Snap’s earnings were a total car crash

Snap’s earnings were a total car crash

Snapchat released its first ever quarterly earnings report on Wednesday, and it was a total car crash.

You know Snapchat, right? People have a hard time describing it for some reason. I’ve seen it called an “ephemeral messaging service”, a “vanishing-messaging app”, or just a plain old “teen sexting app”.

I wrote about it a few weeks ago at the time of its IPO. Here’s my stab at a description:

Snap is the company behind Snapchat, a messaging app for phones. It was started by Evan Spiegel as a project for his Stanford University product design class in 2011.

The genius of Snapchat is that the messages disappear once they’ve been viewed once. This doesn’t sound like a big deal, but it’s important. It’s basically the reason why Snap is valued at $22.5bn today.

When messages disappear after they’ve been read, the whole vibe around communication changes. It gets less serious. There becomes less need to respond to the message, or engage with what you’ve been sent. It makes the conversations more spontaneous, more emotional, more silly. It makes Snapchat stand out from a busy field of messaging apps.

So, back to Snap’s terrible results. What was so bad about them?

No growth.

When I wrote about the Snap IPO, I said the company had two big problems.

The first problem was that Snapchat’s growth in users was starting to slow. It had exploded in popularity around the start of 2015, and ploughed ahead to the stage where there are 160m daily active users. The trouble was that at the time of the IPO, there were early signs that growth in daily active users was slowing down.

Investors who bid Snap up to a $22bn valuation had to have been betting that slowdown was just a blip. Because it’s very hard to make a case that Snapchat is worth all that money, if it’s not growing. In the scheme of things, 160m users isn’t big enough to build a sustainable advertising-based business.

This week we got an update on user growth. It seems that the numbers for early 2017 weren’t just a blip; the number of new users really is slowing down. The number for “daily active users” is growing at its slowest rate in at least two years.

Growth is a cure-all for software companies like Snapchat. Investors will forgive a software business any sin, so long as its growing. So long as there’s growth, there’s a chance of getting scale, and from there making money.

Take away the growth though, and you’re left with incredibly expensive shares in a relatively-small messaging app.

No business.

The plan for Snapchat has always been to do a Facebook on it: come up with an addictive app, capture peoples attention, then slap some ads on it. A conceptually simple plan.

The problem for Snapchat is that it’s having trouble shifting those ads.

Ad revenue – which is supposed to take off like a rocket, since Snapchat has already done the hard work of creating an addictive app used by 160m people a day – actually fell 10% compared to the previous quarter. Snap is putting that down to “seasonality”, ie the fact that ad spending tends to be a bit lower in the first quarter of the year.

But that’s weak beer. Once a social network “pulls the lever” and starts selling ads, money is supposed to come gushing in the door. It happened with Facebook, Instagram, LinkedIn and Twitter. But it hasn’t happened with Snapchat. Revenue is growing way more slowly than it should. And the company is burning cash – $155m this quarter.

So which is worse? That Snapchat isn’t growing or that it has no business?

If asked to choose, I reckon the Snapchat team would rather growth than ad revenue. Ads are fixable. But growth keeps the show on the road. It keeps the stock price high, which keeps his employees from jumping ship. Unless it can restart growth, Snap’s in a lot of bother.