Let's Recap Q1 2020 Earnings Call
I'd like to start off by reviewing some highlights & forward guidance from Snap's Q1 2020 earnings call in order to give some perspective on Q2 2020 earnings call.
2020 Q1's revenue of $462 million was up 44% compared to the same period in the prior year. 2020 Q2's revenue of $454 million was up 17% year-over-year however revenue declined when compared to the previous quarter. Presumably because of reduction in AD revenue which we will discuss some more detail later.
Daily Active Users growth was still strong up 17% year-over-year to 238 despite not meeting projections of 239 million, off by 1 million. Chief Financial Officer Derek Anderson explained it this way "we observed an increase in daily active users that informed our initial estimate. This initial lift dissipated faster than we anticipated as shelter in place conditions persisted. Despite the unusual circumstances influencing user growth in the quarter, we were pleased with the overall level of growth and that growth continued month over month from April to May and May to June.""
Revenue by Region
I pulled this chart from snap's investor relations site to get a better understanding of revenue breakdown across regions. It was mentioned during the call that Rest Of The World Revenue had declined because of the Cash Economy which Covid impacted negatively.
In Europe, Revenue actually grew by 3 million. Which makes some sense Since Europe has recovered better against Covid.
In Rest Of The World, Revenue fell by 1 million to $69 million despite DAU growth of 37 percent to reach 77 million. With such strong growth in Rest Of World Region, you would expect at least some revenue growth? Never the less, the strong DAU growth in Rest Of World is good.
Now, One more thing to notice is that since Covid, Snap's overall revenue growth has stalled and is heading in the reverse direction. From Q4 2019, to Q1 2020, Q2 2020, we see revenue's declining. I wondered if this was cyclical in nature (are q4 revenues sequential higher than all other quarters in the year?, or is it the case that Covid has caused revenue declines that much? To find out, I looked at 2018 q4, q1 2019 earnings in comparisons to other quarters to look for a trend that explains revenue drop from q4 2019 to q1 & q2 2020.
Based on our brief travel into Snap earnings history, we can see from the chart that q4 revenues tend to be significantly higher than the preceding quarters and the other quarters right after. I can't explain why this trend yet, i'll continue to look into it.
Revenue Per User
One important metric to examine when looking at Ad-based platforms like Snap is the ARPU (Average Revenue Per User) metric. The expectation from Investors at least, and I would hope for Snap Inc as well, is that with growth in Daily Active Users, there's corresponding revenue growth that comes with it as well. Below I'll share 2 charts for arpu cover from q4 2017, to the most recent quarter q2 2020
Similar to revenue trends, we see that highest arpu during q4 of 2017, 2018, 2019. The key take away is that we want to see q4 revenues of the current cycle being greater that q4 revenues of the previous cycle. To Snap's credit we can clearly see that growth trend.
We also see that prior to 2020, the quarters following q4 show continued growth from q1 to q2, from q2 to q3, and finally from q3 to q4. The caution here however is that in 2020, average revenue per user declined from $2.02 in Q1 to $1.91 in Q2.
Some Questions to ask with decline in arpu.
- If revenue growth remains flat in the short term, what does it mean for the bottom line or profitabily?
- How does snap address growth in users but a decline in revenue
If revenue growth remains flat... Let's look at the two charts. The Cost Of Revenue, and Operating Expenses Chart.
From the Cost of Revenue Chart, I don't see too slack there, Perhaps the gross margins could improve into the 50%. I see those as fixed costs. It's hard to cut back on Servers or Data Centers when you have more DAUs. Content is what's bringing those DAUs into the Snap Platform so that's not going to be scaled back. I see more room for adjustments in the Operating Expenses Chart.
From the Operating Expenses section, when companies aim to become lean, they cut back staff, marketing, as well as research and development efforts. How much Snap would have to cut back in each of these sections If revenue growth remains flat, I can't say but surely they would have to make some tough decisions.
How does snap address growth in users but a decline in revenue.
What we've seen lately is that advertisers have been pulling back spending in an attempt to reduce operating expenses during the Covid pandemic. We have seen this after twitter reported earnings, we have also seen this with Linkedin from Microsoft's earnings Call. Peloton, the exercise bike manufacturer also said during their Q1 call that they were cutting back on advertising spend. Across the board we've seen companies cutting back on advertising, as ad-based platform, how does snap pivot?
Dynamic Ads is one such attempt. I'm exactly sure how to describe so i'll just copy and paste directly from Snap's website.
"Dynamic Ads are a simple way to personalize ads for your customers. By leveraging catalogs, the Snap Pixel, or your Mobile Measurement Partner, we can automate ad creation, while optimizing towards actions that matter most to your business, like driving purchases online or in app"
I think this is definitely a smart move. One of the many frustrations I had with Instagram back in the day is that you would see a product that you liked, but then have to click 100 different links just to get to that product. Instagram now offers links in add where you can buy a product with 1 or 2 clicks. With growing DAUs in Snap's Platform, this makes a lot of sense. So Advertisers can not only look at Snap as ad-platform, but perhaps a sales channel.
In regards to more revenue generation while ad-revenue is down, An anaylst from Jefferies asked Snap how they "plan to eventually monetize Map, and what that time frame might look like". CEO and Co Founder Evan Spiegel gave some insight saying they're "helping local businesses reopen, following the COVID lockdown, providing free ad credits and letting them easily create Snap Ads, but we'll continue to work on those products, especially as we build products around categorizing places and lists, helping recommend places to different friends. We see that as a really big opportunity over time."
From Evan's Spiegel responseI don't quite understand how they plan to use maps. I kind of do, but then I don't. Maybe he was being purposefully vague not to give anything away about their future plans. We'll monitor developments in that space
Major Takeway, Looking ahead
In his prepared remarks, Chief Financial Officer Derek Anderson withdrew Q3 guidance but shade some light on some expectations.
"Thus far in Q3, we estimate year-over-year revenue growth to be 32% through July 19. While we are cautiously optimistic that these trends could sustain over time, we are also conscious that operating conditions may remain volatile and that economic conditions could further deteriorate. For example, advertising demand in Q3 has historically been bolstered by factors that appear unlikely to materialize in the same way they have in prior years, including the back to school season, film release schedules and the operations of various sports leagues."
32% Y-O-Y growth is still tremendous growth. On the hand though, Without the back to school, film release ad revenue, and presumable lower sports league ad-spending there might be some tightening in revenue growth ahead. In the short term i'd be cautioned to make an ambitious bets on snap. The long term fundamentals for Snap remain in-tact.
It's probably not the based idea to invest in ad-based platform stocks in the short-term. Particularly because ad-platforms like Twitter, and Snap are seeing significant drops in advertiser revenue. In the short-term I would lean towards speculating or investing in stocks seeing a surge in paid subscribers and most important growing subscriber revenue.
Abbreviated & Selected Questions of Interest by Analysts During the Call
Richard Greenfield from LightShed Partners: "the elephant in the room, there has been a boycott, as I'm sure you and everyone are aware of some of your peers but most notably Facebook...How are you taking advantage of major advertisers literally stopping their spend on Facebook and even some of the other platforms?
Abbreviated Answer by Jeremi Gorman Chief Business Office: ... "in particular, we've designed in a brand-safe hand-curated way since the beginning. There is no town hall or ability for an un-vetted user to post to our whole community. And as advertisers evaluate platforms which align with their values, these deliberate decisions made years ago are of paramount importance.... With that being said, the majority of our revenue is VR, which is a segment not broadly participating in the boycott.
Mark Mahaney from RBC Capital Markets: "we have a lot of political ads coming out online. I don't know if it's 3 billion or 4 billion, but it's a big chunky number. And I know you are making it a point to show as much transparency around the ads as possible, but what are you doing to tap into those ad dollars?
Abbreviated Response from Jeremi Gorman: " political ads, yes, it's a segment that we are actively going after. We serve 90% of 13 to 24-year olds in the US and 75% of 13 to 34-year olds in the US. So educating them, allowing them to learn more about the issues, any factual based manner is super-critical...We have very specific guidelines for political advertising that apply to ads related to elections and advocacy issues. But most broadly, we do believe that Snapchat can play an important role in getting first-time voters engage with our democracy.
Ofcourse TikTok was mentioned! Eric Sheridan from USB: "there's been some talk out of the US government about exploring the role of TikTok in the US market...I wanted to know if you had a take on that potential action by the US government.."
Abbreviated Response By Derek Anderson: "I think that really brings us to more like a free markets question as these businesses are able to leverage the massive 1 billion-plus consumer base and obviously in the second-largest economy in the world in China and leveraged their success there to enter the United States market, which is a smaller market in terms of people. So it's been really fascinating to see the government grapple with this, obviously the national security concerns notwithstanding."
Commentary: I don't think any of the leaders at Snap wanted to answer this question. Because it's a catch 22. If they are for banning TikTok, then what does that mean for Snap in the other countries it operates in, what if Snap in return gets banned there? It's more politically savvy to stay neutral on this point.
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