What’s Driving Snap’s ARPU Expansion?

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Snap (NYSE:SNAP) published its Q4 2018 results on Tuesday, posting a smaller than expected loss while beating expectations on revenues. The company’s revenues for the holiday quarter grew by 36% year-over-year to $389.8 million, while its net loss shrank from $350 million in the prior year period to $191.7 million. Below, we take a look at some of the trends that impacted the company’s earnings and what they could mean for Snap going forward.

We have created an interactive dashboard analysis on what to expect from Snap in 2019. Users can modify any of our forecasts and drivers to arrive at their own estimates for the company’s revenue. We note that the dashboard is not yet updated for 2018 actual figures.

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Snapchat stabilized its daily active user base at 186 million users after two straight quarters of sequential declines after the company’s poorly received app redesign. While the company’s base of iOS users rose, its Android user base has been on the decline and the company noted that it was rolling out a rebuilt version of its Android app, which offers better performance and a more streamlined experience. While Snap didn’t discuss future growth rates, it said that it does not anticipate a sequential decline in its user base over the next quarter.

Snap’s progress on the ARPU front was encouraging, with the metric rising by 37% year-over-year to $2.09, driven primarily by growth in markets outside of North America (Europe up 57%, Rest of World up 120%), where the company’s shift to self-serve ads is enabling it to enter new markets more quickly. Under this model, advertisers of all sizes can buy and manage ad campaigns on Snapchat, without having to go through Snap’s ad sales team. Snap’s redesign also appears to be driving the ARPU expansion to some degree, as the new layout emphasizes premium content, and the company noted that about 30% more users were watching its publisher stories and shows every day.

Can Snap Achieve Profitability In 2019?

Snap has an internal goal of achieving profitability in 2019, and the company has been making reasonable progress on this front. Snap’s gross margins rose to about 48%, compared to 36% in Q4 2017 and 36% in Q3 2018, driven by the growing revenue base as well as the company’s move to improve efficiencies, by lowering infrastructure costs by optimizing bandwidth usage on the Snapchat app. The company noted that its operating expenses for the quarter also declined by 9% year-over-year and 3% sequentially, as it witnessed declines in its R&D as well as SG&A driven by lower employee-related expenses. It’s likely that the increasing mix of automated ad sales is also helping the company keep costs low.

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