Snap Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparable period is Q1 2019. Snap’s business is primarily advertising through Snapchat, with Spectacles revenue described as immaterial.
Financial and operating performance
| Metric | Q1 2020 | Q1 2019 | Change / context |
|---|---|---|---|
| Revenue | $462.5 million | $320.4 million | Up 44% year over year |
| Gross profit / margin | $209.1 million / 45.2% | $116.7 million / 36.4% | Margin improved 8.8 percentage points |
| Operating loss | $286.4 million | $316.1 million | Operating-loss margin improved to 61.9% from 98.6% of revenue |
| Net loss | $305.9 million | $310.4 million | Down 1%; diluted loss per share was $0.21 versus $0.23 |
| Adjusted EBITDA (non-GAAP) | $(81.2) million | $(123.4) million | Loss narrowed 34% |
| Operating cash flow | $6.3 million | $(66.2) million | Improved year over year |
| Free cash flow (non-GAAP) | $(4.6) million | $(78.0) million | Improved; includes $10.9 million of capital expenditures |
| Cash, cash equivalents and marketable securities | $2.08 billion | — | At March 31, 2020 |
| Convertible senior notes | $1.265 billion principal; $903.3 million net carrying amount | — | 0.75% coupon; mature August 2026 |
Average daily active users rose to 229 million from 190 million, and ARPU increased 20% to $2.02 from $1.68. ARPU was down from $2.58 in Q4 2019. Stock-based compensation was $172.0 million, up from $162.6 million.
Current assets were $2.53 billion and current liabilities $523.2 million at quarter-end. The $1.25 billion revolving credit facility had no borrowings outstanding; $26.0 million of standby letters of credit were outstanding. Management said existing cash was sufficient for at least 12 months.
Material changes versus Q1 2019
- Revenue growth reflected higher advertising demand in January and February, partly offset by a March slowdown associated with COVID-19.
- Cost of revenue increased 24%, including $26.9 million of higher infrastructure costs associated with user growth and activity. Total expenses rose 18%, slower than revenue growth.
- Research and development, sales and marketing, and general and administrative expenses rose 10%, 25%, and 13%, respectively. Higher marketing investment, headcount, professional services and legal costs contributed.
- Interest expense increased to $15.1 million from $0.8 million, primarily reflecting the convertible notes. Other expense was $12.4 million, including a $10.5 million impairment of non-marketable investments.
Outlook, risks and unusual items
- Outlook: The filing provides no specific financial guidance. Management said COVID-19’s broader effect remained uncertain and could continue to adversely affect advertising demand, operations and partners.
- Commitments: Contractual commitments totaled $1.99 billion, including $1.52 billion for hosting. Snap’s Google Cloud and AWS agreements include substantial minimum-spend commitments and shortfall payment provisions.
- Legal matters: Snap recorded $10.0 million of Q1 legal expense for a preliminary Vaporstream settlement. A preliminary $187.5 million settlement of securities class actions was agreed in January 2020; $100.0 million, net of insurance coverage, had been recorded in Q4 2019. Snap said the final outcomes of proceedings are inherently uncertain.
- Key business risks: Dependence on advertising, competition for users and advertisers, user engagement and monetization, privacy and data regulation, cybersecurity, reliance on Google Cloud and AWS, and ongoing losses. Average user metrics are internally estimated and may be undercounted or otherwise inaccurate.
- Other: The company reported an accumulated deficit of $7.3 billion. Class A shares are non-voting; the founders controlled approximately 99% of voting power as of March 31, 2020.
Important facts for investors to verify
- Whether the March COVID-19-related advertising slowdown persisted and how it affected subsequent revenue, advertiser collections and user monetization.
- Whether DAU growth translates into sustained ARPU and revenue growth, particularly given Q1 ARPU’s sequential decline.
- Cash generation and the scale and durability of operating-cost improvements, considering continued GAAP losses and substantial stock-based compensation.
- Cash available after contractual hosting and lease commitments, and the terms, potential dilution and cash-settlement implications of the convertible notes.
- Final resolution and total cash cost of the securities and patent matters, including any insurance recovery.