Snap Out of It
Q1 2022 results were solid and guidance for Q2 mitigates TikTok fears
Let’s just Snap (Ticker: SNAP) to a key question: is Snapchat impacted by TikTok?
The answer, based on 18% user growth in Q1 (and +13mn DAU guidance for Q2), appears to be a no. DAUs and engagement on Snapchat continue to grow, even as more teens are flocking to TikTok. So why is Snap thriving, while Facebook is under pressure? The answer was already provided by the company during its Q4 2021 earnings call:
“…augmented reality is a fully immersive experience that Snapchatters choose to engage with, versus something that is passive or served to them, and AR is now delivering a return on investments that is both measurable and repeatable…that's something that's incredibly important for Direct Response advertisers.”
Brands like MAC and Ulta use AR on Snap to engage with users via try-ons and Lenses, things that CANNOT be done on TikTok (at least not yet). This level of engagement is unique to Snap – it is active and communicative, not passive.
Deeper dive into Q1 2022 results:
Snap would have exceeded its revenue guidance for Q1, had it not been for the war in Ukraine. Direct Response advertising business – which accounts for majority of Snap’s revenue – grew almost 50% prior to the invasion (Fed 24) then dropped below 40%, ending the quarter with a growth rate of 43%. Overall revenue followed the same trend: pre-invasion at 44%, then dropped to 32%, ending with a blended growth rate of 38%.
In Q2 to date, revenue growth clocked in at ~30%, weighted down by uncertainties in the operating environment. But more significantly when looking at this number, Q2 2022 growth rate against Q2 2021 is skewed by the 116% year-on-year growth from Q2 2020 (pandemic low) to Q2 2021 (when ad dollars came back with a vengeance with reopening as tailwind). Looking at the estimated sequential growth from Q1 2022 to Q2 2022, it is guided to grow by 15.5% at the high-end. This is largely consistent with pre-pandemic trends, and reflective of strong growth, despite macro factors baked into conservative management guidance.
Snap continues to execute well in terms of user growth:
DAU grew by 18%. This metric is all-important, as Snap continues to grow its reach. Sequentially, it added 13 million users. More significantly, for Q2, it is expecting to add another 13 million users – no slowdown expected from TikTok competition
Snap grew (and retained) its North American users – this segment is the most important, since CPMs are the highest in this region. Europe is the second most important, and Snap continued to add users there as well
ARPU grew as well, with both North American and European ARPUs rising by more than 30%.
Engagement was high across multiple metrics. Snap proves its innovative prowess, consistently enhancing user experiences for Snapchatters via Maps, Discover, Spotlight, Lenses, Creator Marketplace, Stories, Games, Minis and more:
“Over 250 million Snapchatters engage with augmented reality every day, on average, across a variety of use cases including entertainment, fashion, and education. Over 250,000 creators have built more than 2.5 million Lenses, and Snapchatters played with Lenses created by our community more than twice as much this quarter when compared to Q1 2021…In Q1, overall time spent watching content globally grew on a year-over-year basis, driven primarily by growth in time spent with content in Discover and Spotlight…We continue to see growth in viewership of content on Discover, which has become a destination for credible and entertaining content for our community. For example, total daily time spent by Snapchatters 25 and older engaging with shows and publisher content on Discover increased by more than 25% year-over-year… Our content partners continue to find success on our platform, with six Discover partners reaching over 100 million global viewers in Q1… While still very early, we are encouraged to see that Snapchatters open Places from the Map more than twice as often this quarter when compared to Q1 2021. We also added a new way to help Snapchatters discover live events with the launch of our Ticketmaster Layer. Snapchatters can now browse Ticketmaster’s upcoming events on the Map based on what is happening nearby. We see incredible potential for innovation across our communications platform, which brings enormous value to our community by connecting people with their close friends and family.”
A key test for Snap in 2022 is to pivot its way out of measurement issues brought about by Apple’s iOS privacy related changes. So far, the signs are very good:
Rollout of privacy-preserving first-party measurement solutions continues to progress, with these solutions now enabled for advertisers representing more than 90% of Direct Response advertising revenue (was 75% in Q4 2021)
Initial results from advertisers (Snap cited beauty brand Nice One and sports betting company DraftKings) adopting these solutions have been promising
Work with ad agencies and partners resulted in upfront commitments for 2022 that are more than 60% higher than the total upfront commitments made in 2021
Snap is still a tiny player in the digital advertising world. Yet, it attracts a disproportionately larger share of eyeballs. There is still plenty of runway for growth, and AR is its key differentiating factor to carve out a larger piece of the pie:
“Today, we comprise less than 2% of the $210 billion US digital ad market and less than 1% of the $520 billion global digital ad market, while reaching nearly half of US smartphone users and more than 75% of 13 to 34 yearolds in over 20 countries… Our unique and innovative AR Lenses give our team a huge opportunity to attract advertisers across multiple verticals… AR (is) transforming ecommerce by increasing conversion rates. We believe that virtual try-on represents a massive opportunity to improve the way our community shops and experiences new products.”
On the cost front, Snap derives efficiencies from scaling its cloud infrastructure, driving its unit cost per DAU to $0.58, which is lowest ever for Snap as a public company. As a result, adjusted gross profit margin at 61% is much improved compared to Q1 2021 (47%). Expenses, on the other hand, grew faster than revenue in the quarter, due to increased headcount, higher travel costs and larger marketing outlays. Cashflows remain positive, lessening the need to raise further capital in the current market environment. Cash and marketable securities – in excess of $5 billion – provide further buffer to weather macro storms.
So what’s the conclusion from Q1 2022:
Biggest risk to Snap is not unique to the company – it is the macro environment which is impacting everyone dependent on ad dollars. Uncertainties from privacy changes appear to have narrowed, with Snap successfully pushing out different first-party measurement solutions to majority of its advertisers.
Snap is still growing its user base, engaging them with aplomb. There is no shortage of evidence on Snap’s ability to add (and keep) its young users happy on the platform. For as long as it can prove out measurable ROIs for advertisers, this is still a hypergrowth company. Near term revenue numbers may look like it is flattening out, but this is more due to the unusual topline numbers posted in 2020 and 2021, with various industry-wide pullbacks and pull forwards.
Looking out into the years ahead, with a steadily growing user base, rising ARPU (still a fraction of what other platforms are earning), relentless innovations with expanding AR engagements intersecting with shopping, and a unique platform reach into young demographics, Snap’s investment thesis is more than intact. No wheels are coming off, in spite of what doomsday scenarios are painted across the high-growth space these days.
(Author is a shareholder of Snap)
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