Snap Shares Pop as Revenue Rises

Snap cofounders Evan Spiegel (C) and Bobby Murphy ring the opening bell of the New York Stock Exchange with NYSE Group President Thomas Farley. REUTERS/Lucas Jackson

Snap Inc.’s SNAP 1.52% stock surged more than 25% after the company reignited revenue and user growth for the first time as a publicly traded firm, a promising sign that may reflect progress in persuading advertisers its Snapchat app is a viable alternative to Facebook and Google.

The social-media company said Tuesday it doubled its loss in the fourth quarter, but sales rose 72% to $285.7 million from a year earlier, besting Wall Street’s revenue forecast and reviving growth after three consecutive quarters of a slowdown. The loss, which shrank 20% from the prior quarter, was also better than analysts anticipated.

Snap added 8.9 million daily users during the fourth quarter—the largest addition of users since the third quarter of 2016, when it was still a privately held company. The 5% growth to 187 million users in the three months was an increase from 2.9% growth during the third quarter.

“We ended 2017 confident that we can grow our Snapchat community and monetize our products more efficiently than before,” Chief Executive Evan Spiegel said in prepared remarks.

Shares rose 26% in after-hours trading to $17.95, putting the stock back above the $17 offering price. Snap’s shares had fallen below that threshold over the past several months, including dropping 20% shortly after a disappointing third-quarter report.

The wild stock swings from quarter to quarter suggest investors are unsure whether Snapchat can become a formidable competitor to the two dominant forces in digital advertising, Facebook Inc. and Alphabet Inc.’s Google. Those two companies together bring in about 65% of digital ad dollars in the U.S., compared with about 1% for Snapchat, according to research firm eMarketer.

Created with Highcharts 6.0.4Snap, Crackle and PopSnap’s revenue has shown consistent growth and accelerated in the fourth quarter.Snap total revenue, quarterlySource: the company

“The reality is there is a segment of advertisers that find Snap to be really effective and useful,” such as movie studios and those with younger audiences, said Brian Wieser, a senior analyst at Pivotal Research Group. “There’s another segment who don’t. Snap is a solid niche platform.”

Other social-media platforms have similarly struggled as they have moved into the mainstream.

Facebook stumbled in its first 12 months as a public company, with shares falling about 30% from its IPO price as it struggled to adapt quickly enough to a consumer shift from desktop computers to mobile phones. The company since turned itself into a mobile-ad powerhouse, and through acquisitions of WhatsApp and Instagram, has become one the biggest U.S. companies with a market value more than $500 billion.

Like Snap, Twitter in its first year as a public company dealt with double-digit fluctuations in stock price following each quarterly report, as investors tried to get a grip on whether it could take a bite out of Facebook. Twitter, with a market value under $20 billion, has sputtered at times to show meaningful user growth, and its revenue declined in the last quarter.

Before Snap went public, its fast growth as a startup and high engagement among young people impressed investors, while advertisers saw Snapchat as a way to reach users who weren’t tuning into traditional media or other social networks.

But since holding one of the largest U.S. IPOs in years last March, Snapchat has struggled to lure new users. Snap has sought to counter the slowing growth by recently overhauling the app to make it simpler to use, though the company hasn’t yet made the new design available to all users. The company also has been transitioning from direct ad sales to an auction-based model, in which advertisers bid on the amount they are willing to spend—the same method used by Facebook and Google.

That change had weighed on its business in the third quarter, because it wasn’t attracting enough ad buyers to its automated auctions. Snap said Tuesday that during the fourth quarter, more than 90% of Snap ads were bought on the automated auction, and the number of advertisers buying ads in the auction more than doubled from the previous quarter.

Snap’s gains don’t offer complete protection from the existential threat that Facebook and its collection of apps pose to its business. Facebook’s vastly deeper pockets have allowed the larger social-network to mimic some of Snapchat’s best-performing features, such as its photo and video montages, now a regular feature of Instagram Stories.

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“While Snap has been slow to ramp up auction-based buying, competitors are making their platforms easier and easier to buy,” said Jim Cridlin, global head of innovation at Mindshare, a unit of ad-agency giant WPP PLC.

Facebook said in November that Instagram Stories had 300 million daily users, doubling the total from the start of 2017. Snapchat, by comparison, added about 29 million daily users for the entire year.

Snap in the past quarter doubled down on some of the features that distinguish it from its larger competitors, including separating the social, messaging portion of its app from the media and publisher content as part of a redesign.

On a conference call with analysts, Mr. Spiegel voiced optimism about the redesign. He said early results indicate that users are spending more time watching “publisher stories,” the content that houses many of Snap’s premium ads. The redesigned app also resulted in users viewing ads longer and engaging with them more, he said.

“We believe that the redesign has also made our application simpler and easier to use, especially for older users,” Mr. Spiegel said.

Snap plans to make the new version of the app available to all users by the end of March.

The company also worked to improve the Android version of its flagship Snapchat app, which previously had been slower and had more bugs than the iPhone version of Snapchat. With the improvements, new Android users were nearly 20% more likely to stick around and become daily users than before the changes, Mr. Spiegel said.

Snap also said it had launched partnerships with wireless carriers in more than a dozen markets to reduce mobile bandwidth costs for Snapchat users.

The company now plans to rein in some of its growing costs. After hiring more than 2,400 people over the past two years, the company will “moderate” the growth of Snap’s team, Mr. Spiegel said in the prepared remarks.

“It has become clear that we can now unlock substantially more productivity simply by changing the way that we work and by continuing to build an inclusive and creative culture,” he said.

For the fourth quarter, Snap recorded a loss of about $350 million, or about 28 cents a share, compared with a loss of $169.9 million, or 20 cents a share, a year earlier. Analysts had expected a loss of $409 million, or 33 cents a share, according to a FactSet survey.

Write to Georgia Wells at Georgia.Wells@wsj.com

Appeared in the February 7, 2018, print edition as ‘Snap Shares Pop As Revenue Rises.’

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