Thread by @TurnerNovak

Here’s a thread with some pre-earnings thoughts and reads prior to the $SNAP Q2 earnings today.

Biggest thing I am looking for is the Snaps Created per Day metric (will probly have to wait for the 10-Q), updates on Bitmoji, content plans, and hints on the long-term AR strategy.

(This is not all-inclusive of my Snap thoughts, a few more that paint a bigger picture can be found in my earnings threads below from the past two quarters. Happy to discuss as I realize I have extremely an contrarian view on Snap.)

https://twitter.com/TurnerNovak/status/991355560376315904

The context for Snap’s Q2 earnings is very interesting with the recent 20% post-earnings drops by FB and TWTR. Two big reasons for those drops:

1) Slowing/declining usage in North America and EU
2) Anticipated drop in FBs margins as it invests in things Snap did years ago

I mention this every time I tweet about Snap: global users for an ad-based business are deceiving. What matters most is a critical mass of users in high GDP per Capita countries, which is primarily the US and EU. Other ad markets are too small to move the needle in 3-5 years.

It’s fun for FB’s 700+ person PR team that it has tens of millions of advertisers, nearly a hundred millions “business users”, and billions of users; but Big Mike’s Sub Shop in NYC gets zero value from advertising to someone in Indonesia. Local reach and ad effectiveness matters.

If you don’t think Snap’s social graph is attractive to advertisers or developers, stop drinking the dark blue kool-aid.

Snap's reach in the US/EU compares to FB and IG, which are the only ad markets that matter. Snap also crushes them in Gen Z.

marketingland.com/facebooks-inst…

The eight countries that made up 41% of Facebook’s 2.1B MAU’s as of Q1'18 were only projected to bring in ~$6.4B of mobile ad spending in 2018, giving Facebook an upper ARPU range of $7.38 on 41% of its userbase if it can capture 100% mobile ad market share.

In the five markets Snap’s reach compares to IG (US, UK, CAN, AUS, FRA), mobile ad spend is est @ $83.4 billion in 2018, 100x greater than Snap’s 2017 revenue.

Despite this five-market audience being 10% of FB’s reach in 8 of its 10 largest markets, total ad spend is 10x higher.

And don’t think Gen Z matters?

-96% of Gen Z parents say their teens influence family spending
-70% of Gen Z consider their friends to be like family
-85% would prefer having a few very close friends rather than a large group they’re not as close to.

forbusiness.snapchat.com/blog/true-to-s…

Younger users are also more likely to have fragmented app usage. The fact that Snapchat can reach such a large share of young users in the world's richest economies is HUGE. There is no better way to reach Gen Z, and their parents are slowly joining.

Snap destroyed the Snapchat app for three months, yet DAU's remained flat in Q1. In my mind, this debunks the "teens will eventually leave Snapchat" argument. Snapchat IS their platform. They aren't leaving.

Snapchat captured the hardest to reach demographic.

Snapchat was the favorite social media platform of 45% of teens in the US in Spring of 2018, down only 2% from 47% in the Fall 2017 survey despite the flurry of backlash following the February redesign (also now used by 83% of teens, up from 82%).

businesswire.com/news/home/2018…

Even Snapchat’s weak Android app held up well (improvements also coming 2H'18). There was an immediate post-redesign dip in time spent by US users from 45 to 43 mins/day (interestingly no IG usage increase), but was back to nearly 50 mins/day by June.

recode.net/2018/6/25/1750…

Another post-redesign study:

“Nearly half of American teens are online ‘almost constantly.’ And that’s about double what it was three years ago.

What are they doing? Mostly using Snapchat and YouTube.”

recode.net/2018/5/31/1740…

I wrote this back in November, tweeted in February:

I still think the recent redesign was a good move (increased ad impressions and spurred Bitmoji adoption).

https://twitter.com/TurnerNovak/status/963529383930683392

$SNAP also continues gaining on FB’s ad product:

“Snapchat CPM’s are $1.88 vs. $14-17 and $19 on FB/IG” @herrmanndigital

“Cost per Acq is 50% lower than FB/IG since using Snap Pixel”

“The ad product is fairly easy to use. Anyone disagreeing is asinine”

digiday.com/marketing/supe…

"Not only does $SNAP have lower CPMs and CPIs, but it’s providing solid ROI and conversion rates”…. “as Snap improves its measurement capabilities with the Snap pixel and its self-serve buying options, advertisers are warming up to the platform."

adexchanger.com/ad-exchange-ne…

"Whereas “eyeballs” determined the last 25 years of tech growth, cart conversions will determine the next 25 years." h/t @2PMinc

Snap’s conversion rates are historically terrible; however it’s made improvements and younger users convert better on mobile.

heapanalytics.com/blog/data-stor…

FB saw early success with direct response install ads.

Snapchat’s userbase is the prime demographic for direct response advertisers, and Snapchat has become so central to their lives that its unlikely new apps significantly cannibalize Snapchat usage.

https://twitter.com/TurnerNovak/status/1001645487836028928

Snap’s big upside lies in the camera tech and AR ecosystem it’s quietly creating, could be worth 10x the Snapchat app. The market is currently giving this nearly zero value.

The relative valuation between Snap ($17B) and IG (~$100B) is very interesting.

https://twitter.com/TurnerNovak/status/1014290562944589825

“Snaps Created per Day” is the most important metric for $SNAP. It trended up above 3 billion/day post-IG Stories, but was flat in Q1 due to redesign.

Extrapolated, it’s more than all estimated digital photos taken globally in 2017, excluding Snapchat.

mylio.com/true-stories/t…

$SNAP controls the camera usage of early AR adopters and is building a cross-platform (Android/iOS) camera-centric mobile OS that may eventually support full AR apps. This could become a cross-platform OS bridging mobile and wearables, positioning Snap similarly to pre-mobile FB.

$SNAP is building an AR ecosystem:

-50% of US 13-34 yr olds play w/ Snapchat AR weekly
-Bitmoji = AR/VR Profiles
-Spectacles = SmartGlasses
-Snap Map = HUD
-Snap Lenses = AR apps
-Lens Studio = App dev
-Lens Explorer = AR app store
-Snap Codes = Bridges b/wn phys/digital world

Bitmoji is particularly interesting: A decentralized social network of over 134 million digital avatar’s baked into the $SNAP ecosystem as we are becoming more accepting of fluid, digital personas (see: ephemeral stories). Nothing else has that reach.

nytimes.com/2018/06/14/mov…

(More of my thoughts on Bitmoji here)

https://twitter.com/TurnerNovak/status/1001645489450835970

For FB, mobile to wearables will be nothing like desktop to mobile. Desktop and mobile content was exactly the same. In AR/wearables, nearly zero content on core-FB will translate. There is almost no overlap.

FB’s pivot to stories is about:

1) Short-term: Turning every piece of content into video ad inventory
2) Long-term: AR (also synergizes with video because all AR can become video, at least right now on mobile)

To do this, $FB must own consumers camera usage.

FB-owned cameras have similar functions, but Snap remains far ahead of Facebook in terms of actual camera usage, which is how you experience AR. This is highlighted in this article summing up Snap’s strategy of using Messaging to launch its AR platform.

seekingalpha.com/article/416650…

The new $FB “feed AR ads” are also NOT the same as $SNAP AR lenses.

“Tap for this AR ad” as you quickly scroll feed is a completely different experience than intentionally interacting and playing w/ a lens in a camera, regardless if it’s an ad or not.

adweek.com/digital/facebo…

Snap is fun to hate because it's a public company that burns cash.

An increase in headcount from ~200 to 3,069 over past 3 yrs for same things FB just announced have historically been biggest profitability drag; but management’s comments indicate hiring should slow going forward

In Q3 ’17, management mentioned gross margin in the US was 50%. Most Snapchat usage doesn’t bring in revenue, so an increase in sponsored lenses and better monetization of Shows/Stories could fall to the bottom-line over the next few quarters.

Hard to say what Q2 brings for Snap. Management hinted on Q1 call that user and revenue growth could be ugly. I’ve always thought Snap was positioning well in AR for the long-term (decades), so we’ll see how long it takes to play out.

Will try to add some thoughts post-earnings.

@alexeheath sums up the reaction to Q2: Despite losing users (was obvious to everyone), Wall Street is warming to the fact that $SNAP has lots of room to monetize its existing user base.

https://twitter.com/alexeheath/status/1026926012557418497

-$SNAP provided Q3 guidance of $265-290M [low range of consensus $289M estimates]
-DAU's fell, but MAU's were actually up in Q2 [bigger #'s shown to advertisers]
-Disclosed over 100 million MAU's in the US & Canada
-Hinted that DAU growth historically declines QoQ in Q3

-Android re-design [terrible right now] seeing improvements, testing w/ small group
-More Discover & Shows views in July than any other month in history [higher ad prices than Stories]
-11 Snap Shows reached monthly audience of over 10 million users in Q2, up from 7 in Q1 2018

-Programmatic ads (self-serve) made up 75% of Snap's Q2 ad revenue
-Ad impressions up 26% QoQ, 191% YoY
-Prices STILL dropping; down 9% QoQ, 52% YoY (down 90% over two years)

It’s interesting to contrast with FB’s trend of dramatic price increases and flattening ad inventory.

Snap also reminds:

-Hosting costs are included in COGS as opposed to CapEx for FB/GOOG, etc, and likely to decrease as GOOG/AMZN compete on price (also hinted this in IPO road show)
-Revenue will also grow much faster than OpEx as ~60% is employee cost

bloomberg.com/news/articles/…

-2018 FCF will be hit by CapEx related to the move to the new Santa Monica facility
-Going forward, its capital light business model should lend to high EBITDA to FCF conversion as revenue growth falls to the bottom-line (again, low CapEx due to multi-cloud hosting strategy)

One of the biggest concerns re: Snap has been the cash burn (it has just under 2 years of cash left).

Big investments like this hint Snap could secure big private placements w/ institutional investors if revenue is slow to ramp.

cnbc.com/2018/08/07/pri…

Another interesting comment from new CFO Tim Stone: Look for Snap to monetize new parts of Snapchat. AR filters in video chat? Group Shows? The Snap Map? Bitmoji? No answers, but suggests new revenue streams are coming.

Analysts are consistently asking ?'s addressed in the prepared remarks, and it’s clear a few are not familiar with Snap’s recent product launches (Snappables, group video chat, e-com initiatives, etc). Don’t be surprised to see them underestimate the revenue impact as these ramp.

Great ? on minimum hosting cost agreements w/ Amazon/Google: Could Snap's actual hosting costs come in under those minimum's? ["No"]

Also asked about Snaps per Day ["over 3 billion per day"]

Overall, auctions are becoming more competitive, but still lots of opportunities to onboard more advertisers, which will help increase CPM's.