Snap Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless stated otherwise. Unaudited consolidated GAAP results. Snap generates substantially all revenue from advertising on Snapchat.
Financial and operating performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $320.4 million | $230.7 million | +39% |
| Gross profit / gross margin | $116.7 million / 36.4% | $33.9 million / 14.7% | Margin improved |
| Operating loss / operating margin | $(316.1) million / (98.6%) | $(392.5) million / (170.1%) | Loss narrowed 19% |
| Net loss | $(310.4) million | $(385.8) million | Loss narrowed 20% |
| Diluted loss per share | $(0.23) | $(0.30) | Improved |
| Adjusted EBITDA loss | $(123.4) million | $(217.9) million | Loss narrowed 43% |
| Operating cash flow | $(66.2) million | $(232.0) million | Cash use decreased |
| Free cash flow | $(78.0) million | $(268.3) million | Cash use decreased |
Cost of revenue increased 4% to $203.8 million, slower than revenue growth. Total costs and expenses were $636.5 million, up about 2%; excluding stock-based compensation, they decreased 4%, according to management. Stock-based compensation was $162.6 million, versus $133.3 million a year earlier.
Average daily active users (DAUs) were 190 million, down 1 million year over year but up 4 million from Q4 2018. ARPU was $1.68, up 39% year over year and down from $2.09 in Q4 2018. Management attributed revenue growth mainly to more ads delivered, increased advertiser demand, additional ad placements, and higher impressions per user, with incremental spend primarily through the self-serve platform.
Liquidity, debt and commitments
- Cash, cash equivalents and marketable securities totaled approximately $1.21 billion at March 31, 2019: $245.6 million of cash and equivalents and $963.1 million of marketable securities.
- No borrowings were outstanding under the $1.25 billion revolving credit facility. The facility was extended through August 2023 for $1.05 billion of its capacity.
- Operating lease liabilities were $375.4 million, including $46.1 million current and $329.3 million noncurrent.
- Contractual commitments totaled $2.61 billion, including hosting commitments and leases. The filing reports Google Cloud and AWS minimum purchase obligations; failure to meet annual minimums may require payment of the shortfall.
- Capital expenditures were $11.8 million, versus $36.3 million in Q1 2018. Cash, cash equivalents and restricted cash decreased by $141.5 million during the quarter.
Material changes, outlook and risks
- Management said DAU declines in 2018 were primarily associated with application redesign changes and Android performance issues. The rebuilt Android application was available to all users by quarter-end; management said its engagement impact was difficult to predict.
- Management believes existing cash is sufficient to fund working capital, investing and financing needs for at least the next 12 months. The filing provides no specific revenue, earnings or cash-flow guidance.
- The Q1 2018 comparison included a $31.5 million stock-compensation forfeiture benefit and $9.9 million in reduction-in-force charges; these affect comparability. Q1 2019 other expense included foreign-currency transaction and non-marketable investment losses.
- Snap adopted the new lease accounting standard on January 1, 2019, recording approximately $284.5 million of right-of-use assets and $375.4 million of lease liabilities; management reported no material impact on operations or cash flows.
- Key risks include user engagement and growth, competition, dependence on advertising, privacy and regulatory requirements, reliance on Google Cloud, substantial hosting commitments, ongoing losses, and significant stock-based compensation. Management identified securities class actions relating to the IPO, a BlackBerry patent suit, and a stayed Vaporstream patent suit; reasonably possible losses could not be estimated.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Android improvements translate into sustained DAU growth and engagement, and whether the quarterly ARPU decline from Q4 reverses.
- Whether advertising growth and self-serve demand can continue to outpace operating costs and reduce GAAP losses and cash burn.
- The effects of recurring stock-based compensation and equity awards: shares outstanding plus shares underlying awards totaled 1.544 billion, compared with 1.457 billion a year earlier.
- Cash runway relative to ongoing losses, lease liabilities and multiyear cloud-hosting commitments; the filing presents hosting commitment totals in different sections that investors may wish to reconcile.
- Developments in the disclosed securities and patent litigation, and any resulting financial or operational consequences.
Adjusted EBITDA and free cash flow are non-GAAP measures; the filing cautions that they have limitations and should not replace GAAP results. User metrics are company estimates and may be affected by measurement limitations.