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Snapchat beats in Q3, adding 7M users & revenue up 50%
The Snap-back continues. Snapchat blew past earnings expectations for a big beat in Q3, as it added 7 million daily active users this quarter to hit 210 million, up 13% year-over-year. Snap also beat on revenue, notching $446 million, which is up a whopping 50% year-over-year, at a loss of $0.04 EPS. That flew past Bloomberg’s consensus of Wall Street estimates that expected $437.9 million in revenue and a $0.05 EPS loss.
Snap has managed to continue cutting losses as it edges toward profitability. Net loss improved to $227 million from $255 million last quarter, with the loss decreasing $98 million versus Q3 2018.
CEO Evan Spiegel made his case in his prepared remarks for why Snapchat’s share price should be higher: “We are a high-growth business, with strong operating leverage, a clear path to profitability, a distinct vision for the future and the ability to invest over the long term.”
Snapchat’s share price had closed down 4% at $14, and had fallen roughly 4.6% in after-hours trading as of 1:50 pm Pacific, to $13.35, despite the earnings beat. It remains below its $17 IPO price but has performed exceedingly well this year, rising from a low of $4.99 in December.
That’s partially because of the high cost of Snapchat’s growth relative average revenue per user. While it notes that it saw user growth in all regions, 5 million of the 7 million new users came from the Rest of World, with just 1 million coming from the North America and Europe regions. That’s in part thanks to better than expected growth and retention on its re-engineered Android app that’s been a hit in India. But since Snapchat serves so much high-definition video content but it earns just $1.01 average revenue in the Rest of World, it has to hope it can keep growing ARPU so it becomes profitable globally.
Some other top-line stats from Snapchat’s earnings:
- Operating cash flow improved by $56 million to a loss of $76 million in Q3 2019, compared to the prior year.
- Free Cash Flow improved by $75 million to $84 million in Q3 2019, compared to the prior year.
- Cash and marketable securities on hand reached $2.3 billion.
Interestingly, Spiegel noted that “We benefited from year-over-year growth in user activity in Q3 including growth in Snapchatters posting and viewing Stories.” Snapchat hadn’t indicated Stories was growing in at least the past two years, as it was attacked by clones, including Instagram Stories that led Snapchat to start shrinking in user count a year ago before it recovered.
Since Stories viewership is critical to total ad view on Snapchat, we may see analysts insisting to hear more about that metric in the future. Snap also said users opened the app 30 times per day, up from 25 times per day as of July 2018, showing it’s still highly sticky and being used for rapid-fire visual communication.
The other major piece of Snapchat’s ad properties is Discover, where total time spent watching grew 40% year-over-year. And rather than being driving by just a few hits, more than 100 Discover channels saw over 10 million viewers per month in Q3. With Instagram’s IGTV a flop, Discover remains Snapchat’s best differentiated revenue driver, and one it needs to keep investing in and promoting. With Instagram trying to compete more heavily on chat with its new close friends-only Threads app, Snapchat can’t rely on ephemeral messaging to keep it special.
TikTok buys ads on Snapchat that could steal its users
Surprisingly, Spiegel said that “We definitely see TikTok as a friend” when asked about why it allowed the competitor to continue buying ads on Snapchat. The two apps are different, with Snapchat focused on messaging and biographical social media while TikTok is about storyboarded, premeditated social entertainment. But this could be a dangerous friendship for Snapchat, as TikTok may be taking time away that users might spend watching Snapchat Discover, and its growth could box Snapchat out of the social entertainment space.
Looking forward, in Q4 Snap is estimating 214 to 215 million daily active users and $540 million to $560 million in revenue. It’s expecting between break even and positive $20 million for adjusted EBITDA. That revenue guidance was below estimates for the holiday Q4, contributing to the share price fall.
Snap has a ways to go before reaching profitability. That milestone would let it more freely invest in long-term projects, specifically its Spectacles camera-glasses. Spiegel has said he doesn’t expect augmented reality glasses to be a mainstream consumer product for 10 years. That means Snap will have to survive and spend for a long time if it wants a chance to battle Apple, Facebook, Magic Leap and more for that market.
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9 highlights from Snapchat CEO’s 6,000-word leaked memo on survival
Adults, not teens. Messaging, not Stories. Developing markets, not the U.S. These are how Snapchat will make a comeback, according to CEO Evan Spiegel . In a 6,000-word internal memo from late September leaked to Cheddar’s Alex Heath, Spiegel attempts to revive employee morale with philosophy, tactics and contrition as Snap’s share price sinks to an all-time low of around $8 — half its IPO price and a third of its peak.
“The biggest mistake we made with our redesign was compromising our core product value of being the fastest way to communicate,” Spiegel stresses throughout the memo regarding “Project Cheetah.” It’s the chat that made Snapchat special, and burying it within a combined feed with Stories and failing to build a quick-loading Android app have had disastrous consequences.
Spiegel shows great maturity here, admitting to impatient strategic moves and outlining a cohesive path forward. There’s no talk of Snapchat ruling the social app world here. He seems to understand that’s likely out of reach in the face of Instagram’s competitive onslaught. Instead, Snapchat is satisfied if it can help us express ourselves while finally reaching even meager profitability.
Snapchat may be too perceived as a toy to win enough adults, too late to win back international markets from the Facebook empire and too copyable by good-enough alternatives to grow truly massive. But if Snap can follow the Spiegel game plan, it could carve out a sustainable market through a small but loyal audience who want to communicate through imagery.
Here are the most interesting takeaways from the memo — and why they’re important:
1. Apologizing for rushing the redesign
There were, of course, some downsides to moving as quickly as a cheetah We rushed our redesign, solving one problem but creating many others . . . Unfortunately, we didn’t give ourselves enough time to continue iterating and testing the redesign with a smaller percentage of our community. As a result, we had to continue our iterations after we launched, causing a lot of frustration for our community.
Spiegel always went on his gut rather than relying on user data like Facebook. Aging further and further away from his core audience, he misread what teens cared about. The appealing buzz phrase of “separating social from media” also meant merging messaging and Stories into a chaotic list that made both tougher to use. Spiegel seems to have learned a valuable lesson about the importance of A/B testing.
2. Chat is king
Our redesigned algorithmic Friend Feed made it harder to find the right people to talk to, and moving too quickly meant that we didn’t have time to optimize the Friend Feed for fast performance. We slowed down our product and eroded our core product value. . . . Regrettably, we didn’t understand at the time that the biggest problem with our redesign wasn’t the frustration from influencers – it was the frustration from members of our community who felt like it was harder to communicate . . . In our excitement to innovate and bring many new products into the world, we have lost the core of what made Snapchat the fastest way to communicate.
When Snap first revealed the changes, we predicted that “Teen Snap addicts might complain that the redesign is confusing, jumbling all content from friends together.” That made it too annoying to dig out your friends to send them messages, and Snap’s growth rate imploded, with it losing 3 million users last quarter. Expect Snap to optimize its engineering to make messages quicker to send and receive, and even sacrifice some of its bells and whistles to make chat faster in developing markets.
3. Snapchat must beat Facebook at best friends
Your top friend in a given week contributes 25% of Snap send volume. By the time you get to 18 friends, each incremental friend contributes less than 1% of total Snap send volume each. Finding best friends is a different problem than finding more friends, so we need to think about new ways to help people find the friends they care most about.
Facebook’s biggest structural disadvantage is its broad friend graph that’s bloated to include family, co-workers, bosses and distant acquaintances. That might be fine in a feed app, but not for Stories and messaging where you only care about your closest friends. With friend lists and more, Facebook has tried and failed for a decade to find better ways to communicate with your besties. This is the wedge through which Snapchat can attack Facebook. If it develops special features for luring your best friends onto the app and staying in touch with them for better reasons than just maintaining a Snap “Streak,” it could hit Facebook where it can’t defend itself.
4. Discover soars as Facebook Watch and IGTV stumble
Our Shows continue to attract more and more viewers, with over 18 Shows reaching monthly audiences of over 10M unique viewers. 12 of which are Original productions. As a platform overall, we’ve grown the amount of total time spent engaging with our Shows product, almost tripling since the beginning of the year. Our audience for Publisher Stories has increased over 20% YoY, and we believe there is a significant opportunity to continue growing the number of people who engage with Discover content . . .We are also working to identify content that is performing well outside of Snapchat so that we can bring it into Discover.
Discover remains Snapchat’s biggest differentiator, scoring with premium video content purposefully made for mobile. What it really needs, though, are a few must-see tent-pole shows to drag in a wider audience that can get hooked on the reimagined digital magazine experience.
5. But Discover is a mess
Our content team is working hard to experiment with new layouts and content types in the wake of our redesign to drive increased engagement.
Snapchat Discover is an overcrowded pile of clickbait. News outlets, social media influencers, original video Shows and aggregated user content collections all battle for attention in a design that feels overwhelming to the point of exhaustion. Thankfully, Snapchat seems to recognize that more cohesive sorting with fewer images and headlines bombarding you might make Discover a more pleasant lean-back consumption experience.
6. Aging up to earn money
Most of the incremental growth in our core markets like the US, UK, and France will have to come from older users who generate higher average revenue per user . . . Growing in older demographics will require us to mature our application . . . Many older users today see Snapchat as frivolous or a waste of time because they think Snapchat is social media rather than a faster way to communicate. Changing the design language of our product and improving our marketing and communications around Snapchat will help users understand our value . . . aging-up our community in core markets will also help the media, advertisers, and Wall Street understand Snapchat.
Snapchat can’t just be for cool kids anymore. Their lower buying power and life stage make them less appealing to brands. The problem is that Snapchat risks turning off younger users by courting their older siblings or adults. If, like Facebook, users start to feel like Snapchat is a place for parents, they may defect in search of the next purposefully built app to confuse adults to stay hip.
7. Finally prioritizing developing markets
We already have many projects underway to unlock our core product value in new markets. Mushroom allows our community to use Snapchat on lower-end devices. Arroyo, our new gateway architecture, will speed up messaging and many other services . . . It might require us to change our products for different markets where some of our value-add features detract from our core product value.
Sources tell me Snapchat’s future depends on the engineering overhaul of its Android app, a project codenamed “Mushroom.” Slow video load times and bugs have made Snapchat practically unusable on low-bandwidth connections and old Android phones in the developing world. The company concentrated on the U.S. and other first-world markets, leaving the door open for copycats of Stories built by Instagram (400 million daily users) and WhatsApp (450 million daily users) to invade the developing world and dwarf Snap’s 188 million total daily users. In hopes of a smooth rollout, Snapchat is already testing Mushroom, but it will have to do a ton of marketing outreach to convince frustrated users who ditched the app to give it another try.
8. Fresh ideas, separate apps
We’re currently building software that takes the millions of Snaps submitted to Our Story and reconstructs parts of the world in 3D. We can then build augmented reality experiences on top of those models and distribute them as Lenses . . . If our innovation compromises our core product of being the fastest way to communicate, we should consider create [sic] separate applications or other ways of delivering our innovation.
Snapchat has big plans for augmented reality. It doesn’t just want to stick animations over the top of anywhere, or create AR art installations in a few big cities. It wants to build site-specific AR experiences across the globe. And while everything the company has built to date has lived inside of Snapchat, it’s willing to spawn standalone apps if necessary so that it doesn’t bog down its messaging service. That could give Snapchat a lot more leeway to experiment.
9. The freedom of profitability
Our 2019 stretch output goal will be an acceleration in revenue growth and full year free cash flow and profitability. With profitability comes increased autonomy and freedom to operate our business in the long term best interest of our community without the pressure of needing to raise additional capital.
Snapchat is still bleeding money, losing $353 million last quarter. Snapchat ended up selling 2.3 percent of its equity to a Saudi Arabian prince in exchange for $250 million to lengthen its rapidly shortening runway. And last year it took $2 billion from Chinese gaming giant Tencent. Deals like that could threaten Snapchat’s ability to prioritize its goals alone, not the moral imperatives or developer platforms that would benefit its benefactors. Once profitable, Snapchat won’t have to worry so much about struggling with short-term user growth and can instead focus on retention, societal impact and its true purpose — creativity.
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Why unskippable Stories ads could revive Facebook
Prepare for the invasion of the unskippables. If the Stories social media slideshow format is the future of mobile TV, it’s going to end up with commercials. Users won’t love them. And done wrong they could pester people away from spending so much time watching what friends do day-to-day. But there’s no way Facebook and its family of apps will keep letting us fast-forward past Stories ads just a split-second after they appear on our screens.
We’re on the cusp of the shift to Stories. Facebook estimates that across social media apps, sharing to Stories will surpass sharing through feeds some time in 2019. One big reason is they don’t take a ton of thought to create. Hold up your phone, shoot a photo or short video and you’ve instantly got immersive, eye-catching, full-screen content. And you never had to think.
Facebook CPO Chris Cox at F8 2018 charts the rise of Stories that will see the format surpass feed sharing in 2019
Unlike text, which requires pre-meditated reflection that can be daunting to some, Stories are point and shoot. They don’t even require a caption. Sure, if you’re witty or artistic you can embellish them with all sorts of commentary and creativity. They can be a way to project your inner monologue over the outside world. But the base level of effort necessary to make a Story is arguably less than sharing a status update. That’s helped Stories rocket to more than 1.3 billion daily users across Facebook’s apps and Snapchat.
The problem, at least for Facebook, is that monetizing the News Feed with status-style ads was a lot more straightforward. Those ads, which have fueled Facebook’s ascent to earning $13 billion in revenue and $5 billion in profit per quarter, were ostensibly old-school banners. Text, tiny photo and a link. Advertisers have grown accustomed to them over 20 years of practice. Even small businesses on a tight budget could make these ads. And it at least took users a second to scroll past them — just long enough to make them occasionally effective at implanting a brand or tempting a click.
Stories, and Stories ads, are fundamentally different. They require big, tantalizing photos at a minimum, or preferably stylish video that lasts five to 15 seconds. That’s a huge upward creative leap for advertisers to make, particularly small businesses that’ll have trouble shooting that polished content themselves. Rather than displaying a splayed out preview of a link, users typically have to swipe up or tap a smaller section of a Story ad to click through.
And Stories are inherently skippable. Users have learned to rapidly tap to progress slide by slide through friends’ Stories, especially when racing through those with too many posts or that come from more distant acquaintances. People are quick with the trigger finger the moment they’re bored, especially if it’s with an ad.
A new type of ad blindness has emerged. Instead of our eyes glazing over as we scroll past, we stare intensely searching for the slightest hint that something isn’t worth our time and should be skipped. A brand name, “sponsored” label, stilted product shot or anything that looks asocial leads us to instantly tap past.
This is why Facebook COO Sheryl Sandberg scared the hell out of investors on the brutal earnings call when she admitted about Stories that, “The question is, will this monetize at the same rate as News Feed? And we honestly don’t know.” It’s a radically new format advertisers will need time to adopt and perfect. Facebook had spent the past year warning that revenue growth would decelerate as it ran out of News Feed ad inventory, but it’d never stressed the danger as what it was: Stories. That contributed to its record-breaking $120 billion share price drop.
The shift from News Feed ads to Stories ads will be a bigger transition than desktop ads to mobile ads for Facebook. Feed ads looked and worked identically, it was just the screen around them changing. Stories ads are an entirely new beast.
Stories ads are a bigger shift than web to mobile
There is one familiar format Stories ads are reminiscent of: television commercials. Before the age of TiVo and DVRs, you had to sit through the commercials to get your next hit of content. I believe the same will eventually be true for Stories, to the tune of billions in revenue for Facebook.
Snapchat is cornered by Facebook’s competition and desperate to avoid missing revenue estimates again. So this week, it rolled out unskippable vertical video ads it actually calls “Commercials” to 100 more advertisers, and they’ll soon be self-serve for buyers. Snap first debuted them in May, though the six-second promos are still only inserted into its longer-form multi-minute premium Shows, not user-generated Stories. A Snap spokesperson said they couldn’t comment on future plans. But I’d expect its stance will inevitably change. Friends’ Stories are interesting enough to compel people to watch through entire ads, so the platform could make us watch.
Snapchat is desperate, and that’s why it’s already working on unskippable ads. If Facebook’s apps like Instagram and WhatsApp were locked in heated battle with Snapchat, I think we’d see more brinkmanship here. Each would hope the other would show unskippable ads first so it could try to steal their pissed-off users.
But Facebook has largely vanquished Snapchat, which has seen user growth sink significantly. Snapchat has 191 million daily users, but Facebook Stories has 150 million, Messenger Stories has 70 million, Instagram Stories has 400 million and WhatsApp Stories (called Status) leads with 450 million. Most people’s friends around the world aren’t posting to Snapchat Stories, so Facebook doesn’t risk pushing users there with overly aggressive ads, except perhaps amongst U.S. teens.
Instagram’s three-slide Stories carousel ads
That’s why I expect we’ll quickly see Facebook start to test unskippable Stories ads. They’ll likely be heavily capped at first, to maybe one to three per day per user. Facebook took a similar approach to slowly rolling out auto-play video News Feed ads back in 2014. And Facebook’s apps will probably only show them after a friend’s story before your next pal’s, in-between rather than as dreaded pre-rolls. Instagram already offers carousel Stories ads with up to three slides instead of one, so users have to tap three times to blow past them.
An Instagram spokesperson told me they had “no plans to share right now” about unskippable ads, and a Facebook spokesperson said “We don’t have any plans to test unskippable stories ads on Facebook or Instagram.” But plans can change. A Snap spokesperson noted that unlike a full 30-second TV spot, Snapchat’s Commercials are up to six seconds, which matches an emerging industry trend for mobile video ads. Budweiser recently made some six-second online ads that it also ran on TV, showing the format’s reuseability that could speed up adoption. For brand advertisers not seeking an on-the-spot purchase, they need time to leave an impression.
By making some Stories ads unskippable, Facebook’s apps could charge more while making them more impactful for advertisers. It would also reduce the creative pressure on businesses because they won’t be forced to make that first split-second so flashy so people don’t fast-forward. Employing unskippable ads could also create an incentive for people to pay for a hypothetical ad-free Facebook Premium subscription in the future.
If Facebook makes the Stories ad format work, it has a bright future that contrasts with the doomsday vibes conjured by its share price plummet. Facebook has more than 5X more (duplicated) Stories users across its apps than its nearest competitor Snapchat. The social giant sees libraries full of Stories created each day waiting to be monetized.
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Facebook was never ephemeral, and now its Stories won’t have to be
Before Snapchat made social media about just today, Facebook made it about forever. The 2011 “Timeline” redesign of the profile and keyword search unlocked your past, encouraging you to curate colorful posts about your life’s top moments. That was actually an inspiration for Snapchat, as its CEO Evan Spiegel wrote in its IPO announcement that “We learned that creativity can be suppressed by the fear of permanence.”
Now Facebook is finding a middle ground by optionally unlocking the history of your Stories that otherwise disappear after 24 hours. Facebook will soon begin testing Stories Highlights, the company confirmed to TechCrunch. Similar to Instagram Stories Highlights, it will let you pick your favorite expired photos and videos, compile them into themed collections with titles and cover images and display them on your profile.
The change further differentiates Facebook Stories from the Snapchat Stories feature it copied. It’s smart for Facebook, because highly compelling content was disintegrating each day, dragging potential ad views to the grave with it. And for its 150 million daily users, it could make the time we spend obsessing over social media Stories a wiser investment. If you’re going to interrupt special moments to capture them with your phone, the best ones should still pay dividends of self-expression and community connection beyond a day later.
Facebook Stories Highlights was first spotted by frequent TechCrunch tipster Jane Manchun Wong, who specializes in generating screenshots of unreleased features out of the APK files of Android apps. TechCrunch inquired about the feature, and a Facebook spokesperson provided this statement: “People have told us they want a way to highlight and save the Stories that matter most to them. We’ll soon start testing highlights on Facebook – a way to choose Stories to stay on your profile, making it easier to express who you are through memories.”
These Highlights will appear on a horizontal scroll bar on your profile, and you’ll be able to see how many people viewed them just like with your Stories. They’ll default to being viewable by all your friends, but you can also restrict Highlights to certain people or make them public. The latter could be useful for public figures trying to build an audience, or anyone who thinks their identity is better revealed through their commentary on the world that Stories’ creative tools offer, opposed to some canned selfies and profile pics.
Facebook paved the way for Highlights by launching the Stories Archive in May. This automatically backs up your Stories privately to your profile so you don’t have to keep the saved versions on your phone, wasting storage space. That Archive is the basis for being able to choose dead Stories to show off in your Highlights. Together, they’ll encourage users to shoot silly, off-the-cuff content without that “fear of permanence,” but instead with the opportunity. If you want to spend a half hour decorating a Facebook Story with stickers and drawing and captions and augmented reality, you know it won’t be in vain.
Facebook Stories constantly adds new features, like this Blur effect I spotted today
While many relentlessly criticize Facebook for stealing the Stories from Snapchat, its rapid iteration and innovation on the format means the two companies’ versions are sharply diverging. Snapchat still lacks a Highlights-esque feature despite launching its Archive-style Memories back in July 2016. Instead of enhancing the core Stories product that made the app a teen phenomenon, it’s concentrated on Maps, gaming, Search, professional Discover content, and a disastrously needless redesign.
Facebook’s family of apps seized on the stagnation of Snapchat Stories and its neglect of the international market. It copied whatever was working while developing new features like Instagram’s Superzoom and Focus portrait mode, the ability to reshare public feed posts as quote tweet-style Stories and the addition of licensed music soundtracks. While writing this article, I even discovered a new Facebook Stories option called Blur that lets you shroud a moving subject with a dream-like haze, as demonstrated with my dumb face here.
The relentless drive to add new options and smooth out performance has paid off. Now Instagram has 400 million daily Stories users, WhatsApp has 450 million and Facebook has 150 million, while Snapchat’s whole app has just 191 million. As Instagram CEO Kevin Systrom admitted about Snapchat, “They deserve all the credit.” Still, it hasn’t had a megahit since Stories and AR puppy masks. The company’s zeal for inventing new ways to socialize is admirable, though not always a sound business strategy.
At first, the Stories war was a race, to copy functionality and invade new markets. Instagram and now Facebook making ephemerality optional for their Stories signals a second phase of the war. The core idea of broadcasting content that disappears after a day has become commoditized and institutionalized. Now the winner will be declared not as who invented Stories, but who perfected them.
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What is Snapchat, now that Story sharing has stopped growing?
In a betrayal of loyalty signaling poor morale, a massive dump of Snapchat’s usage stats has leaked. The most worrisome is that the number of users posting Stories has shown zero growth, an even worse performance than Snapchat’s total user growth that was sluggish this year. It appears Instagram’s Stories clone has stopped Snapchat’s most monetizable feature dead in… Read More
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Instagram launches Story Search for hashtags and locations
Instagram Stories wants to be your window into what’s going on around a topic or place right now, so it’s adding a way to search Stories two months after Snapchat did the same. Instagram users can now search for a location or hashtag, and see a Story compiled from Story posts by other users that include that location sticker, hashtag sticker, or hashtag in the caption. Location… Read More
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Instagram on copying Snapchat: “This is the way the tech industry works”
“I think it would frankly be silly of us if we were to say “Oh see that good idea over there that’s actually fulfilling a need people have to share more moments of their life, oh because one person did that we can’t even go near that idea.” That’s Instagram’s VP of Product Kevin Weil’s perspective about cloning Snapchat. He’s the man in… Read More
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Snapchat’s new eraser lets you ‘Photoshop’ stuff out of photos
It’s Snapchat’s turn to copy Instagram while also staying one step ahead of its competitor. Today Snapchat launched a slew of new creative tools, several of which mimic Instagram’s features. But Snapchat’s new option to let users erase real-world objects from their photos shows it’s still pioneering the visual communication format. Read More
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Facebook pivots into Stories
In its biggest change in a decade, Facebook is evolving from text and link-focused sharing to the visual communication format it admits “Snapchat has really pioneered.” Starting today, all users will soon have access to the new Facebook Camera feature that lets them overlay special effects on photos and videos. They can then share this content to a Snapchat clone called Facebook… Read More
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If the camera is the new keyboard, then the future of social media will look more like a slideshow than a Word document. So while Snapchat invented Stories, we’ll have to get used to using them everywhere.