Snap (SNAP) Up 16.2% Since Last Earnings Report: Can It Continue?

A month has gone by since the last earnings report for Snap (SNAP). Shares have added about 16.2% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Snap due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Snap Q3 Loss Narrower Than Estimates, Revenues Up Y/Y

Snap reported third-quarter 2019 loss of 4 cents per share, narrower than the Zacks Consensus Estimate of a loss of 5 cents and the year-ago quarter’s loss of 12 cents.

Revenues surged 49.9% from the year-ago quarter to $446.2 million, comfortably surpassing the consensus mark of $431 million. The revenue figure was also exceeded the company’s guidance of $410-$435 million.

Geographically, revenues from North America (70.8% of revenues) soared 52.7% year over year to $316 million. Revenues from Europe (15.5%) jumped 38% to $69 million. Rest of the World (ROW) revenues were $62 million, up 55% year over year.

Average revenues per user (ARPU) increased 32.5% year over year and 11% sequentially to $2.12. On a year-over-year basis, North America, Europe and ROW ARPUs increased 43.1%, 23.5% and 20.2%, respectively.

User Engagement Improved in Q3

Daily Active Users (DAU) at the end of the reported quarter were 210 million. Snap added 24 million DAUs on a year-over-year basis and 7 million sequentially. The growth was broad based, with year-over-year and sequential growth in both iOS and Android platforms.

North America DAU was 84 million, up 5 million year over year and 1 million sequentially. Europe DAU was 65 million, which increased 6 million on a year-over-year basis and 2 million on a sequential basis.

ROW DAU was 61 million at the end of the reported quarter, up 14 million year over year and 5 million sequentially. The growth was primarily driven by the strong adoption of Snap’s redesigned Android application. The company is increasing efforts to improve user experience in these markets through language support, local content and local partnerships.

Snap is benefiting from improved user engagement. It stated that each DAU opens Snapchat 30 times a day on average.

Notably, the company launched Lens Studio 2.0 that introduced Landmarkers, a new tool for overlaying AR on the world, and a variety of other features. By the end of the reported quarter, more than 600,000 Lenses had been created by Snapchat members through Lens Studio, with Community Lenses achieving significant popularity.

The company stated that more than 15% of the Snaps sent every day with Lenses now feature Lenses made by Snapchatters using Lens Studio.

Snap is investing heavily in Lens Studio to help creators build AR experiences. Solid adoption of products like Scan and AR Bar is driving the usage of AR-based lenses, providing significant growth opportunities to the company.

Further, Snap is helping advertisers reach Millennials and Gen Z audience, who are more active on immersive mobile platforms like Snapchat. The company stated that more than 75% of 13-34-year olds and 90% of 13-24-year olds in the United States are active on Snapchat.

The company stated that advertisers focused on consumer end markets like beauty products, beverages and grocery are selecting Snap to penetrate the 13-34-year old demography. This popularity provides the company with a competitive edge over the likes of Facebook, Google and Twitter in attracting ad dollars.

Premium Content Drives Ad Impressions

Impressions per DAU were up 121% from the year-ago quarter, driven by growth in Snap Ads, which benefited from strong demand for bid optimization products such as app installs and premium ad units such as Commercials.

Snap stated that the combination of Snap Ads with AR and Creative Tools products are helping advertisers achieve higher ROI. This is also driving the adoption of Self-Serve Reach and Frequency Lens products, which grew more than 30% sequentially in the reported quarter.

Price per ad impression declined 6% sequentially. However, Snap benefited from the year-over-year increase in user activity, including growth in Snapchatters posting and viewing Stories, and continued strong growth in viewership of Premium content.

Notably, in the reported quarter, more than 100 Discover channels reached a monthly audience of more than 10 million viewers. The company added more than 50 new channels internationally across eight markets.

Snap stated that the number of media partners distributing content on Discover has doubled. It has also strengthened relationships with larger partners. Notably, total daily time spent by Snapchatters on Discover grew more than 40% year over year. Moreover, time spent on premium content internationally increased more than 55% year over year.

Snap stated that its new horror-thriller original Dead of Night reached more than 14 million unique viewers since the premiere in September.

Further, the company launched Spectacles 3, its new camera glasses. Additionally, the company in partnership with SYBO Games launched a new multiplayer game called Subway Surfers Airtime exclusively on Snapchat.

Video Ad Portfolio Expanded in Q3

Given the robust growth opportunity provided by video ads, Snap is focused on expanding the video advertising solutions portfolio.

The company extended the maximum length of video ads to three minutes on its platform. The same capability was added to its unskippable Commercials. A Snap content viewer can now skip the ad-video only after the first six seconds.

Further, Snap announced that advertisers can now add swipe actions to their Commercials campaigns. This allows Snapchatters to swipe up to access a web page, view a long-form video or a Lens.

Moreover, Snap launched new models for in-app and web purchases in the reported quarter.

Most recently, the company launched Dynamic Ads, which it had started testing during the third quarter. This solution allows advertisers to automatically create ads in real time, based on product catalogs.

Further, Snap’s partnership with Shopify helped e-commerce advertisers expand their reach at scale and gain new customers.

Operating Details

In third-quarter 2019, the cost of revenues on a non-GAAP basis increased 13.6% year over year to $223.1 million. Infrastructure costs, revenue sharing costs and other expenses increased 4.3%, 73.1% and 4%, respectively, on a year-over-year basis.

Infrastructure costs per DAU in the reported quarter were 70 cents, down 5 cents year over year and 3 cents sequentially.

Gross margin on a non-GAAP basis increased to 51% compared with 36% in the year-ago quarter.

Operating expenses were $271 million, up 10.2% year over year. Sales and marketing expenses jumped 41.2% year over year to $96 million due to investments in the Real Friends marketing campaign.

Adjusted EBITDA loss was $42.4 million compared with a loss of $138.4 million in the year-ago quarter.

Balance Sheet and Cash Flow

As of Sep 30, 2019, cash and cash equivalents and marketable securities were $2.26 billion, up from $1.18 billion as of Jun 30, 2019, driven by net proceeds from the Convertible Notes offering completed in the reported quarter.

Net cash used from operating activities was $76.1 million compared with $132.5 million used in the year-ago quarter.

Free cash outflow was $84.1 million compared with an outflow of $158.8 million reported in the year-ago quarter.

Fourth-Quarter Guidance

For the fourth quarter of 2019, Snap expects revenues between $540 million and $560 million compared with $390 million reported in the year-ago quarter. The Zacks Consensus Estimate for fourth-quarter revenues is pegged at $552.1 million.

DAUs are expected between 214 million and 215 million, up 4-5 million sequentially.

Adjusted EBITDA is expected between breakeven and $20 million compared with a loss of $50 million in the year-ago quarter.

Near, Medium & Long-term Outlook

Over the next one-three years, Snap is focused on strengthening content and AR platforms. The aim is to make Snapchat content and AR more personalized and monetizable.

Moreover, Snap expects to invest significantly in both maps and gaming endeavors over the coming years (next 3-5 years), which it believes are areas with significant growth potential.

Further, over the next seven to 10 years, Snap intends to realize its “vision of computing overlaid on the world” through wearable AR.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended upward during the past month. The consensus estimate has shifted 8.59% due to these changes.

VGM Scores

Currently, Snap has a nice Growth Score of B, a grade with the same score on the momentum front. However, the stock was allocated a grade of F on the value side, putting it in the fifth quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions has been net zero. Notably, Snap has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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