Snap Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; interim financial statements are unaudited. Snap operates Snapchat, with substantially all revenue generated from advertising.
Financial results and key metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $769.6 million | $462.5 million | +66% |
| Cost of revenue | $412.6 million | $253.4 million | +63% |
| Gross profit / gross margin | $357.0 million / 46.4% | $209.1 million / 45.2% | Margin +1.2 percentage points |
| Operating loss / operating margin | $(303.6) million / (39.5)% | $(286.4) million / (61.9)% | Loss widened; margin improved |
| Net loss | $(286.9) million | $(305.9) million | Loss narrowed 6% |
| Diluted loss per share | $(0.19) | $(0.21) | Improved 11% |
| Adjusted EBITDA | $(1.7) million | $(81.2) million | Improved $79.5 million |
| Operating cash flow | $136.9 million | $6.3 million | Increased $130.6 million |
| Free cash flow | $126.0 million | $(4.6) million | Improved $130.6 million |
DAUs averaged 280 million, up 22% from 229 million; ARPU rose to $2.74 from $2.02. Stock-based compensation was $237.1 million, versus $172.0 million a year earlier, a significant recurring expense excluded from Adjusted EBITDA.
At March 31, 2021, cash and cash equivalents were $967.5 million and marketable securities were $1.589 billion, totaling approximately $2.557 billion. Current assets were $3.239 billion and current liabilities $751.9 million. Convertible notes had a net carrying value of $2.245 billion, against $2.265 billion principal. The company had no borrowings under its $1.25 billion revolving credit facility. Management said existing cash was sufficient for at least the next 12 months.
Material changes and management commentary
- Revenue growth reflected more advertisers, stronger advertising demand, and optimization efficiencies. United States revenue was $514.6 million, compared with $273.2 million.
- Cost of revenue rose mainly from higher content costs, including $90 million for Spotlight, increased revenue sharing, and infrastructure use from DAU growth; efficiencies partly offset infrastructure costs.
- Research and development expense increased 46%, primarily due to headcount, compensation changes, and stock-based compensation. Sales and marketing rose 23%, and general and administrative expense rose 20%, with personnel and stock compensation among the drivers.
- Operating cash flow benefited from noncash stock compensation and depreciation, collections that reduced receivables by $129.3 million, and a $56.5 million increase in accounts payable. Investing cash flow included $108.9 million paid for acquisitions.
- Snap early adopted convertible-debt accounting guidance on January 1, 2021. This increased the notes’ carrying value by $569 million and reduced reported interest expense; the accounting change was not a new debt issuance.
- Fit Analytics was acquired in March for $124.4 million of purchase consideration, primarily cash; purchase-price allocation was preliminary. A separate acquisition had $7.6 million consideration.
Outlook, risks, and contingencies
The provided filing text does not give a clear numerical revenue or earnings forecast. Management described COVID-19 effects and advertising demand as uncertain and cautioned that short-term changes in engagement or advertising may not indicate longer-term trends. The company prioritizes long-term user engagement and may invest at the expense of short-term profitability.
- Key risks include dependence on advertising, competition for users and advertiser budgets, user growth and engagement, and changes to privacy rules or mobile operating systems. Snap specifically identified Apple’s planned iOS privacy changes as a potential constraint on data use, ad targeting, and measurement.
- Snap relies heavily on Google Cloud and AWS and has substantial minimum cloud-service commitments. Contractual commitments totaled $1.359 billion, including $896.7 million for hosting; the filing’s commitment schedules distinguish different categories and periods.
- Convertible notes may be converted or become eligible for optional conversion; both note series met conversion-price conditions for optional conversion during Q2 2021. Conversion settlement could require cash or shares, at Snap’s election under the note terms.
- The IPO securities class-action settlement had received court approval, subject to exhaustion of appeals before escrow funds are released. Snap said other legal matters could be unpredictable; it did not provide a reasonably estimable loss range for pending matters.
- Q1 included a $23.3 million gain on non-marketable investments in other income. The prior-year quarter included a $10.5 million impairment of non-marketable investments.
- Management reported effective disclosure controls as of March 31, 2021. The initial phase of a new ERP implementation migrated general ledger, consolidation, and planning processes; related controls were modified and validated.
Investor verification priorities
- Verify that user growth and ARPU gains persist, and assess how much revenue growth reflects advertiser demand versus measurement or targeting changes.
- Track Spotlight and other content costs against monetization, gross margin, and operating-loss trends.
- Evaluate cash generation after working-capital movements and stock-based compensation; Adjusted EBITDA excludes significant recurring stock compensation and related payroll taxes.
- Review convertible-note conversion and settlement outcomes, dilution exposure, and the distinction between debt principal and its accounting carrying value.
- Monitor cloud commitments, acquisition integration and purchase-price allocations, and developments in the securities settlement and other legal matters.
- Consider the limits of Snap’s DAU and demographic measures: the company notes potential undercounting, estimation challenges, and lack of uniform industry standards.