Snap Missed Earnings Expectations, but Evan Spiegel Is Planning a Big Redesign

The company reports revenue of $208 million

Snapchat reported 178 million daily active users.
Illustration: Dianna McDougall; Sources: Getty Images, Snapchat

Snap may be building out a slick advertising business in hopes of competing against juggernauts like Facebook, Google and Amazon, but the media and messaging app continues to fall below Wall Street’s expectations. So, it’s building new versions of the app for Android and is planning a major redesign.

The newly public company announced its third-quarter earnings Tuesday, reporting that it made $208 million, which is down from analysts’ expectations of $237 million. However, the third-quarter revenue is a 16 percent increase from $182 million in the second quarter.

In terms of revenue by location, North America continues to be Snap’s biggest market, accounting for $167 million. Europe generated $27 million, and $13 million came from the rest of the world.

Snapchat said it has 178 million daily active users, adding 4.5 million from in the quarter. That 2.9 percent growth rate was down from Snap’s 4.2 percent and 5.1 percent growth rates in the previous two respective quarters. Some analysts had expected Snapchat to hit 180 million daily active users. More than 3.5 billion Snaps are created every day, up more than 40 percent over the same period a year ago.

“This quarter, we grew our daily active users at a lower rate than we would have liked, adding 4.5 million new users,” CEO and founder Evan Spiegel said during a call with investors. “This can be partially attributed to our decision to report our daily active users as an average over the entire quarter, where a strong September was offset by the more modest months of July and August. Ultimately though, we want to drive more user growth in 2018.”

Snap has spent the past year building out ad-tech pipes to its platform as well as measurement and reporting features. Per the company, 80 percent of Snap Ad impressions were delivered programmatically during the third quarter, up from 60 percent in the second quarter. Meanwhile, the number of advertisers buying ads via Snapchat’s auction grew five times, quarter over quarter.

The move to automated advertising has decreased cost-per-thousand impressions, or CPM, by 60 percent over the past year, which chief strategy officer Imran Khan hinted at during the call.

“As we transition more and more of our business to the auction, this had a meaningful impact on overall pricing,” Khan said. “While this diminishes revenue in the short term, it builds the foundation for long-term scalable revenue. As we onboard more advertisers and multiple advertisers compete for the same ad impression, we should see higher pricing.”

Spiegel also talked about some improvements the company has made for Android users while also acknowledging some of the app’s challenges.

Augmented reality is one area Snapchat is aiming to differentiate itself. After launching 3D Bitmojis, the use of World Lenses grew 20 percent.

Spiegel also spent a chunk of time talking about Android devices. Snap claims that since April it has worked out bugs in its Android version of the app, reducing the time that it takes to start the app by more than 20 percent. He added that Snapchat was used on more than 60,000 different versions of Android phones during the third-quarter.

Spiegel also revealed that Snapchat may get a major redesign and warned investors that the redesign could harm Snapchat’s ad business. Those new features will use machine learning to surface and discover content.

“One thing that we have heard over the years is that Snapchat is difficult to understand or hard to use and our team has been working on responding to this feedback,” Spiegel said. “As a result, we are currently redesigning our application to make it easier to use. There is a strong likelihood that the redesign of our application will be disruptive to our business in the short term, and we don’t yet know how the behavior of our community will change when they begin to use our updated application. We’re willing to take that risk for what we believe are substantial long- term benefits to our business.”

Spiegel also acknowledged that the company has not worked as closely with creators and influencers and hinted at possible upcoming rev-share programs for 2018.

“We have historically neglected the creator community on Snapchat that creates and distributes public Stories for the broader Snapchat audience,” Spiegel said. “Developing this ecosystem will allow artists to transition more easily from communicating with friends to creating Stories for a broader audience, monetizing their Stories and potentially using our professional tools to create premium content.”

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