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Snap said to leverage discounts with coupons and bonuses for advertisement

TimeOdd Stories - Snap

After a painful first-quarter miss, Snap, the parent company of the popular social app Snapchat, is looking to avoid the same fate in the second.

According to Digiday, Snap is working to drive new and increased business ahead of the end of its second quarter. To do so, the company is said to be cutting deals. In the words of the report, Snap is “looking to goose its ad business with offers of discounts and incentives to ad buyers.”

At least some of the discounts have an end date, it appears. The same report, citing “multiple agency executives,” notes that Snap’s proffered “bonuses, discount coupons and media credits for ad buys” are tied to the close of the second quarter. If the incentives work as likely intended, Snap could book new top line inside the current quarter that might help it meet or best market expectations.

Of course, incentives are not new, and potentially using discounts to drive growth is not something inherently bad. Snap declined to comment on the purported deals.

After its first-quarter miss, Snap’s share fell steeply, erasing much of the company’s post-IPO gains. Snap, which went public at $17 per share, traded as high as $29.44. It’s worth $21.30 today. Therefore, it is not surprising that Snap wants to avoid another embarrassing earnings miss. And to see the company allegedly turn to discounts with expiration windows is not an utter shock.

There is a bit more to the story, however, that we should understand by viewing Snap’s first quarter’s results inside of proper historical context.

Snap’s first quarter

Grounding Snap’s discounting push are its first-quarter results: The company grew rapidly, lost billions and missed expectations on both ends of its line. Snap reported first quarter revenue of $149.65 million. The street had anticipated a $157.98 million tally.

The company was expected to be deeply unprofitable in the quarter, due in part to one-time share-based compensation expenses. Even so, Snap bested the market’s expectation of a $1.92 per share loss with a steeper $2.31 per-share deficit.

And finally, Snap’s growth in daily active users, or DAUs, fell 2 million under the expected tally of 168 million.

That is broad context for why Snap may be pushing hard to ensure that it doesn’t miss again in the second quarter. A similar setback to its share price will put it either at or below its IPO price, a dramatic repudiation of the young company.

Second quarter dreamin’

As such, Snap must not miss when it reports its second-quarter results. But there is something lurking beneath the firm’s first-quarter miss that is interesting for us to consider: seasonality. Or perhaps more clearly: too much seasonality, and too soon.

In its S-1, Snap noted that it seasonality impact its business. That fact surprised no one. Ad-based businesses often see more sales during the fourth quarter when holiday buying cycles push consumer spend up. Brands, naturally, want a chunk of those dollars, and they spend to get them.

Snap’s fourth quarter was gangbusters, with the firm reporting $165.68 million in revenue, up from $32.72 million during the fourth quarter of the preceding year. If the sheer magnitude of growth between Snap’s results compared to the year-ago period surprises you, bear in mind that Snap is a very young business, with fewer than four quarters of positive gross margins under its belt, including the first of this year.

The company’s year-over-year results were impressive. But also notable was the firm’s history of continuing to grow sequentially — that is, from one quarter to the next — despite the impact of seasonality. More simply, through the 2015 holiday cycle, Snap’s revenue grew sequentially in the first quarter of 2016 compared to the seasonally-amplified fourth quarter of 2015.

The company generated $32.72 million in revenue during the fourth quarter of 2015 and $38.79 million in revenue during the first quarter of 2016. That gain was smaller than other sequentially-derived revenue gains listed in its S-1, but it showed that, at the time, Snap was growing so quickly that even the impact of seasonality couldn’t knock it off its upward sequential path.

Its forward momentum was greater than the potential for a slow first quarter, compared to the expectedly hot preceding fourth quarter. The company failed to repeat the feat in the first quarter of 2017.

New year, new results

If you recall, Snap’s first quarter brought in $149.65 million in revenue. And, as we listed a moment ago, Snap’s fourth quarter of the preceding year saw $165.68 million in top line. The second figure, from the earlier quarter, is larger than what the company reported in the first quarter. That’s a sequential decline in revenue.

Why do we care? Because as we try to understand the company’s first-quarter miss and its rush to cement the second quarter, we need to have the company’s history in mind. And, of course, historical analogs.

After all Snap, for all its hype, is another social company that sells ads. That’s not precisely new, though Snap is certainly, from a feature perspective, different than Twitter, for example. And, until recently, it was differentiated from products inside the Facebook orbit.

This brings us to a question: Is it normal for a company of Snap’s age to see seasonality impact its revenue in terms of driving its sequential revenue down? Let’s ask Ben Thompson.

Thompson, following Snap’s results, noted on Stratchery that the historical record is not overly kind to the company in this area. Thompson looked at the past results of Google, Facebook, Twitter, and Snap in the following way: After one of the companies started to grow at “>100% […] year-over-year,” how long did it take for the firm to see a seasonally bolstered fourth quarter followed by a sequentially smaller first quarter?

Google won with nine years. Facebook and Twitter both rocked four. Snap, using Thompson’s results, made it just one year.

The obvious inference from the difference is that Snap’s business is operating in a different fashion than the other listed companies, two of which are in its social space.

Its quicker-to-declines results are hard to read positively, except the following perspective: Snap grew so quickly that vetting it against the results of historically similar companies is silly. That sort of argument works for private companies that want to present adjusted EBITDA as profit and other such silly things. We can discount it.

Investors’ expectations

Spry readers will have caught our inconsistency by now, so let’s address it.

That Snap’s revenue fell from the fourth quarter to the first is simple. But, if we compare investor expectations for the first quarter to what happened in the fourth, the market actually anticipated the decline. Bringing the numbers back to you here, investors expected Snap to report $157.98 million, which is still a lighter result than the firm’s fourth-quarter sum.

So, investors were, in fact, ready to allow Snap to snap its record of sequential revenue growth regardless. Again, interpretation is yours, but I have a hard time finding the inordinately bullish in that fact.

All this brings us back to Snap’s second quarter sprint, which takes on extra weight in light of the preceding. Snap not only fell behind historical antecedents’ results but fell under the already low bar that investors set for it, regarding sequential revenue growth consistency.

That’s doubly not good.

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Written by TimeOdd

TimeOdd is a leading technology media property, dedicated to obsessively profiling startups, reviewing new Internet products, and breaking tech news.

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