Snap reported first quarter results yesterday, April 23rd, after the closing bell and posted solid DAU growth. Below are the comments from analysts on the company’s announcement.
While we were not expecting a more meaningful recovery in users given the release of the Android app in 2Q19, this does place Snap in a better position to outpace our current assumptions for DAU growth. Snap specifically called out new Virtual Reality enhancements that allow users to engage with the world around them using filters. It also rolled out a new gaming platform which serves to bring on new users and keep existing users on the platform for longer periods. We have noted previously despite the +155% growth in ad impressions, SNAP is still serving less than half an ad per session and with the rollout of gaming and new filters we can assume that time spent will shift away from messaging and towards parts of the platform that are more easily monetized. We have increased our full year 2019 DAU estimates to 10.5 million for the year. We maintain our Outperform rating based on the following factors: 1) potential for better-than-expected user growth with a revamped Android app, 2) advertising revenue growth acceleration by 2H19 (or earlier) as Snap laps the balance of the reserved/programmatic transition headwinds, 3) Snap is a scarce asset that offers advertisers access to a coveted younger demographic.
SNAP’s 1Q revenue/top-end of 2Q revenue guide was 2%/1% better than our forecast with particular success in direct response advertising (spend doubling Y/Y). This is bullish as it speaks to SNAP’s ability to deliver ROI for its advertisers. SNAP also talked to the macro tailwind of increased Stories advertiser adoption/familiarity at other platforms, which we interpret to be Instagram.
Snap reported 1Q results ahead of expectations as solid DAU growth combined with cost efficiencies in operations and product led to narrowing operating losses. In the advertising business, management noted strength in both performance advertising (more than doubled YoY) and brand advertising, with opportunities to increase inventory in emerging products. On the product front, the company completed the rollout of its redesigned Android app, and new product (as detailed in their Partner Summit earlier this month) is a clear point of emphasis, with Games, the Snap Audience Network, and new Snap Originals programming coming online. Looking forward, management anticipates continued solid revenue trends, but increased frequency and depth of interaction on the platform could lead to increasing infrastructure costs per user, reducing the amount of revenue flowing to the bottom line. In addition, the company’s sales force is undergoing a reorganization (completed in the US, in process internationally) to a vertical-based structure from a regional model, which may lead to some short-term revenue disruption as accounts are transitioned. This quarter brought a number of encouraging data points, but the company is still on a long track to profitability. We’re keeping our Neutral rating and our target price goes to $10.
Snap reported upside to DAUs, revenue , and adj. EBITDA forecasts in 1Q:19, building on its momentum in recent quarters. With potential usage tailwinds like the Android update and Snap’s gaming platform not in numbers yet, coupled with growth in engagement with Discover content, we expect Snap’s DAUs to continue growing sequentially throughout FY 2019. Although Snap is executing a potentially disruptive sales organization restructuring during 2Q, the company’s ad products appear to be gaining traction with both large brands and direct response advertisers as they continue to grow in sophistication, building Snap’s active advertiser base and auction density. Snap’s plans to invest in marketing, content, engineering, and sales in 2Q to support its long-term strategic objectives could mitigate near-term operating leverage but we still believe the company can reach breakeven adj. EBITDA by 2021. We raise our Target Price to $13 but maintain our Hold rating on SNAP shares.
After 2 quarters of declining DAUs and a quarter of flat sequentially, SNAP returned to DAU growth with the highest sequential adds since 1Q18. Mgmt also announced that the updated Android rebuild has been made available to all users by the end of the first quarter, ahead of schedule (by year end). Revenue growth of 39% (vs 36% in 4Q18, and our est of 34%) was driven by strong growth in the US (+33%, 71% of rev) and Rest of World (+74% y/y, 15% of rev). Rest of World saw the largest net DAU adds of +2MM vs +1MM each for EU and North America.
Snap beat Street expectations for both the top and bottom lines, while showing positive user trends and 2Q19 guidance (at the midpoint, guidance is higher than current consensus). 1Q19 revenue and adj. EBITDA were $320.4M/($123.4M) vs. Street consensus of $305.7M/($144.0M), and a prior guidance range of $285-310M/($165M)-($140M). The bottom line beat was particularly notable given that it was the second quarter with over 100% flow through from revenue to adj. EBITDA, showing the model's material scale leverage. Revenues benefited from increasing advertiser adoption, greater reach into key demographics, and improving monetization, especially in North America.