Snap’s $2.2 Billion Loss Caps Bumpy First Months as a Public Company

Snap’s $2.2 Billion Loss Caps Bumpy First Months as a Public Company

Traders working the floor at the New York Stock Exchange during Snap’s initial public offering on March 2. Credit Bryan R. Smith/Agence France-Presse — Getty Images Fotografia de: Bryan R. Smith/Agence France-Presse — Getty Images

SAN FRANCISCO — When Snap listed its shares on the New York Stock Exchange in March, the floor of the exchange was festooned in the company’s signature yellow. Family members of Snap executives posed for photographs; some wore the company’s video-recording Spectacles. And as Snap’s two 20-something founders rang the opening bell, the crowd — including one of the founder’s fathers and a supermodel fiancée — applauded.

Yet just two months into its life as a public company, Snap’s celebration may already be ending.

On Wednesday, Snap, the parent of the messaging app Snapchat, reported earnings that missed Wall Street expectations in almost every regard. Not only did Snap record a $2.2 billion loss for the first quarter, its revenue was lighter than expected, and the company disclosed that its user growth was decelerating sharply. Investors punished the company, sending its stock down more than 25 percent in after-hours trading.

The results represented a bumpy start for Snap after its much-celebrated initial public offering, the biggest for a technology company in recent years. Snap’s earnings illustrate how difficult it is for smaller social media companies to compete in the age of Facebook, the social network run by Mark Zuckerberg, which has sucked up more than two billion people worldwide and has made the size of its network a primary selling point.

For Snap, the challenge is tricky because the company approaches social networking differently. Instead of emphasizing the number of people users know, Snapchat focuses on fewer connections and the quality of friends on the network. Yet with Wall Street and others using Facebook as a benchmark, the comparisons for Snap are tough. For now, Snap looks more like Twitter, the social media service that has had rough times because of anemic user growth.

Snap’s weak results so soon after its I.P.O. appeared to shock many — even though it had warned investors that owning Snap stock would not be an easy path to riches. In its I.P.O. filing, Snap had highlighted slowing growth and huge losses that were not expected to end. Snap’s executives had cautioned that results would be “lumpy and unpredictable.”

Evan Spiegel, Snap’s chief executive, had said, “One of the challenges we’ve encountered over time is explaining to people why bigger isn’t better.”

But the excitement over a social media entity with young founders (Mr. Spiegel is 26; his co-founder, Bobby Murphy, is 28), an even younger user base and quirky digital advertising products had drowned out those warnings.

“They told us all of this,” Brian Wieser, an analyst at Pivotal Research, said of Snap’s executives. “With Snap in particular, there’s always been a greater fool element — a lot of people bought it because they thought someone else would pay more for it. That’s impossible to ignore.”

Snap’s $2.2 billion loss for the first quarter, which included a $2 billion expense related to stock compensation, was far above its $104 million loss a year ago. Revenue was $149.6 million, almost four times as much as a year ago, but fell short of Wall Street estimates of $158.6 million.

And while Snap said its number of daily users had increased to 166 million in the first quarter, up 36 percent from a year ago, that was down from 53 percent growth in the first quarter of 2016.

Snap’s shares plunged in after-hours trading to about $17.27, just above the company’s I.P.O. price of $17 a share.

Snap emphasized on a call with analysts on Wednesday that people were spending more time than ever on Snapchat, more than 30 minutes a day, seeking to convince investors that loyalty to its products matters more than the size of its user base.

“We still have a lot of work to do, but I’m excited by the amount of progress we’ve made in such a short time,” Mr. Spiegel said. He added that people were highly engaged with Snapchat, with users creating on average more than three billion snaps, or short pieces of content, every day, up from 2.5 billion the previous quarter.

Ali Mogharabi, an analyst at Morningstar Research, said Snap’s argument was that “if users are spending more time in the app, no matter the growth rate, that by itself could attract advertisers.” Still, he said, “at this early stage, growth in both user time spent on the platform and in the number of users are both very important.”

Snap’s results were also viewed as a referendum on whether it would be able to fend off Facebook, which wanted to buy Snap in 2013 and is trying to crush the young company. For years, Snap — which is based in Venice, Calif., outside the orbit of Silicon Valley companies — had turned certain social media norms on its head by pioneering features like disappearing messages and add-ons like lenses and filters.

In the last year, Facebook has copied some of Snapchat’s features and inserted them into its apps, including Instagram and the messaging app WhatsApp. Given Facebook’s immense size, the moves have created concern that Snapchat will not seem sufficiently different and attractive to users.

When asked during the call on Wednesday about whether he was worried about Facebook, Mr. Spiegel said innovative companies needed to “basically enjoy the fact that people are going to copy your products if you make great stuff.”

The issue of slowing user growth has been evident for Snap for some time. The company’s average number of daily users grew by 48 percent in the fourth quarter of 2016, by 63 percent in the third quarter and by 66 percent in the second quarter, Snap said in its public offering filing.

In March, Snap said its financial performance would depend more on its “ability to elevate user engagement” if the number of users did not grow significantly. The company generates most of its revenue by selling space to advertisers who want to reach a young audience that spends a lot of time looking at images and stories in the app.

Snap is also spending handsomely to create products to engage users. It spent $805.8 million on research and development in the first quarter, 28 times higher than a year ago. Marketing costs skyrocketed to $219.7 million, from $14.7 million a year ago.

Snapchat still has an ace: Its users are demographically attractive. Many are between 18 and 34, a group that is particularly alluring to advertisers, said Sean Corcoran, executive director for the Americas at MullenLowe Mediahub, a digital advertising firm.

“It’s close to 80 million people, spanning high school to young moms and dads, and they are incredibly hard to reach because their media habits are fragmented,” Mr. Corcoran said. “Snapchat is one of the few places you can get to them in a mass way.”

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