Snapchat disaster

There wasn’t much to cheer about Snapchat’s earnings report after the close. The stock fell by 25% in after hours trade. A proper disaster.

If you only looked at the headline numbers you’d be forgiven for wondering why the reaction has been so negative:

• Daily Active Users increased 19% year-over-year to 363 million
• Revenue increased 6% year-over-year to $1,128 million
• Operating cash flow was $56 million and Free Cash Flow was $18 million

More users, higher revenues. All sounds fine on the surface. However, it seems that a lot of the fears that have already driven the share price down throughout this year continue to weigh on the tech firm.

Back in June we highlighted that JPMorgan had downgraded an entire smorgasbord of tech stocks (including Snap) because ‘the rising risk of a recession could see a pullback in online advertising and ecommerce’.

In Snap’s letter to investors the impact and implications of this risk becoming real are hard to miss (emphasis added):

“Our revenue growth continued to decelerate in Q3 and continues to be impacted by a number of factors we have noted throughout the past year, including platform policy changes, macroeconomic headwinds, and increased competition.”

“We are finding that our advertising partners across many industries are decreasing their marketing budgets, especially in the face of operating environment headwinds, inflation-driven cost pressures, and rising costs of capital.”

“In some industries where topline growth remains strong, but businesses are experiencing input cost pressure due to inflation, we have observed reduced campaign budgets as businesses seek to offset input cost pressures.”

“In many high growth sectors, businesses are reassessing investment levels amid the rising cost of capital. We experience this on our advertising platform in the form of decreased brand-oriented advertising spending, but also in the form of lower bids per action and lower overall campaign budgets.”

All of which is highly detrimental to Snap’s revenues and hopes of achieving profitability. The company lost $360 million this quarter:

“Adjusted EBITDA was $73 million in Q3, marking an improvement over the prior quarter, but down from $174 million in Q3 of the prior year, reflecting lower revenue growth and costs, as noted earlier.”

“Net loss was $360 million in Q3, compared to a net loss of $72 million in Q3 of the prior year. The $288 million higher net loss compared to the prior year largely reflects $155 million in transition costs associated with our reprioritization efforts, the flow-through of the $102 million decline in adjusted EBITDA, unfavourable investment impacts of $47 million, and income tax expense of $8 million.”

The $155 million of ‘reprioritization efforts’ includes plans to lay off approximately 1,200 employees, and shuttering projects such as the Pixy drone.

The firm also announced a $500 million share buyback plan, “to protect stockholder value from the impact of dilution”. Stock-based compensation (SBC) for staff dilutes existing stockholders so these announcements are designed to mitigate the impact.

Nevertheless, committing to repurchase stock in a quarter of heavy losses and a deteriorating business environment is unlikely to have a positive impact on the share price.

Snapchat faces a huge challenge to turn the business around.