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Snap's delight at not losing users seems peculiar

Although by some measures the firm is on the right track, growth isn’t fast or steady enough in either users or advertising

Snap is crowing about not losing users but slow growth speed is more worrying. Bloomberg
Snap is crowing about not losing users but slow growth speed is more worrying. Bloomberg

The word of the moment for Snapchat is stability; that seems a tad overstated.

Evan Spiegel, CEO of parent company Snap, essentially declared on Tuesday that a year of tumult is over. (Maybe it’s two years of tumult?) The company stopped losing users in the fourth quarter, and Snap said the figures probably wouldn’t get worse in the three months ending in March. That’s good, but it feels odd for a company that’s supposed to be in rapid growth mode to crow about not shrinking.

Snap’s revenue in the fourth quarter was also better than the company and stock analysts had forecast, and it is showing progress in some of its profit metrics. Spiegel said he has the right leadership team to tackle some of the company’s thorny problems.

That all sounds good, and investors were relieved that Snap isn’t getting worse. Shares spiked about 20 per cent in after-market trading on Tuesday. It’s worth noting that even with that jump, the stock price is half the level of its 2017 initial public offering. Snap has been a disaster as a public company by almost any measure. Now it’s merely extremely messy, and it feels too soon to declare Snap is on the right track.

Growth isn’t fast or steady enough in either users or advertising. There wasn’t much word on Tuesday from Snap executives about two priorities that Spiegel declared for 2019: To boost the numbers of relatively older users - those older than 35 - and to expand its revenue growth rate. The company’s first-quarter revenue forecast implied as much as 34 per cent growth from a year earlier.

That would not be an acceleration. To be fair to Snap, it’s still getting its sea legs as a digital advertising seller, but that’s tough to do when competing with the twin hurricanes of Google and Facebook. Snap also said its first-quarter growth would be hurt by comparisons to last year, when there was an advertising bump from the Olympics.

Snap’s revenue in what it calls North America rose a relatively modest 23 per cent in the fourth quarter. For comparison, Facebook’s revenue in the United States and Canada rose 31.5 per cent in the same period, and Facebook’s revenue in the region is 30 times Snap’s domestic revenue. (Snap counts Mexico, the Caribbean and Central America with the US and Canada.)

Facebook is unusually good at making money, but Snap’s North America sales pace is slower than what you’d expect from a company valued for rapid growth.

It will be costly if Snap remains serious about boosting the number of older users, and if it wants to meet another stated goal of expanding its use outside of countries such as the US, the UK and France where it has a large base of users. Snap also plans to spend more money for programming in “Discover”, its section for short video shows from companies such as NBC and from celebrities or others with a large following on Snapchat.

Those kinds of investments seem to clash with another of Spiegel’s declared “stretch goals” - to generate profits this year. “Profits” are a relative term for Snap, which continues to bleed cash and will for as far as the eye can see. An improvement in free cash flow, for example, meant that “only” 69 cents of cash was incinerated for each dollar of sales in 2018. Progress is relative, but Snap is showing it may someday be a business that can stand on its own two feet. Operating costs for the quarter declined about 10 per cent.

There are other bright spots. Snap trumpeted improved use of its iPhone app, which is good news following a controversial redesign of its app that some Snap fans hated. The company said it has started to slowly roll out a new version of its app for Android phones. Snap has been promising forever to fix what has been a slow Android app that the company has blamed for wobbly user numbers dating back to its IPO. Snap is running out of excuses about its Android app, and the company must move with alacrity here.

The open question, however, is whether Snap can eat away at its losses, generate more revenue and land more users. It seems like an impossible combination, no matter how much stability there is in its ranks and in the company’s product development.

Snap for now remains what it has always been: a company that created genuinely novel ways for people to communicate and show their creative side, on which Snap attempted to graft Facebook’s business model but with significantly less competent management. Let’s wait to see whether Snap can keep a chief financial officer for more than a year. Let’s wait to see whether Snap’s Android app will actually launch in high volume. Let’s wait to see whether Spiegel can settle on manageable priorities. Let’s wait to see whether Snap can make itself a steady part of more advertising budgets.

Stability is welcome for Snap. But it’s definitely not mission accomplished.

Bloomberg

Updated: February 6, 2019 10:06 AM

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