020. Snap said it believes it has meritorious defenses; reasonably possible losses could not be estimated. The DOJ and SEC confirmed in September 2019 that they were no longer pursuing investigations relating to IPO disclosure allegations.
Important Facts for Investors to Verify
- Whether DAU and ARPU growth and advertising demand continue, and how much revenue growth depends on impression volume versus pricing.
- Whether improving cash flow is sustainable after excluding the Placed divestiture gain and considering substantial stock-based compensation.
- The cash impact and dilution potential of the convertible notes, including conversion and capped-call terms.
- Future hosting spend, infrastructure-cost efficiency, and compliance with cloud-provider minimum commitments.
- Developments in the disclosed legal matters and privacy or other regulatory requirements.