Snap's Q3 revenue grows 43% despite losing 2M users

Brief:

Snapchat's parent company Snap said its user base fell for a second straight quarter and forecasts more declines ahead, with CEO Evan Spiegel blaming most of the decrease on the Android version of the image-messaging app, per a conference call with investors about its Q3 2018 earnings. Snapchat lost 2 million users from the prior quarter to end Q3 2018 with 186 million, according to a regulatory filing.
Snap's quarterly revenue grew 43% to $297.7 million from a year earlier, beating the average analyst estimate of $283 million. The company lost $325.2 million, or 25 cents a share, beating estimates for 27 cents a share, Variety reported.
Snap CEO Spiegel said the company is working to address technical issues with the Android version of the app, which he's blamed in the past for hindering audience growth. The company is testing a rebuilt Android app in a few markets, but isn't ready to release it widely, Spiegel said on the conference call.

Insight:

Snapchat's user base is shrinking as the company gets better at monetizing that audience, indicated by its revenue gains in the most recent quarter. That growth indicates that brands and marketers are spending more money on the platform to reach an audience that's shunned traditional media like TV and print. In a move that reflects its desire to further build ad revenue, Snap earlier this week hired away Amazon's head of global ad sales Jeremi Gorman as its new chief business officer.

Snapchat continues to expand its offerings for marketers, with several big advancements arriving during the last quarter, potentially setting up the platform for a strong Q4 in terms of revenue. In September, Snapchat expanded three e-commerce and ad targeting features to all marketers and linked with Amazon on visual search, enabling Snapchat users to take a picture of something and purchase it on Amazon. Snapchat also continues to find new ways to leverage AR — a tech that marketers are gravitating toward — including with immersive portals for 12 recently launched original shows.

Marketers will need to weigh the size of Snapchat's user base against its potential benefits as a platform that boasts passionate users active in an immersive environment when deciding whether to invest. Snapchat's key advantage has been its popularity among U.S. teens, although Instagram is proving to be a formidable competitor. Eighty-five percent of teens report using Instagram at least once a month, neck and neck with Snapchat’s 84%, per Piper Jaffray's recent "Taking Stock With Teens" survey. While Instagram is the most-used platform, 46% of teens name Snapchat as their favorite, compared to 32% for Instagram. Just 28% of teens reported using Facebook, down from more than 40% two years ago.

"We believe that Instagram is much more penetrated in these demographics, and it will be challenging for Snap to pull users away from Instagram," JP Morgan analyst Doug Anmuth said in a report cited by Reuters.

Facebook-owned Instagram has copied several of Snapchat's features and has become a key growth engine for the bigger social network, with 1 billion users worldwide. Facebook reports its Q3 results next week.

Snap's estimated ad revenue last month was cut 36% to $662.1 million in a revised forecast from researcher eMarketer, which in March had predicted the parent company would reach $1.03 billion in U.S. sales this year. Automated ad-buying has pushed down prices for Snapchat's inventory.