Where Does Snap Go From Here After Rough Q1?

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Snap (NYSE:SNAP) published a rough set of Q1 results on Tuesday, significantly missing market expectations on user growth, with revenues also coming in below street estimates, driven by continued backlash over the company’s recent app redesign and weaker ad rates. Below we take a look at some of the key trends that are impacting the company and what to expect going forward.

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Snap added just about 1 million daily average users (DAUs) in North America over Q1, while its Europe and Rest of the world segments together added about 3 million users, taking its average user base over the quarter to 191 million. This is well below the 7 million net additions expected by analysts surveyed by Factset. Much of the slowdown is attributable to Snap’s recent redesign, which did not go down well with its core user base, while also causing some high-profile celebrity user defections from its platform. Users have said that the app’s user interface is unwieldy compared to the older app, with the focus appearing to be more on advertisers rather than users. Moreover, the company also noted that its DAU metric actually declined in March, falling below the 191 million quarterly average. While Snap is working on optimizing the new design, the company still faces mounting competitive pressure from Facebook’s photo-sharing app Instagram. Instagram has been making deeper inroads into Snap’s core functionality, allowing developers to create more AR tools such as face filters, which were popularized by Snap.

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Snap’s revenues grew by just about 54% year-over-year to $230.7 million, while they declined by almost 20% compared to the holiday quarter. While marketers typically spend more over the holiday quarter, these seasonal impacts are usually less visible for younger companies, meaning that Snap’s sequential performance was also disappointing. While Snap said that its engagement levels remained strong (30+ minutes per day), with total ad impressions also posting healthy growth driven by its shift to programmatic (95% of impressions were served programmatically in Q1) overall Snap Ad pricing, excluding Story Ads, was down by roughly 65% year-over-year and by about 20% sequentially. Snap has indicated that it expects its growth rates to slow down significantly over Q2 compared to Q1 levels.

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