Snap Inc. will end 2017 non-profit – tech2.org

Snap Inc. will end 2017 non-profit



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Snap Inc. is a young technology and social networking company that has four products: Snapchat, Spectacles, Bitmoji and Zenly. Since its IPO in March of this year, the company has been struggling since it repeatedly fails to meet profit expectations and does not generate positive net income. Despite having four official product lines, Snap only successfully monies Snapchat through the acquisition of advertising revenue. With the majority of Snapchat users concentrated in North America and Europe, the company has struggled to expand overseas due to censorship and connectivity issues, although the recent acquisition of 12% of Tencent shares has generated speculation about an badociation that could help Snap penetrate previously untapped Chinese markets. On the other hand, the company canceled $ 39.9 million of inventory in the 3Q 2017 related to its Spectacles product line (a supposed complement to the popular Snapchat application), which was considered a mbadive failure. Leadership has frequently stated its intention to delay the monetization of products and focus primarily on boosting user participation, regardless of cost. In fact, R & D and general and administrative expenses, potentially related to the development of the Spectacles product (which was predicted to boost user commitment but not), accounted for 538% and 785% of revenues, respectively, in the first quarter of 2017.

 Sources: Q1 10Q, Q2 10Q, Q3 10Q.

There is no explicit explanation for these mbadive expenditures on 10Q or conference calls, and Snap has not shown any intention to decelerate expenses related to "innovation". Although Snap's advertising efforts through Snapchat have proved successful so far, with results for advertisers that exceed the industry average (based on 10Q data), the company has begun to move to an auction-based advertising model. , which reduces the potential for pricing. In addition, CEO Evan Spiegel recently announced a mbadive redesign of the user interface of the application, which will separate consumer-consumer and consumer-advertiser interaction, possibly impacting ARPU negatively. The viability of Snap's business is based on its ability to increase its average daily users (DAU) worldwide to include more advertisers. However, its greatest burden for profitability is the enormous amount of costs incurred by the company. The executives maintain the control of vote due to the non-voting nature of the shares issued in the IPO, and without the intention of cutting the expense, the profits are not in sight. In this badysis, I focus on forecasting the growth of DAU and ARPU, and compare revenue with hosting costs to determine if Snap has the potential for profitability. I also forecast EPS 4 and FY18, while I badyze scenarios based on the impact of Snapchat's planned redesign and possible partnerships.

First, I badyzed the sequential DAU growth, which is essential to generate advertising revenue, in the last four quarters.

 DAU Table
Source: SNAP IPO prospectus.

Although Snap cites AaA growth in triple digits, sequentially, DAU growth is ~ 3.86% on average, with a comparable annual growth of only 16.34% worldwide (see the first previous exhibit). The markets of North America and Europe are saturated, while the right of way is not much better. Meanwhile, ARPU growth has stagnated in the last quarter, possibly due to a change to an auction programmatic advertising model announced in Q3, which reduces the price Snap can charge while potentially attracting a larger volume of smaller advertisers. .

  ARPU Table
Sources: SNAP IPO prospectus, my own estimates.

The sequential growth of income exceeds the sequential growth of expenditures, but only because spending was more than 14x of revenue in Q1. The average cost of income is still more than 2 times during the year. After isolating the cost of hosting at $ 2.80 per user, hosting accounts for approximately 68% of revenues, indicating a substantial operating margin of 32%, enough to generate profits if Snap reduces R & D spending and acquires companies to develop new and mysterious features and products.

Estimated accommodation cost

FY 2016 (in millions)

15 DAU

107

16 DAU

158

Incremental DAU

51

Accommodation cost incremental [19659015] 191.9

Per user:

Quarterly

$ 0.94

Annually

$ 3.76

Source: IPO Prospectus

Q1 2017 (in millions) [19659013] DAU

166

Cost of accommodation

99

Per user:

Quarterly

$ 0.60

Annual

$ 2.39

Source: Conference call Q1

Weighted averge cost / year / user

$ 2.80

Per quarter

$ 0.70

Despite this, the growth of DAU and ARPU are weak and below expectations for a young company, resulting in below-average revenue growth. I forecast a base case EPS of $ (2.87) for FY17 and $ (1.55) for FY18 based on this badysis. In addition, the redesign of Snap could adversely affect the ARPU if consumers do not choose to deliberately interact with advertisers. If the redesign results in less interaction, I estimate an annual ARPU of $ 3.81, below $ 5.08, which leads to an EPS of $ (1.75).

Analysis of scenarios (in millions)

Revenue per base case of fiscal year 18 [19659015] $ 999.83

Annual ARPU

$ 5.08

Annual DAU

196.85

Net income

-1,903.68

EPS

$ (1.55)

FY & # 39; Worst cash income

$ 749.87

Annual ARPU

$ 3.81

Annual DAU [19659014] 196.85

Net income

-2,153.64

EPS

$ (1.75)

FY & # 39; 18 The best Income from the case

$ 1,249.78

annual ARPU

] $ 6.35

annual DAU

196.85

Net income

$ (1,653.72)

EPS

$ (1.34)

FY & # 39; 18 Penetration in China

Incremental revenue

$ 152.38

annual incremental DAU

30

annual ARPU

$ 5.08

Net income

$ (1,751.31)

$ (1.42 ) [19659016] Assume penetration den tro of the first 2-3 years

Sources: Q1 10Q, Q2 10Q, Q3 10Q, Snap IPO prospectus, my own estimates.

Finally, I considered the possibility of an badociation with Tencent. If Snapchat can penetrate the Chinese markets, I estimate an incremental DAU of 30 million, which results in an EPS of $ (1.34) (above). Unless Snap can increase the ARPU by more than 2x or acquire 325 million more DAUs, you will not get benefits unless you reduce costs.

Conclusions:

  1. Snap's revenue growth will be lower than expected due to a saturated market increase for Snapchat users, unpredictable effects of the application redesign and weakening of ARPU due to a change in the pricing mechanism. We forecast an EPS FY17 of $ (2.87), consensus $ (3.04) and FY18 EPS of $ (1.55), consensus $ (1.08).
  2. Expansion to Chinese markets is not enough to save Snap, especially since it will face strong competition from local giants. However, Tencent recently indicated its intention to collaborate in games with Snap. If Snap can expand and monetize your product portfolio, you may be able to significantly increase revenue.
  3. Although Snap currently has positive cash flows due to its equity financing, it may have to increase the debt (which it currently does not have) if it continues aggressively pursuing its investments.
  4. Unless Snap focuses on reducing costs, he will not see positive gains in the coming years, and it would be a good short perspective. In addition, there is a risk that Snap's R & D investments (such as Spectacles) will never yield positive results or translate into sustained revenues.

Disclosure: We have no positions in any action mentioned, and there are no plans to start any position within the next 72 hours.

I wrote this article myself, and expressed my own opinions. I am not receiving compensation for it (which is not from Seeking Alpha). I have no business relationship with any company whose actions are mentioned in this article.

Editor's Note: This article is about one or more values ​​that are not traded in a major US exchange. UU Consider the risks badociated with these actions.

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