Snap Inc. Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2018. Snap operates Snapchat, a camera and communications application, and generates substantially all revenue from advertising. Figures below are unaudited; dollar amounts are in U.S. dollars.
Financial and Operating Performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $262.3 million | $181.7 million | $492.9 million | $331.3 million |
| Operating loss | $357.8 million | $449.0 million | $750.4 million | $2.663 billion |
| Net loss | $353.3 million | $443.1 million | $739.1 million | $2.652 billion |
| Adjusted EBITDA loss | $169.0 million | $194.0 million | $386.9 million | $382.2 million |
| Cash used in operating activities | $199.3 million | $209.6 million | $431.3 million | $364.6 million |
| Free cash flow | $(234.2) million | $(228.9) million | $(502.5) million | $(401.9) million |
Q2 diluted loss per share was $0.27, versus $0.36 a year earlier. Revenue grew 44% in Q2 and 49% for the first half year over year. Management attributed growth mainly to more ad impressions, advertiser demand, and increased use of its advertising API. Average revenue per user was $1.40, up from $1.05 a year earlier and $1.21 in Q1 2018.
Average daily active users (DAUs) were 188 million, up 8% year over year from 173 million, but down 2% from Q1 2018. The February 2018 app redesign negatively affected DAUs; Snap said it rolled out an update during Q2 and expected to continue making changes.
Gross margin, calculated from reported revenue less cost of revenue, was approximately 27% in Q2 2018 versus 16% in Q2 2017. Operating margin was approximately negative 136% versus negative 247%. Cost of revenue increased 26% year over year, primarily due to infrastructure costs. Q2 total costs and expenses were $620.1 million; management said costs excluding stock-based compensation and related payroll tax expense rose 18% year over year.
Liquidity, Cash Flow and Capital
At June 30, 2018, cash and cash equivalents were $393.2 million and marketable securities were $1.177 billion, totaling about $1.57 billion. Current assets were $1.869 billion and current liabilities were $279.3 million. Total liabilities were $366.6 million. No amounts were drawn on the $1.25 billion revolving credit facility, which matures in July 2021.
Snap said existing cash was sufficient for at least the next 12 months. It nevertheless continued to use cash: first-half operating cash use was $431.3 million and capital expenditures were $71.2 million. Cash and marketable securities declined from approximately $2.04 billion at December 31, 2017. Snap reported no off-balance-sheet arrangements.
Contractual commitments totaled $2.819 billion, including $2.349 billion of hosting commitments, $401.3 million of operating leases, and $43.2 million of financing leases. The Google Cloud agreement requires at least $400 million of purchases annually; the AWS agreement includes $1.0 billion of minimum spending from 2017 through 2021. Snap stated shortfalls against annual cloud minimums may require payment.
Material Changes, Outlook and Risks
- Q2 net loss narrowed 20% year over year, while first-half net loss fell substantially from 2017. Comparisons are materially affected by unusually high 2017 stock-based compensation associated with IPO-related RSU vesting, including the CEO award. Q2 2018 stock-based compensation was $156.4 million; first-half expense was $289.6 million versus $2.237 billion in the first half of 2017.
- Despite revenue growth, first-half operating cash use and free cash flow deficit worsened year over year. Adjusted EBITDA loss was broadly level for the first half.
- Snap announced no specific revenue, earnings, or user-growth guidance in the provided filing. Management said the effects of redesign changes on DAUs and other metrics were difficult to predict. It expects operating expenses to increase as the business expands.
- Snap planned to exit leases as it moved to a centralized Santa Monica office. Approximately $82 million of remaining lease obligations related to leases identified for exit; Q2 included a $3.9 million exit charge. Management expected total 2018 lease exit charges of $25 million to $45 million, primarily in Q3.
- Principal business risks include user growth and engagement after the redesign, competition, advertising dependence, rising hosting costs and reliance on Google Cloud, privacy and regulatory obligations including GDPR, and continued losses and negative cash flow. User metrics are internally calculated and subject to estimation, undercounting, and comparability limitations.
- Material legal matters include IPO securities class actions, for which the court denied Snap’s motion to dismiss in June 2018, and patent suits brought by BlackBerry and Vaporstream. Snap said outcomes remain uncertain and reasonably possible losses could not be estimated.
- Snap’s Class A shares are non-voting; founders held approximately 96% of voting power at June 30, 2018. The filing also notes potential shareholder dilution from equity awards and that common shares plus shares underlying stock-based awards totaled 1.5 billion.
Key Investor Verification Points
- Track DAUs and engagement following the redesign, including the Q2 sequential decline, and review how Snap defines and estimates its user metrics.
- Assess whether advertising monetization and ARPU growth can outpace infrastructure and other operating costs.
- Monitor operating cash burn, free cash flow, capital spending, and the use of cash and marketable securities.
- Review cloud minimum-spend obligations, lease commitments, and the expected timing and amount of lease exit charges.
- Follow developments in the securities and patent litigation, GDPR compliance, and other privacy or regulatory matters.
- Consider recurring stock-based compensation, outstanding equity awards, potential dilution, and the governance implications of non-voting Class A stock and concentrated founder control.