Snap’s Revenue Growth Slows Drastically in Q2 2022

Snap Inc. saw revenue sputter a bit in the second quarter of 2022, tallying $1.111 billion, up 13% from the same quarter last year. The company said in its letter to investors that revenue decelerated by 25 percentage points from the first quarter of the year, occurring throughout the quarter, across both brand advertising and direct-response advertising, although the latter performed better. Snap wrote, “From 2018—our first full year as a public company—through the end of 2021, our revenue grew at an average compound annual rate of more than 50%. The rapid growth of our top line has been fueled by our fast-growing community, deep engagement with our platform and a robust advertising business that has driven measurable returns for our advertising partners. However, over the past year, a series of significant headwinds have emerged that have disrupted this momentum.” Insider Intelligence principal analyst Jasmine Enberg said in an email, “It’s clear that the challenging economic environment continues to put pressure on Snap’s business. Snapchat has many brand advertisers, and it is brand advertising—particularly on experimental ad formats like augmented reality—that tends to go first whenever marketing budgets are cut. Snap is also still reeling from the impact of Apple’s privacy changes, which have disproportionately impacted performance advertisers, creating a one-two-punch to its entire ad business.” Snap posted a net loss of $422 million for the period, up from $152 million in the second quarter of 2021, and its adjusted EBITDA (earnings before interest, taxes, debt and amortization) plunged to $7 million from $117 million in the year-ago period. Snapchat saw an 18% year-over-year jump in daily active users, to 347 million, and it said DAUs rose sequentially and year-over-year in North America, Europe and the rest of the world. The company wrote in its letter to investors, “While we are excited about the progress we have made in terms of community growth and engagement, demand growth on our advertising platform has slowed significantly. The combination of macroeconomic headwinds, platform policy changes and increased competition has limited the growth of campaign budgets. In some cases, advertisers have lowered their bids per action to reflect their current willingness to pay. For example, in some industries where topline growth remains strong, but businesses are experiencing input cost pressure due to inflation, we have observed reduced marketing spending and lower bids per action. In certain high-growth sectors, businesses are reassessing investment levels amid the rising cost of capital, which is further reflected in campaign budgets and the level of bids per action.” Snap said it sees room for growth via its direct-response advertising platform, but this will rely on three key priorities: improving its privacy-preserving first-party measurement tools, such as advanced conversions and estimated conversions; ensuring that its ad performance is represented well in advertisers’ preferred third-party measurement solutions; and continuing to invest in ranking and personalization. Enberg wrote, “Snap is well-positioned to capitalize on its AR capabilities in the long term. While AR is still niche as an advertising and commerce tool, it appeals to Snapchat’s core user base. Snap users are clearly loyal to the app, but engagement growth is now coming more from the public-facing areas like Spotlight and publisher content. By focusing on driving engagement in those areas, Snap will be able to retain and attract eyeballs, and ad dollars will follow.” Snap touted the debut of subscription service Snapchat+ in June and the release of Snapchat for the web earlier this week, but it did not share any specifics, and reaction was mixed among analysts. Application analytics provider Sensor Tower reported that Snapchat tallied roughly $6 million in in-app spending in the three weeks following the debut of Snapchat+, up a whopping 136 times from $44,000 in the same three-week period (June 8 through 28) last year, with the monthly option proving to be more popular than the 12-month plan. But Forrester vice president and research director Mike Proulx cautioned in an email, “Revenue diversification won’t happen overnight. Snapchat’s premium subscription play isn’t likely to gain much traction in its early days despite the company’s efforts to differentiate the service with features like desktop messaging and video calls. Consumers were already facing subscription overload, and now they’re being even more discerning over their spending. An additional $3.99 per month is hard to justify when heading into a possible recession.” The company also revealed in its letter to investors that co-founder and CEO Evan Spiegel and co-founder and chief technology officer Bobby Murphy signed agreements to remain in their roles through at least Jan. 1, 2027, in exchange for $1 per year and no equity compensation, and the board of directors agreed to a stock split if Snap’s class-A share price reaches $40 apiece within the next 10 years. Snap projected that DAUs would rise to approximately 360 million at the end of the third quarter, and while it said revenue was roughly flat on a year-over-year basis thus far in the third quarter, “Forward-looking visibility remains incredibly challenging, and it is unclear how the headwinds we observed in the second quarter will evolve as we move through Q3. Given this, we do not intend to provide financial guidance for the third quarter.” The company wrote in its letter to investors, “The second quarter of 2022 proved more challenging than we expected. Revenue grew 13% year-over-year to $1.11 billion, which resulted in adjusted EBITDA of $7 million and free cash flow of negative $147 million. DAUs grew to 347 million, an increase of 54 million, or 18% year-over-year in the second quarter. We also observed a number of encouraging engagement trends across our platform, including growth in overall content engagement. While the continued growth of our community increases the long-term opportunity for our business, our financial results for the second quarter do not reflect the scale of our ambition. We are not satisfied with the results we are delivering, regardless of the current headwinds.” Proulx took a similar tone, writing, “While the platform’s user base remains strong, Snap’s ad-centric model is no longer a sure bet and is especially volatile heading into a period of economic headwinds where marketers are sure to pull back their ad spend.”

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Snap’s Revenue Growth Slows Drastically in Q2 2022

Both brand and direct-response advertising were curtailed by headwinds

David Cohen

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