That huge sigh of relief you heard earlier this month was Snap(NYSE: SNAP) investors exhaling over the message app's results not looking any worse than it did after reporting fourth quarter and full year earnings. And in some respects it actually looked even better than some expected.
The one item high on investors' list of things to look at was how many daily active users (DAU) Snap lost in the period, and the good news is the hemorrhaging had stopped. DAU was flat sequentially for the quarter at 186 million, though down 0.3% from last year. Considering it had posted two straight quarters of consecutive declines, this was an achievement.
Two women taking selfie
Image source: Getty Images.
Moreover, the quarter's adjusted EBITDA -- earnings before interest, taxes, depreciation & amortization -- losses of $50 million was a 68% improvement over the year-ago period, which led CEO Evan Spiegel to declare Snap was "substantially closer to achieving profitability." While that means Snap failed to attain Spiegel's "stretch goal" of being break-even in the fourth quarter, it still puts the company within striking distance of his other target: being profitable for all of 2019.
But before you begin celebrating -- and with Snap's stock up over 30% since the report, it seems many of you have broken out the bubbly -- there's still a lot of work to be done, and with some of the plans Snap has unveiled, things could go horribly awry again.
Still coming up short
That Snap didn't lose more users this quarter is an improvement, but that doesn't mean it's back on the road to health again. For one, even though DAU was flat from last quarter, it's the first time the growth rate has turned negative year over year.
Chart of Snap Daily Active User growth
Data source: Snap quarterly SEC filings.
Spiegel had delineated a few other stretch goals for 2019, including accelerating revenue growth and attaining full-year positive free cash flow, but based on the fourth quarter's results, it's going to be a long slog.
Revenue jumped 36% for the period to $389.8 million, and it guided first-quarter revenue growth to between 24% and 34%. Considering revenue grew 54% in the first quarter of 2018, that's not an acceleration on a sequential or year-over-year basis.
Although Snap's free cash flow position improved by $10 million this quarter, to negative $149 million, that kind of incremental improvement won't be enough to achieve his goal, either. Considering Snap is projecting it will lose between $140 million and $165 million in the first quarter, profitability seems as if it will remain elusive.
In search of a permanent fix
And all that is if Snap doesn't screw things up again, which is by no means guaranteed. It is undertaking a review of Snapchat to see whether making public posts permanent and not letting users hide behind a screen name can improve the app's attractiveness to advertisers. They've reportedly found the disappearing nature of the messages difficult to work with, and publishers are reluctant to include Snap content because it will soon disappear.
While advertisers might like permanent content, Snap could find its users are a completely different story, as the original charm of the platform was that its content didn't hang around very long and users could be anonymous. After one disastrous overhaul, another major change could send them scurrying for the exits.
Android still AWOL
Snapchat also has other structural problems that it needs to repair, like the lack of an effective Android version. One has been promised for several years now but has not materialized.
Arguably the most overlooked point in the fourth quarter was Snapchat's increasing its number of daily active users using the app via Apple's iOS sequentially and year over year. That's key because since it also said its DAU remained flat, it means Snap is losing boatloads of Android users.
Snap's Android problems extend way back to well before its IPO and it continuously promises to fix the problem, but none has ever materialized. Spiegel says "early testing" of a fix shows signs of encouragement, but that means Android users still have a long wait ahead of them and Snap will continue to hemorrhage Android users until one is offered.
Worse, its prospects for international growth -- where Spiegel is especially targeting users aged 13 to 34 -- are diminished because Android accounts for three quarters of all smartphone sales in five major markets in Europe, according to data from Kantor's Worldpanel Comtech survey. Android has a 90% share of the market in Spain; 82% in Italy; 76% in Germany; 75% in France; and 59% in the U.K.
Snap has undoubtedly lost the race to Facebook's Instagram as a result, where one-quarter to one-third of the population in those countries use the rival social media platform.
Better isn't good
There's still too much to repair at Snap to declare the messaging platform has reached an inflection point, and many things could actually accelerate a second leg down.
The fourth quarter of 2018 was an improvement in certain respects, but it shouldn't be classified as "good." I'd put the cork back in the champagne bottle till Snap shows concrete evidence it can actually execute on making Snapchat profitable without scaring off its user base.
Randi Zuckerberg, a former Director of Market Development and Spokeswoman for Facebook and sister to CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple and Facebook. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.
