Written by Norman Isaac Mwambazi

Snap registers first billion in sales but falls short of Wall Street expectations, blames Apple

Snap Inc. (ticker: SNAP), the maker of the photo messaging app Snapchat released its earnings report of the third quarter …

Snap Inc. (ticker: SNAP), the maker of the photo messaging app Snapchat released its earnings report of the third quarter of the 2021 fiscal year (Q3 FY2021) yesterday, Thursday, October 21, 2021, that was webcast live after market close.

In the report, Snap announced a net loss of $71.9 million, or Earnings Per Share (EPS) of 5 cents in Q3 FY2021, down from a loss of $199.8 million, or EPS of 14 cents the company posted in the same quarter last fiscal year. In this aspect, Snap beat Wall Street expectations of a loss of 10 cents a share.

The report shows that Snap made sales of $1.07 billion in Q3 FY2021, the first time the company has crossed the billion-dollar mark in revenue in a single quarter. However, this is lower than what Wall Street analysts surveyed by FactSet expected the company to earn in the quarter, which is $1.1 billion.

The company reported 306 million Daily Active Users (DAU) in Q3 FY2021, exceeding the Wall Street projection of 301.8 million. This represents a 23% rise in Snap’s DAU compared with the 249 million DAU the company reported in the same quarter 12 months ago. Snap’s Q3 FY2021 report said that the company expects to reach between 316 million and 318 million DAU in Q4 FY2021. DAU is the most important metric to social media companies.

Snap provided guidance for its Q4 FY2021 earnings, in which the company expects revenue of between $1.165 billion and $1.205 billion, and this was not received well by investors because it is lower than the $1.36 billion that consensus analysts expect the company to earn in the final quarter of this fiscal year, according to a FactSet poll.

In an interesting way, Snap blamed its lower-than-expected Q4 guidance to Apple Inc. (ticker: AAPL), and supply chain disruptions that the company believes will slow down its growth going into the holiday season, which is usually the season advertising companies earn the most. After this 65-minute earnings call, its share price fell as high as more than 20% in the extended trading session.

Snap had a good year, as its stock has gained 50% year to date, outperforming the benchmark S&P 500 Index (SPX) which has gained 21% in the same period. The company’s stock is currently trading at $59.62 a share, and it has a market capitalization of $94.21 billion.

According to Snap, Apple’s privacy changes that were rolled out in June and July on iOS devices affected its ability to target and measure its digital advertising, adding that these changes disrupted industry advertising norms and behaviours that had been designed on Apple’s unique identifier for advertising (IDFA) over the past 10 years.

Snap said that the alternative measurement solution that Apple provided to third parties did not perform to its expectation, so the company’s advert partners had a hard time measuring the performance of their advertisements on Snapchat for iOS, which in turn disrupted Snap’s advertising business. It is worth noting that the primary revenue stream is advertising so if any changes disrupt that stream, it hurts the company’s cash inflow.

While speaking at the earnings call yesterday, Snap Chief Executive Officer (CEO) Evan Spiegel described Apple’s privacy changes to iOS as a “frustrating setback that essentially rendered Snap’s customers’ tools blind”, but told analysts that the company is working at the scale necessary to navigate these challenges.

Apple aside, Spiegel also pointed out that the ongoing supply chain disruption and labour shortage in the U.S. have also dealt a blow to the operations of Snap’s partners as they cut back on their advertising budget to focus on more important aspects of their businesses. Spiegel said that they are also cautious of the holiday season fearing that “advertisers are uncertain their holiday supply would advertise.”

Speaking about the lackluster Q4 guidance issued, Snap Chief Financial Officer (CFO) Derek Andersen said that the above-mentioned “largely exogenous” challenges the company is facing make the provision of guidance challenging and complex, and he expects them to continue hurting Snap’s business throughout Q4 FY2021.

“The adoption of new measurement solutions will take time, and it is still not clear what the longer-term impact of the iOS platform changes may be,” Andersen said in the earnings call, adding that the clear picture will come after several months when advertisers will be able to fully implement the new measurement solutions the company is developing.

Snap is the first major social media company to release Q3 FY2021 earnings results, and they were closely watched by investors in the social media companies, and the data shows that digital advertising, which these companies highly depend on, has dropped in the quarter that ended on September 31, 2021, according to Wall Street analysts. 

On Tuesday, October 19, 2021, Snap launched a global creative studio codenamed “Arcadia” that brands will use to develop augmented reality advertising and experiences. Arcadia has already teamed up with mass media and telecommunications giant Verizon Communications Inc. (ticker: VZ), fast-casual restaurant chain Shake Shack Inc. (ticker: SHAK), as well as integrated media and entertainment company for professional wrestling World Wrestling Entertainment Inc. (ticker: WWE). These and more companies/creators will have access to Snapchat’s millennial and Gen Z audiences through Arcadia.

Spiegel said that Arcadia provides Snap with several exciting long-term opportunities as more than 200 million people engage with Augmented Reality (AR) every day on Snapchat for entertainment, education, fashion, and arts, even though the technology is still in its early development stage.

Snap is not the only social media company that saw its stock drop. Facebook Inc. (ticker: FB), which has been under scrutiny lately and even shut down for more than six hours over two weeks ago also saw its stock falling in the extended trading session by more than 6%. The same happened to Google’s parent company Alphabet Inc. (ticker: GOOG, GOOGL) in the same period. Twitter Inc. (ticker: TWTR), and Pinterest Inc. (ticker: PINS) also dropped in after-hours trading yesterday.