Snapchat: 3 Things to Watch Ahead of Snap Inc Q2 Earnings

For Snap CEO Evan Spiegel, 2019 marked the beginning of a new upswing for the tech company he co-founded in 2011. Snap Inc., the parent company of Snapchat, is scheduled to report its second-quarter earnings Tuesday afternoon as one of the hottest companies of the year, with its stock price more than doubling since early January. That run has been spurred by the Los Angeles-based company returning to positive user growth last quarter and a second-straight quarter of better-than-anticipated sales. This time last year, Snap was in a tough spot, after a botched redesign prompted the hemorrhaging of millions of users during the second and third quarters of 2018. The tech company’s stock price took a beating, falling to about $5 per share a week before Christmas, a 63% drop from mid-July. Adding salt to the wound, Snapchat’s chief rival, Instagram, announced in January it had reached a milestone, with more than 500 million daily Stories users. For comparison, Snapchat — the creator of the popular pictures and video feature that comes with a 24-hour shelf life — has 190 million daily users. Will Snap continue its rebound or potentially slide back into the ditch it found itself for most of 2018? Here are three things to keep an eye on when Snap reports: How are Snap’s new games and shows performing? This will be the first opportunity to see if Snapchat’s new slate of original shows and games is paying off, after Spiegel unveiled the fresh lineup at Snap’s glitzy first annual “Partner Summit” in West Hollywood earlier this year. Unlike Facebook, which has leaned on big names like Tom Brady and Will Smith to lead many of its half-hour shows, Snap has bet on brief, 3-5 minute shows that lack the relative star power. In an interview with TheWrap in April, Snap original content head Sean Mills said that’s by design, since most users only spend a few minutes at a time on Snapchat. At the same time, Snap has rolled out an in-app gaming hub that features several multiplayer games. Expect to get a better sense if those bets have paid off. If its shows clicked, Snap could drive more ad revenue and time spent on the app — something else that also will lead to more ad dollars. Same goes for its gaming push. Goldman Sachs analyst Heath Terry, in a recent note to clients, indicated Snap’s gaming and content moves already are paying off. “Total app downloads for May, the first month reflecting these recent innovations, was a record 41 million (the previous record was 30 million from mid-2016), representing a stark reversal of what were otherwise multi-year lows in app downloads that the platform experienced through most of 2018 and early 2019,” Terry said. It’ll be worth seeing how much Snap has generated from the short ads that run between game levels. If Snap’s revenue takes another healthy leap on Tuesday, it’ll likely have something to do with either its new games or shows finding an audience — and its advertising partners taking notice. Where are users coming from? As always, user growth will be a key metric driving Wall Street’s reaction. But where Snapchat is attracting new users will be just as interesting to watch as whether it reports positive user growth for the second straight quarter. In April, Spiegel proudly boasted that Snapchat “now reaches nearly 75% of 13-34-year-olds” in the U.S., and 90% of 13-24-year-olds. “In fact, we reach more 13-24-year-olds than Facebook or Instagram in the United States, the U.K., France, Canada and Australia,” Spiegel said at Snap’s Partner Summit. More than half of Snapchat’s user base comes from the U.S., and about another 25% of users come from Western Europe. That’s where Snap’s updated Android app could pay dividends. To keep adding users, Snapchat can either attract more people age 35 and older at home, or grab a bigger audience abroad. Having a functional Android app is critical to international growth — something Snap will need to show as it moves toward a saturation point in the U.S. While Snap makes less off its international users — about $1 per user compared to $2.81 per American user — investors will likely overlook that trend, acknowledging the company is better off figuring out its ad strategy with more people in its fold. Analysts expect Snap to report 2 million new daily active users, bringing Snap to 192 million overall. Average Revenue Per User This ties back to Snap’s gaming and content push. Theoretically, Snap should be making more money off of its users who are spending more time watching shows or playing a game with their friends, since it doing so gives users more time to interact with Snapchat’s ads. Snap is expected to report $360.3 million in revenue and $1.87 in average revenue per user — which would be the company’s second-highest quarterly ARPU after Q4 2018. (It should be pointed out Snap’s strong Q4 ARPU had more to do with record sales, not its static user growth for the quarter.) There’s a chance, if Snap’s advertisers gravitated towards its new slate sooner than expected, Snap could even set a new company record. Spiegel set a company goal of reaching full-year profitability for the first time ever in 2019, but that still appears to be a year off. Snap, in its letter to shareholders in April, said it expects to lose up to $150 million during Q2. By posting strong ARPU results, Snap’s investors would likely overlook the company is trending towards not reaching Spiegel’s mandate.