Snap Reports Disappointing Revenues While Ads Decline; Stocks are sinking

(Bloomberg) – Snap Inc. Its shares fell more than 30% in late trading after reporting disappointing revenue in the holiday quarter, a sign that the Snapchat owner is still suffering from a decline in its digital advertising business.

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Fourth-quarter revenue rose 5% to $1.36 billion, below analysts' average forecast of $1.38 billion. Over the full year, sales growth was flat, “reflecting a challenging operating environment,” according to a letter to shareholders.

CEO Evan Spiegel has been leading the company through an extensive restructuring over the past two years, cutting jobs and terminating projects that didn't boost revenue or user growth. And it's not over. The Santa Monica, California-based company said Monday that it will reduce its workforce by an additional 10% this year in an effort to reduce bureaucracy and promote in-person collaboration.

Snap expected an adjusted EBITDA loss of between $55 million to $95 million in the current period — far exceeding the $33 million loss that analysts had expected.

Despite efforts to reduce reliance on social media advertising, Snap still relies on that market, said Jasmine Enberg, principal analyst at Insider Intelligence. This is where the company struggles to compete with Meta Platforms Inc, owner of Instagram and Facebook.

“Snap is a smaller, less important player for advertisers than Meta, and has struggled to build a strong ad business,” she said. Despite revenue growth in the fourth quarter, “the company's recovery has not kept pace with the big tech giants.”

Snap and Meta were severely affected by changes to Apple Inc's privacy settings. In 2021, making it difficult for advertisers to track iPhone users. Meta has bounced back, posting a 25% increase in sales in the fourth quarter, its biggest quarterly increase in two years, while Snap is still recovering.

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Snap has overhauled its core business to improve ad targeting and how it measures their effectiveness, while also increasing its direct response ad offerings.

In the letter to shareholders, the company said it was “encouraged by the progress we are making on our advertising platform,” and improving results for some advertising partners, but acknowledged that the conflict in the Middle East was a “headwind.” Snap said it achieved about two percentage points of growth in the fourth quarter.

Snap has tried adding new revenue streams — with varying degrees of success. Its subscription offering, Snapchat+, has already amassed 7 million paid users and has an annual revenue run rate of $249 million. This is a unique achievement among social media companies, which have mostly failed to convert users into paying subscribers. But its efforts to build augmented reality displays for retailers were deemed too complex, and that project was shut down last year.

Snapchat had 414 million daily active users in the fourth quarter, up 10% from the same period last year. Nearly half of those are in established markets such as North America and Europe, regions the company says it will now prioritize. It's a notable pivot for Snap, which has spent years devoting resources to building support for Android phones in emerging markets.

“We are shifting our focus more toward user growth and deepening engagement in our most profitable geographies,” Spiegel said in the letter. “Focusing on these initiatives will help us increase daily active usage of Snapchat, deepen content engagement, improve performance for advertisers, and ultimately accelerate revenue growth and increase free cash flow.”

The company said that more than 800 million people use the application globally every month.

Snap expected its revenue to range from $1.10 billion to $1.14 billion in the first quarter, an increase of up to 15% from the previous year. The pace of growth is in line with average analyst estimates, according to data compiled by Bloomberg.

In the fourth quarter, Snap reported a net loss of $248.7 million, compared to a loss of $287.6 million last year. That was below analysts' average estimate of $287 million. Earnings per share were 8 cents, compared to analyst estimates of 6 cents.

The company will incur costs of between $55 million and $75 million related to layoffs, most of which will be spent in the first quarter.

(Updates with analyst comments in fifth paragraph.)

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