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Snap Earnings’ ‘Miss’ Shows Misreading of Analyst Expectations

17 May, 2017 By: Doug McPherson

SAN FRANCISCO – Reuters is reporting that Snap Inc.’s failure to reach revenue projections last week is due to analysts misreading expectations. Wall Street witnessed a massive sell off after Snap posted its first quarterly results as a public company and fell short of forecasts.

David Ingram, a Reuters reporter, says there were two distinct camps of forecasters, which suggests the earnings “miss” was a matter of interpretation, and other factors were behind the stock decline.

A Reuters review of 19 predictions heading into Snap’s earnings report last week shows that analysts affiliated with the underwriters of Snap’s initial public offering in March had far lower revenue expectations than investment firms not involved in the IPO.

Nine investment firms that were not underwriters predicted, on average, that Snap’s revenue would grow slightly from the prior quarter to $168.4 million, even though the company in its IPO prospectus had estimated a decline due to the seasonal nature of its advertising business.

Analysts affiliated with 10 underwriters forecast on average that revenue would hit $138.4 million, $30 million below the estimate of the non-underwriting firms.

Going into Snap’s earnings announcement after the market close on Wednesday, anticipation was high about what kind of user growth the company’s Snapchat messaging app would show and how much ad revenue it was bringing in.

Ahead of time, the Venice, California-based firm said in securities filings that it expected a seasonal decline from its $165.7 million in revenue during the final quarter 2016. Not everyone believed Snap’s warning, though.

“Some people may have taken these words more literally, and some less so,” said Shebly Seyrafi, managing director at FBN Securities.

FBN was on the high end of the estimates, at $195.6 million, because “it is not uncommon for high-growth companies to grow through Q1,” Seyrafi said in an interview on Thursday.

In Snap’s case, it did not, and the stock plunged as much as 24 percent after hours on Wednesday to $17.58. On Friday, it rose 6 percent to $19.14.

CEO Evan Spiegel told analysts on a Wednesday earnings call that, during the past quarter, Snap was focused primarily on automation. So far, “we are pleased with early results … [but] we still have a lot of work to do,” he said.

Spiegel said he was particularly excited about Snap’s recent expansion into search, “because it begins to expose the so-called long tail,” and the continued automation of its ads platform.

Year-over-year, Snap saw Snapchat daily active users increase 36 percent to 166 million, in the first quarter. Year-over-year, average revenue-per-user rose 181 percent to $0.90, in the first quarter.

Jessica Liu, senior analyst at Forrester, believes that the “camera company” has yet to prove itself in the key areas of ad tracking and measurement. “Investing in proving ad effectiveness is encouraging, but talk is cheap,” Liu said. “Marketers are demanding that all digital marketing channels be held more accountable for everything from ad fraud to ad delivery transparency to better measurement.”

Another analyst, Pivotal’s Brian Wieser, doesn’t love the fact that Snap is already blaming “seasonality” for revenue softness. “As seasonality is commonly associated with more mature companies,” Wieser explained in a note, “the revenue figure will cause some investors to be understandably concerned, and suggests that our expectations for revenue growth over the remainder of this year and beyond might be too aggressive.”

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