Snap Inc (SNAP) USD0.00001 A

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Revenue in the first quarter rose 38% to $1.1bn, driven by a 17% increase in average revenue per user to $3.20 and an 18% rise in daily active users (DAUs) to 332m.

The group reported a $271.5m operating loss, an improvement from last year's $303.6m loss, despite a 24.3% rise in costs.

Shares were broadly unchanged in pre-market trading.

Our view

It's encouraging to see that both user numbers and average revenue per user are on the rise, but profits didn't climb as quickly as the market had hoped. Snap's bumping up against the same issues as Facebook, with Apple's privacy restrictions and a pullback in advertiser spend weighing on progress.

The good news is that Snap's doing a pretty good job of making its platform appealing enough to spur on user growth. Ongoing investment in the platform has been driving this growth. Proprietary video content and augmented reality filters are improving the experience for users. A large, engaged audience spending an increasing amount of time on the app is essential if Snap's to attract advertisers, who are finding their budgets spread thin.

Crucially Snap's also investing in the backend tools that allow marketing teams to target and assess the effectiveness of their advertising dollars. This is an expensive endeavour, but once these costs are covered each new user will drop almost straight through to profits - it's a model that's worked well for competitors like Facebook, and one that Snap's on its way to replicating.

The latest iPhone operating system, iOS 15, makes it more difficult for advertisers to track ad performance. This lack of visibility has inevitably put off some spending. Together with thinning advertising budgets, this could make for a difficult environment ahead.

With operating losses narrowing, maintaining user growth is a key piece of the puzzle. Teenagers are a fickle audience - with an ever- present risk they vanish off to the next big thing. Advertisers are spoiled for choice when it comes to social media platforms, and the likes of Facebook and TikTok are formidable opponents.

Costs are also a potential obstacle. The group's free cash flow has turned positive, but that doesn't account for eye wateringly high share awards to employees. Stock options may be costless in cash terms, but they have a real effect on other shareholders by spreading any future returns more thinly. Add to that the fact ordinary shareholders have no voting rights and CEO Evan Spiegel controls a majority of voting shares, and governance could potentially be a real concern.

The latest results suggest that Snap is executing on its strategy. But competition, cost and governance concerns, together with a price to earnings ratio currently well above rival social media groups mean we remain wary of Snap.

The Share Research team is ceasing covering of Snap. This is the last update and house view HL will produce on this stock. You can still find out more about our thought on the Tech industry by signing up to our Share Insight email.

First quarter results

Revenue in North America rose 37% to $758.3m. This was driven primarily by a 31% increase in Average Revenue per User (ARPU) to $7.77. Daily Active Users (DAUs) increased 5% to 98m.

In Europe, revenue rose 43% to $162.1m, reflecting a 10% rise in DAUs to 84m and a 30% increase in ARPU to $1.93. Rest of World saw revenue increase 38% to $142.3m.

Free cash flow was down 16% to $106.3m and the group had a net cash position of $1.3bn. Snap spent $275.4m on share-based compensation.

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