Snap surges 25% in extended trading after signs that its Ad revamp is finding an audience

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Snap Inc. offered positive signs that its efforts to revamp its digital advertising business are gaining popularity with marketers — boosting revenue and providing stronger competition with powerhouses Google and Meta Platforms Inc. The shares surged more than 20% in extended trading.

Sales will jump as much as 18% to $1.26 billion in the period ending in June, the company said Thursday in a statement. Analysts, on average, projected $1.21 billion.

Chief Executive Officer Evan Spiegel has reshaped the company over the past two years, downsizing headcount and eliminating projects that don’t boost revenue or user growth. At the same time, Snap has reworked its advertising business, introducing new ways to target and measure ads on the Snapchat app, and added new direct-response offerings. While those changes initially dragged on revenue, the latest results show the modifications are working.

“Years of diligent work are beginning to pay off for Snap’s ad business,” said Max Willens, senior analyst at Emarketer. With the changes it has made and the increase in marketers coming to the platform, “Snap appears to be developing some credibility as a platform that can deliver.”

The company reported first-quarter revenue of $1.2 billion, a 21% jump from the period a year ago, when Snap was making wide-ranging changes to its digital ad offerings. Analysts, on average, estimated $1.12 billion.

Snap posted adjusted earnings before interest, tax, depreciation and amortization of $45.7 million, compared with less than $1 million a year earlier. Analysts projected a loss of $67.6 million.

The shares reached a high of $15.04 in extended trading after closing at $11.40 in New York. The stock has declined 33% this year. Snap’s results came the same week that the US government moved to ban or force the sale of a key competitor, ByteDance Ltd.’s TikTok.

Snap has focused intently on competing more closely with the likes of Meta’s social media sites and Alphabet Inc.’s Google by expanding direct-response ads, which prompt viewers to take an immediate action like make a purchase or subscribe to an email list. The company said it’s finally seeing an acceleration in demand, with revenue for those offerings increasing 17% from last quarter.

That’s also lured smaller advertisers to spend money on Snapchat, with direct response ads helping to broaden out the base of their advertising business. The number of small- and medium-sized businesses advertising on the platform rose 85% compared with a year earlier, the company said in a letter to investors.

“The value we provide our community and advertising partners has translated into improved financial performance,” Spiegel said in the statement. “Our large, growing, and hard-to-reach community, brand-safe environment, and full-funnel advertising solutions have made us an increasingly important partner for businesses of all sizes.”

The company said users spent 125% more time last quarter watching Spotlight, its scrollable feed of videos that offers a similar experience to TikTok. With the possibility that TikTok may be banned in the US, investors will pay close attention to whether Snapchat and its peers will see any benefit in the coming quarters.

Snapchat recorded 422 million daily active users in the quarter ended March 31, a gain of 10% from a year earlier. The company projected 431 million users in the current period. Both measures beat analysts’ average estimates.

Santa Monica, California-based Snap has also looked to its users for new sources of revenue. The company’s subscription offering, Snapchat+, had more than 9 million paying users in the first quarter – triple the number from last year.

“The most important strategic priority we set out for 2024 is accelerating and diversifying revenue growth,” Spiegel said on a conference call after the results.

The company has continued investing in machine learning, augmented reality and artificial intelligence technology to help recommend the right content to Snapchat users and improve its digital ad offerings. That type of computing requires spending for tech infrastructure, and Snap gave full-year guidance on that expense for the first time. The company expects to spend 83 cents to 85 cents per user each quarter for the remainder of the year.

Snap posted a net loss of $305 million in the first quarter, a 7% improvement from the period a year earlier. Earnings, excluding some items, were 3 cents a share compared with analysts’ estimate of a loss of 5 cents.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow