What marketers should know about Snap’s Q2 2017 earnings report
Snap's ad revenue and daily audience grew in Q2, but not by as much as Wall Street analysts had estimated.
After stumbling in the first quarter of 2017, Snap Inc.’s business appears to be regaining its step, albeit slowly. Maybe too slowly.
In the second quarter of 2017, Snapchat’s parent company recorded $181.7 million in revenue, 153 percent more money than it generated a year earlier. Its flagship product, Snapchat, attracted on average 173 million people using it each day — 21 percent more than used it daily a year ago.
But Snapchat isn’t growing as quickly as it was a year ago. This year, its daily audience grew by 4 percent from Q1 to Q2, but last year it had grown 17 percent from Q1 to Q2. Neither its audience nor its revenue is growing as much as Wall Street analysts had hoped, which led to its stock price dropping by up to 17 percent after its earnings report was released.
Snap’s business appears to be at something of an inflection point between following Twitter’s path or Facebook’s. During the company’s earnings call on Thursday, Snap execs dropped stats that should have sounded like they were taking a victory lap.
The view counts for Snaps within Stories “are higher than they have ever been before,” said Snap’s chief strategy officer, Imran Khan. Since Snapchat slots ads between and after those Stories, that trend could indicate that Snap has never had more Snap Ad inventory to sell to advertisers. But it’s worth noting that he said view counts for “Story Snaps,” i.e., the individual posts that make up a Story versus Stories themselves. If Snapchat slotted ads within regular people’s Stories, the difference wouldn’t matter, but since it doesn’t, the difference could be significant.
Views of Publisher Stories increased by 30 percent quarter over quarter, said CEO Evan Spiegel. Publisher Stories — perhaps better known as publishers’ Discover channels — are considered Snapchat’s most premium inventory and are prized by brand advertisers looking to steer some of their TV spend online. So the fact that people are watching more of these Stories means that Snapchat has more of this top-shelf inventory to sell.
“Revenue from both Creative Tools and Snap Ads increased both year over year and sequentially,” said CFO Drew Vollero. In other words, advertisers haven’t soured on Snapchat’s shiny-but-pricey Sponsored Lenses or Sponsored Geofilters, which it categorizes under Creative Tools. That’s likely helped by the fact that, per Khan, Snapchat’s average daily user spends three minutes a day playing with Lenses, which can include the branded variety.
Parent-level advertisers that had bought ads on Snapchat in the first half of 2016 — that is, PepsiCo, not individual PepsiCo-owned brands like Pepsi or Gatorade — spent 142 percent more money on Snapchat’s ads in the first half of 2017, said Khan. In other words advertisers are not only reinvesting in Snapchat but upping those investments, an indication that those earlier campaigns had paid off.
Sixty percent of the Snap Ads served in Q2 were bought through either Snapchat’s advertising API or its self-serve ad-buying tool, said Khan. Combined with the fact that revenue from Snap Ads increased, Snapchat’s efforts to lower the barrier to entry for advertisers are working, removing one of the main barriers to Snapchat becoming a must-buy for advertisers.
Yet Pivotal Research senior analyst Brian Wieser described Snap’s Q2 results in a research note as simply “decent.” What gives? Consider the flip side of the aforementioned victory-lap stats.
The stories in the stats
View counts for Snaps within Stories are up. While that’s great, it’s not the same as saying view counts for Stories are up, which would indicate that people are viewing more Stories and give Snapchat more opportunities to show those people ads, since it slots them between or after Stories. It’s more likely an indication that Stories are getting longer — without any added inventory for Snap Ads — since Snapchat doesn’t slot ads within regular people’s Stories.
Views of Publisher Stories increased by 30 percent quarter over quarter. Another solid stat with a potential dark-side omission. Views is not the same as viewers. While it may sound like more people are being exposed to Snapchat’s most premium inventory, it’s possible that it’s the same number of people just exposing themselves to Publisher Stories more often. That would be an issue, since Publisher Stories appeal primarily to brand advertisers who care about how many people they can reach.
Revenue from Sponsored Lenses and Sponsored Geofilters, as well as Snap Ads, has increased. While this sounds like a positive growth step for these categories, Snap execs neglected to say by how much revenue increased for either.
Umbrella brands are spending 142 percent more money on Snapchat’s ads — another solid stat that casts a shadow. If Snapchat’s revenue from these existing advertisers grew by 142 percent in Q1 and Q2 2017, and its revenue from advertisers overall grew by 146 percent in Q2 2017 — as Khan said it did — then how much of its Q2 ad revenue growth came from existing advertisers, as opposed to new advertisers? In other words, how successful has Snapchat actually been at winning over advertisers following Q2 2016, since it rolled out Facebook-level ad targeting options, online-to-offline ad measurement, targetable Sponsored Lenses, Sponsored World Lenses, a version of retargeting, an ad API and a self-serve ad platform?
Sixty percent of Snap Ads were bought through the ad API and self-serve platform — another nice stat. It shows that advertisers don’t need their hands held as much by Snap’s sales team when buying its previously alien vertical video ad format. It also sets a foundation for advertisers to buy these ads more regularly, since they can automate those buys much like a new parent can automate diaper purchases on Amazon. With advertisers handling more of their own Snap Ad buys, Snap’s sales team can concentrate on pitching its pricier ad formats.
But here comes the other shoe…
Snap Ads sold programmatically are sold through an auction — meaning the market, not Snapchat, dictates the price — and right now the market is dictating a lower price, said Vollero. That’s not necessarily a bad thing. It could make Snap Ads more affordable for the small and medium-sized advertisers most likely to use its self-serve platform, and more palatable for other advertisers who aren’t quite sold on Snapchat’s ability to drive a return on their investment. Once Snapchat gets those advertisers in the door, if it can sufficiently demonstrate value — thereby making advertisers willing to pay more per ad — then its ad revenue will soar. “Our goal over time will be to drive Snap Ad pricing higher through strong auction participation and improved targeting,” said Vollero.
But if Snap can’t convince those advertisers that its ads are worth more money, Snap’s future ad revenue growth becomes more reliant on how many ads it can sell, which is a function of Snapchat’s ability to both attract new users and to show more ads to its existing users. Unfortunately for Snap, you’ve likely heard of other companies in similar pricing predicaments to Snap’s. You have. One of those companies is Twitter. You may also feel like you’ve heard of other companies that have found ways to not only attract new users but also extract higher prices from advertisers. You have. It’s Facebook.
Twitter: It’s good for advertisers that our ad prices are going down.
Facebook: Ad prices have gone up each quarter since Q1 2015.
— Tim Peterson (@petersontee) July 27, 2017