Snap Slides by Most in a Year After Holiday Sales Disappoint

Snap Inc. faced a substantial decline, the most in over a year, as the owner of the Snapchat app reported lower-than-expected revenue during the crucial holiday season. This setback disappointed investors, particularly coming just a week after its larger rival, Meta Platforms Inc., reported its best sales growth in two years.

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For the fourth quarter, Snap's revenue increased by 5% to $1.36 billion, falling short of the $1.38 billion average estimated by analysts. The full-year growth remained flat, with the company acknowledging a challenging operating environment in a letter to shareholders released on Tuesday.

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CEO Evan Spiegel has been steering Snap through an extensive restructuring over the past two years, involving job cuts and the discontinuation of projects that did not contribute to revenue or user growth. On Monday, Snap announced an additional 10% reduction in its workforce for the current year, emphasizing the aim to streamline hierarchy and promote in-person collaboration.

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Despite these layoffs, Snap projected a loss in adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) ranging from $55 million to $95 million for the current period. This projection exceeded the analysts' expectation of $33 million.

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Snap's shares experienced a significant decline of up to 32% in New York, reaching $11.82, marking the most substantial intraday drop since July 22, 2022. The company, along with Meta, had been adversely affected by Apple Inc.'s privacy settings changes in 2021, making it challenging for advertisers to track iPhone users. While Meta managed to rebound with a 25% gain in sales for the fourth quarter, Snap continues to grapple with recovery.

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Snap has undertaken a revamp of its core business to enhance ad targeting and measurement effectiveness, coupled with an expansion of its direct-response advertising offerings. In a shareholder letter, the company expressed optimism about the progress in its ad platform and noted improved results for some advertising partners. However, it acknowledged external challenges, citing the conflict in the Middle East as a "headwind" that impacted growth in the fourth quarter.

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The company's attempts to diversify revenue streams have yielded mixed results. Its subscription offering, Snapchat+, has attracted 7 million paying users, achieving an annualized revenue run rate of $249 million—an accomplishment rare among social media companies struggling to monetize subscribers. Conversely, Snap abandoned its augmented reality offerings for retailers, deeming them too complex and shuttering the initiative in the previous year.

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Snapchat reported 414 million daily active users in the fourth quarter, representing a 10% increase from the same period the previous year. A strategic shift is evident in the company's decision to prioritize established markets like North America and Europe, where almost half of its user base resides. This shift contrasts with Snap's prior focus on building support for Android phones in emerging markets.

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Snap outlined its strategy, emphasizing a heightened focus on user growth and engagement in its most monetizable regions. CEO Evan Spiegel stated that this focus would enhance daily active usage, deepen content engagement, improve advertiser performance, and ultimately accelerate revenue growth and increase free cash flow.

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Looking ahead, Snap projected revenue of $1.10 billion to $1.14 billion for the first quarter, representing a potential 15% increase from the previous year. This growth trajectory aligns with analysts' average estimates. In the fourth quarter, the company reported a net loss of $248.7 million, less than the $287 million average analyst estimate. Earnings per share were 8 cents, surpassing the estimated 6 cents.

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To cover the costs related to layoffs, Snap anticipates incurring expenses ranging from $55 million to $75 million, with the majority expected to be spent in the first quarter. As Snap navigates these challenges, investors will closely monitor its strategic initiatives, user engagement, and revenue growth in the evolving landscape of social media and technology.

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